INTRODUCTION

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Canal Financial creates value and financial reward for its investor clients by providing diverse and innovative investment products secured by real estate mortgages. Canal Financial conducts its loan origination and loan servicing operations under a Mortgage Lenders License (issued by the State of Florida’s Office of Financial Regulation). Our business is a subset of a broader trend throughout the capital markets of “securitization”. Canal Financial procures, originates, underwrites, and services all of its investment products from the loan payoff through the return of the capital to the private investors.

Canal Financial’s loan offering includes “Private Money Loans”. Private money lending refers to loans collateralized by real estate where the decision to make a loan is based primarily upon the protective equity in the property securing the loan. To a lesser extent the borrower’s credit history is also considered.

Private money loans are needed when a borrower and/or a property fall outside the normal underwriting guidelines of conventional sources such as banks, life insurance companies, and conduits. The primary credit decision for those types of lenders is typically based upon the borrower’s credit rating and their income. A loan may be a very prudent transaction from our perspective but is classified as sub prime by institutional lenders, thereby creating a need for private money.

Canal Financial solicits, underwrites, processes and funds these types of private money loans. After a loan request is approved and processed, the loan is funded and Canal Financial acts as the servicing agent for each loan until it is paid in full or otherwise liquidated.

Our Private Money Loans represent an opportunity for private or non-institutional investors to participate in Trust Deed (Mortgage) Secured Investments.?

Real Estate lending is characterized by making a loan to a borrower who executes a Promissory Note and Deed of Trust (also known as a “Trust Deed” or “Mortgage”) encumbering the borrower’s real property. The Promissory Note is the borrower’s promise to repay the loan. The Deed of Trust (Mortgage) is a security instrument recorded with a County Recorder’s office, creating a lien on the borrower’s real estate.

WHAT IS A TRUST DEED (MORTGAGE INSURED) INVESTMENT?

A Trust Deed investment occurs when an Investor purchases the Note and Deed of Trust. Canal Financial raises capital for Trust Deeds (Mortgages) from private sources as opposed to institutional sources such as banks and savings and loans.

Trust Deeds are recorded in different lien positions, such as “first” Trust Deeds (Mortgages), “second” Trust Deeds (Mortgages), etc. The date and time of recordation establishes the lien priority of the trust deed on the title of the property in the public records.

A Trust Deed Investment is considered to be a fixed income security. In addition to Trust Deeds, Canal Financial also utilizes various other types of collateral as security for its loans such as cross-collateralized properties (i.e. more than one property securing the loan); personal guarantees from third parties; irrevocable letters of credit; assignments of Certificates of Deposits; assignments of corporate stock; and UCC-1 Financing Statements.

WHAT ARE THE MERITS OF A TRUST DEED (MORTGAGE) INVESTMENT?

1. Monthly Income from interest payments.
2. High Yields from 8.5% to 12.5% per annum.
3. Minimal Management - Canal Financial services all aspects of the investment from arranging the loan, to collecting and distributing the monthly payments, through the payoff of the loan.
4. Your invested capital is SECURED by real estate.
5. Diversification - You may invest in Trust Deeds and other programs with varying property types, property locations, interest rates, loan-to-value ratios, and maturity dates.

ASSOCIATED RISKS

There are risks associated with Trust Deed Investments that Investors should be aware of. These risks include:

1. Trust Deed Investments are not insured by the FDIC or any other government agency. Additionally, Canal Financial, LLC, its principals, and associates are not allowed to guarantee the success of the investments. The investments involve certain risks and are suitable only for persons of adequate means who anticipate no need for immediate liquidity.
2. The value of property is given by an appraiser reflecting his/her opinion of the value at a specific date. There is no assurance that the appraised value will reflect a fair market value, as general and local economic conditions may change.
3. The borrower’s ability to repay the loan will depend upon the borrower’s financial conditions, which could change over time.
4. There are general risks associated with real estate investments including general or local economic conditions, neighborhood values, interest rates, real estate tax rates, the supply of and demand for properties of the type involved, the ability of the borrower to obtain necessary alternative financing, governmental rules and acts of God.
5. If a borrower files a reorganization or full insolvency bankruptcy, the foreclosure process could be stalled. Trust deed investors could incur significant legal fees and costs in attempting to obtain relief from the automatic freeze on collection proceedings provided by the Bankruptcy Code. Relief consists of getting court approval to release the property out of the bankruptcy so that the property can be foreclosed upon. Furthermore, the court could modify the terms of the loan by extending the due date, changing the interest rate and payment structure, or causing the priority of the loan to be subordinated to a bankruptcy court-approved financing plan.?

WHAT TO LOOK FOR WHEN EVALUATING

APPRAISED VALUE

• Canal Financial always obtains an Independent Appraisal of the property
  • Three Approaches - Replacement Cost, Market or Sales Approach, and Income Approach
  • Rental Survey, if applicable for income producing property
• Loan to Value Ratio / Protective Equity
• The ratio between a mortgage loan and the value of the real estate pledged as security is usually expressed as a percentage.
  LOAN = LTV $300,000 = 37.5% (LTV) VALUE $800,000
• This means that the loan, expressed as a percentage of the property value, is 37.5%. The higher the loan to value ratio, the greater the lending risk because the protective equity declines as the LTV increases.
  Example: A single-family home with 4 bedrooms and 2 ½ baths is valued at $425,000. If we are making a 70% of value loan, the loan is $297,500. The difference between the value of the property and the loan is $127,500. This is referred to as protective equity or “equity cushion”.

LIEN PRIORITY

• Determined by date and time of recording at the county recorder’s office
• Lien priority is insured by a title insurance policy
• Items to consider in lien property:
  • Property taxes are required to be current at the time of closing the loan
  • Association dues, if any, are required to be current at the time of closing (Note: more likely to be a commercial association).

INVESTING IN FIRST TRUST DEED POSITIONS

Approximately 90% of the trust deed investments offered by Canal Financial are First Trust Deeds. There is greater security because First Trust Deeds are not subject to any senior liens, except for County property taxes.

INVESTING IN JUNIOR TRUST DEED POSITIONS

• Balance owing on senior trust deed loans
  • Terms of senior Notes and Deeds of Trust
    • i. Is there a prepayment penalty?
    • ii. Is there negative amortization?
    • iii. Is junior financing allowed
  • Payment history of senior Notes
  • Status of payments. Is the borrower current on his payments? Obtain a Beneficiary Statement or recent Lender Statement showing the senior loan is current

EXIT STRATEGY

When the loan becomes due, what is the pay off strategy?

• Extend loan term
• Refinance with an institutional lender
• Sell the property - use proceeds to pay off loan
• Borrower obtains other funds to facilitate the payoff

ADDITIONAL DUE DILIGENCE BY CANAL FINANCIAL

• Coordinate the underwriting and processing of the proposed loan
• Coordinate the escrow function
• Title Insurance
  • Insures the property is free of other liens and encumbrances
  • Explanations of title items and issues
• Fire Insurance policy in place. Flood, construction, and liability insurance where necessary.
• Tax Service - Property Taxes (Check to see that taxes are kept current)
  Environmental Site Assessment when deemed necessary (ESA Phase I, II, III and Remedial Action Plan - when necessary)
  • Toxic Substances
  • Asbestos
  • Lead Based Paint
• Rental and/or market survey, tenant estoppels certificates, lease analysis (when applicable)

LOAN SERVICING BY CANAL FINANCIAL

GENERAL LOAN SERVICING

• CANAL FINANCIAL provides services as described in the Loan Service Agreement
• Collects monthly payments and disburses to Investors
• Retains original documents
• Collects Late Fees (generally 10% of the payment amount, split 50/50 with Investors)
• Sends Balloon Payment Notices to borrowers when loan is due if required by State Law
• Communicates with borrower at various stages of the loan
• Coordinates loan payoff procedures and Reconveyances

IF PROBLEMS OCCUR - “WHEN THINGS GO WRONG”

If the borrower fails to pay the loan as promised, the Deed of Trust allows the lender to sell the property through a non-judicial foreclosure procedure. Invested capital may be recaptured at the foreclosure sale from the purchase by a successful third party bidder or through subsequent resale of the foreclosed property.

You can rely on Canal Financial to:

• Initiate foreclosure proceedings, if necessary (file an NOD - Notice of Default)
• Retain an attorney to act on your behalf if borrower files a Chapter 7, 11, or 13 bankruptcy case to forestall the foreclosure sale.
• Each Investor pays the attorney’s fees. These fees are reimbursed by the borrower in the event of reinstatement or from the proceeds of the property sale.
• Check on senior lien status, property tax status, and make sure hazard insurance remains in effect.
• Arrange Forced Insurance Coverage in the event that the borrower allows the existing coverage to lapse.
• If in a junior position, to advance funds to keep the senior loan current due to borrower’s delinquency.
• Discuss work out arrangements with borrower through lower payments, extending the loan, or modifying its terms.
• Discuss Deed in Lieu of Foreclosure. This circumstance is very rare and involves the borrower granting his/her interest in the property to the investor(s) rather than going through the foreclosure process.
• If the property reverts back to the investor at the foreclosure sale, locate a Realtor to market the property.
• Coordinate any repairs or improvements to the property needed to enhance marketability.

INVESTMENT YIELDS BASED ON LOAN TYPE

FIRST POSITION TRUST DEEDS

SECOND POSITION TRUST DEEDS

INVESTMENT RETURNS COMPARABLES

• Minimum Investment is US $100,000.
• Prepayment penalty may apply
• There are investor suitability standards that must be met prior to participation.
• None of the products described herein are guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other governmental entity.