Edward Seymour is a financial consultant to Cornish Inc., a real estate syndicate. Cornish finances and develops commerc
Posted: Thu May 05, 2022 5:20 am
Edward Seymour is a financial consultant to Cornish Inc., a real
estate syndicate. Cornish finances and develops commercial real
estate (office buildings) projects. The completed projects are then
sold as limited partnership interests to individual investors. The
syndicate makes a profit on the sale of these partnership
interests. Edward provides financial information for prospective
investors in a document called the offering “prospectus.” This
document discusses the financial and legal details of the limited
partnership investment.
One of the company’s current projects is called JEDI 2, and has
the syndicate borrowing money from a local bank to build a
commercial office building. The interest rate on the loan is 6.5%
for the first four years. After four years, the interest rate jumps
to 9% for the remaining 20 years of the loan. The interest expense
is one of the major costs of this project and significantly affects
the number of renters needed for the project to break even. In the
prospectus, Edward has prominently reported 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 during the first four years. The 65% break-even point
is very low compared to similar projects 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 that
the break-even occupancy jumps to 95% after the fourth year when
the interest rate on the loan increases to 9%. Edward believes
prospective investors are adequately informed of the investment’s
risk.
Discussion:
estate syndicate. Cornish finances and develops commercial real
estate (office buildings) projects. The completed projects are then
sold as limited partnership interests to individual investors. The
syndicate makes a profit on the sale of these partnership
interests. Edward provides financial information for prospective
investors in a document called the offering “prospectus.” This
document discusses the financial and legal details of the limited
partnership investment.
One of the company’s current projects is called JEDI 2, and has
the syndicate borrowing money from a local bank to build a
commercial office building. The interest rate on the loan is 6.5%
for the first four years. After four years, the interest rate jumps
to 9% for the remaining 20 years of the loan. The interest expense
is one of the major costs of this project and significantly affects
the number of renters needed for the project to break even. In the
prospectus, Edward has prominently reported 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 during the first four years. The 65% break-even point
is very low compared to similar projects 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 that
the break-even occupancy jumps to 95% after the fourth year when
the interest rate on the loan increases to 9%. Edward believes
prospective investors are adequately informed of the investment’s
risk.
Discussion: