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342 CHAPTER CRAFTING AND NEGOTIATING Concept Check Expanding Gregory's Fergus and Freya Eneas have owned Gregory's Greek Restaurant for over thirty years in Greg. orytown, a small scenie town in the country. The restaurant overlooks a river and offers visitors a lovely view of the countryside. Over the years, the restaurant's popularity has grown through word-of-mouth advertising, and now guests often wait up to two hours on the weekend before being seated. Fergus and Freya have been approached by Divina Developers, which wants to use the Gregory's Greek Restaurant concept in a mixed-use development it is putting together. It seems that one of Divina's managers ate at Gregory's and loved the concept. Divina Developers put together an investment proposal for Fergus and Freya requesting to use their concept and cash equity for the deal. The following are excerpts from the offer sent by Divina: Use of the Gregory's Greek Restaurant name in exchange for limited partnership units in the new restaurant A request for a 45% equity investment from Fergus and Freya on the total project cost of $3,000,000. In return for their investment, they will receive 25% ownership and 25% of all cash flows, with Divina reserving 75%. With an estimated $175,000 in cash flows in Year 1 and a 10% growth rate over the next decade, the return on equity looks very promising. Divina Developers, as the general partner, will retain all operating rights, including the right to decide when the restaurant and property will be sold. QUESTIONS 1. Identify and explain the positive and negative aspects of the proposed business entity for Fergus and Freya 2. Calculate the IRR for this project based on a sale in Year 6 with a 10% cap rate. 3. Analyze the structure of the equity proposal. If you were Fergus and Freya, would you accept this offer as it stands? If not, what would you negotiate? Concept Check Star or Prize: Which Bank? Dean Hotel Investments, an S-corporation, has identified a potential investment property near a major New England airport. The 302-room Blackstone Hotel is a recently defranchised upscale