Question

Four friends plan to form a corporation for purposes of constructing a shopping center. Charlie will be contributing the land for the project and wants more security than shareholder status provides.
He is contemplating two possibilities:

receive corporate bonds for his land or take out a mortgage on the land before transferring it to the corporation.

Comment on the choices Charlie is considering. What alternatives can you suggest?

Answer 1

Answer:

The two security possibilities that Charlie wants in exchange for contributing land for the purpose of constructing a shopping center, a project that he joined his three friends to accomplish are to:

• receive corporate bonds for his land or
• take out a mortgage on the land before transferring it to the corporation.

Another alternative would be equity in the corporation.

Explanation:

If charlie opts for the fist option which is to receive bonds for his land,  He can hold it  until their maturity date and collect interest payments on them. Bond interest is usually paid twice a year or he can resell them at a higher price.

Taking out a mortgage on his land will also accrue earnings that is secure before transferring it to the operation.

However, having an equity stake in  the corporation will pay much more. A shopping center is a real estate investment which is also secure and less risky.

His best best would be to negotiate a good percentage higher than 25% stake on the corporation's equity.