The Pro Bulgaria

Investment Memorandum perty Buyers Guide to Opportunity in

enquiries@c

www.c

City Trading Post Ltd

Godliman House, 21 Godliman Street

London, EC4V 5BD City Trading Post Ltd

enquiries@ci

www.ci

Godliman House, 21 Godliman StreetLondon, EC4V 5BD

(+44) 20 7015 5020

itytradingpost.co.uk

itytradingpost.co.uk (+44) 20 7015 50

20 tytradingpost.co.uk tytradingpost.co.uk

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Table of Contents

Executive Summary

Investment Location & Rationale

Development Appraisal

Development Company

Management Company

Guaranteed Yield

Costs & Investment Returns

Tax

Purchase Process

Financing

Legal

Letting & Management

Appendices

This Investment Memorandum is the independent work of City Trading Post Ltd and is written after careful and due diligence has been conducted with all counterparties. While this document has been written in good faith, City Trading Post Ltd cannot accept responsibility for inaccuracies contained within it, or matters outside the direct control of the company that may effect your investment. The value of an investment can fall as well as rise, and you may not get back all of the money that you put in. This is not a regulated investment for the purpose of the UK FSMA (2000). © City Trading Post Ltd 2005

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Executive Summary “The Association of British Travel Agents said that Bulgaria was the fastest growing holiday destination for 2004 and that at least 200,000 Britons were likely to visit this year – nearly double last year’s total” Fiona Govan, Daily Telegraph (11th January 2004). City Trading Post (CTP) has identified an exceptional development on Bulgaria’s popular Black Sea coast that offers investors early exposure to substantial capital growth potential with an attractive 3-year guaranteed yield. This investment opportunity is summarised below:

o Located in Obzor on the Black Sea coast o Front line (beachfront) position

o Within an hour’s drive of two international airports at Varna and Burgas

o Danish developer with proven track record in central and eastern Europe and an AA

credit rating

o 4 star quality development offering swimming pools, restaurants, shops, gym, underground parking, etc.

o 6 storey blocks comprising 1, 2 & 3 bedroom apartments ranging from 50 – 110 square

metres

o Internally decorated to western European standards and inclusive of all fixtures, fittings & furniture

o Up to 70% loan to value mortgage finance available from local finance partner on the

basis of a 20-year mortgage capital repayment basis (subject to status)

o Staggered payment structure – 15% upon reservation, 15% when the roof is completed and 70% payment upon formal completion of the building work in May 2006

o 5% rental yield guaranteed for 3 years from completion in May 2006 provided by the

management company and backed up by international tour operators such as Kuoni

o The developer has set up a subsidiary company to offer on-site management for the whole development, and has expressed an interest in maintaining a presence in the location as developer / property manager for at least the next 25 years.

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Investment Location & Rationale

Bulgaria fact file

Capital city

Sofia

Population 8 million Currency Lev (Lv) - pegged to the Euro Government Parliamentary democracy GDP US$57 billion in purchasing power parity terms (2003 est.) GDP growth 4.3% (2003 est.), 6% (Q3 2004) Area 110,910 sq km Borders Romania to the north, Serbia & Montenegro and Macedonia to the west,

Greece and Turkey to the south and the Black Sea directly to the east Bulgaria is located on the Back Sea coast in eastern Europe and has been a traditional holiday destination for tourists throughout Europe for many years. The mountainous towns in the west of the country are endowed with substantial snowfall during the winter months affording a long ski season, while the Black Sea coast enjoys bright sunshine and high temperatures during the summer months. There are three international airports in Bulgaria, one in Sofia and two on the Black Sea coast in Varna and Burgas.

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Any country has an individual potential to prosper based on its raw materials and traditional industries, and in Bulgaria’s case the driver is tourism. Since 1991, working with the IMF, and more recently in working towards 2007 entry to the European Union, Bulgaria has stabilised its macro economy and worked to develop an infrastructure and business environment to facilitate tourism and external investment. The budget airlines are expected to begin flights within the next 2-3 years.

The Bulgarian government has developed a program for increasing tourism, especially in skiing and beach holiday resorts. The program includes support and development of infrastructure, services, cultural offerings, historical sites, green areas, and tourist information centres.

The tourism industry in terms of numbers of visitors in Bulgaria increased by 18% in 2003, the highest figure in Europe. This increasing popularity is particularly noticeable in the UK, with 130,000 Britons visiting during the summer of 2004. Tourism from the UK increased by 60% between 2003 and 2004, with Britons now the seventh largest group of visitors.

The coast line in Bulgaria is 380km long, only a small part of which is sandy beaches. All the beachfront land has now been bought by developers and speculators, and the land is now traded at huge premiums.

Despite this, the price of property on the Bulgarian coast is around a third of that in Spain, while the cost of living is also significantly lower. This represents a great investment opportunity for those interested in property. Prices in Bulgaria are already rising fast driven by the following key factors:

• Stable economy with currency pegged to the Euro • significantly cheaper prices than Spain and other Western resort destinations • the low cost of living • imminent EU accession • the booming tourist trade • impending arrival of the UK budget airlines

The growth of tourism and stabilisation of Bulgaria’s economy have made it an attractive destination for property investors. Holiday towns have shown substantial growth in property prices of between 18% and 21% as burgeoning demand from domestic and foreign investors outstrips supply, and in the lead up to EU accession this trend seems set to continue. Properties in some Black Sea coastal resorts like Sunny Beach and Golden Sands have risen in value by more than 35%. While prices may not hit the dizzy heights of southern Spain due to the shorter length of the tourist season, there is still room for significant growth. It is important for investors to get in quickly to make the most of these trends.

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The Black Sea coast The Black Sea coast has been a traditional tourist destination for centuries due to its sandy beaches and warm seasonal climate. Its two main resorts of Sunny Beach and Golden Sands attract over 150,000 tourists a year and have developed over the years to offer western European standard hotels. Two of Bulgaria’s three international airports can be found on this coastline. The popular resorts of Sunny Beach and Golden Sands are

already well developed with many completed developments like those below:

Figure 1 - Sunny Beach Figure 2 - The Berlin Hotel in Sunny Beach

Figure 3 - Golden Sands Figure 4 - The Hotel Marina in Golden Sands

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Obzor Obzor is a small coastal town located on the Black Sea coast surrounded by vineyards, forests and farms. It has a population of 2,000 people and is approximately 20km north of Sunny Beach and within an hour’s drive of two international airports located outside Bulgaria’s second and third largest cities of Varna and Bourgas. Temperatures in the region vary from a very warm 31ºC in the summer right down to 5C in the winter and sea temperatures remain between 20ºC and 25ºC for 7 months of the year. The town is rich in history, which stretches back over a thousand years through the settlements of the Greeks, Romans and Ottoman Empire, and today there are many sites remaining of historical and cultural interest. The centre of Obzor contains a host of shops and restaurants together with a bank, post office pharmacy and hospital. Entertainment is also featured in the form of folk music and dance theatres, circus, cinema and an area for sports activities. The Black Sea also offers the opportunity for fishing and water sports.

Figure 5 - St Elijah Church, Obzor Figure 6 - A typical beachfront villa

Obzor beach is one of the last remaining undeveloped stretches of naturally sandy coastline in Bulgaria and has the further good fortune of being enclosed by cliffs at either end, permanently limiting the expansion of the resort to the north or south. The beach itself is one of the best in Europe with the crystal clear waters known for their clean, safe swimming during summer months.

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The beach itself at Obzor is only about 6km long, of which 2km is located to the north of the town. The Obzor Beach Resort development has acquired 800m of this portion of the coast for its exclusive development and will therefore, being by far the largest in the area, set the standard to which other developments must aspire. Planning laws in the area state that all developments must be of a 4 star rating in an effort to avoid the mistakes made whilst over developing Sunny Beach and Golden Sands, the country’s two principle seaside destinations. Accordingly, it is anticipated that Obzor will develop into a far more exclusive and sought after location than its neighbours. This should ensure that prices here reach similar if not greater heights in the next 2 to 3 years. The rationale for buying so early in Obzor's development is to offer investors maximum exposure to the latent growth potential the area has to offer. As the respective markets of Sunny Beach and Golden Sands approach maturity, a location like Obzor presents a more realistic opportunity for long-term growth in the future. This is being demonstrated by the uptake of the land by prospective developers in the area and it is notable that all the front line positions have been sold. Indeed several other developments, also of a 4 star plus quality are already underway (and sold out off plan) further down the beach. The following are computer generated images of how they are expected to look in the next few months post completion

Mirava Bay – to be completed Summer 2006

Helios Bay – to be completed Summer 2005

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Development Appraisal The Obzor Beach resort has been designed to modern western European standards and will be arranged over 6 storeys in accordance with local planning legislation.

Figure 7 - Front view of one of the blocks

The site occupies 800 metres of first line beachfront land and comprises 4 main accommodation blocks. The site is accessed via a service road, which leads directly to the reception block at the south of the development.

Figure 8 - Site plan of the development highlighting the 4 blocks and access roads

The development is made up of 590 units in total comprising 1, 2 and 3 bedroom apartments. The approximate dimensions of these apartments are as follows:

1-bedroom apartments 50 – 60 sqm 2-bedroom apartments 70 – 80 sqm 3-bedroom apartments 100 – 110 sqm

Please see Appendix A for floor plans of the various floors in the first block of the resort. The properties will be fully decorated and furnished to a standard suitable for the western holiday market at which they are targeted. This includes all furniture, fixtures and fittings making the apartments immediately rentable on completion. The architecture of the building affords most of the apartments a terrace or balcony and a direct sea view.

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As a genuine 4 star resort development, the Obzor Beach Resort will provide various onsite facilities for the use of its holidaymakers. These will include the following:

• Restaurants • Gymnasium • Spa and solarium • Supermarket • Indoor and outdoor pool for each block • Underground parking • Conference facilities • Internet facilities • Child entertainment rooms

Below is a computer generated image of the northern most block of the development.

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Development Company Notabenus A/S (NB) was founded in March 1995 as a property company involved in the purchase, sale and lease of real estate in Denmark and abroad, as well as investments into related sectors. It is owned outright by its founder Borris Tangaa Nielsen, and over the years the company has moved from investments into renovation of existing properties in the commercial and retail sector as well as residential properties and holiday homes. The company develops approximately 300 houses per year, corresponding to approximately 30,000sqm. NB has developed and sold 3 holiday park projects in Denmark both as residential summer houses and hotels, developed 142 holiday homes in the coastal town of Skagen with reception facilities, sports hall, a restaurant and a waterpark, and 40 luxury houses with service buildings in 110,000sqm of forest land on the island of Bornholm. Below are some examples of Notabenus projects.

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The policy at NB is to always utilise local employment and local Bulgarian partners have been identified on the advisory side as well as for construction side. Funding for the Obzor project has been agreed with a regional Danish bank. The Notabenus Group is liquid and stable with current assets in 2004 of DKK42.7 million up from DKK27.1 million in 2003, and net current assets oft DKK8.1 million up from DKK6.4 million. NB set up NewCo EOOD as a Bulgarian entity in order to buy land in accordance with national legislation restricting foreigners owning land. Strandholms Allé 38 Aps (a subsidiary of NB) has been appointed to manage the Obzor project and has bought NewCo in order to control the development. NewCo EOOD was a joint stock company with the only purpose of handling the stock and owning the land plot.

FerieFlex EOOD has been established by NB in Bulgaria to provide management services to properties in Obzor.

Management Borris Tangaa Nielsen is the founder and CEO of Notabenus A/S, which he owns a 100 %. He has 29 years experience in the property industry. Per Helios is employed in Notabenus A/S as developer and project manager. He is a qualified accountant and has worked in the construction industry since 1994. Lars Vendelbo is the owner and CEO of Boligpension A/S and Boligview A/S. Boligpension A/S is a company that provides investment to real estate projects. It was founded in 1989 by Lars and is managed by Boligview A/S. Boligview A/S is a property administrative company operating in Denmark. Boligview A/S and Boligpension A/S have a portfolio with a value of DKK80 million. Lars Vendebo and Borris Tangaa Nielsen have been working together for 17 years. Local Partners Lawyers: DelaCour, Copenhagen. Known to the Danish embassy in Sofia for 14 years and used by Carlsberg and IØ Investment Fund for transactions in Bulgaria. Accountants: KPMG, Sofia

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Management Company

FerieFlex EOOD This is a local Bulgarian company setup to provide the ongoing management and maintenance of the Obzor Beach Resort. This company will be responsible for the running of the resort and the servicing of investors apartments and will also pay the guaranteed yield if this option is taken. This company will be run by Tanyo Gospidov, a Notabenus employee. Tanyo Gospodinov is a Bulgarian living in Denmark. He was born and raised in Plovdiv and came to Denmark 5 years ago. He is a Market Economist specialising in entrepreneurship. Besides that he is experienced in the hospitality industry as he has worked for numerous hotels in Denmark and abroad. Tanyo Gospodinov has facilitated the negotiation process between Denmark and Bulgaria as an expert interpreter. Notabenus has expressed an interest in maintaining a presence in Obzor as developer and property manager for the next 25 years.

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Guaranteed Yield For the first three years, as the resort takes root and local infrastructure is established, a guaranteed rental yield will be made available to investors. This will be provided by the management company at a rate of 5% of the purchase price, and will be paid to investors on a quarterly basis. Support for this yield will be provided by exclusive deals struck with tour operators like Apollo. Under the standard terms of the agreement, the tour operators will have year round use of the property, but if investors wish to use their property for some weeks during the year, the yield will be reduced by 1/20th for each week they take. As well as excellent covenant strength, the involvement of companies like Apollo provides a major endorsement to the expected growth of the resort, and the booming demand for holiday homes in the area. FerieFlex EOOD (a subsidiary of Notabenus) has been set up to manage the development on behalf of investors, and will oversee relationships with tour operators. Accepting the guaranteed yield means a hassle free initiation to the Bulgarian market with no concerns over property management or potential void periods. Alternatively, investors can arrange to let the properties privately on an annual basis using local agents, and onsite management services will be made available by FerieFlex.

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Costs & Investment Returns

Transaction costs The main transaction costs involved with a purchase in Bulgaria come with arranging the mortgage finance. An investor taking mortgage finance can expect to pay around 5% of the property purchase price in transaction costs. For an investor buying for cash, transaction costs are reduced to around 2% of the purchase price.

Cashflow For an investor taking a 70% mortgage and the full guaranteed yield package on an average priced apartment, there is likely to be a small net outflow of cash of around £1,800 a year, as illustrated below:

5 year cash flow analysis

-10,000

-9,000

-8,000

-7,000

-6,000

-5,000

-4,000

-3,000

-2,000

-1,000

01 2 3 4 5

Year

Ban

k A

/c B

alan

ce (£

)

This illustration is based on the following assumptions:

• Average priced apartment valued at £63,620 • Full 70% mortgage over 20 years at a rate of 7% variable • Exchange rate of €1.46 to the pound • Rental yield of 5% (of purchase price) continues after guaranteed yield period • Investor does not visit the unit at all • No change in mortgage interest rates

For an investor who does not require mortgage finance, the property will be cashflow positive and generate a surplus of around £11,800 over 5 years as illustrated below:

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5 year cash flow analysis

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1 2 3 4 5Y ear

The following assumptions have been used in this illustration:

• Average cost of an apartment assumed to be £63,620 • No mortgage finance taken • Exchange rate of €1.46 to the pound • Rental yield of 5% (of purchase price) continues after guaranteed yield period • Investor does not visit the unit at all

Personalised cashflow forecasts can be produced for investors as required.

Returns The following table shows the possible return from an apartment with 70% mortgage finance.

Year Bank account balance (£)

Mortgage paid down

Mortgage balance

Value of property

Equity Return

0 0 0 -44,534 63,620 19,086 -14% 1 -1,792 1,059 -43,474 69,982 26,507 11% 2 -3,584 2,195 -42,338 76,980 34,642 40% 3 -5,376 3,414 -41,120 84,678 43,558 72% 4 -7,169 4,720 -39,814 93,146 53,332 108% 5 -8,961 6,120 -38,413 102,460 64,047 148%

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The following assumptions have been used in this illustration:

• Average cost of an apartment assumed to be £63,620 • Full 70% mortgage over 20 years at a rate of 7% variable • Exchange rate of €1.46 to the pound • Rental yield of 5% (of purchase price) continues after guaranteed yield period • Investor does not visit the unit at all • No change in mortgage interest rates • 10% increase in property prices year on year • Includes initial and ongoing transaction and servicing costs

If no finance is taken, the returns are likely to be as follows:

Year Bank account balance (£)

Mortgage paid down

Mortgage balance

Value of property

Equity Return

0 0 0 0 63,620 63,620 -1% 1 2,359 0 0 69,982 69,982 12% 2 4,718 0 0 76,980 76,980 27% 3 7,077 0 0 84,678 84,678 42% 4 9,436 0 0 93,146 93,146 59% 5 11,795 0 0 102,460 102,460 77%

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Tax

Capital gains tax (CGT) There is a currently a double taxation treaty in place between the UK and Bulgaria. At this point in time, it is expected that no CGT will be incurred by investors in Bulgaria as purchasing funds for the property do not enter Bulgaria at any stage. However, investors will be liable to CGT in the UK following the normal UK CGT rules on sale of their property.

VAT The purchase price of the apartments in the Obzor Beach Resort is inclusive of VAT.

Income tax If any rental income for the apartments passes through a Bulgarian bank account it will be liable to income tax at a rate of 15% per annum. All rental income will also be liable to UK income tax according to the ordinary rules. However, due to the double taxation treaty that is in place, any tax that has already been paid in Bulgaria will be taken into account.

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Purchase process Once an investor has selected an apartment to buy, they can verbally reserve the unit for a period of 72 hours (3 days). During this time a reservation form must be completed and a non-refundable deposit of €1,500 paid to a UK-based Euro denominated escrow account (see legal process below). If this is not done within the time allowed, the property will be put back on the market. Once the reservation is formalised the investor must state their intention to utilise the optional financing package (detailed overleaf) or buy for cash. If the financing option is taken, CTP will instigate the mortgage application process. Once an agreement in principle has been issued by the lender the investor will have 3 weeks to transfer the initial 15% portion of their 30% deposit (less reservation deposit already paid) to the escrow account. If this is not done within the time allowed the investor may lose their reservation deposit. If the investor is a cash purchaser, they will have 3 weeks to transfer their first payment of 15% into the escrow account. If this is not done within the time allowed the investor may lose their reservation deposit. The next payment of 15 % is due when construction of the roof is completed, expected to be 1st quarter 2006. As before, the payment will be made to the escrow account. The final payment of 70% is due upon completion of the development. This will manifest as a draw down from the lender in the case of mortgage purchasers, and as a cash transfer for cash purchasers. The transaction will be formalised and declared complete once the legal notary has signed the paperwork. This process is illustrated below:

Select unit with sales agent

Complete the following forms :Property Application, Preliminary contract

Financing application (if required)Power of attorney (if required)

Make reservation deposit of €1,500 to secure unit

Await financing approval from Bank

Financing Required?

STOP On receipt of financing approval make 1st instalment payment of

15% less €1,500)

On completion of roofing works make 2nd instalment

of 15%

On completion sign notary deed (remotely by attorney if set-up) and

make final instalment of 70%(by mortgage finance if approved)

Arrange own financing

Make 1nd Instalment of 15% less €1,500

Yes No

Unsuccessful

Select unit with sales agent

Complete the following forms :Property Application, Preliminary contract

Financing application (if required)Power of attorney (if required)

Make reservation deposit of €1,500 to secure unit

Await financing approval from Bank

Financing Required?

STOP On receipt of financing approval make 1st instalment payment of

15% less €1,500)

On completion of roofing works make 2nd instalment

of 15%

On completion sign notary deed (remotely by attorney if set-up) and

make final instalment of 70%(by mortgage finance if approved)

Arrange own financing

Make 1nd Instalment of 15% less €1,500

Yes No

Unsuccessful

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Financing A finance package has been arranged with Bulgaria based Greek bank Piraeus who will be lending on the following basis: Loan Purpose Purchase of completed residential property in Bulgaria Currency Euro Interest Rate 7.0% variable Loan To Value Maximum 70% Term 5 – 20 Years Minimum Loan Amount €35,000 Status Full Status only Borrowers All UK residents over 21 now and below 70 on maturity of loan.

Available to companies against the personal guarantee of the company’s UK beneficial owners.

Loan security 1. First ranking mortgage on property in Bulgaria 2. Pledge over company’s assets (for company loans)

3. Personal guarantees of beneficial owners (for company loans) Repayment Method Capital and Interest (in equal instalments) Early Redemption Charges Year 1 = 3% of outstanding balance, Year 2 = 2%, Year 3 = 1%,

nothing subsequently Arrangement Fee 1% of loan amount Building Insurance Fire, Flood and Earthquake insurance required Life Assurance Not required Fees Legal fees and costs (using Piraeus legal representation -

€2,000) Using own representation - 1.2% of loan (max €1,000) + legal fees Valuation Fees - €100 +/- €20 Application fee - €75

Further information is available upon request.

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Legal Bulgarian legislation does not allow foreign individuals to own land in Bulgaria. The land will actually be owned by NewCo EOOD and investors will own their own apartment and a share in common parts of the building. The nearest equivalent to this in the UK is ‘share of freehold’. The services of local notary company will be employed to oversee and confirm legal ownership and officiate completion. Investors have two options on how to formalize their purchase; they can visit Bulgaria and sign documentation in person, or they can appoint a power of attorney to do so on their behalf. Due to the “off-plan” nature of this development, investors will be expected to periodically transfer monies into a UK based escrow account that holds the funds until build completion. The nature of this account means that the developer will not be able to access this money until completion. Letting & Management Investors who select the guaranteed yield option will start accruing rent on completion. Payment to investors will be quarterly in advance. After three years, the tenancy will be terminated and the investor will have full rights of access to the property. For investors who wish to use their apartment, each week they use their apartment will cost them 1/20th of the guaranteed yield for the year. If investors wish to privately let or occupy properties, they will receive keys and have full rights of access on completion. FerieFlex will provide on site management for all investors and will charge a €100 per month service charge for this

Appendix 1 – Floor Plans

Basement

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Ground floor

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First floor

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Second floor

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Third floor

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Fourth floor

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Fifth floor

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