Question
You are the general partner (GP) of a new development that includes 10 limited partners (LPs). Your LPs want to make money. You do too,
You are the general partner (GP) of a new development that includes 10 limited partners (LPs). Your LPs want to make money. You do too, of course, but you want your investments to also be meaningful, responsible contributions to the communities. Under the law, you have a fiduciary responsibility to maximize your LPs' return. Therein lies the reality of one of many tensions between GPs and LPs. Your project will have 600 units. The demographic and rent profile is:
Feature | Figure |
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Household Size | 2.5 persons/unit |
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Renter Income |
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1/3 Lower Income | $30,000 |
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1/3 Middle Income | $60,000 |
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1/3 Upper Income | $90,000 |
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Rental Profile | Area | Bedrooms | Bathrooms | Rent |
1/3 Lower Income | 900 sq.ft. | 2.0 | 1.0 | $1,260 |
1/3 Middle Income | 1,200 sq.ft. | 2.0 + den/office | 1.5 | $1,680 |
1/3 Upper Income | 1,500 sq.ft. | 3.0 | 2.0 | $2,100 |
Extra Costs/Month |
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Recreation facilities |
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| $200 |
Notice that an extra charge is imposed for access to recreation facilities. These include a club house with indoor card tables and games, and gym, and an outdoor pool, Jacuzzi, tennis and basketball courts. You need to generate $60,000 each month to pay for the capital and operating costs of the recreation facilities. You know from experience that all the renters in the upper income units will pay the additional $200/month fee, as will half (50%) of the middle income units. But you know that none of the renters from the lower income units will pay the additional amount. Your LPs say "so what" but you want to do the right thing to extend access to recreation facilities to all your tenants, not just those who can afford to pay the higher amount. Using what you believe to be relevant public finance criteria and applications such as type of public or common goods, monopoly provision, price and income elasticity, substitution, etc. devise a strategy that extends the recreation facilities to all tenants in a way that makes your LPs happy and gives you, the GP, the satisfaction that you're building and managing a responsible real estate development.
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