WFP Income Fund

As is consistent with the nature of many investments, there is always the possibility of losing a portion of your invested principal. In the event that a loan within the Fund portfolio defaults, a foreclosure may occur. When that happens, there is a chance that the foreclosed property might sell for less than the amount of the loan, causing a loss. Such losses, however, should be minimal.

For example: The Fund makes a first loan of $3,250,000 to a borrower purchasing prop­erty for $5,000,000, which 65% of the property’s value (also known as a 65% loan-to-value or 65% LTV).  Because of market or other conditions, the property value decreases and after default and foreclosure, the Fund sells the property for $3,100,000 (or a 38% reduction in the original purchase price), resulting in a $150,000 loss for the Fund. Assuming the Fund has $50,000,000 in portfolio investments and a member/investor has invested $100,000 (or 0.2% of the Fund), the investor’s pro rata share of the loss would be $300 (or $150,000 x 0.2%). However, if the Fund’s loan loss reserve is greater than $150,000, the loss would be absorbed by the reserve, and there would be no impact to the investor’s principal. If the Fund’s loan loss reserve is insufficient and the anticipated annualized return is 7%, the loss could be absorbed through a reduction in the return distributed to all investors in the fund by reducing the return from 7% to 6.7% (or $3,500,000 gross return - $150,000 loss = $3,350,000 adjusted return / $50,000,000) to mitigate or eliminate the impact of the loss to the investor’s principal investment. This example is for illustrative purposes only and if a loss occurs the actual results may vary. 

In order to help mitigate the costs and potential losses in the Fund’s portfolio, the Fund may establish a loan loss reserve (“Loan Loss Reserve”) with a portion of the net proceeds of the capital contributions it receives or with cash from the Fund’s operations, or both. The Loss Reserve is designed to cover estimated losses from the Fund’s loans, investments, and operating activities. The methodology and amount of the Loss Reserve will be defined, adjusted, and managed by the Manager. 

The combined benefit of the Fund’s Loan Loss Reserve and lower LTV ratio offers our investors downside risk protection and a buffer against potential losses.  Because of the lower LTV ratios, a borrower who falls upon difficult times may have additional options because of their equity in the property (including the sale or refinance of the property) before a foreclosure is completed. In the event a property did go to auction as part of the foreclosure process, a third party could potentially overbid the Fund, leaving the Fund in the position to receive the principal investment back, in addition to interest and costs. Further, if the Fund obtains the property in foreclosure, it is possible the property could be sold for the amount owing under the loan or for a profit. Lastly, in the event of a loss on the property after a foreclosure and sale, the Loan Loss Reserve may be sufficient to absorb the loss, resulting in no impact to the investor’s principal.

As seasoned investors already know, the principal invested in stocks, bonds, and mutual funds may rise or fall, create gains or losses, due to a number of factors, including, the fundamentals of the underlying investments and fluctuations in respective markets in which those investments trade.

If “alternative investments” is defined as everything other than stocks, bonds and cash, the universe of alternative investments is very large, and the risk in each category of investment is varied, will differ in each potential investment in those categories, and may change based on a number of factors, including, changes in economic conditions, law and regulation, market conditions, and other factors. Therefore, a comprehensive discussion of risk of all alternative investments is beyond the scope of this discussion. A better approach for an investor may be to compare the risk of the Fund relative to other alternative investments in their portfolio and under consideration.

To assist with that comparison, investors may consider the following risk categories as a starting point:

• Market Risk. Market risk includes increases or decreases in an investment’s value due to volatility or fluctuation in the respective market in which those investments trade, and for real estate-based investments positive and negative impacts to the real estate market.

Exchange traded investments may have direct correlation to the stock and bond markets and/or interest rates, and some may be subject to volatility or fluctuation driven by factors completely unrelated to the fundamentals of the underlying investment or investment quality, such as investor sentiment, potential monetary action, geopolitical impacts, news, and other factors.

Because the Fund is not exchange traded and anticipates holding shorter-term loans and investments in its portfolio, the Fund is non-correlated to the stock and bond market and has little to no sensitivity to interest rate changes. Therefore, the Fund is potentially less susceptible to the impacts of stock and bond market volatility and interest rate fluctuations.

With respect to real estate market risk, the Fund’s portfolio will generally consist of loans in first lien position secured by real estate. Real estate values underlying these loans and investments are not immune from fluctuation or change. Real estate values have changed in the past and will change in the future.

What is unique about the Income Fund is the blend of risk mitigation strategies in place, as outlined below.

- Lower loan-to-value ratios provide a protective equity cushion to buffer against loss in the event of property value fluctuations or a borrower default.

- Shorter-term investments in real estate allows the Fund to react to real estate values and interest rates more quickly as compared to being locked into a 30-year mortgage. Additionally, the Fund has the opportunity to better gauge potential future market conditions over a 1- to 2-year time period as opposed to projecting market conditions 7 to 10 years into the future.

- Diversification across a number of segments, versus a pool of homogeneous loans, helps to mitigate the risk of an entire pool of loans and investments negatively reacting in a similar fashion at the same time. The Fund segments by geography, property types, borrowers, sponsors, maturities, rates, terms, and other mitigating factors.

• Interest Rate Risk. Interest rate risk is the potential for losses that result from a change in interest rates. For example, because of the inverse relationship between bond prices and interest rates, an increase in interest rates may result in a decrease in bond prices. Further, rising interest rates may negatively impact the capitalization rates used to value income producing real estate and the costs of operation.

Because the Fund invests in loans at lower loan-to-values with terms of approximately 1 to 3 years and holds those loans to maturity, the Fund is better able to react to changes in real estate values and interest rates as compared to being locked into 30-year mortgages.

• Liquidity Risk. Liquidity risk is the illiquidity or the inability to quickly or easily exist an investment or convert to cash. While exchange traded investments may have greater liquidity, the tradeoff is market risk and volatility.

Unlike other alternative investments that may have very long investment horizons (e.g. REITs with 7 to 10 year investment periods), the Fund allows investors to withdraw all or a portion of the investment after an initial 12-month period has passed. After that period, an investor may withdraw up to the lesser of 25% of your investment or $1,000,000 every consecutive 3 months. Additional restrictions on withdrawals may apply.

By having shorter-term loans with staggered maturities in the Fund’s portfolio, the Fund has internal liquidity as loans repay to help meet redemption requests.

•  Regulatory Risk. Regulatory risk includes the risk that a change in laws or regulations will adversely affect a business, business sector, market or investment, or their respective prospects.

As an industry, real estate is subject to direct and indirect impacts of changing laws and regulations. During the COVID-19 pandemic, stay in place orders and prohibitions against gathering had both direct and indirect impact on certain real estate segments, such as hospitality and retail properties. Moratoriums on evictions and foreclosures impacted both owners and lenders in multifamily and other residential properties.

A certain level of regulatory risk is inevitable and an accepted part of real estate-based investments and, with certain exceptions, such as the emergency regulations described above, can be foreseen and managed. For example, laws and regulations related to leasing and tenant rights are an accepted part of the real estate business and can be managed.

Because of the nature of its operations, the Fund will be exposed to certain forms of regulatory risk and will seek to mitigate regulatory risk by managing existing requirements and foreseen changes where the regulatory risk is at an acceptable level for the applicable loan or investment. The Fund will avoid regulatory risk by not engaging in certain forms of investments where the risk is not in alignment with the Fund’s objectives or outweighs the potential rewards, such as entitlement risk associated with raw land, development, and ground-up construction loans and investments due to its risk with obtaining discretionary and non-discretionary approvals for matters like zoning, mapping, site plans, etc.

• Operational Risk. Operational risk includes the risk of loss resulting from inadequate or failed internal processes, procedures, people or systems.

In a real estate context, operational risk often relates to the plan and positioning of the property in the market and the owner or property manager’s execution of that plan.

Operational risk exists in most real estate investments, with some risk being greater than others. For example, ground up construction and later stabilization after completion has greater operational risk than the operational risk associated with a well-positioned, existing property managing tenant rollover. Further, there is greater operational risk in hotels and certain seniors housing properties compared to multifamily or warehouse properties.

Because the Fund will lend against and invest in various property types and properties in transition, operational risk will be present in various degrees in the loans and investments made by the Fund. The Fund will seek to mitigate those risks by lending to and investing with borrowers and sponsors who have experience and a successful track record in the specific asset class and circumstances giving rise to the lending and investment opportunities.

• Principal Risk. Principal risk involves the potential loss of the principal amount of an investment.

As addressed in this document, the Fund will seek to provide principal safeguards through the avoidance of certain risks, diversification in the Fund’s portfolio, shorter term lending and investment horizons, selection of borrowers and sponsors, the establishment of a Loan Loss Reserve, and underwriting the strength and viability of the plan of execution.

• Other Risks. Investors are encouraged to investigate and inquire about other potential risks in all investments they are contemplating, including the Fund. For more information about the potential risks of investing in the Fund, please review the Memorandum, including the section entitled “Risk Factors.”

Declines in real estate values, longer marketing periods, lower absorption rates and other factors in a declining market may have an effect on the Fund’s portfolio. Specifically, if the value of the property which is collateral for a loan drops below the breakeven point for the loan, a loss would occur. 

As an active market participant who has weathered several real estate cycles, the Manager’s principals have in-depth knowledge, expertise, and experience managing such risks. In anticipation of potential market changes, the current underwriting philosophy employed by the Manager results in the use of third-party valuations (e.g. appraisals), market analysis, stress testing of cash flows, capitalization rates and other factors, lower Loan-to-Value (LTV) ratios, shorter maturities, and other loan terms to help mitigate downside risk. When combined with the Loan Loss Reserve in the Fund, the result is a protective equity cushion for the loans within the Fund to help buffer the impact of changing real estate values and related market conditions.

Further, by keeping the terms of the loans short, the Fund has the ability to require existing borrowers to payoff or remargin (i.e. pay down the principal balance) their loans at maturity and to make new loans at the then current market values. This helps to reduce the risk of having a legacy portfolio of loans with longer maturities made at a time when property values were much higher.

While there are no assurances that the manager will be successful with all loans, in a waning market the Manager also has the ability to review and revise its underwriting approach and stress testing as necessary so that maximum Loan-to-Values (LTV), capitalization rates, loan maturities, and other loan terms are adjusted (i.e. may become more conservative) to address changing market conditions.