Case Study of Generator Portfolio Company (GP Company)

Location: Austin, Texas

Facts: GP Company is conceived by Johnson Bridges and Jeffrey Arnold (the Founders), both who are residents of Austin, Texas. They both recently graduated from the University of Texas in Austin, earning degrees in Business Administration with a minor in Real Estate. Although the company is still in the conception stage, the Founders realize that they should organize some form of business entity to carry on business successfully.

One of their goals is to use their real estate skills to earn profits quickly, so they can experience the good life. John Kismet is a friend who graduated from UT School of Law and passed the bar exam. He agrees to be the companys legal initial advisor and immediately recommends they consider forming either a C corporation or an S corporation for the business and to focus on commercial real estate instead of residential real estate. He also suggests that forming a real estate investment trust could attract investors who want a return on their investment without actually owning the real estate properties themselves.

Youve been hired as additional outside counsel to advise the Founders during each step of the companys formation and operation. As the new legal advisor, how do you respond to the following questions, so it will benefit your client, GP Company?

Questions:

1. What form of ownership would be best for the Founders and their investors, a C corporation or an S corporation? What are the pros and cons of each entity in this case? Pick an entity and make your argument. (20 points)

2.

(a) If Johnson and Jeffrey elect to be an S corporation and then decide to create a joint venture with another corporation (investor-venturer), should the Generator Portfolio Corporation (GP) contribute any equity capital, if its major role is to provide operating expertise? Why?

(b) If the investor-venturer holds a cumulative distribution preference and will share cash flow from operations with the GP, what does this preference mean for the investor-venturer? (20 points)

3.

(a) If GP wants to set up a syndicate for investor financing, will it also have to invest some of its own capital? If GP doesnt identify the real estate properties to the potential investors that will be acquired through the syndicate, what type of offering is this?

(b) What rights will GP have in this type of offering? In which type of syndication offering will GP be subject to numerous state and federal regulations? (20 points)

4.

(a) Assuming that most REITs are formed as corporations and GP registers as a corporation under Texas law, what can GP promise that will attract new investors? What can a REIT do when calculating taxable income? In most cases, will the GP REIT have to pay federal income tax?

(b) What are the asset requirements for the GP REIT? What are the income and distribution requirements for the GP REIT? What is the minimum number of persons who can hold shares in the GP REIT? (20 points)

5.

(a) What is the difference between a GP REIT equity trust and a GP REIT mortgage trust? What can create a conflict of interest in the sale of mortgage REITs? Currently, which of the REITs is more popular with investors the equity trust or mortgage trust?

(b) Which of the equity REITs specializes in senior housing? In gas transmission?In single-family rental housing? What expenses are associated with the mortgage REIT? How are most REIT dividends taxed? What act of the U.S. Congress created the real estate investment trust? (20 points)