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Corporate Interests
This Private Placement Memorandum (Memorandum) is furnished to prospective investors on a confidential basis in consideration of an investment interest in Lionheart Holding, Inc (the Company, Corporation), and may not be used for any other purpose. The information contained in this Memorandum has been compiled from sources believed to be reliable, primarily the management of the Corporation, Lionheart Holding, Inc., a Texas Corporation. Statements in this Memorandum are made as of the date of the initial distribution of this Memorandum unless stated otherwise. Neither the delivery of this Memorandum at any time, nor any sale hereunder, will under any circumstances create an implication that the information contained herein is correct as of any time subsequent to such date. In making an investment decision, investors must rely on his or her own examination of the Corporation and terms of the offering, including the merits and risks involved. Prospective investors should not construe the contents of this Memorandum as legal, tax, investment or other advice. Each investor should make his or her own inquiries and consult his or her advisors as to the Corporation and this offering and as to legal, tax and related matters concerning this investment. This offering is not a security offering and/or assets offered hereby have not been, and will not be registered under the Securities Act of 1933, as amended, or the securities laws of any of the states of the United States. NO GUARANTEES ARE MADE BY THE CORPORATION OF ANY KIND IN REGARDS TOWARDS THE INVESTMENT. The investment and/or assets offered hereby have not been approved or disapproved by the securities regulatory authority of any state or by the United States Securities and Exchange Commission, nor has any authority or commission passed upon the accuracy or adequacy of this Memorandum. This Memorandum does not constitute an offer or solicitation in any state or in any other jurisdiction where such offer or solicitation would be unlawful. Any representation to the contrary is unlawful. The assets being offered hereby are being offered under Rule 506, Regulation (D), under the United States Securities and Exchange Commission, which is considered a safe harbor for the private offering exemption of Section 4(2) of the Securities Act. Companies using the Rule 506 exemption can raise an unlimited amount of money. This Memorandum is qualified in its entirety by reference to the Corporate Agreement amongst its Officers and the subscription agreement related thereto, copies of which will be made available upon request and should be reviewed prior to purchasing an interest. If descriptions or
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terms in this Memorandum are inconsistent with or contrary to descriptions or terms in the Corporate Officers Agreement, the Corporate Officers Agreement shall control. No person has been authorized to give any information or to make any representation other than what is contained in this Memorandum and, if given or made, such information or representation must not be relied upon as having been authorized. Information contained in this Memorandum is as of April 2013. The delivery of this Memorandum does not imply that the information herein is correct as of any time other than April 2013. The Corporation and its affiliates reserve the right to modify any of the terms of the offering and the interests described herein. Each potential investor, by accepting delivery of this Memorandum, agrees not to make a photocopy or other copy or to divulge the contents hereof to any person other than a legal, business, investment or tax advisor in connection with obtaining the advice of such person with respect to this offering. Notwithstanding the foregoing, the investor (and each employee, representative or other agent of such investor) may disclose to any and all persons, without limitation of any kind, the discussion of U.S. tax treatment and U.S. tax structure of: (i) the Corporation, and (ii) any transactions described herein, and all materials of any kind (including opinions or other U.S. tax analyses) that are provided to the investor relating to such U.S. tax treatment and U.S. tax structure. Each prospective investor is invited to meet with a representative of the Board of Directors and/ or Corporate Officers to discuss with, ask questions of, and receive answers from, the Corporation concerning the terms and conditions of this offering of interests, and to obtain any additional information, to the extent the Corporation possesses such information or can acquire it without unreasonable effort or expense, necessary to verify the information contained herein. Investment in Corporate Interests will involve significant risks due to, among other things, the nature of the Corporations investments. Investors should have the financial ability and willingness to accept the risks and lack of liquidity that are characteristic of the investment described herein. The Corporation makes no guarantee of any results and or returns to be realized by investing the offering. There will be no public market for the Corporate Interests, and they will not be transferable without the consent of the Corporation. Each purchaser of the Corporate Interests offered hereby must be both an accredited investor within the meaning of Regulation D promulgated by the United States Securities and Exchange Commission under the Securities Act of 1933, as amended, and a qualified purchaser, as defined under the Investment Company Act of 1940, as amended, unless otherwise agreed to by the Corporation. April 2013
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Http://Lionheartholding.com
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TABLE OF CONTENTS
I. EXECUTIVE SUMMARY....................................................................................8 The Corporation ..............................................................................................................8 Investment Approach .......................................................................................................9 Corporate Structure........................................................................................................10 Limited Liability ............................................................................................................10 Raising Capital...............................................................................................................11 Taxation .........................................................................................................................11 Owners & Employees ....................................................................................................11 Public Perception ...........................................................................................................11 II. FIRM AND INVESTMENT PHILOSOPHY.......................................................13 Overview........................................................................................................................13 Geographical Focus .......................................................................................................13 Competitive Advantage .................................................................................................13 Buying Advantage .........................................................................................................14 Sales Advantage ............................................................................................................14 Ability to service a Non-Digitalized Market .................................................................15 Investment Process ........................................................................................................16 Transaction Flow............................................................................................................16 Liquidation Model .........................................................................................................16 Exit Strategy ..................................................................................................................17 Investment Analysis ......................................................................................................18 Small-to-Middle Market Bankruptcy Sales and Non-Performing Assets .....................19 The Domestic Market for Non-performing Investments ...............................................19 III. CORPORATE INVESTMENT PROFESSIONALS AND PARTNERS .............20 The Corporation and Management Company Managed by its officers .....................20 Stacy R. Sutter , Broker / Chief Executive Officer....................................................20 Wayne Lohmeyer, Chief Information Officer............................................................21 Laura L. Sangiri-Kellogg, Chief Real Estate Officer ................................................23 Douglas R. Williamson, Chief Investment Officer / Chief Financial Officer............24 Bernadette M. Canero, VP Operations ......................................................................25 Corporate Partners .........................................................................................................27 First American Title Company ..................................................................................27 Hudson and Marshall Auction House ........................................................................27 Jack OBoyle & Associates .......................................................................................27 Page 4 of 55
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Hodgson CPA ............................................................................................................27 Memberships and Affiliations .......................................................................................28 IV. CORPORATE TERMS AND AGREEMENTS ......................................................29 Investment Objective .....................................................................................................29 Corporate Investment Size ............................................................................................29 Profit Distributions ........................................................................................................30 Transfer of Interests .......................................................................................................30 Unrelated Business Taxable Income ..............................................................................30 V. LEGAL AND TAX MATTERS ...........................................................................32 Erisa Investors ...............................................................................................................32 Certain ERISA Considerations: Employee Benefit Plan Regulations ...........................32 Certain Income Tax Considerations ..............................................................................33 Taxation of the Investors ...............................................................................................33 VI. INHERENT FUND RELATED INVESTMENT RISKS ....................................34 Risk Factors ...................................................................................................................34 Investment Risks ...........................................................................................................34 The Corporations Investments May Be Volatile...........................................................34 Government-Entity Risk ................................................................................................34 Management Risks ........................................................................................................35 Liquidity Risks ..............................................................................................................35 Geopolitical Risk ...........................................................................................................36 Distressed and Defaulted Assets Risks ..........................................................................36 Small Company Risk .....................................................................................................37 General Real Estate Risks .............................................................................................37 Risks of Litigation .........................................................................................................38 VII. ACCOUNTING AND REPORTING SECTION .................................................39 Securities Law Matters ..................................................................................................39 In General ......................................................................................................................40 Deductibility of Corporate Investment Expenditures by Non-Corporate Investors. .....41 Application of Rules for Income and Losses from Passive Activities...........................41 Taxation of Tax-Exempt Investors.................................................................................41 Special Considerations for Foreign Investors ................................................................43 U.S. Trade or Business. .............................................................................................43 Withholding Taxes .....................................................................................................43 United States Real Property Interests. .......................................................................44 Other Potential Taxes ................................................................................................44 Tax Audits and Related Matters ....................................................................................45 Page 5 of 55
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Tax Shelter Reporting Requirements ............................................................................45 State and Local Income Tax Aspects .............................................................................46 VIII. BUDGET & PROJECTED RETURNS ...............................................................47 Projected Budget (1st Year) ...........................................................................................47 Forecast Projection 2013 - $10MM ...............................................................................49 Forecast Projection 2013 - $20MM ...............................................................................50 Forecast Projection 2014 - $10MM ...............................................................................51 Forecast Projection 2014 - $20MM ...............................................................................52 Forecast Projection 2015 - $10MM ...............................................................................54 Forecast Projection 2015 - $20MM ...............................................................................55
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I.
EXECUTIVE SUMMARY
The Corporation
Lionheart Holding, Inc is a commercial real estate company created to buy and sell residential properties at an institutional level given the efficiencies in bank purchasing, computerized sales, and the ability to bundle and sell real estate commercially. The investment objective of the Corporation is to maximize total return on capital by seeking capital appreciation and through the development and management of a diversified portfolio of non-performing, underperforming, or distressed residential assets. The Corporation buys non-performing assets solely from Hedge Funds, Banks, and Financial Institutions, seeking to achieve its objectives primarily through acquiring, then liquidating the assets at a profit using a highly automated sales system. The Corporations liquidation model uses a trifurcated approach to expedite turnarounds and maximize profits; namely bulk, Single Property, and Auction Sales. Lionheart Holding, Incs President and Chief Executive Officer (CEO), Stacy R. Sutter, closed over 395 transactions in 2012 by raising over $39 Million Dollars of real estate for resale. Over the course of the last ten years, Mr. Sutter has raised and sold in excess of $250 Million Dollars of real estate for transactions of this type, evidence of the empirical results and strategic alliances forged during this last decade. Affiliates of the Corporation have owned a controlling interest in several diverse property types for over 15 years. The Corporation invests only in control positions, where it has complete control of the management of the investment, from acquisition to sale. The portfolio is diversified according to the types of organizations from which The Corporation acquires non-performing assets. Track record, proven solution-mechanisms, and strong following notwithstanding, the Corporation intends to maintain its focus on real estate acquisitions in the distressed and nonperforming sector because tightened credit in the real estate market and the volume of foreclosures forecast from purchases by over-leveraged buyers early in the decade provide attractive opportunities for acquisition in 2013.
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Investment Approach
Lionheart Holdings, Inc. pursues opportunities judiciously, with discipline, data, and careful analyses. The mid- and long-term opportunities presented by todays avalanche of nonperforming assets, however, are clear. Banks are currently carrying too many non-performing assets forcing banks to buy back these non-performing assets through the foreclosure process. Both Freddie Mac and Fannie Mae institutions have announced bulk sales opportunities for such non-performing assets. According to a recent CoreLogic Report, the residential shadow inventory, as of January 2013, is at 4.2 million units, a supply of 24+ months. The Corporation knows of more than 5,200 banks that are holding non-performing/distressed assets immediately available for purchase. Because these are historically undervalued by the marketplace, such assets offer the prospect of greater appreciation than the assets of more financially stable companies. Market undervaluation in relation to fundamental value results from the difficulties conducting thorough financial analysis of a non-performing asset. If an asset is not producing for the entity that owns it, they are unable to assign a definitive value. Holders of these non-performing assets are aware of the market value before acquiring the underlying property. The Corporation focuses on assets experiencing absolutely no success and profitability. However the entities that will acquire these non-performing assets from the Corporation understand the mandatory need for purchasing these assets in bulk, in order to obtain a financial profit. The Corporations track record over time in the industry offers it other avenues of sale, when one of the entities above is unable to buy a portion of its purchased non-performing assets. Partnering with entities whose goal is to ensure the sale of these assets provides a greater likelihood of profitability for all involved. The Corporation, based on its collective 100 plus years of industry experience, is confident that its investment approach minimizes downside risk while ensuring profitability. Further, for ease of its Partners, closing for these assets is openended while projections to close the acquisition-to-sale process fall within a 90 day time frame of acquisition period. The non-performing assets in which the Corporation invests shall be sold through a trifurcated approach, as described. Lionheart Holding, Inc is a commercial real estate company created to acquire and dispose of residential property at an institutional level utilizing efficiencies in bank purchasing, computerized sales and the ability to bundle and sell on a commercial scale due to the Officers established relationships and growing network of industry strategists. While some risk is necessarily inherent in such investments, the Corporations disciplined approach capitalizes on underlying value.
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Corporate Structure
A Texas corporation is created by filing the Articles of Incorporation with the Texas Secretary of State. The Secretary of State provides a form that meets minimum state law requirements. A corporation is a legal person with the characteristics of limited liability, centralization of management, perpetual duration, and ease of transferability of ownership interests. The owners of a corporation can be characterized as shareholders, and/or investors based on their agreement with the corporation. However, state corporate law does provide for shareholders to enter into shareholders agreements to eliminate the directors and provide for shareholder management. The persons who manage the business and affairs of a corporation are referred to as directors and/or Officers depending on how the corporation is structured. When a corporation is originally chartered by Texas, it exists as a C Corporation. If you do nothing more after forming your Texas Corporation, it will remain a C Corporation. Under Federal Taxation a C Corporation is taxed as a separate entity and must report profits and losses on a corporate tax return. The C Corp pays corporate taxes on its profits while the shareholders are not taxed on the corporations profits. C Corp shareholders report and pay income taxes only on what they are paid by the corporation. When the corporation chooses to pass along any of its after-tax profits to shareholders in the form of dividends, the shareholders must report those dividends as income on their personal tax returns even though the corporation has already paid corporate taxes. Texas C Corporation shareholders do not report any of the business income and expense on their individual tax return. The corporation files tax returns and pays its income taxes (at generally lower tax rates than would individuals) while the individual shareholders report and pay personal income taxes only on monies paid to them by the corporation. It should be noted that shareholders are required to pay personal income taxes on income from dividends paid by a C Corporation even though income taxes have previously been paid by the corporation. This leads to what is commonly referred to as double taxation. Texas C Corporations best serve owners who want the limited liability, a more formal business structure, the ability to reduce overall income taxes and accumulate assets in the business, and ways to more easily raise capital. Official documents must be filed with Texas in order to form a Texas C Corporation.
Limited Liability
Texas C Corporation shareholders normally enjoy limited liability and can lose no more than the amount they invested in the corporation Texas C Corporation shareholders cannot normally be held liable for legal judgments against the corporation or for any of the corporations debts or obligations Protection of Texas C Corporation shareholders personal assets is one of the major reasons business owners choose to incorporate in Texas
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Raising Capital
A Texas C Corporation can raise additional capital easier than some of the other types of business since you can issue and sell stock or a variety of other financial instruments as evidence of interest in the corporation The sale of stock is sometimes subject to Texas and Federal securities laws Ownership can be easily transferred by selling stock in the corporation
Taxation
Texas C corporations are normally audited less frequently than sole proprietorships and partnerships Texas C Corporations file tax returns and pay income taxes but since tax rates are lower for C corporations, owners can (by dividing profits) accumulate more in the corporation than is possible with pass-through taxation Texas C Corporation shareholders face double taxation since they are required to pay personal income taxes on dividends paid them by the corporation Texas C Corporations can reduce owners self employment taxes
Owners working for the Texas C Corporation are employees and are therefore eligible for certain fringe benefits such as group insurance plans, retirement and profit sharing plans, and tax-favored stock option and bonus plans Employees frequently prefer to work for a corporation that can offer them stock options and stock bonuses In a sense a Texas C Corporation is immortal and perpetual since it does not end with the death of a shareholder owner as do some of the other business types
Public Perception
The general public normally thinks of corporations as being more substantial than sole proprietorships and partnerships
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Geographical Focus
The Corporation is focused on investing in non-performing and distressed assets in Texas and other Non-Judicial states, primarily in the Midwest.
Competitive Advantage
Lionheart Holdings, Inc. is currently in a market environment of low interest rates and low inventory, driving real estate costs to increase significantly. Thus, market environment has been dictating a drastic economic turn-around, causing an astronomical demand for housing. The Corporations select and discriminating management team has more than a century of real estate experience between them, and as much wisdom in the market. More importantly, the Corporation holds the singular ability to liquidate a large inventory in an expedited Purchase-toSale process. Lionheart Holding, Inc. also places value in the fact it will be investing in hard, tangible assets.
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Buying Advantage
The Corporation offers the significant buying advantage of a virtually undiscovered niche market: the small and regional banks not being serviced by the large asset disposition companies. With an experienced and trusted management group, the Corporation can track its ability to negotiate notably attractive purchase prices for its investors. More importantly, Lionheart Holding, Inc. has an in-house asset management team with nation-wide real estate experience overseeing all asset pricing and evaluation.
Sales Advantage
Potential sales of assets acquired by the Corporation shall be closed with maximum efficiency by the exceptional sales team and its extensive years of residential and commercial sales experience in bulk real estate transactions and negotiations. Lionheart Holding, Inc. has efficiencies in property maintenance, including boarding, initial and recurring property services, waste, and trash removal. Lionheart Holding, Inc. has a longstanding relationship with Jack O Boyle & Associates, one of the nations largest and top foreclosure law firms. Attorney OBoyle, Freddie Macs attorney, i is known for highly personalized cradle-to-grave eviction services and has associates in all 50 states. This relationship allows Lionheart Holding, Inc. to efficiently purchase and maintain real estate, regardless of the occupancy status. Lionheart Holding, Inc. has a proprietary computer system t designed to streamline the buying process and which allows the Corporations clients to customize their own applications. By design, the system enables clients to mix and match their property portfolios. With maximum efficiency in mind, the Corporation has streamlined the entire process with the following:
Active and Sold Comparables Rental Comparables by neighborhood Tax records Up to100 date-stamped photographs of an asset Professionally-prepared Broker Price Option (BPO) Estimated repair list Previous MLS Listings, as available
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Investment Process
Key elements of the Corporations investment process include: (i) identification of nonperforming assets, (ii) acquisition at a discounted, current written-down value, (iii) implementation of one of the three Liquidation models. With the Corporations 100 years of collective real estate negotiation experience, the process will be one of due diligence and keen evaluation of each individual property, conducted by in-house managers at the time of purchase. Local REO Brokers, with expertise in the local real estate market, will provide the Broker Price Opinions (BPO). These BPOs contain essential information relevant to the property. Upon receipt of the BPO, in-house Asset Managers evaluate the price, condition, and profitability margins of the property, for further classification.
Transaction Flow
The flow of transactions begins with the banks ownership of non-performing assets (NPA) that meet the Corporations specific criteria, maximizing investor profitability. Based on the evaluation of its in-house asset managers, the Corporation will negotiate a substantially discounted price to acquire properties, at which point First American Title will begin title research, to confirm clear title or remedy any encumbrances that might hinder the title transfer process. The Broker Price Opinion (BPO) is then ordered, to further assist with the asset aid evaluation process.. The BPOs are ordered from a local real estate professional. Next, the Corporation develops a package of real estate non-performing assets to be listed on the website for bulk liquidation. After 60 days, if the property is not sold in bulk liquidation, the property will be transferred to the one-off sales team, which will assign it to a local real estate professional for sale in the area market. If the asset has not sold 60 days after this listing, it will be listed with Hudson and Marshall Auction House for final liquidation. Currently Hudson and Marshall is receiving 70-73% of list price in an absolute sale.
Liquidation Model
The Corporation targets financially non-performing assets, purchasing them from Hedge Funds, Banks, and Financial Institutions. In turn, the Corporation liquidates them through Bulk Sales, Single Property Sales, and Auction Sales.
(i)
Bulk Sales begin with the Title Companies performing due diligence and initiating a proper title check of each property to ensure clear and unencumbered title. Thereafter, the Broker Price Opinion (BPO) is ordered through the Broker Network who will perform a Property Evaluation. Investors shall register and deposit $50,000 into a non-refundable trust account for 6-months. These deposits shall be credited to
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the purchase price if the transaction closes. Within the 6-month period from when the deposit is placed into the trust account, the Properties shall be listed for sale. Investors have the ability to build their own asset packages and bundles. Investors shall be given full and complete access to all information for their own15 - 30 day due diligence. All closings shall be done on a cash only basis and the deposited credit of $50,000 shall be credited towards the purchase price.
(ii)
Single Property Sales begin with the Real Estate Owned (REO) Attorney who initiates the foreclosure process, if necessary. As stated, Lionheart Holding, Inc. has a longstanding relationship with Jack O Boyle & Associates, one of the nations largest and top foreclosure law firms. Attorney OBoyle is Freddie Macs Attorney because of his long standing highly personalized and cradle-to-grave eviction services with associates in all 50 states. If the foreclosure process is not necessary, then the one off sales team will assign the property to a local real estate professional who has 60 days and a single price reduction, to have the asset placed under contract for purchase. Upon the success of the local real estate professional, the Title Company will immediately close the transaction. The Corporations Officers have had significant relationships with First American Title Company for more 15 years and for over 120 years, First American has offered its services through direct operations and a network of qualified agents across the United States and internationally. In the extremely unlikely event that any property is unable to be sold within the 60-day period allotted, the property shall be immediately listed with the Auction House Partner, Hudson and Marshall, for Absolute Sale.
(iii)Properties that have not been sold through the Single Property sales process, will be
listed with the Auction House, Hudson and Marshall, for Absolute Sale. Hudson & Marshall is the most experienced and trusted leader in the REO auction industry, having sold over 80,000 homes in the past ten years. Moreover, during the past five years alone, Hudson & Marshalls total sales topped $3.5 billion dollars. The auction process will commence 60 days after the Property has first been listed. Cost servicing the auction is at maximum efficiency since the price to sell is zero. Hudson and Marshall is producing 70-73% of the current market list price in an Absolute Auction. All auction houses primary revenue stream for servicing auctions is earned through retaining a 5% buyers premiums.
Exit Strategy
The Corporation has a 3 Option Exit Strategy.
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Option 1: By the end of year 2, all the original funds shall be returned to the investors. Projections assume that the investment group shall continue to share in the profits and the Company will continue to expand and grow while liquidating properties. Option 2: With increased and successful returns, an Investment Fund may elect to purchase Lionheart Holding, Inc. Option 3: If market competition grows at an exponential rate, the Corporation will elect to take proceeds and dissolve Lionheart Holding, Inc. while, satisfying investors. More importantly, the Corporation shall assess the market and anticipate any material changes in the real estate market, which shall allow the Corporation to maneuver with market opportunities. Any principal investments returns are contingent upon returns actually being realized on the principal contribution.
Investment Analysis
Sound corporations must first identify attractive investment opportunities. Next they should conduct rigorous due diligence, to identify the prospective risks and rewards of the investment. However, with this opportunity, the Corporation has already completed all the research and development needed to identify, understand, and vet-out the investment in non-performing assets. The liquidation analysis is an essential component of the due diligence process, as it enables the corporation to clearly define the true downside of the investment opportunity. Once again, the Corporation has identified a proven, profitable liquidation structure based on its Officers collective experiences and relationships. Investors will have a very competitive advantage with profitable returns since the Corporation has completed the due diligence of acquiring and selling non-performing assets. The Corporation has consulted and performed financial investments of this sort with vendors and other financial institutions involved in order to understand the investment opportunity and the sources of efficient profitability. These relationships have assisted in identifying a critical process for targeting cost reductions for potentially maximizing the profitability that shall yield the most efficient and highest profit on the investment. The due diligence process is managed by investment professionals. Typically, a comprehensive transaction summary is prepared, including third-party analyses, and/or valuation opinions.
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VA, and Bank of America, to name a few, with a small, agile staff of 13 posting over a $1 million in gross commissions earned. Sutter lives in Houston Heights, a historic neighborhood, with his incredibly patient wife Kay and their two wonderful Scotties, Maggie and Duffy.
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Laura is the mother of three, step mom to three, and has six wonderful grandchildren.
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to the job seeker. Initially, serving as the organizations COO, Williamson now volunteers in the CIO capacity.
Doug Williamson lives with his wife Margot in Fort Worth, Texas and is an avid Barbershop Quartet Singer.
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Corporate Partners
First American Title Company With experience dating back to 1889, First American offers its services through direct operations and a network of qualified agents across the United States as well as internationally. Hudson and Marshall Auction House
As the nations largest real estate foreclosure auction house, Hudson and Marshall handle all the marketing and liquidation of the Corporation. The Corporation has negotiated with Hudson and Marshall to auction off their non-performing assets for a zero cost to the Corporation. Hudson & Marshall will receive their profits by retaining a 5% buyers premium generated from the sale.
Hodgson CPA
A Houston based Certified Public Accounting Firm provides Certified Public Accountant services and professional tax preparation and planning services for individuals and businesses. More than a traditional accounting company, they are a business advisory firm with International Experience. Hodgson CPA has
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provided financial analysis, quarterly financials and conduct yearly audits. Memberships and Affiliations
National Association of Realtors Texas Association of Realtors Houston Association of Realtors Elite REO 5 Star Institute Freddie Mac - Circle of Excellence National Association of Hispanic Realtors Katy Chamber of Commerce Heights Chamber of Commerce
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IV.
Investment Objective
The investment objective of the Corporation is to maximize total return on capital by seeking capital appreciation through the development and management of a diversified portfolio of nonperforming assets, underperforming assets or distressed residential assets. The Corporations investment strategy is to purchase assets from state and regional banks offering a discounted rate on the written down value. Thereafter, the Corporation intends to resell the assets at a 15%-20% of the retail value in an up market. The current management team has been together for the last 5 years. All additional Officers who have joined the Corporation have been in the real estate industry for over 15 years and have worked with the Current Management Team for the last 10 years. Collectively, the Current Management Team has over 100 collective years of experience in the real estate industry. Lionheart Holding, Inc. is a virtual hybrid Corporation which allows the Corporation to expedite the Purchase to Sale process compared to the larger, more traditional Companies. Due to the Corporations vastly experienced management team and a green process, the Corporation is able to capture the market trends and act at a much faster rate than any industry competitors. Lionheart Holding, Inc. has a custom built computerized system that allows for a more efficient marketing process, which inevitably allows for a more efficient resale process. In addition, Lionheart Holding, Inc.s works with institutional buyers to sell in bulk at a commercial level. Lionheart Holding, Inc. has a custom built, computerized system that allows for a more efficient marketing process which inevitably allows for a more efficient resale process. In addition, Lionheart Holding, Inc.s relationship with institutional buyers allows Lionheart Holding, Inc. to sell in bulk at a commercial level. The Corporation seeks to purchase the non-performing assets and other obligations at substantial discounts to their original value, in situations where the Corporation believes that the underlying asset values protect the cost of the investment, realizing gains through sale after value is recognized in the market.
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Prot Distributions
Profits shall be distributed to all investors at a level that commensurate with investor terms outlined in investors agreement. Said shares will be distributed to all investors on a Quarterly basis of the Corporations Annual Fiscal Year. Income, gain, loss, deduction and credit of the Corporation will be allocated for Federal income tax and book purposes in a manner, which generally conforms to the foregoing distribution provisions. Thus, income and gain will generally be allocated to offset certain loss allocations. Such income and gain will then be allocated to the Investor Agreement. Losses will generally be allocated to reverse the foregoing allocations of income and gain and then to all Investors in proportion to their capital contributions. The minimum capital commitment of an Investor will be Five Million Dollars USD ($5,000,000), although commitments of lesser amounts may be accepted at the discretion of the Corporation. An initial closing of this offer by the Corporation will be held as soon as practicable after the Corporation determines that a sufficient minimum amount of commitments has been obtained. Additional commitments may be added at the discretion of the Corporation for up to 270 days after the Initial Closing. The Corporation will pay all costs and expenses relating to the Corporation's activities (to the extent not reimbursed in connection with an investment), including legal, auditing, consulting, research and accounting expenses, other expenses associated with the sourcing, acquiring, holding and disposing of its investments or proposed investments, expenses incurred in collection of monies owed to the Corporation, expenses of its Officers, any taxes, fees or other governmental charges levied against the Corporation or any Special Purpose Vehicle or Alternative Investment Vehicle, extraordinary expenses (such as litigation-related and indemnification expenses) and expenses substantially comparable to the foregoing.
Transfer of Interests
No Investor may sell, assign, pledge or otherwise dispose of its Interests without the prior written consent of the Corporation in its sole discretion. An Investor desiring to affect a transfer must also comply with certain requirements of the Corporation. No trading market will exist for the Investors Interests.
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liability or take such actions; provided that such UBTI will not be material in light of the anticipated return on any such investment. UBTI will be considered material if the anticipated amount of UBTI from an investment exceeds ten percent (10%) of the anticipated income from such investment.
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participate in, or substantially influence the conduct of, the management of the operating company, and must, in the ordinary course of its business, exercise its management rights with respect to one or more of its portfolio investments. The Regulation defines an "operating company" as a company which is engaged in the production or sale of a product or service other than the investment of capital. The Corporation does not intend on spending the investment on any acquirement of companies. Thus, ERISA does not apply to the Corporation.
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VI.
Risk Factors
The statements made in this Memorandum regarding the future activity and opportunities in the distressed assets market are forward-looking statements. The matters discussed in such statements may be affected by a number of events, including general market and economic conditions and the other factors described in this Memorandum and in this Risk Factors section. Prospective investors are urged to read this section, which should be considered, before making an investment in the Corporation.
Investment Risks
All Corporation investments risk the loss of capital. The Corporation believes that its investment program and research techniques moderate this risk through a careful selection of real estate, equity interests, debt and other financial instruments and assets. No guarantee or representation is made that the Corporations program will be successful. There are several risks inherent in such investments, some of which are specifically referenced below. Not only are such investments subject to investment-specific price fluctuations but also to macro-economic, market and industry-specific conditions. No assurance can be given as to when or whether adverse events might occur which could cause significant and immediate loss in value of Corporation's portfolio.
Government-Entity Risk
Some U.S. Government securities, such as Treasury bills, notes and bonds are mortgages-backed Securities guaranteed by the Government National Mortgage Association (Ginnie Mae), are supported by the right of the issuer to borrow from the U.S. Treasury; others are supported by the discretionary authority of the U.S. Government to purchase the agencys obligations; still others are supported only by the credit of the issuing agency, instrumentality, or enterprise. Although U.S. Government-sponsored enterprises (GSEs), such as the Federal Home Loan Banks, Freddie Mac, Fannie Mae and the Student Loan Marketing Association (Sallie Mae) may be chartered or sponsored by Congress, they are not funded by Congressional appropriations, and
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their Securities are not issued by the U.S. Treasury or supported by the full faith and credit of the U.S. Government and involve increased credit risks. Although legislation has been enacted to support certain GSE, including the Federal Home Loan Banks, Freddie Mac, Fannie Mae, there is no assurance that GSE obligations will be satisfied in full, or that such obligations will not decrease in value or default. It is difficult, if not impossible; to predict the future political, regulatory or economic changes that could impact GSEs and the values of their related securities or obligations. In addition, certain governmental entities have been subject to regulatory scrutiny regarding their accounting policies and practices and other concerns that may result in legislation, changes in regulatory oversight and/or other consequences that could adversely affect the credit quality, availability or investment character of securities issued or guaranteed by these entities.
Management Risks
The Corporations ability to identify and invest in attractive opportunities is dependent upon the Officers. If one or more key individuals leave the Officers, it may not be able to hire qualified replacements, or may require an extended time to do so. This could prevent the Corporation from achieving its investment objectives. As with any officer managed corporation, the Officers may not be successful in selecting the best-performing assets, leverage strategy or investment techniques, and the Corporations performance may lag behind that of similar investments as a result.
Liquidity Risks
Investors will not be permitted to withdraw from the Corporation prior to its termination and interests in the Corporation may be assigned or otherwise transferred only under limited circumstances. At times, a major portion of an issue of non-performing assets may be held by relatively few investors. Under adverse market or economic conditions or in the event of adverse changes in the financial condition of the issuer, the Corporation may find it more difficult to sell such assets when it believes it advisable to do so or may be able to sell such assets only at prices lower than if the assets were more widely held. Illiquid assets are assets that the Officers determine cannot be disposed of within seven days in the ordinary course of business at approximately the value at which the Corporation has valued the assets. Illiquid assets may trade at a discount from comparable, more liquid investments, and may be subject to wide fluctuations in market value. Also, the Corporation may not be able to dispose readily of illiquid assets when that would be beneficial at a favorable time or price or at prices approximating those at which the Corporation currently values them. The absence of trading market can make it difficult to determine a market value for illiquid investments. Disposing of illiquid investments may involve time-consuming negotiation and legal expenses, and it may be difficult or impossible for the
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Corporation to sell them promptly at an acceptable price. The Corporation may have to bear the extra expense of registering such assets for resale and the risk of substantial delay in effecting such registration. In addition, market quotations are less readily available. The judgment of the Officers may at times play a greater role in valuing these assets than in the case of publicly traded assets.
Geopolitical Risk
The wars with Iraq and Afghanistan and similar conflicts and geopolitical developments, their aftermath and continued military presence in Iraq and Afghanistan are likely to have a substantial effect on the U.S. and world economies and securities markets. The nature, scope, and duration of the wars and the potential costs of rebuilding infrastructure cannot be predicted with any certainty. Terrorist attacks on the World Trade Center and the Pentagon on September 11, 2001 closed some of the U.S. securities markets for a four-day period and similar future events cannot be ruled out. The war and occupation, terrorism and related geopolitical risks have led, and may in the future lead, to increased short-term market volatility and may have adverse long-term effects on U.S. and world economies and markets generally. Likewise, natural and environmental disasters, such as the earthquake and tsunami in Japan in early 2011, and systematic market dislocations of the kind surrounding the insolvency of Lehman Brothers in 2008, if repeated, could be highly disruptive to economies and markets. Those events, as well as other changes in foreign and domestic economic and political conditions, also could have an acute effect on individual issuers or related groups of issuers. These risks also could adversely affect individual issuers and securities markets, interest rates, secondary trading, ratings, credit risk, inflation, deflation, and other factors relating to the Corporations investments and the market value.
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may represent a substantial discount to what the Officers believe to be the ultimate value of such obligations. It may be difficult to obtain information as to the true financial condition of such issuer.
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be realized or that there will be any return of capital. There is no assurance that there will be a ready market for resale of investments because investments in real estate generally are not liquid. Illiquidity may result from the absence of an established market for the investments, as well as from legal or contractual restrictions on their resale by the Corporation. The possibility of partial or total loss of capital will exist and investors should not subscribe unless they can readily bear the consequences of such loss.
Risks of Litigation
Investing in distressed assets can be a contentious and adversarial process. Different investor groups may have qualitatively different, and frequently conflicting, interests. The Corporation's investment activities may include activities that are hostile in nature and will subject it to the risks of becoming involved in litigation by third parties. The expense of defending against claims against the Corporation by third parties and paying any amounts pursuant to settlements or judgments would be borne by the Corporation and would reduce net assets and could require the partners to return distributed capital and earnings to the Corporation. The Shareholders will be indemnified by the Corporation in connection with such litigation, subject to certain conditions.
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In General
Generally, the gains and losses realized by a trader or investor on the sale of assets are capital gains and losses. Thus, subject to the treatment of certain currency exchange gains as ordinary income and certain other transactions, The Corporation expects that its gains and losses from its investments typically will be capital gains and capital losses. These capital gains and losses may be long-term or short-term depending, in general, upon the length of time the Corporation maintains a particular investment position and, in some cases, upon the nature of the transaction. Property held for more than one year generally will be eligible for long-term capital gain or loss treatment. The maximum ordinary income tax rate for individuals is currently thirty-eight point six percent (38.6%)* and, in general, the maximum individual income tax rate for long-term capital gains is twenty percent (20%).** A special individual long-term capital gains tax rate of twenty-five percent (25%) generally applies to the portion of the "depreciation recapture" recognized upon the sale of depreciable real estate held for more than one year. In all cases the actual rates may be higher due to the phase out of certain tax deductions, exemptions and credits. The excess of capital losses over capital gains may be offset against the ordinary income of an individual taxpayer, subject to an annual deduction limitation of Three Thousand Dollars ($3,000). For corporate taxpayers, the maximum income tax rate is thirty-five percent (35%). Capital losses of a corporate taxpayer may be offset only against capital gains, but unused capital losses may be carried back three years (subject to certain limitations) and carried forward five (5) years. The Corporation may also acquire debt obligations with "market discount." Upon disposition of such an obligation, Corporation generally would be required to treat gain realized as interest income to the extent of the market discount, which accrued during the period the debt obligation was held by Corporation. Moreover, if the Corporation were treated as a "dealer" with respect to all or part of its assets (meaning that it was viewed as holding such assets for sale in the ordinary course of its business), then all the gains from such assets would be treated as ordinary income and the Corporation generally would be required to recognize gains and losses with respect to such assets (and other assets not properly designated as being held for investment) on a mark-tomarket basis at the end of each year.
**
Under existing legislation, this rate is reduced in stages until calendar year 2006 when the maximum rate will be thirty-five percent (35%). However, this legislation contains a "sunset" provision that will result in the top rate being restored to thirty-nine point six percent (39.6%) in 2011.
****
The maximum individual long-term capital gains tax rate is eighteen percent (18%) for certain property purchased after December 31, 2000 and held for more than five (5) years.
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improvement. The calculation of a particular tax-exempt organization's UBTI is also affected if it incurs indebtedness to finance its investment in Series One. Section 514(c)(9) of the Code excludes from the definition of "acquisition indebtedness" any indebtedness incurred in acquiring or improving real property (but not mortgage loans) that is owned by employee trusts qualified under Section 401 of the Code and certain educational institutions (collectively "Qualified Organizations") if six enumerated conditions are met. Those conditions include (subject to certain exceptions) that the purchase price for the real property be fixed at the time of acquisition, that certain terms of the indebtedness not be dependent upon the income from the real property, that no part of the real property be leased to the seller (or its affiliates), that the real property not be acquired from or leased to certain persons connected with the Qualified Organization, that the real property not be financed by the seller, its affiliates or certain persons connected with the Qualified Organization, unless the financing is on commercially reasonable terms, and that, where the investment is held through a partnership with partners that are not Qualified Organizations, the partnership's tax allocations satisfy certain technical requirements. The amount of UBTI that is realized by tax-exempt Investors will depend on the nature of Corporation's future operations. Although the Corporation will use its reasonable best efforts not to take any action that might generate UBTI, some investments of the Corporation might generate UBTI. For example, it is possible that, in implementing its acquisition and disposition strategy with respect to distressed debt portfolios, the Corporation will be treated as a "dealer" with respect to a portion of the assets in which it invests, in which case all the gain from the disposition of such assets generally would be UBTI. Even if the Corporation were not treated as a dealer as described above, due to the Corporations investment strategy of using leverage in certain circumstances to finance its investments, it is possible that a portion of the income of the Corporation will be UBTI under the acquisition indebtedness rules described above. The Corporation will use reasonable efforts to qualify for the Section 514(c)(9) exception with respect to real estate securities for Investors that are Qualified Organizations. However, it is possible that Corporation will take actions (such as employing certain types of seller financing) which would make the Section 514(c)(9) exception not applicable. Furthermore, UBTI may be generated for reasons unrelated to leverage. Accordingly, it is possible that a portion of the income and gain earned by the Corporation will constitute UBTI, even for Investors that are Qualified Organizations. However, it is expected that any investments which might generate UBTI would be an insignificant part of the Corporation's portfolio.
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Withholding Taxes
In general, a foreign Investor of a corporation which does not conduct a U.S. trade or business is nonetheless subject to a withholding tax of thirty percent (30%) on the gross amount of certain U.S. source income which is not effectively connected with a U.S. trade or business. Income subject to such a flat tax rate is of a fixed or determinable annual or periodic nature, including dividends and certain interest income. Such withholding tax may be reduced or eliminated with respect to certain types of such income under any applicable income tax treaty between the United States and the foreign Investor's country of residence or under the "portfolio interest" rules contained in Section 871 or 881 of the Code, provided that the foreign Investor provides proper certification as to his eligibility for such treatment. Any foreign Investor that is a governmental entity qualifying under Section 892 of the Code may be exempt from the thirty percent (30%) withholding tax. Foreign Investors generally will be personally liable to The Corporation with respect to any withholding tax not satisfied out of their share of any distributions by The Corporation.
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For non-corporate partners, the thresholds are Two Million Dollars ($2,000,000) in any one taxable year or an aggregate of Four Million Dollars ($4,000,000) over the six-year period described above, and for corporate partners, the thresholds are Ten Million Dollars ($10,000,000) in any one taxable year or Twenty Million Dollars ($20,000,000) over the six-year period described above.
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reporting requirements unless it is marked to market under the Code (e.g., Section 1256 Contract): (i) a transaction involving an asset that is, or was, part of a straddle (other than a mixed straddle), (ii) a transaction involving certain "stripped" instruments, (iii) the disposition of an interest in a pass- through entity, and (iv) a foreign currency transaction which generates an ordinary loss. The Regulations require The Corporation to complete and file Form 8886 ("Reportable Transaction Disclosure Statement") with its tax return for each taxable year in which The Corporation participates in a "reportable transaction." Additionally, each Investor treated as participating in a reportable transaction of The Corporation is required to file Form 8886 with its tax return. The Corporation and any such Investor, respectively, must also submit a copy of the completed form with the Service's Office of Tax Shelter Analysis. The Corporation intends to notify the Investors that it believes (based on information available to The Corporation) are required to report a transaction of The Corporation, and intends to provide such Investors with any available information needed to complete and submit Form 8886 with respect to The Corporation's transactions. Under the above rules, an Investors recognition of a loss upon its disposition of an interest in the Corporation could also constitute a "reportable transaction" for such Investor. Investors should consult with their advisors concerning the application of these reporting obligations to their specific situations.
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