Question

Edward Seymour is a financial consultant to Cornish, Inc., a real estate firm. Cornish Inc. finances and develops commercial real estate such as office buildings and warehouses. The completed projects are then sold as limited partnership interests to individual investors. The real estate firm makes a profit on the sale of these partnership interests. Edward provides financial information for the offering prospectus, which is a document that provides the financial and legal details of the limited partnership offerings. In one of the projects, the bank has financed the construction of a commercial office building at a rate of 10% for the first four years, after which the rate jumps to 15% for the remaining 20 years of the mortgage. The interest costs are one of the major ongoing costs of a real estate project.

Edward has reported prominently in the prospectus that the break-even occupancy for the first four years is 65%. This is the amount of office space that must be leased to cover the interest and general upkeep costs over the first four years. The 65% break-even is very low and thus communicates a low risk to potential investors. Edward uses the 65% break-even rate as a major marketing tool in selling the limited partnership interests. Buried in the fine print of the prospectus is additional information that would allow an astute investor to determine the break-even occupancy will jump to 95% after the fourth year because of the contracted increase in the mortgage interest rate. Edward believes prospective investors are adequately informed as to the risk of the investment.

Is Edward wrong? Is there an ethical concern? Is Edward a savvy business person? Discuss the position Edward is in and support or defend the position. Shouldn't all investors complete their own due diligence? The information is included in the prospectus, isn't this just business?

Answer 1

Answer:

Edward is coming clean on the way that the initial 4 years the breakeven point is 65% anyway he isn't recounting to the total story, why he isn't telling the potential financial specialists that after year 4 the breakeven point will be at 95%? Simple, since he realizes this will frighten the financial specialists off and he is keen on making the deal.

I concur that the speculators ought to examine on their side and not simply purchasing what the dealer is letting them know yet in addition Edward isn't by and large totally fair, he has the data and isn't advancing it.

In one hand yes financial specialists ought to get their work done yet in the other hand Edward ought to give all the data. What will occur on year 4 when breakeven is higher? What might Edward tell the financial specialists?

It is my conclusion that Edward isn't being moral.