North Star Group, Inc.

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701-770-9118

michaelh@nsgia.com

1

Affordable Housing Finance: Life

Settlement Integration

An Alternative Financing Structure for Public Housing

Authorities

Aﬀordable Housing Finance: Life Settlement Integration 1

An Alternative Financing Structure for Public Housing Authorities 1

1. Executive Summary 3

2. Current Affordable Housing Finance Landscape 3

3. Life Settlement-Housing Finance Difference 4

4. Stakeholder Benefits 10

5. Implementation and Scale 12

6. Northstar's Role and Mission 13

7. Northstar Income Illustration 14

8. Hedge Fund Return Illustration 15

9. Conclusion 17

10. Universal Application Beyond Affordable Housing 18

11. Appendices 21

Appendix A: (Capital Return) 21

Appendix B: Preliminary Risk Assessment 24

Important Disclaimers 28

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Appendix C: Text Flowcharts 28

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1. Executive Summary

The affordable housing development industry relies heavily on Low Income Housing Tax Credits

(LIHTC) and HUD 221(d)(4) loans, creating structures where developers retain minimal

ownership and housing authorities receive no equity stake. This white paper presents a

financing approach that combines life settlement portfolios with affordable housing development,

potentially improving economics for participants.

Current State Challenges:

● Housing authorities typically receive no ownership despite providing project-based

vouchers

● Developers receive limited equity after compliance periods

● Development fees of 15–20% with minimal long-term ownership

● Cash flows that provide limited operational flexibility

Proposed Solution Characteristics:

● Housing authorities may receive improved cash flows with progressive participation

● Life settlement-backed financing may reduce recourse debt requirements

● Self-extinguishing debt structure as life settlements mature

● May provide improved economics compared to existing financing options

2. Current Affordable Housing Finance Landscape

2.1 Traditional LIHTC Structure

The Low Income Housing Tax Credit program is a primary source of equity for affordable

housing development. In Alabama, approximately seven major developers focus on multifamily

Section 8 project-based voucher housing using this structure.

Standard LIHTC Deal Structure:

● 9% or 4% tax credits provide capital

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● Developer receives 15–20% development fee

● Developer equity interest: typically ~1% after compliance

● Housing authority equity: 0%

● Community receives: New housing units

Example Challenge: While housing gets built and communities are served, the economic

structure leaves housing authorities dependent on other parties for development, with no

ownership stake in assets they support through voucher assignments.

2.2 HUD 221(d)(4) Challenges

The HUD 221(d)(4) program offers 40-year mortgages with below-market rates, but current

interest rate environments (6%+) present project feasibility challenges.

Current Market Conditions:

● High construction costs strain project feasibility

● Interest rates near 6% create limited cash flows

● Developers retain ownership but face thin margins

● PHAs receive no equity participation

2.3 Recourse Financing Limitations

Alternative recourse financing approaches typically feature:

● Higher interest rates than HUD programs

● Personal guarantees from developers

● Limited projects that achieve financial feasibility

● No improvement in PHA ownership position

3. Life Settlement-Housing Finance Difference

3.1 The Shift

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This approach proposes using life settlement portfolio income to replace external tax credit

investors and traditional debt, creating a self-extinguishing debt structure that may improve

economics for all parties.

3.2 Financial Example

Traditional HUD Structure (from actual term sheet):

● Project Cost: $20,102,945

● HUD Loan: $16,328,300 @ 6.00%

● Annual Debt Service: $1,118,907

● Net Operating Income: $1,296,332

● Cash Flow: $177,425

Life Settlement Structure (same property):

● Life Settlement Loan: $15,000,000 @ 8.5% (interest-only)

● Traditional Mortgage: $5,000,000 @ 5.0%

● Combined Debt Service: $1,590,000

● Net Operating Income: $1,296,000

● Life Settlement Income: $1,275,000 (covers primary loan)

● Cash Flow: $981,000

Note: Based on a $200M life settlement portfolio generating $17M annually; $1.275M would

service each $15M loan.

Financial Comparison: Traditional HUD vs Life Settlement Structure

Component

Traditional HUD

Life Settlement Structure

Project Cost

$20,102,945

Primary Financing

HUD Loan: $16,328,300 @

6.00%

Life Settlement Loan: $15,000,000 @

8.5%

Secondary Financing

-

Traditional Mortgage: $5,000,000 @

5.0%

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Annual Debt Service

$1,118,907

$1,590,000

Net Operating Income

$1,296,332

$1,296,000

Life Settlement

Income

-

$1,275,000

Cash Flow

$177,425

$981,000 (5.5x improvement)

PHA Distribution

PHA Initial Share

$350,000 (36% of cash flow)

HUD Comparison

$177,425

PHA Improvement

$172,575 (1.97x increase)

Note: Life settlement analysis based on $200M portfolio generating $17M annually; $1.275M

would service each $15M loan.

3.3 Return Calculations

Interest Rate Equivalence: The improved cash flow is equivalent to:

● HUD loan at approximately 3–4% interest

● Self-extinguishing debt vs. 40-year amortization

3.4 Payment Waterfall and Debt Management Structure

The Flexible Payment System

Unlike traditional mortgages that require fixed monthly payments regardless of cash flow, this

structure uses a flexible waterfall approach that protects the PHA while ensuring debt service:

Payment Priority Order

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1. Life Settlement Income (Primary)

○ Life settlement payouts directly service the hedge fund loan

○ Target yield: 8.5% annually

○ PHA receives any excess above required debt service

2. Property Rental Income (Secondary)

○ If life settlements underperform, excess rental income supplements debt service

○ Only surplus cash flows are used (after property operations)

○ PHA never required to inject additional funds

3. Debt Roll-Over (Buffer)

○ If both sources insufficient, debt simply rolls to next period

○ No default triggers or acceleration clauses

○ Accumulated interest compounds but doesn't create distress

Self-Correcting Mechanism

The system naturally balances because:

● Life settlements are self-liquidating: Eventually all policies pay out

● Property cash flows are stable: Project-based vouchers provide 15-year certainty

● Time is on the side of the structure: Longer duration allows for natural resolution

Example Scenario: Underperformance Year

● Year 3 Projections:

● - Required Debt Service: $1,275,000

● - Life Settlement Income: $800,000 (underperformance)

● - Shortfall: $475,000

● - Property Excess Cash: $200,000 (available)

● - Net Shortfall: $275,000

- Result: $275,000 rolls to next period, no PHA impact

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Example Scenario: Recovery Year

● Year 4 Projections:

● - Required Debt Service: $1,275,000

● - Life Settlement Income: $1,900,000 (policies mature)

● - Excess: $625,000

● - Previous Shortfall: $275,000

● - Net After Catch-up: $350,000

- Result: Full current payment + catch-up, $350,000 excess

Why This Structure Works

For PHAs

● No cash call risk: Never required to fund shortfalls

● Stable operations: Property cash flows remain for operations

● Ownership benefits: Retain progressive equity interests

● Flexible timing: Structure accommodates property performance cycles

For Hedge Funds

● Secured position: Life settlements provide collateral

● Ultimate payment certainty: Death benefits ensure eventual payment

● Risk-adjusted returns: Structure compensates for timing uncertainty

● Scalable model: Repeatable across multiple properties

For the Overall Structure

● Self-balancing: Natural equilibrium through life settlement maturity

● Stress-resistant: Can withstand temporary underperformance

● Patient capital: Time horizon aligns with asset characteristics

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● Innovative application: Creates new financing possibilities

Key Distinction from Traditional Financing

Traditional mortgages create potential distress because:

● Fixed payment obligations regardless of income

● Default triggers if payments missed

● Personal guarantees or recourse to other assets

This structure eliminates distress by:

● Payment flexibility based on available sources

● No default triggers, only roll-over

● Non-recourse to PHA beyond property

Implementation Considerations

Legal Documentation

● Clear waterfall priorities in loan documents

● Defined roll-over mechanisms and interest treatment

● Agreed-upon life settlement performance metrics

Operational Management

● Monthly reconciliation of payment sources

● Transparent reporting to all parties

● Regular update of life settlement maturity projections

Performance Monitoring

● Track life settlement performance vs. projections

● Monitor property cash flow trends

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● Maintain reserve accounts for operational continuity

This innovative payment structure represents a fundamental shift in real estate finance, creating

a truly non-recourse opportunity for PHAs while providing sustainable returns for investors.

●

4. Stakeholder Beneﬁts

4.1 Public Housing Authority/Non-proﬁt Beneﬁts

Current State:

● No equity in typical developments

● Dependent on developer decisions

● No long-term ownership beneﬁts under typical structures

● Limited cash ﬂows from traditional ﬁnancing

Life Settlement Model Beneﬁts:

Immediate Cash Flow Improvement:

● Base income doubles compared to HUD 221(d)(4) ﬁnancing

● Example: $354,850 vs. $177,425 ( 2x improvement)

● Eﬀective interest rate may approach 0% when life settlement income covers debt service

Progressive Income Structure:

● Initial equity sharing: PHA receives 36% of cash ﬂows

● 50% life settlement maturity: PHA receives 50% of all cash ﬂows

● 70% life settlement maturity: PHA receives 70% of all cash ﬂows

● 100% life settlement maturity: PHA owns property debt-free (100% of cash ﬂows)

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Rental Growth Participation:

● Equal 50/50 sharing of all rental increases with hedge fund throughout deal term

● Applies to base rent increases, market adjustments, and property improvements

● Shared upside regardless of life settlement maturity stage

Operational Control:

● Full ownership from inception (not dependent on compliance periods)

● Option to hire developers on fee-for-service basis rather than equity partners

● Self-extinguishing debt structure eliminates reﬁnancing risk

● Enhanced access to permanent capital for development

4.2 Hedge Fund Advantages

Investment Characteristics:

● Transform 8-12% life settlement returns into 15-20% total returns through leverage and

diversiﬁcation

● Multiple uncorrelated income sources reduce portfolio volatility

● Self-liquidating asset class eliminates reﬁnancing risk

● Government-backed rental income (project-based vouchers) provides stable cash ﬂows

● ESG-compliant investment supporting aﬀordable housing and community development

Return Sources:

● Interest income from PHA loans (8.5% on deployed capital)

● Life settlement yields (8.5-12%+ historically)

● Life settlement death beneﬁt payouts (return of principal)

● Initial majority share of property cash ﬂows (64% initially, decreasing as settlements

mature)

● Equal 50% participation in all rental growth throughout deal term

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● Net returns target: 13-15% after management and performance fees

Strategic Beneﬁts:

● Diversiﬁcation through uncorrelated asset combination (real estate + life settlements)

● Predictable income stream backed by government voucher payments

● Progressive exit strategy as life settlements mature and return principal

● Lower fee structure than traditional private equity (1.5% management + 15% performance

above 8% hurdle)

5. Implementation and Scale

5.1 Portfolio Approach

Flexible Scale Options:

● Single deal basis: One life settlement pool ﬁnancing one development

● Portfolio approach: Multiple deals across various PHAs

● Scalable from individual projects to large portfolio programs

● No minimum portfolio size requirement

Implementation Flexibility:

● May be structured for individual PHAs or multi-PHA programs

● Replicable across markets without requiring large initial scale

● Standardized documentation allows for eﬃcient deal execution

● Accommodates various project sizes and PHA capabilities

5.2 Market Impact

Social Goals:

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● Additional aﬀordable housing units through improved ﬁnancing access

● Enhanced cash ﬂows enable better property maintenance and services

● Housing authorities gain equity ownership and development independence

● Reduced dependency on traditional LIHTC structures

● Greater PHA autonomy in development decisions

Financial Innovation:

● Novel application of life settlement assets for real estate development

● Alternative to traditional LIHTC/debt structures

● Demonstrates viability of uncorrelated asset combinations

● Creates new pathway for PHA-controlled development

● Establishes precedent for self-extinguishing debt in aﬀordable housing

Market Potential:

● Enables PHAs to become developers rather than passive participants

● May attract new capital sources to aﬀordable housing

● Creates sustainable ﬁnancing model with built-in exit strategy

● Demonstrates alignment of social impact with investor returns

6. Northstar's Role and Mission

6.1 Personal Commitment

The loss of family to housing-related challenges motivates our work to create sustainable

affordable housing solutions. This personal commitment drives our focus on long-term success

of the model.

6.2 Expertise Integration

Team Capabilities:

● Affordable housing development experience

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● Life settlement market knowledge

● Financial structuring capabilities

● PHA relationship management

Platform Benefits:

● Scalable deal origination

● Standardized processes

● Ongoing asset management

● Performance optimization

7. Northstar Income Illustration

$200M Portfolio Example:

Source

Calculation

Annual Amount

Management Fee (1.5%)

$200M × 1.5%

$3,000,000

Performance Fee (15% on returns

above 8% hurdle)

Example: 12% gross → 15% of

$8M excess

$1,200,000

Deal Origination Fees

$100K per deal × 10–15

$1,000,000 –

$1,500,000

Total Estimated

Subtotal

≈ $5,200,000

Scaling Potential: If Northstar successfully scales to multiple $200M tranches:

● With 5 tranches ($1B total): $15–25M annually

● Each portfolio may create precedent for additional deals

● Management fees provide base income, performance fees reward success

Important Notes:

● Performance fees earned only when returns exceed 8% hurdle

● Management fees provide income regardless of performance

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● Deal origination fees are one-time per project

● Fee structure aligns Northstar compensation with investor success

8. Hedge Fund Return Illustration

Target Returns (before Northstar fees):

● Life Settlement Base: 8.5% projected yield

● Target Total Return: 15–20% with all sources

● Calculation example using 16%

Fee Impact on Returns: Year 1 Example:

● Gross Returns: $200M × 16% = $32,000,000

● Management Fee: $200M × 1.5% = $3,000,000

● Performance Fee: ($32M - $16M) × 15% = $2,400,000

● Net Return to Hedge Fund: $26,600,000 (13.3%)

Fee Structure Rationale:

1. Performance Fee Structure

● Northstar receives performance fees only on returns above 8%

● Hedge funds receive 100% of returns up to 8%

● Above 8%, split is 85% hedge fund / 15% Northstar

2. Risk Sharing

● Management fee (1.5%) for active management

● Performance fee only earned when deals succeed

● Target 13–15% net returns for hedge funds

● Compares favorably to traditional 2% management + 20% performance

3. Comparison to Alternatives

● Traditional PE/Hedge Funds: Often 2% mgmt + 20% performance

● Northstar Structure: 1.5% mgmt + 15% performance (above hurdle)

● Result: Lower fees than industry standard

Return Comparison:

Traditional Fund (2% + 20%):

● Gross Return: 16%

● Management Fee: 2%

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● Performance Fee: 20% × (16% - 0%) = 3.2%

● Net to Investor: 10.8%

Northstar Structure (1.5% + 15% above 8%):

● Gross Return: 16%

● Management Fee: 1.5%

● Performance Fee: 15% × (16% - 8%) = 1.2%

● Net to Investor: 13.3%

Hedge Fund Return Illustration

Return Structure

Life Settlement Base

8.5% projected yield

Target Total Return

15-20% with all sources

Example Calculation

16%

Year 1 Return Calculation ($200M Investment)

Gross Returns

$32,000,000

Management Fee (1.5%)

-$3,000,000

Performance Fee ($32M-$16M × 15%)

-$2,400,000

Net Return to Hedge Fund

$26,600,000 (13.3%)

Fee Structure

Management Fee

1.5% annually

Performance Fee

15% above 8% hurdle

Hurdle Rate

8%

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Split Above Hurdle

85% Hedge Fund / 15% Northstar

Fee Comparison vs. Industry

Northstar

Traditional PE/HF

Management Fee

1.5%

2%

Performance Fee

15% (above 8% hurdle)

20% (no hurdle)

Gross Return

16%

Management Fee Paid

1.5%

2%

Performance Fee Paid

1.2%

3.2%

Net Return

13.3%

10.8%

Advantage

+2.5%

-

9. Conclusion

The combination of life settlements with affordable housing development may create benefits

for:

● Housing Authorities through improved cash flows and ownership opportunities

● Investors through risk-adjusted returns via diversification

● Communities through potentially better-maintained housing

This model proposes transforming affordable housing finance by combining self-extinguishing

debt with improved cash flows, potentially providing an alternative to traditional financing

approaches. The structure allows for scaling while potentially maintaining social benefit.

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10. Universal Application Beyond Affordable Housing

10.1 Investment Thesis

The life settlement financing model creates an investment strategy combining life settlement

portfolios with real estate development, potentially generating superior risk-adjusted returns

across multiple asset classes.

Core Strategy:

● Deploy life settlement portfolio income as acquisition/development financing

● Interest-only structure at 8.5% covered by life settlement yields

● Self-liquidating debt may eliminate refinancing risk

● Multiple return streams may provide downside protection

Financial Characteristics:

● Interest-only payments at competitive rates

● Self-extinguishing debt as policies mature

● May provide improved cash flows compared to conventional financing

● Predictable income stream coverage

● Long-term ownership benefits

10.2 Application Flexibility

This financing structure may adapt across property types while maintaining consistent

mechanics. The model's versatility allows deployment where traditional financing creates

constraints.

The same financial approach may be applied to:

● Office buildings

● Warehouses

● Industrial facilities

● Retail centers

● Hospitality projects

● Luxury residential

● Commercial developments

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● Infrastructure projects

● Mixed-use complexes

10.3 Northstar's Mission Focus

While acknowledging the approach's broad applicability, Northstar remains committed to our

mission:

Our Focus We choose to concentrate on projects that:

● Improve housing quality and accessibility

● Benefit underserved communities

● Create sustainable community benefits

● Align with our values and expertise

● Maximize social impact

Strategic Approach While this financing tool could be used for any development, our discipline

comes from:

● Mission-driven project selection

● Community-focused partner selection

● Social impact prioritization

● Long-term community relationships

10.4 The Power of Choice

Available Options:

● Office towers

● High-end retail centers

● Speculative warehouses

● Premium residential projects

Our Chosen Focus:

● Affordable housing

● Community improvement

● Long-term benefit prioritization

● Impact over maximum profit

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10.5 Real-World Example: Macedonia Church, Montgomery

To illustrate how this approach works with mission-aligned projects, consider our proposed

development with Macedonia Church in Montgomery, Alabama:

The Site

● Location: 3070 Selma Highway, Montgomery (21.2 acres)

● Context: Underserved community

● Opportunity: Transform corridor with mixed-use development

The Project Components

1. Boutique Hotel (30-40 rooms)

● Community conference center

● Wedding and event venue

● Visitor lodging

2. Retail Shops

● Coffee shop for community fellowship

● Local businesses and services

● Ground floor activation

3. Affordable Housing

● Single-family homes for sale

● Senior cottages

● Mixed-income options

4. Community Facilities

● Church programming spaces

● Green infrastructure

● Community gathering spaces

The Financial Structure

● Total Project: ~$10 million

● Church Contribution: Land ($2.4M value) plus improvements

● Life Settlement Loan: Would cover primary development costs

● Partnership Split: 80% church / 20% developer

● Revenue Streams:

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● Hotel operations

● Retail leases

● Home sales

● Event venue rental

Benefits to Church:

● Community improvement aligned with mission

● 80% of cash flows and ownership

● Long-term asset ownership

● Self-extinguishing debt structure

This example demonstrates how the same financial approach can benefit faith-based

organizations creating mixed-use developments that serve community needs while generating

sustainable revenue.

Key Point The life settlement financing model is a financial tool that may be applied to various

development types. We focus on affordable housing because it aligns with our mission of

creating better housing and supporting communities.

11. Appendices

Appendix A: Capital Return Mechanism

Purpose

This addendum outlines the capital return mechanism that ensures equitable treatment of Public

Housing Authorities (PHAs) while providing the hedge fund with both target returns and a clean

exit strategy. The structure recognizes that the hedge fund's 13.3% IRR is achieved during the life

settlement phase, with the ﬁnal note conversion serving as a liquidity mechanism rather than an

additional return vehicle.

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1. Interest-Only Period Structure

Life Settlement Income Assignment

● The life settlement income stream is assigned to the PHA as the borrower

● The PHA remits annual interest to the hedge fund at 8.5% on the outstanding balance

● Payments are made only to the extent that assigned life-settlement income supports

them

Payment Calculation

● As life settlements mature and people die, the outstanding balance decreases

● Interest obligation correspondingly decreases (e.g., $15M becomes $5M)

● However, the hedge fund continues to sweep all excess life settlement proceeds

beyond PHA obligations

2. PHA Protection Mechanism

2x HUD Baseline Protection

The PHA is guaranteed to retain at least twice the amount of net operating income after debt

service that they would have under comparable HUD 221(d)(4) ﬁnancing.

Simple example:

● Under HUD 221(d)(4): PHA would retain $177,000 after debt service

● Under this structure: PHA will retain minimum $354,000 (2 × $177,000)

● This means the PHA is guaranteed to be at least twice as well oﬀ as under conventional

ﬁnancing

Shortfall Treatment

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● If life settlement income falls short of interest obligation, the hedge fund accepts partial

payment

● Shortfalls are tracked but non-defaulting

● Cumulative shortfalls are expected to balance over the investment period

● PHA maintains 2x HUD protection regardless of shortfall accumulation

3. Capital Return and Note Conversion

Trigger for Conversion

● When the hedge fund's $15M principal investment is fully recovered through life

settlement proceeds

● At this point, life settlement income ceases (all policies have matured)

● The hedge fund's 13.3% IRR target has been achieved through excess proceeds during

the interest-only period

New Note Creation

● Upon capital recovery, a new note is created for the same principal amount ($15M)

● Suggested terms: 30-year amortization at 5% interest

● Annual payment approximately $965,000

● This creates a conventional, sellable instrument for hedge fund exit

Property Performance Veriﬁcation

● Year 5 projected NOI: approximately $1,400,000

● Proposed note payment: $965,000

● Debt-to-income ratio: approximately 69% (healthy coverage)

● Payment remains well within PHA's 2x HUD protection threshold

4. Exit Strategy Beneﬁts

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For the Hedge Fund

● Target returns achieved during life settlement phase

● Clean, sellable note for capital recovery

● Attractive to institutional buyers (pension funds, insurance companies)

● Standard government-backed aﬀordable housing instrument

For the PHA

● Gradual transition from interest-only to conventional amortization

● No balloon payment risk

● Terms remain within protection parameters

● Sustainable long-term debt service

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5. Reﬁnancing Provisions

Cooperative Reﬁnancing

● PHA cannot be forced into adverse terms

● Reﬁnancing must maintain the 2x HUD protection standard

● Any reﬁnancing preserves the accomplished return structure to date

6. Implementation Summary

This structure accomplishes:

● Hedge fund achieves 13.3% IRR during life settlement phase

● Clean exit via sellable conventional note

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● PHA protection from structural disadvantage vs. HUD ﬁnancing

● Sustainable transition from interest-only to amortizing debt

● Alignment of interests throughout investment period

The capital return mechanism eﬀectively separates the investment return phase (life settlements)

from the capital recovery phase (ﬁnal note), ensuring both parties achieve their objectives while

maintaining appropriate risk allocation.

Appendix B: Preliminary Risk Assessment

Investment Performance Risks

Life Settlement Portfolio Performance Risk

Risk: Life settlement yields may be lower than projected

Factors: Policyholder longevity variance, insurer credit quality, premium obligations

Mitigation: Diversiﬁed portfolio across multiple policies and insurers; non-correlated assets

provide additional income support

Housing Market Performance Risk

Risk: Property values or rental income may underperform projections

Factors: Local market conditions, demographic changes, maintenance costs

Mitigation: Project-based vouchers provide 15-year guaranteed income stream

Interest Rate Risk

Risk: Rising interest rates could aﬀect PHA's cost for remaining project funding

Factors: Credit market conditions aﬀecting secondary ﬁnancing

Mitigation: High debt service coverage ratio can withstand reasonable rate increases without

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material impact; PHAs may access various funding sources; life settlement-backed ﬁnancing

remains ﬁxed cost

Operational Risks

Construction Completion Risk

Risk: Projects may experience delays, cost overruns, or quality issues

Factors: Contractor performance, weather, permitting delays, material costs

Mitigation:

● Require contractors to obtain performance bonds

● Payment bonds to ensure payments to subcontractors

● Use experienced contractors with surety bond capacity

● No funding until development entitlements are complete

● Staged draw requirements

● Predevelopment costs may be reimbursed from project proceeds

PHA Performance Risk

Risk: Housing authorities may fail to properly manage properties

Factors: Property management performance based on HUD metrics

Mitigation:

● Hedge fund step-in rights to hire professional operators

● Operator costs paid from PHA's share of returns

● Performance standards tied to HUD metrics

● Diversiﬁcation across multiple PHAs

● Project-based voucher income provides stability

Counterparty Risk

Risk: Life settlement originators or insurers may fail to perform

Factors: Originator insolvency, insurer credit issues, policy validity problems

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Mitigation: Due diligence on originators and underlying insurers; diversiﬁcation across multiple

insurers

Structural Risks

Legal/Regulatory Risk

Risk: Changes in regulations aﬀecting life settlements, housing ﬁnance, or tax treatment

Factors: State insurance regulations, HUD policy changes, tax law modiﬁcations

Mitigation: Legal review of all structures; compliance monitoring; ﬂexibility to adapt to regulatory

changes

Liquidity Risk

Risk: Life settlements are illiquid until death beneﬁts are paid

Factors: Inherent illiquidity of life settlement assets until policy maturation

Mitigation:

● Structure recognizes illiquidity as inherent investment characteristic

● Diversiﬁed pool reduces concentration risk

● Secondary market exists for life settlement assets at approximately equivalent yields

● Early exit not recommended due to structure design

Documentation Risk

Risk: Inadequate legal documentation could create disputes

Factors: Complex structure, novel ﬁnancing approach

Mitigation: Experienced legal counsel; standardized documentation; clear dispute resolution

procedures

Market Risks

Concentration Risk

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Risk: Over-concentration in geographic markets or property types

Factors: Limited diversiﬁcation, correlated exposures

Mitigation: Geographic diversiﬁcation strategy; various housing authority partnerships

Risk Monitoring and Management

Regular Monitoring

● Monthly performance reporting on life settlement portfolios

● Quarterly property performance and development updates

● Annual review of all counterparty creditworthiness

Early Warning Systems

● Trigger mechanisms for underperforming assets

● Regular communication protocols with all parties

● Proactive intervention procedures

Risk Committee

● Regular risk assessment meetings

● Independent risk oversight

● Escalation procedures for material issues

Contingency Planning

● Appropriate liability and property insurance

● Key person insurance where applicable

● Errors and omissions coverage

Important Disclaimers

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Forward-Looking Statements: This document contains forward-looking statements that involve

risks and uncertainties. Actual results may diﬀer materially from those projected.

No Guarantees: There can be no guarantee that any investor will receive projected returns or

that the structure will perform as anticipated. All investments involve risk of loss, including

potential loss of principal.

Market Risks: Performance depends on numerous market factors beyond any party's control.

Due Diligence Required: Prospective participants should conduct independent analysis and

consult with advisors before making investment decisions.

Past Performance: Historical performance data is not indicative of future results.

This risk assessment is preliminary and subject to revision. It does not constitute investment

advice or a recommendation to invest.

Appendix C: Text Flowcharts

Deal Structure Flowchart

DEAL STRUCTURE FLOW

Start

↓

Hedge Fund Buys $200M Life Settlement Pool

├─ From: Abacus, Coventry, etc.

↓

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Hedge Fund Receives Life Settlement Income

└─ 8.5% target yield

↓

Hedge Fund Lends to PHAs

├─ Amount: Varies per deal (modeled at $15M)

├─ Rate: 8.5% interest-only

└─ Secured by: Life settlement income

↓

PHA Provides

├─ Land/equity contribution

└─ Project-based vouchers (15-year guarantee)

↓

PHA Obtains Additional Funding

├─ Traditional mortgage (~$5M @ 5%)

├─ Grants/municipal programs

└─ Other nonprofit sources

↓

Construction Begins

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├─ Contractor obtains performance bonds

├─ Payment bonds protect suppliers

├─ AIA documents for draw schedule

└─ No funding until entitlements complete

↓

Property Operations

├─ PHA operates (or hires operator)

├─ Life settlement income → pays hedge fund

├─ Rental income → covers traditional debt

└─ If PHA underperforms → Hedge fund step-in rights

↓

Returns Distribution (Progressive)

├─ 0-70% Extinguished: PHA gets 50% of rental growth

├─ 70-100% Extinguished: PHA gets 70% of rental growth

├─ 100% Extinguished: PHA owns debt-free

└─ Hedge Fund: Target 15–20% total returns

↓

Life Settlements Pay Out

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├─ Hedge fund recovers principal

└─ Deal naturally terminates

Construction Funding & Value Creation Flowchart

CONSTRUCTION FUNDING SEQUENCE

PHA Project Initiation

├─ Land: $2.4M value

├─ Project cost: $20M

└─ Total need: $17.6M

↓

PRE-FUNDING REQUIREMENTS

├─ Complete all entitlements

├─ Secure permits

├─ Get approvals

└─ No hedge fund $ until complete

↓

FIRST TRANCHE: Hedge Fund Loan

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├─ Amount: $15M @ 8.5% (interest-only)

├─ Use: Reimburse entitlement costs + construction

└─ Effect: May improve raw land value

↓

VALUE CREATION PROCESS

├─ Site work & infrastructure

├─ Foundation & framing

├─ Building envelope

└─ Property value may increase significantly

↓

PROPERTY STATUS AT 75% COMPLETION

├─ Original: Raw land ($2.4M)

├─ Invested: $15M improvements

├─ Current value: May be higher (est. $18-20M)

└─ Remaining need: ~$5M to complete

↓

SECOND TRANCHE: Multiple Options

├─ TRADITIONAL LENDERS

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│ ├─ Lower risk profile (improved property)

│ ├─ Better loan-to-value ratio

│ ├─ Stable income (project-based vouchers)

│ └─ Potentially competitive rates

│

├─ NONPROFIT/AFFORDABLE HOUSING SOURCES

│ ├─ Community Development Financial Institutions

│ ├─ Housing trust funds

│ ├─ Municipal programs

│ ├─ State affordable housing programs

│ └─ Land bank participation

│

└─ OTHER SOURCES

├─ Grants (no repayment)

├─ Tax increment financing

└─ Public-private partnerships

↓

FINAL FUNDING SECURED

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├─ Total project: $20M

├─ Sources: Hedge fund + PHA land + final loan/grant

├─ Risk profile: Lower than raw land

└─ Loan terms: May be favorable due to property improvements

↓

CONSTRUCTION COMPLETION

├─ Property fully developed

├─ Ready for occupancy

├─ Cash flows begin

└─ All debt service covered

FUNDING ADVANTAGES BY STAGE:

- Raw land: Higher risk, limited financing options

- 75% complete: Lower risk, more options

- Stable income: Project-based vouchers

- Improved loan-to-value: Due to improvements

- Multiple sources: Nonprofits have unique access

Participant Roles Flowchart

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PARTICIPANT ROLES & RELATIONSHIPS

┌─────────────────┐ ┌─────────────────┐

│ HEDGE FUND │────│ PHA │

│ │ │ │

├─ Provides capital├ <─>├─ Owns property │

├─ Lends to PHAs │ ├─ Gets vouchers │

└─ Takes upside │ └─ Manages ops │

↑ ↑ ↑

│ │ │

↓ ↓ ↓

┌─────────────────┐ ┌─────────────────┐

│ NORTHSTAR │────│ CONTRACTORS │

│ │ │ │

├─ Structures deals│ ├─ Build projects │

├─ Manages process │ ├─ Get bonds │

└─ Gets fees │ └─ Follow AIA │

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RELATIONSHIPS:

- Hedge Fund/PHA: Loan and interest payments

- Northstar/All: Coordination and fees

- PHA/Contractors: Construction contracts

Risk Assessment Flowchart

RISK ASSESSMENT FRAMEWORK

OVERALL RISK FRAMEWORK

├─ INVESTMENT PERFORMANCE RISKS

│ ├─ Life Settlement Portfolio

│ │ ├─ Risk: Lower than projected yields

│ │ ├─ Factors: Longevity variance, insurer credit

│ │ └─ Mitigation: Diversified portfolio

│ │

│ ├─ Housing Market Performance

│ │ ├─ Risk: Underperformance

│ │ ├─ Factors: Market conditions, demographics

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│ │ └─ Mitigation: Project-based vouchers

│ │

│ └─ Interest Rate Risk

│ ├─ Risk: Higher rates for PHA funding

│ ├─ Factors: Fed policy, credit markets

│ └─ Mitigation: Various funding sources available

│

├─ OPERATIONAL RISKS

│ ├─ Construction Completion

│ │ ├─ Risk: Delays, cost overruns

│ │ ├─ Factors: Contractor performance

│ │ └─ Mitigation: Performance bonds

│ │

│ ├─ PHA Performance

│ │ ├─ Risk: Poor management

│ │ ├─ Factors: HUD metrics performance

│ │ └─ Mitigation: Step-in rights

│ │

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│ └─ Counterparty Risk

│ ├─ Risk: Originator issues

│ ├─ Factors: Credit, policy validity

│ └─ Mitigation: Due diligence

│

├─ STRUCTURAL RISKS

│ ├─ Legal/Regulatory

│ │ ├─ Risk: Regulatory changes

│ │ ├─ Factors: Various regulatory bodies

│ │ └─ Mitigation: Compliance monitoring

│ │

│ ├─ Liquidity Risk

│ │ ├─ Risk: Exit difficulty

│ │ ├─ Factors: Illiquidity until maturity

│ │ └─ Mitigation: Self-liquidating

│ │

│ └─ Documentation Risk

│ ├─ Risk: Legal disputes

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│ ├─ Factors: Complex structure

│ └─ Mitigation: Experienced counsel

│

└─ MANAGEMENT & MONITORING

├─ Regular Reporting

│ ├─ Monthly: Life settlement performance

│ ├─ Quarterly: Property updates

│ └─ Annual: Counterparty reviews

│

├─ Early Warning Systems

│ ├─ Performance triggers

│ ├─ Communication protocols

│ └─ Intervention procedures

│

└─ Contingency Planning

├─ Insurance coverage

├─ Risk oversight

└─ Disclosure compliance

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Important Investment Considerations

This document is for informational purposes only and does not constitute an offer to sell or a

solicitation of an offer to buy any securities. Any such offer will be made only by means of a

formal offering memorandum in compliance with applicable securities laws. Prospective

investors should carefully consider the risks described herein and conduct their own

independent analysis and evaluation of the investment opportunity.

All investments involve risk of loss, including potential loss of principal. Past performance is not

indicative of future results. The views expressed in this document are those of North Star

Group, Inc. and are not intended as investment advice or a recommendation to purchase or sell

any security.

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