Edward Seymour is a financial consultant to Cornish, Inc., a real estate firm. C

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? Follow the minimum requirements for discussion board posts located in the general discussion area. Recall, those are the minimum requirements, more posts are always encouraged

Explanation / Answer

Edward is telling the truth on the fact that the first 4 years the breakeven point is 65% however he is not telling the complete story, why he is not telling the potential investors that after year 4 the breakeven point will be at 95%? Easy, because he knows this will scare the investors away and he is interested in making the sale.

I agree that the investors should investigate on their side and not just buying what the seller is telling them but also Edward is not being completely honest, he has the information and is not promoting it.

In one hand yes investors should do their homework but in the other hand Edward should provide all the information. What is going to happen on year 4 when breakeven is higher? What would Edward tell the investors?

It is my opinion that Edward is not being ethical

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