Assignment
Irene and Mort Houser live in Iowa City, Iowa, home of the University of Iowa. Both are alumni. Ireneis a veteran real estate broker, specializing in upper-end single-family home sales in her hometown. Mort owns a thriving construction company that builds, remodels and updates single-family homes, apartments and condos in the vicinity; Irene frequently hires Mort to do remodeling work for her listings.
The Housers have four children, two of whomattend Iowa City High School ("Go Little Hawks!"), while the other two are students at the University. After school and during the summer months, the children do construction, finishing work, and miscellaneous jobs for Mort.
The parents had been very active in social and athletic activities during their college years and are long-term ticketholders for Iowa's football and basketball games. All of the Housers are well known in the Iowa City community.
2015 was Irene's best year selling homes in Iowa City, and 2016 promises to be even better. Most of her 24 buyers have been Iowa alumni, eager to purchase second-homes or possible retirement homes, telling Irene that they love the small-town atmosphere and particularly the university-related social activities that they'd enjoyed during their college years. Indeed, the university has recently created 22 annual "Alumni Weekends," featuring tickets to athletic events and theatrical performances, as well as picnics and a variety of fitness activities, including 5K, 10K races, and even marathons.
Irene has an idea. Based on her recent sales history and the brand-new Alumni Weekends, she decides to concentrate on selling single-family homes to University of Iowa alumni. She and Mort will raise the money to purchase 20 of the available homes priced between $232,000 and $250,000 that are currently on the market. Mort's company will expand its operations to handle necessary repairs, such as plumbing, electrical work, and painting.
Questions:
Irene and Mort make an appointment with an attorney in a Des Moines law firm to discuss their idea and to get advice about how to proceed. They have $75,000 available from all sources to invest in the enterprise, and they want to know whether they should incorporate their company or use a different ownership vehicle that will protect their $75,000 investment and allow for others who may want to invest in the company to have the same level of security.
Irene and Mort want the company, however it's structured, to be able to take on necessary equity and debt to enable them to purchase the 20 homes they've targeted, and, if they're as successful as they're confident they will be, to attract additional funds, from other sources, to continue to expand their business by purchasing other right-priced single-family homes and perhaps 12- to 24-unit apartment buildings in the local area. Finally, they want their children to have a role in the new company and have an ownership interest as well.
1. What advice would you give Irene and Mort, understanding that they need to choose the most appropriate ownership form for their immediate and long-term needs, including obtaining debt and/or equity financing?Do you have enough information to be confident in making your recommendations?
2. What practical and financial challenge(s) do Mort and Irene face, in your opinion? What additional information would be helpful to you to solve them?
3. Irene discovers that five owners of the houses she's considering would like to add them to her initial sales inventory, yet continue to own them personally, hoping that Irene's program will capture higher sales prices because of her involvement in the new company. Should Irene accept their offer? Why or why not?
4. Big Guyz Homes, impressed with Irene and Mort's plan, offer to finance the initial purchase of the 20 homes at a 25% increase in price, proceeds to go directly to Irene and Mort, on the condition that they agree to be acquired as part of Big Guyz' S Corporation? Should Irene and Mort consider this opportunity? Why not?
5. Irene and Mort agree that Mort's involvement in the program is essential because of his knowledge of the local market and familiarity with the quality of the individual homes they would acquire. Mort is currently incorporated as a limited liability company; should his ownership continue as an LLC if it's acquired as part of the larger deal? Why?