Stakeholders & Value Creation Open Equity is a framework for equitable ownership and stakeholder engagement. It draws on the employee-ownership precedents of the ESOP movement, but allows for a broader range of stakeholder groups in addition to employees to be defined on the basis of the capacities and resources they contribute toward the value of an asset. Stakeholders Stakeholders create value in an asset by contributing their capacities and resources in in accordance with their stakeholder agreements and performance covenants. Open Equity allocates ownership to each stakeholder on the basis of the value they generate through the fulfilment of their covenants. Stakeholder Groups The Open Equity partnership framework allows for various stakeholder groups to be defined on the basis of the capacities and resources they contribute toward the value of an asset. Stakeholder groups can be comprised of various types of stakeholders, such as employees, managers, directors, investors, guarantors, key customers and vendors, tenants, members, subscribers, sponsors, strategic allies, etc. Value Creation Timelines Each stakeholder group generates a distinct profile of value creation over time. For example, originators and investors carry most of the risk and value creation at the outset of the deployment of an asset; whereas value creation over the lifecycle of an asset is primarily carried by other stakeholders such as employees and tenants. Open Equity accounts for these changing profiles of value creation and allocates ownership accordingly over the lifecycle of the asset. Open Equity allocates participation to stakeholder groups on the basis of the capacities they contribute to the asset. Capital Payments Capital stakeholders create value by capitalizing the deployment of an asset. The default configuration of the Open Equity model allocates all cash distributions toward the elimination of capital contribution balances by prioritizing preferred returns and capital payments to the capital stakeholders. Cash Proceeds Capital payments are achieved from various types of cash proceeds. Operational Cashflow – Net proceeds available from business operations, after consideration for liabilities and cash reserves; Refinancing Proceeds – Net proceeds withdrawn by leveraging assets with appropriate debt ratios; Sale Proceeds – Generally we’re not planning on selling; but sometimes we do, and the proceeds are disbursed to the stakeholders. Operational Cashflow Once an asset is stabilized, it will generally produce surplus annual cashflows, after consideration for current liabilities, investment, capital improvements, and operational cash reserves. Surplus cash can be allocated to return capital payments. Refinancing Proceeds Refinancing assets can provide cash to return capital payments. Where debt financing is available at affordable rates, assets may be leveraged to debt ratios appropriate to the debt servicing capacity of the asset. For example, a stabilized commercial asset in the Edmonton market will generally generate enough cashflow to comfortably service debt at 65-70% loan to value. Over the term of a 5-year commercial mortgage, the mortgage principle will be partially paid down and the asset may increase in value. The asset can now be leveraged back to the original debt ratio at the new asset value. The delta between the new debt and the old debt can be made available as a withdrawal from the equity of the asset to return capital payments. Sale Proceeds Generally the operational and real estate assets developed in the Sparrow Capital ecosystem are designed to be retained as integral to ecosystem functions. However, some projects or circumstances result in the sale of assets. Cash proceeds can also be achieved by sale of the equity of the partnership rather than its assets. Cash proceeds from the sale of the equity or the assets of the partnership can be used to return capital payments. Stakeholder Equity When deploying a commercial asset in Edmonton, elimination of capital contribution balances can typically be achieved within 10-15 years. At this stage, the capital stakeholders have received the return of the full balance of their original capital contributions. Their capital is no longer at risk and no longer at work within the asset. Capital stakeholders have also received full payment of any preferred returns that may have accrued to their capital while it was at work. This is a complete transaction. The investor has received the return of their capital and has received payment of their intended preferred yield. Similarly, every other stakeholder has participated in a complete transaction. The originators and managers have received their fees, employees have been paid, tenants have paid rent and received access to commercial space, vendors have delivered service and received payment, etc. Every stakeholder has participated in a complete transaction; a fair and mutually profitable exchange for all parties on fair market terms. Once all stakeholders have participated in a complete transaction, and all capital contributions have been returned, what remains? Everyone has been paid, and there remains the entire balance of the equity that is nested in the productive capacity of the asset. What do we do with this equity? Daily Equity Allocations Open Equity allocates equity on a daily basis. On a daily basis, Open Equity allocates ownership to each stakeholder on the basis of the value they generate through the fulfilment of their covenants. After all capital contributions have been returned, Open Equity will continue to allocate ownership on a daily basis to each stakeholder on the basis of the value they continue to generate over the lifecycle of the asset. Lifecycle Equity Allocations Capital stakeholders earn stakeholder units in proportion to the amount of capital they have at risk and working in the asset over time. After capital contributions have been returned, they retain the equity already earned but receive no further allocations of stakeholder units. Similarly, a commercial tenant earns stakeholder units while they are an active tenant and performing their covenants. If they leave at the end of their lease term, they retain the equity they earned, but they receive no further allocations of stakeholder units. Instead, the new tenant takes the previous tenant’s place and receives the stakeholder units earned under that position from that time forward. Each stakeholder group generates a distinct profile of value creation over time. Open Equity accounts for these changing profiles of value creation and allocates ownership accordingly over the lifecycle of the asset. Allocations over the lifecycle of an asset can take many profiles, depending on how the stakeholder groups are configured and how the asset performs. The chart to the right represents a hypothetical scenario for a commercial asset with six stakeholder groups on an 80-year lifecycle. Stakeholder Disbursements After all capital contributions have been returned, distributions from that time forward are shared between all stakeholders in proportion to their equity participation at the time of disbursement. As with capital payments, stakeholder disbursements are achieved from various proceeds. Operational Cashflow – Net proceeds available from business operations, after consideration for liabilities and cash reserves; Refinancing Proceeds – Net proceeds withdrawn by leveraging assets with appropriate debt ratios; Sale Proceeds – Generally we’re not planning on selling; but sometimes we do, and the proceeds are disbursed to the stakeholders. Over the lifecycle of a well-performing asset, these proceeds represent material amounts made available for disbursement to stakeholders. Other Features & Configurations Preferred Returns Preferred Return Arbitrage Disbursement Priority Configurations Recapitalization ESOP Compatibility