Real Estate Firm Makes Broward College Ethics In

Shelia Knox is a financial consultant to Berkley, Inc., a real estate firm. Berkley 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. Shelia 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.

Shelia 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. Shelia 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. Shelia believes prospective investors are adequately informed as to the risk of the investment.

Is Shelia wrong? Is there an ethical concern? Is Shelia a savvy business person? Discuss the position Shelia 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?