Jeff Zengel is a financial consultant to Rae Properties Inc., a real estate syndicate. Rae Properties Inc.
Question:
Jeff has reported prominently in the prospectus that the break-even occupancy for the first four years is 60%. 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 60% break even is very low and thus communicates a low risk to potential investors. Jeff uses the 60% 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 that the break-even occupancy will jump to 90% after the fourth year because of the contracted increase in the mortgage interest rate. Jeff believes prospective investors are adequately informed as to the risk of the investment.
Comment on the ethical considerations of this situation.
Partnership
A legal form of business operation between two or more individuals who share management and profits. A Written agreement between two or more individuals who join as partners to form and carry on a for-profit business. Among other things, it states...
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