EFTA00558509.pdf

CONFIDENTIAL MEMORANDUM CLIFF INVESTMENT FUND LLC Private Placement of Thirty-Six Units of Investor Member Interests In a Michigan Limited Liability Company ("Units") $100,000 Per Unit Cliff Investment Fund LLC ("Company") is a newly organized Michigan limited liability company formed for the purpose of acquiring defaulted mortgage loans at a discount to the outstanding loan balance from banks and other sources, through entities formed by the Company for such purpose, and by investment in other entities which own, purchase, sell, lease, develop or manage such assets. Thirty-six (36) Units are being offered to Qualified Investors in one (1) Unit increments ("Offering") with each unit being $100,000.00; provided, however, the Manager of the Company shall have the discretion to accept investments for fractional portions of a Unit in the Manager's discretion. Subscription documents and any proceeds will be escrowed until the initial Closing. If this does not occur by December 31, 2012 Termination Date") the escrowed documents and proceeds will be returned to Subscribers without interest; provided, however, the Company may elect to extend the Offering to January 31, 2013, by mailing written notice to all Subscribers who have completed and delivered the subscription documents by the Termination Date. Notwithstanding the foregoing, the Company has broad discretion as to the use of proceeds from the Offering and Investors will be relying on the judgment of the Manager regarding the application of such proceeds so the Manager may, in its sole discretion, elect to close the Offering without having raised the full $3,600,000 and obtaining subscriptions for thirty-six (36) Units and to cause the Company to accept less than the full Offering amount, and proceed to Closing on any of the Mortgage Loan Acquisitions or Project Entities (as hereinafter described) prior to the subscription of all thirty-six (36) Units provided that the Company has enough funds, in Manager's discretion, to make such investments in the Mortgage Loan Acquisitions or Project Entities, as applicable. Further, Manager shall also have the right to acquire Units and put in its own equity to complete the Offering except that any investment by Manager or its Affiliates will be on the same terms and conditions as the Investor Members. Selling Price Offering to Investors Per Unit $100,000 Total Maximum: $3,600,000 The date of this Confidential Memorandum ("Memorandum") is December 18, 2012. Offeree: Number EFTA00558509 ANY INVESTMENT IN THE COMPANY IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK WITH NO ASSURANCE OF ANY ECONOMIC RETURN. PLEASE SEE THE "RISK FACTORS" SECTION OF THIS CONFIDENTIAL MEMORANDUM AND FOLLOWING NOTICES FOR A SUMMARY OF THESE RISKS AND FOR ADDITIONAL NOTICES TO ALL PROSPECTIVE INVESTORS. NOTICES THE UNITS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("SECURITIES ACT") OR ANY STATE SECURITIES LAWS AND THEY ARE OFFERED PURSUANT TO CERTAIN EXEMPTIONS FROM REGISTRATION THEREUNDER. THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION DOES NOT PASS UPON THE MERITS OF OR GIVE ITS APPROVAL TO ANY SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR OTHER SELLING LITERATURE. THESE SECURITIES HAVE NEITHER BEEN APPROVED NOR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES AGENCY. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE AGENCY HAS MADE A DETERMINATION THAT THE SECURITIES OFFERED HEREUNDER ARE EXEMPT FROM REGISTRATION. NO REPRESENTATION OR ASSURANCE OF ANY KIND IS INTENDED OR SHOULD BE INFERRED WITH RESPECT TO THE ECONOMIC RETURN THAT MAY RESULT FROM AN INVESTMENT IN THE UNITS. NO ASSURANCE CAN BE GIVEN THAT CHANGES IN ECONOMIC OR OTHER CIRCUMSTANCES WILL NOT ADVERSELY AFFECT THE COMPANY AND ANY INVESTMENT IN THE COMPANY. NO ASSURANCE CAN BE GIVEN THAT THE FINAL TERMS OF ANY PROJECT INVESTED BY THE COMPANY WILL NOT VARY FROM ANY GENERAL TERMS SUMMARIZED IN THIS MEMORANDUM. THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. SEE THE SECTION ENTITLED "RISK FACTORS". PROSPECTIVE INVESTORS SHOULD CONSIDER INVESTMENT IN THE COMPANY ONLY AFTER CAREFUL EVALUATION OF THE RISK FACTORS AND OTHER INFORMATION SET FORTH IN THIS PRIVATE PLACEMENT MEMORANDUM, INCLUDING ITS EXHIBITS ("MEMORANDUM"). ANY PROSPECTIVE INVESTOR UNABLE TO BEAR THE ECONOMIC RISK OF A LOSS OF THE ENTIRE INVESTMENT OR WHICH REQUIRES LIQUIDITY WITH RESPECT TO THE INVESTMENT, SHOULD NOT INVEST IN THE UNITS. THERE IS NO EXISTING MARKET FOR AN INVESTMENT IN THE COMPANY AND NONE IS EXPECTED TO DEVELOP IN THE FUTURE. INVESTORS WILL BE REQUIRED TO BEAR THE FINANCIAL RISK OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. INTERESTS IN THE COMPANY WILL BE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE, AND CANNOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE COMPANY'S OPERATING AGREEMENT, AND AS PERMITTED UNDER THE SECURITIES ACT, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO A REGISTRATION OR AN EXEMPTION THEREFROM. ii EFTA00558510 PROSPECTIVE INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE COMPANY AND THE TERMS OF AN INVESTMENT, INCLUDING THE MERITS AND RISKS INVOLVED. THIS MEMORANDUM IS NOT TO BE CONSTRUED AS INVESTMENT, LEGAL OR TAX ADVICE. INVESTORS SHOULD NOT CONSTRUE ANY STATEMENT IN THIS MEMORANDUM OR ANY PRIOR OR SUBSEQUENT COMMUNICATION FROM THE MANAGER, ANY AFFILIATE OF THE MANAGER, OR ANY OF THEIR RESPECTIVE OFFICERS, EMPLOYEES, AGENTS OR ATTORNEYS AS INVESTMENT, LEGAL OR TAX ADVICE. EACH INVESTOR SHOULD CONSULT WITH ITS OWN INVESTMENT ADVISOR, LEGAL COUNSEL AND ACCOUNTANT AS TO ANY INVESTMENT, LEGAL, TAX AND OTHER MATTERS CONCERNING AN INVESTMENT IN THE COMPANY. NO PERSON HAS BEEN AUTHORIZED TO MAKE REPRESENTATIONS, OR GIVE ANY INFORMATION WITH RESPECT TO THE UNITS EXCEPT THE INFORMATION CONTAINED IN THIS MEMORANDUM. NO OFFERING LITERATURE, INFORMATION OR MATERIALS MAY BE EMPLOYED IN THE OFFERING OF THE UNITS EXCEPT FOR THIS MEMORANDUM. THIS MEMORANDUM HAS BEEN PREPARED SOLELY FOR THE BENEFIT OF CERTAIN PERSONS INTERESTED IN THE OFFERING AND MAY NOT BE USED FOR ANY OTHER PURPOSE OR BY ANY OTHER PERSON. ANY REPRODUCTION OR DISTRIBUTION OF PART OR ALL OF THIS MEMORANDUM, WITHOUT THE EXPRESS WRITTEN CONSENT OF THE COMPANY IS PROHIBITED. BY ACCEPTING DELIVERY OF THIS MEMORANDUM, THE RECIPIENT AGREES TO RETURN IT TO THE COMPANY IN THE EVENT THAT THE RECIPIENT DETERMINES NOT TO PURCHASE THE UNITS. NO REPRESENTATION, ASSURANCE OR ADVICE IS GIVEN WITH RESPECT TO THE TAX CONSEQUENCES RESULTING FROM AN INVESTMENT IN THE COMPANY AND EACH INVESTOR SHOULD CONSULT WITH ITS OWN TAX ADVISOR WITH RESPECT TO ANY SUCH TAX CONSEQUENCES. ANY STATEMENTS CONTAINED HEREIN REGARDING ANY FEDERAL TAX ISSUE IS NOT INTENDED AS TAX ADVICE AND CANNOT BE USED BY ANY PERSON FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON SUCH PERSON UNDER THE INTERNAL REVENUE CODE. PROSPECTIVE INVESTORS ARE URGED TO CAREFULLY REVIEW THIS MEMORANDUM, THE OPERATING AGREEMENT, AND THE SUBSCRIPTION AGREEMENT, TOGETHER WITH SUCH OTHER INFORMATION WHICH MAY BE REQUESTED BY THE PROSPECTIVE INVESTOR, IN ORDER TO FULLY COMPREHEND AND EVALUATE ANY INVESTMENT IN THE COMPANY. PROSPECTIVE INVESTORS ARE INVITED TO ASK QUESTIONS OF, AND OBTAIN ADDITIONAL INFORMATION FROM THE MANAGER OF THE COMPANY PRIOR TO MAKING AN INVESTMENT IN THE COMPANY. THIS MEMORANDUM CONTAINS SUMMARIES OF VARIOUS AGREEMENTS, DOCUMENTS, INFORMATION AND LEGAL AUTHORITIES WHICH DO NOT PURPORT TO BE COMPLETE AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE ORIGINAL AGREEMENTS, DOCUMENTS, INFORMATION AND LEGAL AUTHORITIES MENTIONED HEREIN, ALL OF WHICH SHALL BE Iii EFTA00558511 PROVIDED TO ANY PROSPECTIVE INVESTOR UPON WRITTEN REQUEST TO THE COMPANY. THIS OFFERING IS BEING MADE TO QUALIFIED INVESTORS AND NOT TO THE PUBLIC AT LARGE. THE COMPANY RESERVES THE RIGHT, IN ITS SOLE DISCRETION, TO REJECT ANY OR ALL SUBSCRIPTIONS FOR THE UNITS AND WITHDRAW THIS OFFERING FROM ANY OR ALL OF THE OFFEREES AT ANY TIME WITHOUT FURTHER NOTICE. NO ACTION HAS BEEN TAKEN BY THE COMPANY THAT WOULD, OR IS INTENDED TO, PERMIT A PUBLIC OFFER OF THE SECURITIES IN ANY COUNTRY OR JURISDICTION WHERE ANY SUCH ACTION FOR THAT PURPOSE IS REQUIRED. ACCORDINGLY, THE SECURITIES MAY NOT BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, AND NEITHER THIS MEMORANDUM NOR ANY OTHER INFORMATION MEMORANDUM, PROSPECTUS, FORM OF APPLICATION, ADVERTISEMENT OR OTHER DOCUMENT OR INFORMATION MAY BE DISTRIBUTED OR PUBLISHED IN ANY COUNTRY OR JURISDICTION EXCEPT UNDER CIRCUMSTANCES THAT WILL RESULT IN COMPLIANCE WITH ANY APPLICABLE LAWS AND REGULATIONS. WITH RESPECT TO CERTAIN STATES, THE COMPANY MUST CONFIRM THAT YOUR STATE'S SECURITIES LAWS PERMIT THE SALE OF UNITS TO YOU. ACCORDINGLY, PRIOR TO OBTAINING CLEARANCE IN YOUR STATE OF RESIDENCE, PLEASE DO NOT ATTEMPT TO SUBSCRIBE. NOTICE TO MICHIGAN RESIDENTS THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE MICHIGAN UNIFORM SECURITIES ACT, AS AMENDED, PURSUANT TO AN EXEMPTION FROM REGISTRATION. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE OFFICE OF FINANCIAL AND INSURANCE SERVICES OF THE MICHIGAN DEPARTMENT OF CONSUMER AND INDUSTRY SERVICES ("DEPARTMENT"), NOR HAS THE DEPARTMENT PASSED UPON THE ACCURACY OR ADEQUACY OF THIS MEMORANDUM. IRS Circular 230 Notice The information provided in this Memorandum is not intended, and cannot be used by any person, for the purpose of avoiding penalties that may be imposed on such person by the Internal Revenue Service. This Memorandum supports the promotion and marketing of the Units offered hereby. Prospective investors should seek advice based on their particular circumstances from an independent tax advisor. iv EFTA00558512  TABLE OF CONTENTS Eau NOTICES ii NOTICE TO MICHIGAN RESIDENTS iv IRS Circular 230 Notice iv OVERVIEW OF COMPANY I ORGANIZATION 1 INVESTMENT OBJECTIVES 1 Project Entities 2 Selection of Mortgage Loan Acquisitions 2 Existing Mortgage Loan Acquisition Opportunities 3 FINANCIAL PRO-FORMA 4 Pro-forma Notes• 5 Project Holding Period 6 Project Financing 6 MANAGEMENT OF THE COMPANY 6 Manager 6 Key Personnel of Manager 7 Compensation and Fees of Manager 8 Liability and Indemnification of Manager 8 ALLOCATION OF COMPANY ECONOMIC BENEFITS 8 Allocation of Profits and Losses from Operations 8 Cash Distributions 8 CAPITAL CONTRIBUTIONS; ADDITIONAL CAPITAL; DILUTION 9 TRANSFER, REMOVAL OR WITHDRAWAL 9 LIMITED LIABILITY 10 FISCAL YEAR, REPORTS, RECORDS AND MEETINGS 10 DISSOLUTION OF THE COMPANY 10 AMENDMENT OF THE OPERATING AGREEMENT 11 DESCRIPTION OF OFFERING II Qualified Investors 11 How to Subscribe 12 ESTIMATED USE OF PROCEEDS 14 v EFTA00558513 TAX CONSEQUENCES 14 General 15 Status as a Partnership for Tax Purposes 15 Character of Income and Loss 15 Taxable Year and Tax Reporting 15 Taxation of Members 15 Allocations of Company and Project Entities Tax Items 16 Deductions 16 Limitations on Use of Company's Losses and Deductions 16 Basis Limitations 16 At Risk Limitations 16 Passive Loss Limitations 16 Other Tax Risks 17 RISK FACTORS 17 No Operating History 17 Competition, General Mortgage Loan Buying and Real Estate Investment Risks 17 Conflicts of Interest 18 Tax Conflicts 18 Lack of Control Over Certain Project Entities and the Mortgage Loan Acquisitions 18 Offering Price 19 Restrictions on Transfer; Lack of Trading Market 19 Risk of Dilution 19 Uninsured Losses 19 Environmental Liability Risks 19 Tax Risks 20 Changes in Tax Law 20 Possibility of Audit 20 Individual Tax Considerations 20 Partnership Tax Issues 20 Inclusion of the Company's Taxable Income 21 Income on Disposition of Company's Property or Units 21 Unrelated Business Taxable Income 21 MEMORANDUM UPDATES; DEFINITIONS 21 vi EFTA00558514  OVERVIEW OF COMPANY ORGANIZATION THIS MEMORANDUM CONTAINS SUMMARIES OF VARIOUS AGREEMENTS, DOCUMENTS, INFORMATION AND LEGAL AUTHORITIES WHICH DO NOT PURPORT TO BE COMPLETE AND ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE ORIGINAL AGREEMENTS, DOCUMENTS, INFORMATION AND LEGAL AUTHORITIES MENTIONED HEREIN, ALL OF WHICH SHALL BE PROVIDED TO ANY PROSPECTIVE INVESTOR UPON WRITTEN REQUEST TO THE COMPANY. Cliff Investment Fund LLC ("The Company") was formed on December 17, 2012, as a Michigan limited liability company, for the purpose of acquiring defaulted mortgage loans at a discount to the outstanding loan balance from banks and other lender sources, through entities formed by the Company for such purpose, and by investment in other entities which may have already acquired interests in such mortgage loans. The Company has no operating history. The duration of the Company shall continue until it is dissolved as provided under the Operating Agreement. The Company is managed exclusively by the Manager of the Company. See Management of Company. The Company's business and operations are governed by the terms and provisions of the Company's Operating Agreement, a copy of which is attached as Exhibit A to this Memorandum. The rights and obligations of Members of the Company, including voting rights, the management and operation of the Company, and the allocation and distribution of Company profits, losses and cash, are governed by and set forth in the Operating Agreement. Prospective investors should carefully review the Operating Agreement and each investor shall be required to agree to and accept all of the terms and provisions of the Operating Agreement. INVESTMENT OBJECTIVES NO REPRESENTATION OR ASSURANCE OF ANY KIND IS INTENDED OR SHOULD BE INFERRED WITH RESPECT TO THE ECONOMIC RETURN THAT MAY RESULT FROM AN INVESTMENT IN THE UNITS. NO ASSURANCE CAN BE GIVEN THAT CHANGES IN ECONOMIC OR OTHER CIRCUMSTANCES WILL NOT ADVERSELY AFFECT THE COMPANY AND ANY INVESTMENT IN THE COMPANY. NO ASSURANCE CAN BE GIVEN THAT THE FINAL TERMS OF ANY PROJECT INVESTED BY THE COMPANY WILL NOT VARY FROM ANY GENERAL TERMS SUMMARIZED IN THIS MEMORANDUM. The primary investment objective of the Company is to obtain investment gains through the acquisition of defaulted mortgage loans that will be acquired at a discount from various banks and other sources, which loans are all to be secured by first-priority mortgages on various properties that are located in Michigan (the "Mortgage Loan Acquisitions"). Based on assumptions outlined in the FINANCIAL PRO-FORMA below and subject to all sections of this Memorandum the Manager projects an approximate 24% pre-tax internal rate of return for the Investment Members. Mortgage Loan Acquisitions may or may not produce interim operating EFTA00558515 income for the Company subject to restructuring and negotiations of any such mortgage loans with the underlying borrowers. Accordingly, while there may be some interim cash return generated in connection with the Mortgage Loan Acquisitions, it is also possible that any return of the investment will be solely supported through the sale of foreclosed property, the resale of any such mortgage loans or the refinancing or pay-off of such mortgage loan that may result from negotiations with any borrowers. Project Entities. The Company may pursue the Mortgage Loan Acquisitions by investing in other entities, which may be formed by the Company or other parties (each a "Project Entity" or in plural "Project Entities"). To this end, the Company may acquire part or all of the ownership interests in a Project Entity that already exists and which may already own certain mortgage loans. While not currently anticipated, it is also possible that the Company may acquire an interest in a Project Entity in certain circumstances as a limited partner, member or investor and, in which case, it is possible that the Company may not manage, operate or control the Project Entity. Project Entities invested in by the Company may also be invested in, managed, operated and/or controlled by the Manager or Affiliates of the Manager and the Company may control only those Project Entities which are wholly owned by the Company. Selection of Mortgage Loan Acquisitions. The Manager will be responsible for selecting the Project Entities and the Mortgage Loan Acquisitions in which the Company will invest, as well as the nature of the Company's investment in Project Entities. In evaluating each of the Mortgage Loan Acquisitions and Project Entities in which the Company will invest, the Manager has considered various criteria, including the following: (a.) Each Mortgage Loan Acquisition must involve a mortgage loan that is being acquired for a discount off of the outstanding principal loan balance. (b.) Each of the Mortgage Loan Acquisitions will be secured by first-priority mortgage loans on real property located in the Michigan area. (d.) Underlying real property will include land intended for a mixture of uses including but not limited to residential, commercial, retail and industrial/office. (e.) Based upon the reasonable projection of the Manager, Mortgage Loan Acquisitions will be selected that enable the Company to sell its ownership interest in such Mortgage Loan Acquisitions within two to five years. (f.) The capitalization for each Mortgage Loan Acquisition and potential income earned will be determined so that the Company has sufficient funds to pay all acquisition costs of the Mortgage Loan Acquisition and retain sufficient funds for taxes and other expenses. (f) Each Mortgage Loan Acquisition may or may not be supported by personal guaranties, and such personal guaranties may be considered as a potential source of recovery, but will not be relied on as the sole source of recovery. 2 EFTA00558516  (g.) Each Project Entity profitability projections are sufficient enough for the Manager to believe that Company investment objectives of a minimum of ten percent (10%) internal rate of return will be met, or exceeded. Notwithstanding the foregoing, there is a possibility that certain criteria may be overlooked or otherwise not realistic to achieve in light of the fact that the Company may benefit by acquiring a portfolio of loans from one seller and not individual mortgage loans. Accordingly, the Company will analyze a portfolio of loans as a collective whole to evaluate the overall portfolio and may need to acquire some mortgage loans that are less desirable then others in order to obtain an entire portfolio that when evaluated as a whole will still produce the returns desired by the Company. Existing Mortgage Loan Acquisition Opportunities. Two opportunities to have already been identified and will be acquired by the Company as follows: The Company has entered into a purchase agreement with Blue Nile Holdings, LLC, to acquire (through another entity formed by Company) a portfolio of four mortgage loans, and the Company will also acquire all of the membership interests of CP Squared Capital, LLC, an entity affiliated with Manager, which is currently under contract with MB Financial to acquire the one mortgage loan identified in number 5 below this paragraph with Jones Property Development, LLC as the borrower. The loan portfolios to be acquired (through acquisition of a membership interest in Blue Nile Holdings, LLC and of CP Squared Capital, LLC, as applicable) will both ultimately be acquired fora total purchase price of S3,530,000. The combined five mortgages have an unpaid collective balance (including principal, past due interest, fees and borrower payments) of approximately $14,393,372. (PLEASE NOTE, HOWEVER, THAT IT IS NOT EXPECTED THAT THE. COMPANY WILL EVER REALIZE OR RECOVER THE AFOREMENTIONED UNPAID PRINCIPAL BALANCE OR ANYWHERE NEAR THIS AMOUNT.) Blue Nile Holdings, LLC has already entered into a forbearance arrangement with two of the borrowers identified in numbers 1 and 2 below this paragraph, and Manager expects to enter into another forbearance agreement with the borrower identified in Note 5 and is expected to foreclose on the real property or negotiate forbearance agreements with the remaining two borrowers that are operating the gas stations. A general description of the secured real property for each of the mortgage loans to be acquired is as follows: I. Borrower: Detroit Landholdings 1201 W. Lafayette, L.L.0 General Description of Secured Real Property: Approximately 16.817 square foot commercial/industrial block building located in Detroit, Michigan that is currently leased by Grainger Industrial Supply under a lease that has approximately another 3 years remaining on its initial lease term at a rental rate of approximately $10,000 per month. 2. Borrower: Detroit Landholdings 1301 Leverette, LLC General Description of Secured Real Property: Approximately 39,947 square foot commercial/industrial block building located in Detroit, Michigan that is currently being used by a collision business pursuant to a month-to-month lease. 3. Borrower: West Gate B.P., LLC 3 EFTA00558517  General Description of Secured Real Property: Operating gas station located at 2625 Jackson Road, Ann Arbor, Michigan 48103 4. Borrower: C & I I Real Estate Cooley Lake, LLC General Description of Secured Real Property: Operating gas station located at 6601 Cooley Lake Road, Waterford Township, MI 48237 5. Borrower: Jones Property Development, LLC General Description of Secured Real Property: An operational 18 hole golf course in Okemos, Michigan and approximately 250 entitled and unsold residential lots situated on an approximately 300 plus acre development. (Note also that approximately one-half of the infrastructure is in place for the sale of the residential lots.) FINANCIAL PRO-FORMA The financial forecasts set forth below have been compiled by the Manager, based upon certain assumptions made by the Manager concerning future events and circumstances with respect to the Company. The achievement of any such financial forecasts may be affected by fluctuating economic conditions and is dependent on the occurrence of future events that cannot be assured. Some assumptions inevitably will not materialize and unanticipated events and circumstances may occur subsequent to the date of this Memorandum. THE ACTUAL RESULTS ACHIEVED MAY VARY FROM THE FORECASTS AND ILLUSTRATIONS AND SUCH VARIATIONS MAY BE MATERIAL. Pro-Forma Cash Flow 2013 2014 Interest from Detroit (See Note 1) $100,000 Extension Fee Detroit (See Note 1) $6,000 Payoff of Detroit (See Note 1) $1,200,000 Interest from C and H (See Note 2) $50,000 Payoff of C and H (See Note 2) $500,000 Pay down of Jones Dev. (See Note 3) $2,400,000 Sale of West Gate Property (See Note 4) $725,000 Totals $4,256,000 $725,000 Acquisition Investor Member Schedule Cost 2013 2104 Investor 10% Return $360,000 Investor Capital Contribution $3,600,000 Investor Participating Split $177,600 $435,000 -$3,600,000 $4,137,600 $435,000 Investor Member Projected MR 24.63% 4 EFTA00558518 Pro-forma Notes: 1. Detroit Landholdings 1201 W. Lafayette, L.L.0 and Detroit Landholdings 1301 Leverette, LLC referred to above as (the "Detroit Notes") arc under a collective memorandum of understanding (forbearance arrangement). As part of the forbearance arrangement, a fixed interest rate of 101'4 payable monthly, and a stipulated outstanding loan amount of $1,200,000 (after a down payment of $200,000 that has already occurred) has been negotiated with the borrower of the Detroit Notes. To support the monthly interest payments, Blue Nile receives rent checks from the tenant, Grainger Industry Supply, in an amount of $10,000 per month. The initial extension of the maturity date is through April 30, 2013. If the borrowers of the Detroit Notes desire to extend the loans beyond April 30, 2013, they will have to pay an extension fee of $6,000 for the first six month extension and an extension fee of $11,000 for a subsequent six months. At each extension, borrowers must make a down payment towards the loans in the amount of $100,000. For the purposes of the projections above, Manager has assumed the Detroit Notes will be paid off in approximately one year. 2. Foreclosure of the mortgage has commenced and either a sale of the property will occur or a forbearance agreement will be in place with a negotiated reduced stipulated loan outstanding amount. Manager believes that a forbearance agreement will be negotiated with a stipulated outstanding loan amount of $500,000 with a 10% interest payment due monthly. For the purposes of the projections above, Manager is assuming the loan will be paid off at the end of 2013. 3. A forbearance arrangement is anticipated to be negotiated with Jones Property Development, LLC wherein borrower will be required at or after closing on the mortgage loan by CP Squared Capital, LLC from MB Financial to have made a $700,000 principal payment in exchange for an extension of the maturity date under the loan for one more year and reduction of the loan amount to a stipulated $2,400,000 subject to compliance with the forbearance agreement. It is contemplated that the borrower will also have the ability to extend the maturity date of the loan for one additional year for a non-refundable extension fee payment of $25,000 plus an additional $400,000 loan payment to reduce the outstanding amount to $2,000,000. For the purposes of the projections above, Manager assumes that the borrower will not extend the maturity of the loan after the initial year, and that ultimately the note will be sold/assigned to a third-party or otherwise paid off by the borrower for the $2,400,000 stipulated loan amount. Note that Manager may need to use shod-term bridge financing in the amount of $700,000 or greater, which financing would be provided by the Company by Manager or its Affiliates in order to make the initial acquisition of the mortgage loan from MB Financial, which bridge financing is anticipated to be paid back with the initial projected pay-down from borrower of $700,000. 4. Foreclosure of the mortgage has commenced and either a sale of the property will occur or a forbearance agreement will be in place with a negotiated reduced stipulated loan outstanding amount. For the purposes of the projections above, Manager is assuming that the property will be sold at the end of 2014. 5 EFTA00558519 Project Holding Period. Although the life of the investment is expected to be approximately two years; provided, however, this holding period is subject to extreme variation given the uncertain nature for sale of real estate and varying circumstances for each of the mortgage loans, and thus return of investment to the Company and ultimately to the Investors, could be substantially shorter or substantially longer than the anticipated holding period. Project Financing. It is anticipated that the acquisition of the Project Entities will solely be financed with equity investments, but third-party financing, bridge financing, seller financing, or a combination of any of the foregoing depending upon the Mortgage Loan Acquisitions and the reasonable judgment of the Manager may be used. MANAGEMENT OF THE. COMPANY The Manager shall manage the business and affairs of the Company. The Manager shall direct, manage and control the business of the Company. Except as otherwise provided in the Operating Agreement, the Manager shall have full and complete authority, power and discretion to make any and all decisions and to do any and all things the Manager deems necessary or desirable in the furtherance of the Company's business. The Manager shall be the manager of the Company until such time as it resigns or is removed, for "good cause" (as defined in the Operating Agreement). In performing its duties, the Manager shall be entitled to rely on information, opinions, reports, financial statements and other financial data prepared or given by qualified and licensed (when a license is required to provide such information) accountants, attorneys, investment advisors, engineers, land planners and other professionals and consultants. The Manager is not required to manage the Company as its sole and exclusive function, and it, and its owners do have other business interests and will engage in other activities in addition to those relating to the Company. Neither the Company nor any Member shall have any right, by virtue of the Operating Agreement, to share or participate in such other investments or activities of the Manager, or its member, or to the income or proceeds derived therefrom. The Manager and its member shall have a right to compete with the business of the Company, and to be entitled to enter into any business ventures that they so desire. Manager. The Manager of the Company is Blue House Management Company ("Manager"). The Manager was formed on December 18, 2012 to manage the Company and has no operating history. The Manager has and is expected to have only a nominal net worth. The Manager is currently the sole member of the Company. The address and contact information of the Manager is: Blue House Management Company 1026 South Main Street Ann Arbor, MI 48104 Tel: (313) 350-3566 6 EFTA00558520 Key Personnel ofManager. Peter Savarino, Chief Executive Officer Peter has been in the property acquisition/development business for the past fifteen years. His project experience includes multi-family apartments, office condominium and residential condominiums. He has participated from the master planning, financing, zoning as well as the construction side of the development business. His background is in the financial services industry. Peter is the co-founder of Creo Global Capital LLC. Creo Global Capital manages money for small institutions as nil as high net individuals. The majority of his recent projects/investments are in several states including Michigan, Louisiana and in the Phoenix, Arizona market. His most recent projects include The Villas in Surprise, Arizona. This was a 286-unit class A apartment complex built from scratch and was sold in 2006. Coursey Place in Baton Rouge, Louisiana, sold in 2011. Peter also has experience in the private equity world and has sat on the Board of Directors for BioSys, sold to Eastman Chemical in 2006. He currently sits on the Board of Directors of BioLumix, Inc. Chris Westfall, President Chris has a demonstrated track record of successful transaction execution, having advised on more than one hundred acquisition, divestiture and corporate finance related transactions. Chris is a proven investment banking professional with a broad range of knowledge and expertise in mergers and acquisitions. His career includes leading internal corporate development teams in a number of strategic acquisition and divestiture transactions. M&A advisory experience also includes representing strategic and private equity buyers in all phases of the acquisition process, and by representing subsidiaries and divisions of public companies and large privately held businesses for sale. Chris is the co-founder of Creo Global Capital LLC. Creo Global Capital manages money for small institutions as well as high net individuals Additionally, Chris' corporate finance experience includes recapitalizations, capital restructurings and strategic advisory. He has led numerous origination and execution teams delivering advisory services and negotiating transactions with such companies as: Baird Capital, Chrysler, Eagle-Picher, Fiserv, General Electric, I IIG Capital, KRG Capital, The Limited, MidOcean Partners, Omnicare, R.L. Polk, Sun Capital, TRW, and Tomkins PLC. Chris Kouza, Asset Manager Chris is responsible for sourcing the Mortgage Acquisitions in which the Company is going to invest and already has been in the process of negotiating with several of the borrowers under the mortgage loans. Chris is the former General Counsel for Peoples State Bank. As General Counsel for a bank, Chris became very familiar with banking regulations, commercial loan portfolios and negotiating with working-out troubled loans and assets with borrowers. Chris has parlayed his experience at 7 EFTA00558521 the bank, his contacts and loan work-out skills into the purchase and sale of several troubled loans involving in excess of $100,000,000 in the past two years Compensation and Fees of Manager. The Company shall pay the Manager, as compensation for its service rendered to the Company, a one-time management fee ("Management Fee") equal to one percent (1%) of the total Capital Contributions made by the Investor Members. Further, in the event the Manager shall bear any actual out-of-pocket costs in connection with the acquisition of any Project, or any operating or other costs with respect to any Project or the Company (the "Closing and Operating Expenses"), the Manager shall not be deemed to have made any capital contributions to the Company as a result of paying the Closing and Operating Expenses. Rather such expenses shall be deemed reimbursable expenses. The Company shall reimburse such Manager for the Closing and Operating Expenses if and when the Company has sufficient Net Cash from Operations to make such reimbursement. In addition to the above compensation, the Manager also shares in the profits and distributions of the Company. See Allocation of Company Economic Benefits. Liability and Indemnification ofManager. The Manager shall not be liable to the Company or to any Member for errors in business judgment or otherwise in the exercise of his authority or the taking of any other action as Manager, except in the case of the receipt of a financial benefit to which the Manager is not entitled, the Manager's knowing violation of law, or the Manager's approval of a distribution in violation of the Operating Agreement or applicable law ("Excluded Acts"). 'to the fullest extent permitted by law, the Company shall indemnify and hold the Manager harmless against any claims, suits, judgment, losses, damages or expenses (including, without limitation, interest, attorneys' fees and court costs) incurred by the Manager (including claims of the Company or Members) as a result of any actions of the Manager, except for Excluded Acts. ALLOCATION OF COMPANY ECONOMIC BENEFITS The allocation of Company profits and losses, and distributions to its Members are provided for in the Operating Agreement and the following summary is qualified in its entirety by reference to the Operating Agreement. Allocation ofProfits and Lossesfrom Operations Allocations of Profits will generally be made as follows: (a) first, to the Members to recoup Losses previously allocated to them; (b) second, to the Investor Members in an amount equal to ten percent (10%) per annum of the Investor Members' unreturned Capital Contributions ("Priority Return"); and (c) thereafter, to the Members, including the Manager, in proportion to their Participating Percentages (i.e. 60% to the Investor Members and 40% to the Manager). Allocation of Losses will generally be made as follows: (a) first, to recoup Profits previously allocated to the Members; (b) thereafter, to the Members in accordance with their Participating Percentages, to the extent of each Member's Capital Account. Cash Distributions. Once the Manager determines that the Company has sufficient net cash available for distribution to the Members, current distributions are made to the Members in the 8 EFTA00558522 following order: (a) first, pro rata to the Investor Members in an amount equal to ten percent (10%) per annum of the Investor Members' unretumed Capital Contributions; (b) second, pro rata to the Investor Members until the Investor Members have received cash distributions equal to their total Capital Contributions and (c) thereafter, to the Members, including the Manager, in accordance with their Participating Percentages (i.e. 60% to the Investor Members and 40% to the Manager). Other than the payment of the one-time fee to the Manager or the reimbursement of costs more specifically discussed in the Operating Agreement, all Investor Members will receive their cumulative Priority Return and a return of their invested capital before the Manager receives cash distributions from the Company. Upon any liquidation of the Company, distributions are made to the Members as follows: (a) first, pro rata to the Investor Members in an amount equal to ten percent (10%) per annum of the Investor Members' unretumed Capital Contributions; (b) second, pro rata to the Investor Members until the Investor Members have received cash distributions equal to their total Capital Contributions; and (c) thereafter, to the Members in accordance with their respective positive Capital Account balances, as adjusted for all allocations of Profits and Losses and previous distributions as required in the Operating Agreement. CAPITAL CONTRIBUTIONS; ADDITIONAL CAPITAL; DILUTION The initial capital contributions of the Investor Members consist of the amounts paid for Units in the Company. The Manager has made a capital contribution of $1 for the Membership Interest of the Manager of the Company. In the event that the Manager determines that the Company needs additional funds, the Manager may request additional capital from the Investor Members. As stated in further detail in the Operating Agreement, no Investor Member is obligated to make any additional capital contributions to the Company, however, in the event that not all the Investor Members contribute their proportionate share of the additional capital, the Manager will adjust all of the Investor Members' Participating Percentages to reflect the unequal capital contributions made by the Investor Members. The Manager may also solicit additional capital contributions from persons other than existing Investor Members. In such a case, the Participating Percentages of all the Investor Members (including newly admitted Members), shall be adjusted to reflect each Investor Member's capital contribution. Neither the Manager's Membership Interest or Participating Percentage will be affected by any additional capital contributions from the Investor Members or by the addition of additional Investor Members. The Manager's Participating Percentage will remain fixed at forty percent (400/0). TRANSFER. REMOVAL OR WITHDRAWAL THERE IS NO EXISTING MARKET FOR AN INVESTMENT IN THE COMPANY AND NONE IS EXPECTED TO DEVELOP IN THE FUTURE. INVESTORS WILL BE REQUIRED TO BEAR THE FINANCIAL RISK OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. INTERESTS IN THE COMPANY WILL BE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE, AND 9 EFTA00558523 CANNOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE COMPANY'S OPERATING AGREEMENT, AND AS PERMITTED UNDER THE SECURITIES ACT, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO A REGISTRATION OR AN EXEMPTION THEREFROM. The Operating Agreement provides that no Member shall be entitled to transfer, assign, convey, sell encumber or any way alienate his Membership Interest except with the prior written consent of the Manager and upon compliance with the Securities Act and applicable state securities law requirements. No Member shall have the right to withdraw his capital contributions or to demand and receive property of the Company or any distribution in return of his capital contributions, except as specifically provided in the Operating Agreement. LIMITED LIABILITY Members of the Company are not liable, in such capacity, for any debts or obligations of the Company, except to the extent of their respective capital contributions and any amounts wrongfully distributed to them by the Company. FISCAL YEAR REPORTS, RECORDS AND MEETINGS The fiscal year of the Company and methods of accounting shall be established by the Manager. The Manager shall provide annual reports to its Members containing such financial and other information designated by the Manager or provided for in the Operating Agreement. No annual or regular meetings of the Members of the Company are required or planned. The Manager shall be responsible for scheduling the time and place of any meetings of the Members of the Company and notifying the Members thereof. The Manager shall maintain the books and records of the Company, which shall be available for inspection to the Members or for any proper purpose upon reasonable notice and during normal business hours. Additionally, the Manager anticipates providing to all Investor Members a Cliff Investment Fund LLC update letter on a periodic basis, which is intended to include an analysis of activity related to all fund assets, and acquisition and disposition activities, as applicable, related to the fund. DISSOLUTION OF THE COMPANY Pursuant to the Operating Agreement, the Company shall be dissolved and its affairs wound up, upon the first to occur of the following events ("Liquidating Events"): (a) the sale of all of the Company's assets; (b) the consent of a Majority-in-Interest of the Members; or (c) the entry of a decree of dissolution against the Company. Upon the occurrence of a Liquidating Event, the Company shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets and satisfying the claims of its creditors, Manager and Members. The Manager shall be responsible for overseeing the winding up and dissolution of the Company and shall take frill account of the Company's liabilities and property, and the Company property shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom, to the extent sufficient therefor, shall be applied and distributed pursuant to the terms of the Operating Agreement. 10 EFTA00558524 AMENDMENT OF THE OPERATING AGREEMENT Amendments to the Operating Agreement that: (a) are of an inconsequential nature and do not affect the rights of the Members in any material respect, or (b) are in the opinion of counsel to the Company necessary to maintain the status of the Company as a "partnership" for federal income tax purposes, or (c) are required to admit a new Member due to additional capital contributions, may be made by the Manager through use of the powers of attorney granted in the Operating Agreement. All amendments other than those permitted shall require the affirmative consent of a Majority In Interest of the Members of the Company. DESCRIPTION OF OFFERING This Offering is a private offering of thirty-six (36) Units to Qualified Investors. The purchase price for each Unit is 5100,000. The purchase price has been determined by the Manager in its judgment, taking into consideration the amount of money needed for investment. The purchase price has not been the subject of arm's length negotiation. The minimum investment is one Unit absent the consent of Manager. The Manager may, in its discretion, accept subscriptions of fractional Units. The term of the Offering ("Offering Period") will commence on the date of this Memorandum and will terminate on December 31, 2012 provided however, the Manager may extend the Offering Period to a date not later than January 31, 2013, in the sole discretion of the Manager. Notwithstanding anything contained herein to the contrary, the Company has broad discretion to the use of proceeds from the Offering and the Investor Members will be relying on the judgment of the Manager regarding the application of such