Assignment
BACKGROUND. 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 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.
As expected, 2016 was the best year for the Housers' businesses. In late January, the controversial new president of the University of Iowa, Bruce Herreld, met with Irene and offered her a job as president of the university's alumni association and its foundation at a combined salary of $325,000, making her the highest-paid universityofficial; she accepted. The "Iowa City Press-Citizen" newspaper and the "Des Moines Register," together with the state's television affiliates, covered the story extensively; in addition, PBS initiated a monthly feature focusing on Irene's successes with alumni activities.
This extensive media attention drove substantial new business to Irene's agency, as well as to her husband's construction company. During 2016, Irene secured 120 new single-family listings in an expanded geographic area throughout central and eastern Iowa; Gerald, the Housers' son,completed the requirements for his Iowa real estate licensein May and started to assist Irene with her listings. Collectively, the Houser family reported income of $525,000 for the year.
QUESTION 1, FACTS:The Housers form a general partnership - "HouserHouses" - in early February 2016, to be the operating and ownership entity for Ireneand Mort's businesses. The partnership agreement specifies the percentages of cash flow and taxable income for each member of the family, including Gerald and Julie, the Housers' daughter. Realizing that Irene's 2016 listings and sales will produce substantial income, the family decides to purchase five of the 20 homes that Irene targeted the previous year, pledging their initial $75,000 investment and the proceeds of a $100,000 gift from Irene's parents to secure a $1,125,000 loan to purchase the houses.
QUESTION 1, QUESTIONS:
1. Is HouserHomes the appropriate entity to make the purchases? Why or why not? If not, what would be better alternatives? Why?
2. What is the debt coverage ratio for this deal?
3. Assuming that Irene wants to sell each of the houses for a 15% profit, what will the sales price be?
4. What would be a better way, given the Housers' projected 2016 year-end financial position, to finance the purchase of the houses?
5. Assuming that the existing general partnership is a partner in the acquisitions, what other ownership type would be the best partnerto provide the maximum amount of equity to make the purchases? Why?
QUESTION 2, FACTS:Mort phones Julie, requesting that shebring a document to him at one of the newly purchased homes. Julie, driving the HouserHomes-owned Ford 150, gets into an accident; she's texting her boyfriend at the time. Two other vehicles are wrecked in the crash and the occupants suffer serious injuries; GEICO, the Housers' auto insurer, refuses to cover the damages because of Julie's negligence.
QUESTION 2, QUESTIONS:
1. What should the Housers do immediately, if anything?
2. What is the probable liability for the Housers, if any, and the family business, if any, as a result of the accident?
3. Would the result perhaps be different if Julie had been driving to meet her boyfriend, instead of Mort?
4. Would the potential liability be different if the Housers did not own the homes in a general partnership? If so, what other legal ownership vehicle(s), if any, would have protected them? Why?
QUESTION 3, FACTS: Century 21, a major worldwide real estate company with branch offices in several Iowa cities and towns, including Iowa City, has closely followed the Housers and their careers for several years. Indeed, principals of Century 21 in the United States have met with Irene and Mort in Iowa City on several occasions, and have traveled with them for company-sponsored vacations in several Caribbean cities where Century 21 does business. Most recently, shortly after the announcement ofIrene's new assignment with the University of Iowa's alumni association and foundation, the firm sponsored a whirlwind family tour of major cities in Japan and Taiwan, and at the children's request, the five cities in China where the firm does business.
On the last day of their stay in Beijing, the dinner conversation turned to Irene's career and the family's future plans. The principal-in-charge of Century 21's Canadian holdingsasked about Irene's possible interest in succeeding him after his forthcoming retirement in 90 days. The offer included a salary of $325,000/year - together with an opportunity for Mort to lead the firm's brand new sustainable construction business in North America, at a starting salary of $120,000. Benefits would include substantial travel and housing allowances, as well as medical-dental benefits and a generous retirement package.
The offer specifically provided that Century 21 would have an ownership position in Housers'Houses, which Irene initially rejected. In an effort to close the deal, a separate offer was made that Century 21 would cover all money damages that might be assessed as a consequence of Julie's auto accident.
The Housers are intrigued by this opportunity, particularly because they fear a substantial damage award in Julie's case, which as noted would be covered by Century 21. Mort has developed a background in sustainable construction, and Gerald, the son, has spent vacation time in and around Toronto, where the family would live and work.
The major sticking point is sharing the Iowa City business with Century 21. Moreover, Irene had signed a five-year contract with the University, which she anticipates she'd not be able to fulfill because of the relocation to Canada and her challenging new workload. Worse, she and the rest of the family have spent their entire lives in Iowa City, and Housers'Houses is very important to all of them.
QUESTION 3, QUESTIONS:
1. If you were the Housers' close friend and long-term business advisor, what would you recommend to the family? Should they accept the current offer? If not, what modifications to the deal would you suggest? If you believe that they ought to accept the offer, should they attempt to exempt the family business from the deal? If that option is not available, what would be the best legal structure to protect the Housers' interests? Why? What structure would Century 21 prefer, and why?
2. Is there any part of the above question that you would require more information to answer? If so, what additional information would you require, and why?