Business Real Estate

Business Real Estate

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Research Associate Melissa Lam prepared this case under the supervision of Professor William J. Poorvu. HBS cases are developed solely as the
basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective
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The Cardon Family
In summer 1998, freshly graduated from Harvard Business School, Wil Cardon made the difficult
decision to join his father, Wilford, in the family’s investment and real estate business instead of
taking his dream job, an associate position at a premier investment company in the Midwest. Having
made the decision to join his father, Wil wholeheartedly threw himself into running the family firm.
Three years later, during the summer of 2001, Wil found himself at a crossroads. The elder
generation of three brothers running the business had taken a step back and were preparing to turn
over the reins to the younger generation. The business included Broc Hiatt (a cousin who had been
CFO of the firm for the past 6 years), Tom Burton and Brent Bowden (sons-in-law of Wil’s two
uncles), and Greg Davis (an HBS classmate whom Wil had recruited in 1999 to join the company)
along with other non-family professionals.
In addition to passing on the business, Wil’s father and uncles were also passing on a tremendous
amount of family responsibility. The three brother’s families now had 21 direct descendents in Wil’s
generation. Including Wil’s three aunts’ families, who were not owners of the business, this number
grew to 39 and grandchildren numbered over 100.
As owner of his family’s portion of the business and steward of his extended family’s financial
fortunes, Wil grappled with many pressing issues. First, what was the business? Like many real
estate enterprises, properties or assets were owned in many individual partnerships. About 20% of
the family’s investments were outside of real estate.
In the beginning, Wil’s grandfather had started off with full service gas stations. His father then
took over and was immensely successful in land investment and development and eventually
became an operator of convenience stores. The early 1990’s had been a near disaster for the family
with virtually every S& L in Arizona filing bankruptcy. The business, along with several
partnerships, had taken down $250 million of debt for buying land and expansion. Along with
almost all real estate related businesses in Arizona during the late 1980’s and early 1990’s the
Cardon’s had to negotiate a number of deals to survive. Several peripheral businesses were closed.
Yet, the business made it, albeit at a lower level of activity. Wil considered what Cardon was good at
and how the family’s values affected their decisions.
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Second, how could he structure the company so that he, Broc, Greg, and the others were fairly
compensated without making those outside of day to day management feel they were not being
treated equitably? The family values played into this decision as well. For instance, even though
their sisters were not owners, the brothers had always felt a financial responsibility to help them and
did so from time to time.
Finally, where was Wil in his personal career development? Having given up his dream job, did
he really want to commit to this business or did he want to pursue his other interests? He had always
considered someday becoming active in politics.
Family History
After a long odyssey, Wil’s grandfather started the Cardons in the real estate business through the
ownership of gas stations. Wil described his grandfather’s upbringing:
My great grandfather was born in Mexico as part of a large Mormon family who had been
sent by Brigham Young to colonize the southwest. Pancho Villa ran the immigrants out of
Mexico in the early 1900’s and the family migrated and settled just north of Tucson, Arizona.
He lived in a tent with a dirt floor most of his early life and at a young age, 12, he went to
work in a dairy to help support the family. He was a very industrious, boot-strapping
individual. His oldest brother Parley planned for the family to get out of poverty through
education. ‘Every Cardon through college,’ became the family mantra preached by Parley and
their mother.
The system was as follows. One would attend college while the others pooled their money
to pay for tuition and books. Upon graduation, the increased earning power of those with
university degrees would increase the wealth of the pool. Of nine immediate brothers and
sisters, five earned Doctorates with the other four earning at least a Baccalaureate degree. This
was during the 1930’s and 1940’s from a family that did not have any financial wealth.
They had enough money so that when Parley was a senior, my grandfather started as a
freshman at the University of Arizona. When Parley graduated, he accepted a job in
Washington, D.C. Although he was a good swimmer, he drowned in the Potomac River that
summer. To this day no one in the family knows quite what caused him to drown.
It took most of the money in the pool to bring his body back for burial. This happened
during the very early 1930’s. My grandfather now faced the challenge of finding a job and
paying for his education during the depression. He found a solution by working at a gasoline
station next to the University. In a short time he became the lessee of the gasoline station and
passed the bar before he finished law school. He finished up law school at the University of
Arizona but he knew he didn’t want to practice law and became a jobber (gasoline distributor)
for Shell Oil Company in a small town called Stafford. After a few years there, the family
moved to Phoenix and he became the jobber there. At that point, my grandfather began to
build and own full service gasoline stations as well as deliver the product.
Wil’s dad, Wilford Cardon, grew up imbued in the family business. As far back as he can
remember he helped to build stations, deliver product, and do the accounting. He followed his father
to business meetings and construction sites. Recounted Wilford:
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We worked – when everybody else played, we worked together. He had three sons, all
three of us in the business. So I had myself, and two younger brothers. In total in our family
there are six children; three girls, three boys. We worked with our father before school, after
school. We would milk cows in the morning together, we’d build stations in the afternoon
after school together. I was driving gasoline trucks when I was 12 and 13 years old. I was
running complete service stations when I was 16. I mean, he just would put responsibility on
us – he had a great, tremendous capacity to delegate responsibility. He just said make your
own mistakes. There’s your job. Here, I’ll help you. I’ll be your backup, but it’s your business.
So I was hiring, firing, and running people at an early age…responsible for the business.
Wilford left home to attend college and to go on a church mission to Brazil, but was always
involved in the business when he was at home. In his mid 20’s he attended law school in Washington
DC. According to Wil: “my grandfather called him, and said: ‘I have an offer to sell the business.
Either you come home and run it, you’re the one with the potential to run it, or I’m going to sell it.’
My father knew he did not want to practice law and that eventually he wanted to return to the family
business. So he cut his graduate education short and returned home to become partners with his
father and brother, Elijah.”
During the short period of time Wilford worked with his dad, they transitioned the service
stations into a real estate business. Wilford recalled: “Dad was very strong on petroleum. We would
build service stations. That was his vision. We would buy larger tracts of ground. I came back in ’65.
He died in ’69. We had four years together. Instead of a one acre piece on the corner for a service
station, we bought twenty acres. This was a big thing, and it was two or three years before he died.
And he agonized over that. We bought that piece for $200,000, $10,000 an acre. We later sold it. We
kept the front, and sold the rest for a little bit over a million. So it was a good real estate deal.”
Evolution of Business
The Cardon’s business grew. The gas stations were positioned to catch the self-service craze that
swept the country. Said Wilford: “Within five months after my Dad died we built our first selfservice
station. Eventually we changed the whole business to self-service. That was very, very
successful, and allowed us then to expand. We blossomed into industrial real estate, commercial real
estate, land investment, a home building company and lots of other businesses. We’ve been involved
in probably 150 businesses.”
The advent of air conditioning allowed comfortable living and drove the growth of the southwest,
particularly Arizona. The land investment that started around the gas stations grew to larger and
larger deals. Said Wilford: “But in high growth areas like Arizona, land is where the money is. It’s
grown so fast that it’s been a great place to be in the land business. The other aspect of that, of course,
are section 1031 exchanges. In other words, we could sell by arranging to transfer the equity into
another piece without paying tax on it. We have probably a zero basis in about everything we do
because of all the years and years of 1031 exchanges.” The land investment required making big bets
that would not pay off until the land was sold. To supplement their income stream and augment
their gas stations even further, the Cardons opened convenience stores as part of the gas stations.
The convenience stores served as a cash cow to fuel the land investment business.
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Evolution of Family
At the same time the business grew, the Cardon family involvement grew as well. Wilford and
Elijah became partners with their younger brother, Craig, a few years after the death of their father.
Wilford described their relationship:
Elijah has been more involved in the service stations and construction area. Although
Craig never went to law school, his thinking is similar to an attorney’s. As a result, we’ve had
Craig in most of the legal aspects of what we do. He coordinates the attorneys. And he was
very good in our workouts. That’s where he really did his best was in our workout. Although
we all work in each other’s area at times, I’ve taken on the business development and real
I feel very comfortable leaving the business in any of the other two partners’ hands. It’s
not that we’re compartmentalized, although each one deals with separate parts of the business.
We overlap completely if we need to. And during that partnership, each one of us has served a
church mission for three years, which means we’ve left the country. I went to Brazil, Craig
went to Italy, to Rome, and Elijah went to Hamburg, Germany. And during that time you’re
completely doing church service. You don’t come home; you don’t attend board meetings.
During these missions, the Cardon family grew exponentially. Recounted Wil:
My family has eight children. We started off with me, the oldest, then a sister, five years
younger, and then we adopted a boy in the US right before we went down and lived in Brazil
for three years. While in Brazil, unbeknownst to my father, my mother was out looking for
children. He’d go to meetings, and she’d be out looking at orphanages, and adoption agencies.
In the last year we ended up having several children come through our home. We never knew
who was going to stay – my mother helped a lot of families adopt children, but five of them
stayed with us. I have five Brazilian brothers and sisters. I’m 31, I have a sister who is 26, a
brother and sister who are 25, another brother who’s 24, and three who are 21.
Wil Cardon
Wil was also brought up to be involved in the family business. In the summers, he would work
on the crew helping to construct convenience stores. He traveled often with his father and attended
meetings to evaluate potential real estate and private equity deals. However, as Wil recounted, his
post-undergraduate experiences were somewhat non-real estate oriented:
I knew I wanted to go to business school. I knew that the language of business is
accounting. So I applied to accounting firms, and had a couple of job offers with, at that time,
the Big Six. At the same time, the guy who had once run our home-building company called
and began talking to me about starting a sub-prime auto finance company. He asked me to
come back and join him. I thought that was an interesting opportunity, so I went back and did
that, and for two years. It was a great experience. Being the second guy in the shop meant I
had plenty of responsibility. I was in charge of setting up all of the systems and office
personnel for collecting and he was in charge of purchasing the cars and leasing them. I built a
pretty good team and did everything from raising money to repossessing vehicles. It was a
great business learning experience.
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After going to Stanford, working, going on a mission to Portugal and getting married, Wil entered
Harvard Business School. At HBS Wil was offered the opportunity to his “dream job” at a
prestigious Midwest real estate investment firm. At the same time, Wil’s Dad offered Wil the family
business. Wil recalled:
I had a tough decision. I think that was one of the toughest, if not the toughest decision so
far in my life. I remember coming and speaking with Professor Poorvu. I tried to decide
whether to go to Transwestern Investment Company, and work with some people who were
the top of the real estate business nationally, or go home. My father and I spoke about the
choice quite a bit. He did not want to unduly influence my decision but also wanted to make
sure that I understood the ramifications of what I did. He said that in a three to five years he
wanted to be leaving the day-to-day activities of the business and wanted to turn it over to
someone. I had always known that eventually I wanted to go back and work with the family
business, at least for a little while, and see what I could do with it.
Wilford’s father explained his rationale.
I really have liked this business. My father died at 59. When I was in my late fifties I
made some decisions that I really did want to turn it over to the next generation and go out
and do some other things. There are thousands of kids that I know that still need help in
Brazil, Chile and all over the world. We’ve now set up and implemented a program for kids to
go back and further their education in these countries. We’ve gotten thousands and thousands
of kids on scholarships. Every year we bring kids up to get their MBAs here, and then send
them back to their countries. Our goal was to get a hundred MBAs back into Brazil. We have
over one hundred of them who have gone through and are now back down there.
He also explained his view as to responsibility in the family.
Wil is going to manage my assets. When I say ‘mine,’ I mean my family’s assets. I talk
with him a lot about stewardship. I view assets as a stewardship. I don’t view them as mine.
Assets are like a great painting. You can’t own them. You can possess them for a while, but
you can’t own them. We’re all going to die. We’re all going to leave with nothing. We speak
often about why we are here on earth. I talk with him a lot about the use and purpose of
money and wealth. My belief, which he shares with me, is that people are given various
talents. Some people sing well; some play the piano well; some are great painters; some are
given the talent to manage assets well. Some people can’t manage their way out of a paper bag,
but they can sing beautifully. And that’s just the way life is. Those who are given the talent to
manage assets well have the responsibility to use those assets to bless the lives of others. In my
view everything in this earth, including our lives and all that we possess, belongs to God. He
created everything. We can possess His creations for a while, but they belong to Him. We
came into this life with nothing; we’ll leave with nothing. Those who are given the talent to
manage assets well have a responsibility to use that talent and those assets to bless the lives of
God’s children as He would. The talent to manage assets well is comparable to the talent to
sing well. If one is given the talent to sing beautifully, but only sings in the bathtub every day,
never using that talent to bless the lives of others, nor allowing others to grow and expand,
then the talent to sing becomes a thing that cankers one’s soul. It’s of no value to anybody. But
if one uses the talent to sing for the purpose of blessing others, to build our fellow travelers
here on this earth, then it’s a beautiful thing. If one uses his ability to manage assets to bless
and elevate others, then he will be using God’ creations for their intended purposes. If one
uses his talent to manage assets well for self-aggrandizement and ostentatious purposes,
eventual sadness will be the result. I’ve seen too many rich people on their deathbed cursing
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their children. “Oh, you’re just waiting for me to die so you can get my things!” You know,
that’s a crazy way to live.
My sister’s son, Broc, is a very good manager. He has been with us 15 years. He was with
us all through the workout. Broc started working with us as a part-time person while he was
going to college. He earned his degree in accounting, and rather than go to work for others,
he’s been with us all the time. He has all the capacity in the world to go out any time he wants
and do anything. Anybody with whom he deals always comes back and says, “Is he going to
stay with you?” He gets job offers all the time. But he understands the family concept, and
wants to cast his lot with us. So I want to be extremely fair with him, and help him in every
way that I can. And this concept of lending him some equity is a good one. Broc’s a scrambler.
Broc’s and my personality are very similar.
I think Wil is going to do just fine. He has the capacity to do great things – he has the
contacts. He is a network builder. His thinking processes are different from mine. I caution
him. I say, “Where are your weaknesses?” as I often question myself. Wil’s potential
weakness is “ not seeing the water clear to the end of the row.” You can start lots of rows of
cotton with water, talking about irrigation, which is something we understand in Arizona.
You can start lots of rows with water. And he has the capacity to start row after row. So he’s
going to be very good in getting things started. But you’ve also got to be sure that water gets
clear to the end of the row. And that’s where he maybe needs to concentrate. He’ll become
very good at getting the water to the end of the row as he concentrates on it.
The toughest thing I’ve faced in business is passing the family business from the second to
the third generation. The reason is from the founder to the siblings – that is, from my father to
the three brothers – we were all raised in the same home. Of course we had questions of
whether or not the girls were going to be part of the business, of whether or not the sons-inlaw
were going to come into the business, but we worked all those out, because we were all
raised in the same home. My sisters, and I, and my brothers ate at the same breakfast table; we
worked together as a family. And so we understood each other, and the differences between
us we could read pretty well. The sibling relationship is the longest relationship on this earth.
I will be with my brothers and sisters longer than with my parents, or longer than with my
children. Our relationship requires work, but it’s a known quantity.
At the cousins’ level, that is, when you move from my generation down to my children,
the cousins are all raised in different homes. Wil was raised in a different home from Broc, or
from any of the others. There are twenty-one cousins raised in at least three different homes.
Consequently they possess different values taught by different parents. Also there were only
six children in the second generation compared with twenty-one in the third. Twenty-one
adds a whole new dynamic. How to get it from that second level to a third generation is by far
the most complicated and toughest issue to solve.
In addition, to the complexity in transitioning from the second to third generation, the
business faced the challenge of coordinating three different family ownerships with a common
group of assets. Each brother desired the ability to make business decisions independent of
each other as to whom and how their ownership would be managed.
At the same time, Wil harbored some ambitions outside of the business:
I have some political aspirations. So I’m trying to set up a model where people can take
time off to go spend time doing things other than business…if the business doesn’t suffer from
it. So again, it’s that separation of capital…I’d like to run for office some time.
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A family business is a challenge to manage from one generation to the next. Wil and his family
grappled with issues of equity and merit, between siblings and in-laws, family members and
professionals who work in the business and those who do not. According to Wil:
At HBS I took the Family Business class. Using John Davis’ model, we think of ourselves in
three overlapping circles – family, business and ownership. We have family members who fall
in every conceivable category of this diagram. I am in all three of these circles. Some of my
siblings will have ownership but I doubt that they will ever join the day-to-day managment of
the business. Some family members, like Broc, find themselves in two of the circles – family
and business, but not ownership. Others, like Greg, are involved in the business but do not fall
in either the family or ownership circles.
Under this structure, Wil did a lot of thinking about how to handle the business:
Recently we have been changing our business so that the ownership piece is evolving from
an inheritance to more of a meritocracy. We are evolving into a private equity model. And in
this model, those in top level management take a carry. In this way, those who work in the
business are more equitably compensated for their efforts while at the same time justly
rewarding the capital it takes to produce that reward.
As a result, Wil came up with the proposed management structure in Exhibit A to present to the
three brothers.
A family as large as the Cardons added extra complexity. Wil reflected:
We have family councils where we discuss issues. But we never want decisions to be made
by committee. So for each family group, one person is the representative and makes the
decisions. For my family, that is me. For Craig’s family, it is Tom Burton, a son-in-law and for
Elijah’s family it is Brent Bowden, a son-in-law as well.
The Buckeye Deal
In early 2000, a broker brought to Wil and Broc an interesting land deal. Located in Buckeye
County on the west side of Phoenix, this site was located in a growing area 20 minutes west from
downtown. Half of the Phoenix area’s 39,000 new housing starts were on this side of town. This 289
acre site on Airport Road became available and Wil and Broc thought with some negotiation they
could pick up the piece for somewhere around $10,000 to $15,000 per acre (see Exhibit B). The seller
was a family trust that needed some liquidity to settle some family issues.
The land had the potential for a variety of uses including: retail, office and residential. Moreover,
all of the surrounding land was being developed and hopefully the growth in the area would be the
rising tide that lifted all the land values. Properties surrounding this site were being sold for
upwards of $32,500 per acre for some larger tracts or $3 per foot for the smaller parcels, which
translated to $120,000 per acre. Wil stated that they was able to get the inside track on this property
for several reasons:
One of our strengths is our relationship with brokers. Based on our history and our
performance we often get the first look at deals. We have been able to get this preference over
the years because of our reputation in Phoenix. We perform and we close when we say we
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will. Others might put something in escrow and then figure out the financing. We pay cash
and can move quickly. Our combination of strengths allows us at times to get a substantial
market discount. We could probably turn around and sell this land for double what we paid
for it the next day. Our exit for this land, however, is to sell it for $2 per foot or about $100,00
per acre (ten times our purchase price) over a five to ten year time period.
As land developers, the value that Wil’s company adds is not immediately apparent:
We don’t pretend to be developers. In general, we do not develop anything higher than a
curb. In the business we are the “entitlers” of the ground. We buy pieces of property and get
it set up so that it is a turnkey property for developers. We figure out what the best and
highest uses are for a piece, what the requirements are from the municipalities, and figure out
water and sewer. We work with engineers and know the drainage and physical restrictions to
a piece of property. We work with the city and municipality so that all the approvals and
permits are in place. We pay for the environmental impact studies. We get the development
agreements. We have relationships with the city, county and state. We have experience and
the resources to get projects planned. A piece of raw ground generally only has more than
marginal increases in value when you can flush a toilet on it. Otherwise it is generally only
good for agriculture purposes.
In this particular deal, there was a list of outstanding issues that Wil needed to evaluate before
they went forward with the deal.
! Use – There was a flexible general plan that allowed multi-family, commercial and light
industrial. However, for a property that was divided by a highway, what were the best and
highest uses. Would an apartment developer want to build next to a highway? What would
the city want to see on the piece as a part of their general planning? Which of these uses
would provide the greatest financial return?
! Utilities – Wil needed a public utility to provide the power to the development. Power plants
were going in to the East and West. Wil noted that while access to power should not be an
issue, there would be costs associated with it.
! Water – Phoenix, Arizona was a desert. Water generally came from underground aquifers. In
Arizona, a developer needed to prove that he had an assured water supply for 100 years. Not
only did the water supply have to be of adequate quality, but the developer also had to make
sure that it would be replenished continuously. Preliminary tests showed that the water was
spotty in areas. A drilled test well on a neighboring property got good quantity and quality of
water. However, one mile to the south, a different property had been drilled and had shown
bad water samples. Wil thought that the local public utility would be able to supply the water
and issue the necessary Certificate of Water Supply.
! Sewer – Equally important was sewer. A denser development would require more than
septic tanks, it would need sewer lines. Getting sewer lines entailed working with
neighboring land owners as well the municipality. Wil thought that he could secure a
development agreement with the city of Buckeye to take care of both the sewer and the water.
Wil needed to negotiate upfront the impact fees that the developer would ultimately pay.
! Access – The broker was telling Wil that the adjacent property, a massive planned community
being built by the developer DMB, would receive an off-ramp next year. An off-ramp was
key to increasing the property value since it would provide easy access to the property.
Buckeye County passed an ordinance in 1988 for an interchange and the change of access was
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approved by the Arizona Department of Transportation but the funding, and therefore the
building of an off-ramp, really depended on DMB. Wil anticipated that he would be able to
piggyback off the work of the developer of the adjacent property.
! Annexation – Annexation required getting the land incorporated into a city. There was
currently a climate of favorable land designation. While doing business with a county was
easier than doing business with a city – fewer advocacy groups and private citizens — there
were also advantages to working cooperatively with the city from the beginning. There were
no development agreements for this property. The next step was to create a preliminary plan.
Wil had to decide on the timing of the annexation and master plan approval.
! Exit Strategy – Was there a developer who would be willing to purchase this high density,
multi-use property from Wil? Would they be willing to pay 8-10X what Wil paid for the same
While the business plan for these land deals was simple – buy land at a low price, sell at a higher
price based on entitlement improvements and growth in the area — Wil knew from experience that it
was often difficult and time-intensive. Could all these issues be worked out? Would the market in
this area still be there in five to ten years? With no cash flow from a piece of raw land, Wil had to
make sure that he would be able to fund the taxes and other costs over time to hopefully sell it for a
profit. Wil estimated that entitling the land could cost over $150,000 to third parties and additional
costs to fund salaries and expenses for those in his business working on the project. Was he willing
to absorb these costs? While there were a few outs, including a 30 to 60 day feasibility period to
review easements and other issues, Wil knew that if he put a lot of other conditions on the purchase,
he might lose the deal. The ability to close quickly was what got him the first look and the below
market price.
On another level, Wil wanted to finalize the arrangement he had presented to the three brothers
and this land deal would be a good test case as to how it might work. It would involve coming to
grips with many of the issues raised in his proposal.
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Exhibit A
New Organization Proposal
Guiding Principles
1. Management should be rewarded for management and Capital should be rewarded for
capital. An “arms length” relationship should be maintained between Capital and
2. All management is not equal.
3. Objectives of capital providers need to match risk profile. Capital should be matched to
appropriate investments and risk levels.
4. Management and Capital desire partners not employees. (ie.Hunt family has employees
while the Baker family has partners)
5. Control, ownership and financial rewards will be independent of each other and not
necessarily equal.
6. Capital invests Capital. Management directs management.
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Asset and Management Classifications
Issue: Current assets require different work and management levels.
Solution: Create Three Classes of Assets with different compensation
structures for management of each class of asset
• Mature Assets – assets that are fully matured and ready to be exited
• Growing Assets – assets that have had some management on them completed,
yet still have some management left to be done
• New Assets – investments made in future assets that are expected to produce
above par returns
Mature Assets
These assets are fully matured and are (1) ready to be exited or (2) not appreciating above a 9%
hurdle rate and Capital desires to hold them. A management fee will be paid to Management for
the maintenance of assets under a Mature Assets Agreement.
Fee: 1.0% of assets placed in Agreement
Terms: Paid monthly from distributable cash or capital contributions
Review: Annually
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802-196 Brands Retail
Growing Assets
Assets in this class have not reached maturity. They have had some of the work associated with a
typical promote completed. A management fee will be paid to the Management entity for the
maintenance of assets under a Growing Assets Agreement. A transaction fee or promote will be
paid to Management entity with intent to motivate Management to maximize assets appreciation.
(1) Management Fee: 1% of assets placed in Agreement
and either
(2a)Transaction Fee: 0.5% – 1.0% of all assets liquidated each calendar year.
(2b) Carry 5% – 10% carry on profits*
*Profits defined as liquidation proceeds (net of all costs and commissions) minus original
valuation agreed on by Management and Capital.
New Investments Structure
Allocation of Promote:
•Capital Allocation
•Value Enhancement
•Brand Equity
•Fund Raising
Each investment is a new Limited Partnership with General Partner determined at time of investment. The GP receives no financial
reward from the LP. The GP can be removed, with or without cause, upon the affirmative vote of a majority (> 50%) of the Limited
Partnership interests then outstanding. Limited Partnership interests interface with GP and receive management reports from GP.
80% of L.P. 20% Promote
1% Mgmt Fee
(repaid from promote)
Admin. Support
$ Stock
Management Liability
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Brands Retail 802-196
The Partnership’s net distributable proceeds from operations, dispositions, and financings of Investments and other
events giving rise to distributable proceeds will be distributed to the Partners as follows:
• First, to the Capital, until they have received a 9% cumulative return on an annual compounded basis on
their unreturned capital contributions;
• Second, to return to the Capital their unreturned capital contributions;
• Third, 50% to the Management and 50% to the Capital until the Management has received an amount equal
to 20% of all amounts distributed to the Management and Capital under (1) and (3); and,
• Fourth, 80% to the Capital and 20% to the Management.
$1,000,000 investment in ACME Inc.
Twelve months later ACME is liquidated
Total proceeds from liquidation equal $1,200,000
Distribution of Proceeds
(1) $90,000 to Capital
(2) $1,000,000 to Capital
(3) $30,000 to Management and $30,000 to Capital
(4) $40,000 to Capital and $10,000 to Management
Total distributions
Capital $1,160,000
Management $40,000
Allocation of Promote
Proposed division of carry.
Total Promote – 20%
Allocated by:
Capital Allocation
Value Enhancement
Brand Equity
Fund Raising
Allocation determined by
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802-196 Brands Retail
Co-Investment by Management
Allowed (Strongly Encouraged)
Capital provide loans to co-invest in the limited partnerships and are personally guaranteed with full recourse to all
of borrower’s personal assets.
Interest Rate: 8%, compounded annually
Term: Life of limited partnership
Amount: $3,000,000 credit line (Not to exceed 10% of total capital invested, allocated by
Security: Individual loans secured by personal assets of individuals obtaining loan
Buy Out Provision
A Standard Buy Out exists between Limited Partners.
• Moving party submits a valuation and terms of buy out.
• Within 30 days, non-moving party (by simple majority vote) determines whether they agree with the
moving party’s valuation and terms.
(i) If non-moving party agrees with the moving party’s valuation, non-moving party notices moving party
of non-moving party’s intent to buy or sell.
(ii) If non-moving party disagrees with moving party’s valuation, then each party selects an independent
appraiser to value the limited partnership.
(a) If these valuations are within 10% of each other, then an average of the two appraisals is taken
to determine the binding value.
(b) If the valuations are not within 10% of each other then both appraiser agree on a third appraiser
whose value is binding.
Thirty days after a binding value is determined the non-moving party notices the moving party of its intent
to buy or sell under the terms given by the moving party.
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customerse[email protected] or 800-988-0886 for additional copies.
Brands Retail 802-196
Source: Company document
Management Issues
Issue: Allocation of promote to Management
Management will determine allocation of promote among themselves.
Issue: Budgeting of Management Fees
Management will determine allocation of management fees.
Issue: Office Management
Management will determine salary levels, benefits and run the accounting, business development
and real estate staff.
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802-196 -16-
Exhibit B
Youngker – Buckeye
Source: Company document

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