KEAHOLE ENTERPRISES LLC

CAPITAL STRUCTURE

How the investment will be shared (asset ownership) is financed! 

KE USES of debt vs. equity (how much of each) as sources of Financial Capital. 

Traditionally this question has focused on publicly- traded corporations, but

·      Real estate investment is made more directly, not through Keahole Enterprises LLC companies.

·      Real estate investment will be financed at the project level

·      Individual assets are financed directly.

·      Real estate assets trade directly, and are relatively simple, transparent cash generators.

Debt when there is an Equity Capital Constraint

In publicly traded corporations they never face an equity capital constraint (if the stock market is efficient). Whenever they face a positive-NPV investment opportunity, they can simply issue new stock to obtain equity financing.

This is not the case for KE LLC as a private company or the individual companies created by KE. In KE LLC real estate investments, the debt finance can be useful simply as a necessary source of capital if we face an equity constraint, and; KE LLC will face a positive (or at least non-negative) NPV opportunity, or we can seek more diversification across the properties than our equity alone that can be allowed, given the size of the properties and the amount of the equity developed with every company created by KE.

KE will utilize debt financing through American Savings Bank to leverage our “human capital” (as well as our financial capital. Our skills, talent and knowledge will enable KE to successfully manage the income property. This enables KE to earn “wages” or “profits” effectively as a “property developer” or “asset manager”. The more properties KE develops and owns, the more KE can guarantee the creation of a job market while managing, hence, the more earnings KE can make on KE managerial human capital.

The use of debt allows KE LLC to own more properties, to extend KE LLC human capital earnings. How else could KE LLC companies possibly cash in on such human capital without KE LLC taking on the financial investment role!

The leveraging of human capital will show up in the quantitative mechanics designed in the infrastructure described in KE LLC Master Business Plan. KE LLC will define multiple “profit centers” for the firm, some of which derive from operations as distinct from passive investment. The “Operating Expenses” that are pure cash outflows from the investment perspective, will contain an element of profit from the operational perspective; thus, a deal contains more than one source of value.

KE LLC NPV from the pure investment perspective (return on financial capital) in additional NPV from operational profit centers (return on human capital). Together the two (or more) NPVs above equal the total NPV of the deal from KE LLC and or its individual subsidiaries particular (“investment value”) perspective.

KE LLC is aware of the constraints on equity capital availability that may not be as great or as binding as KE LLC first thought starting this designed development. KE LLC is engaged in particular options of ways to “joint venture” in the development of the Real Estate of Government Lands.

KE LLC has looked at debt instruments as an Incentive and Disciplinary Tool for Management and to Leverage as a "disciplinary tool" to "incentivize" good management:

KE LLC has secured Real Estate at the KOA as a physical asset that it will contract MARH LLC to manage, which is not much of a risk or excitement or growth potential in bricks & mortar (e.g., compared to high-tech industries, world trade, etc). With not much downside and not much upside, KE LLC and its subsidiary company managers will tend to the value-enhancing possibilities that have passed many others since the private Jet plane traffic increased at KOA.

With sufficient leverage, the KOA real estate became a low-risk, high- growth investment, making it sufficiently "exciting" to attract good managers, by giving KE LLC and its subsidiary managers sufficient incentives to maximize value.

The arguments that KE LLC had taken on was not based on a capital constraint or capital market failure for its investors, but for debt financing that applies not only to small individual investors, but to large instruments & REITs.

Debt and Liquidity:

KE LLC will Leverage both private and public instruments thus reduces the equity investor's "liquidity". KE LLC investor(s) liquidity will create the ability to quickly obtain "full value" as cash. The underlying (physical) KE LLC or it subsidiaries assets is illiquid. By not borrowing to the hilt, KE LLC can obtain cash by mortgaging the property (i.e., if KE LLC don't borrow now, KE LLC can borrow later), thereby reducing the illiquidity problem of KOA real estate KE LLC investments.

 KE LLC liquid instruments are more valuable because it gives our investors flexibility, which provides more options of security. All KE LLC NPV opportunities will avoid being forced into a negative NPV deal. The Liquid assets will allow KE LLC to use the R.E. cycle for KE LLC advantage instead of being a victim of it. 

The higher the recycle ratio, the greater the profitability of KE LLC and its subsidiaries. KE LLC is very selective of its partners to minimize the risk tolerance and preferences to better determine the right asset allocation for KE LLC partners.

Cost of Financial Distress:

The "Cost of Financial Distress" or (COFD) had created more bankruptcies and foreclosures in Hawaiʻi that has become a large "deadweight cost" that created a rift in the Real Estate market. KE LLC has seen the “agency costs” rise to a High L / V ratio Conflict of interest between equity owner vs. debt holder.

In the current changes the property owners have acted in a suboptimal manner to avoid to pad expenses, to create high-stakes of repositioning of a rent roll or exercise mortgagor’s and or creating a “put”that created a "moral hazard". 

The mere probability of these costs of (deadweight, agency) has reduced the value of properties. KE LLC creation of this development at the KOA has significantly created a more easy management, low risk nature of R.E., & transparency (relatively easy for KE LLC private investors and the public government to easily detect poor management, in part via ability to observe property value in n asset market. The COFD does not “kick in” for R.E. until higher L / V ratio than for other types of investments (e.g., typical stock)

DEBT AND INFLATION:

INFLATION:

·      The more KE LLC borrows, the more money KE LLC makes just from inflation!

·      KE LLC as a borrower knows more about inflation than lenders in the economic zone.

·      Inflation is KE LLC friend as a borrower ex post.

·      KE LLC will utilize an Ex ante (which is when it matters for a leverage decision) when the inflation argument is a fallacy. When there is no positive NPV to KE LLC as the borrower in a loan transaction due to inflation.

KE LLC will establish a fixed-rate debt leverage that makes the equity position more of an "inflation hedge". 

All KE LLC Projects to Level Capital Structured in Real Estate. Much real estate finance occurs at the micro-level of individual investments in properties, projects, or “deals. Hence, much “capital structure” in KE LLC real estate occurs at the micro-level. KE LLC Real Estate Investment is still done directly by individuals or small subsidiary companies.

KE LLC Real Estate development assets are relatively simple, tangible and “transparent”, who makes KE LLC and its subsidiaries the ideal candidates for secured debt and other types of instruments for its projects for level financing from an external investor(s) that needs to feel confident. KE LLC knows what is going on in the investment even if KE LLC has an indirect management control of highly specialized expertise.

KE LLC also will be governing its real property rights facilitate in any type of finance private, public or institutional.

Definition:

KE LLC: Keahole Enterprises LLC 

KOA: Kona International Airport

NPV: is the present value (PV) of all the cash flows (with inflows being positive cash flows and outflows being negative), which means that the NPV can be considered a formula for revenues minus costs. If NPV is positive, that means that the value of the revenues (cash inflows) is greater than the costs (cash outflows).