Essay On What Organizational Structures Would You Recommend And Why? (5 Marks)
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Questions from Chapter 1 of the Text, Strategic and Financial Planning for Property Managers
1) You have been asked by retired hockey player that has annual income of $300,000 and significant assets and net worth to recommend a preferred and a secondary organizational structure for the following situation:
A developer has approached the hockey player for an investment of $500,000 with anticipated returns of 8% annually. The developer acquired a property 250 km from Toronto to develop a large retirement community of 500 units of townhomes. The property consists of 100 acres and the developer had enough funds to pay for the property and rezone the property but will require additional investors to build the properties. These investors have not been located yet.
The preferred organizational structure that I would recommend to the hockey player is the general or limited liability partnership model (LLP). This is the most popular pool of investments that make up a hedge fund. In this organizational structure, the general partner (GP) assumes liability for the operations of the fund. In this case, the general partner will be the developer. The limited partners (LP), on the other hand, are only responsible for the amounts they paid in. This would make the hockey player one of the limited partners.
The secondary organizational structure that I would recommend is the limited liability company (LLC). In this structure, investors are limited in their liability to the amount that they invested in the company. The general partner in this organizational structure has to ensure that he markets and manages the fund and oversees the administration of the hedge fund’s operations. The developer will most likely assume these responsibilities in this case.
2) The owner of a building that was purchased 10 years has been informed the building has asbestos in the building and it will cost $5M to remove.
Provide an explanation of what accounting standards and principles that you would use to explain to the owner why financial information is recorded this way and how you would think this would impact the income statement and balance sheet?(5 marks)
One of accounting standards and principles that I would use to apply to the case mentioned above is the full disclosure principle. The full disclosure principle that a certain information that is important to an investor should be disclosed within the financial statement or within the “notes” to the statement. The notes will include the information pertaining to the asbestos that costs $5 million to remove. These notes will be important in allowing readers of the financial statements to make investment choices as it relates to purchasing the building.
Another accounting standard and principle that I would use is the cost principle. This principle refers to the amount spent when an item was originally obtained or purchased. The amount that I would show on the financial statement to the owner the historical cost amounts of the building that was purchased 10 years ago. As a general rule in accounting principle assets amount are not adjusted upwards to reflect inflation current inflation rates. Therefore, the financial statement that will be shown to the building’s owner will not be current market value of the building. A third-party appraiser will provide this information.
3) A new board member of a small non-profit housing provider states they do not want to complete an annual audit and submit to a compliance review by the Service Manager. What would be your recommendations for action? (2 marks)
I would inform the new board member that a board member of a non-profit housing is responsible for the preparation of financial statements and engaging with an auditor, according to Canadian law. Then I will recommend that he and the rest of the board to hire an auditor. The auditor’s report should then be sent along with the non-profit housing’s audited financial statements within five months of the corporation’s year end.
4) The owner of a property company has come to you with the following problem:
The company Broke and Unprofitable (BU) has just completed the operating and capital budget for the next five years. The results show the company is making lots of money and is not having any problems paying its bills.
What would you focus on first and why you provided that recommendation to the owner? (3 marks)
I would first focus on Broke and Unprofitable’s (BU) plans to expand its company to another part of the country or in another nation. If BU were to expand its company by using the company surplus to reinvest in these expansion plans, then this would ensure that it provides its good and services to other potential customers in the country and another place on the globe.
“Accounting Principles | Explanation | AccountingCoach.” AccountingCoach.com. Accounting Coach, LLC. Web. 16 Jan. 2015. <http://www.accountingcoach.com/accounting-principles/explanation>.
“Implementation Guide to Ontario Social Housing Annual Information Return (AIR).” Ministryof Municipal Affairs and Housing. Housing Fund and Risk Management Branch. Web. 16 Jan. 2015. <http://www.mah.gov.on.ca/Asset9997.aspx>.
“Organizational Structure - Complete Guide to Investment Companies, Funds And REITs | Investopedia.” Investopedia. Investopedia, LLC, 21 June 2012. Web. 16 Jan. 2015. <http://www.investopedia.com/walkthrough/fund-guide/uit-hedge-fund-reit/hf/organizational-structure.aspx>.
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