Final Exam

 

This project is to be a 70 unit assisted care facility (you can find the definition for “assisted care facility” at http://en.wikipedia.org/wiki/Assisted_living) with 17 units for congregate living (no assistance required) and 53 beds for assisted living units. The project will be located within city limits, three blocks from the local hospital and near other retirement type facilities. The demographic studies for the facility tend to show that given the local population there may be a need for a facility of this type. The cost of the land will be $250,000.00. Construction is estimated to cost $5,381,106.00. Equipment, i.e.: furniture for each unit and office furniture and equipment, is estimated to cost $259,978.00. Loan fees (the fees to obtain the loan) are expected to cost $233,861.00. The loan amount will be fixed at $5,512,451.00. Negotiations for the loan, purchase of the land, and construction permits will take place simultaneously. The estimated costs are set forth in the accompanying documents. The documents contain the Assumptions, Development costs, Revenue & Expense and Amortization of the loan.
A Limited Liability Company (LLC) formed under the laws of the state of California will undertake the project. One of the members of the LLC will act as the “Managing Member” of the LLC. That person is also the general contractor who will build the facility. The facility will be owned and operated by the LLC, but the day-to-day management of the facility will be contracted out to a non-profit corporation who will have a manager on-site. Other than this one management person, all employees shall be employees of the LLC.
The sequence of events for this project, should it take place, is as follows:
1. Ten investors will each contribute $100,000.00 cash.
2. The project will be a Limited Liability Company formed under the laws of the state of California, and the project will be called “Blueberry Acres”.
3. One of the investors will be the general contractor building the facility.
4. The investor who is the general contractor will also act as the “managing member” for the LLC.
5. Another investor will act as the HVAC subcontractor.
6. The remaining investors are “passive”, that is they will have no active role in the project.
7. Each investor will be an equal owner in the project.
8. The project will not start until the last investor has contributed his/her investment.
9. Day one for our purposes is the day step 8 is met.
10. The escrow for the sale of the land will open on day 30.
11. The escrow will close, and title to the land vest in the LLC, on day 75.
12. Construction permits will be applied for on day one.
13. The permitting authorities will require environmental reports which, may or may not, take 180 days for the authorities to finalize.
14. Construction will start on day 180 and take 455 calendar days to complete.
15. The loan documents will be signed on day 20 and the investors will not be personally liable for the loan.
16. The first “resident” will move in 30 days after completion of construction.
As an advisor to a potential investor you are asked to answer the following questions:
1. Is the budget for the 10-year projections reasonable?
2. Is the contract for the construction reasonable?
3. Is the anticipated return on investment “acceptable”?
4. Is it acceptable to have the general contractor also act as the LLC general manager?
5. What types of insurance should the LLC carry?
6. Is this a “good” investment?
Your response to each question must be in sufficient detail to provide a full understanding of the issue. You will be graded on the degree of completeness of your answer. You are expected to conduct sufficient research to fully answer each question in a logical and understandable manner.