Foundations of Economics for Planning and Real Estate Development

Third
Assignment
RED 585 Foundations of Economics for Planning and Real Estate Development

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

Household Size

2.5 persons/unit

Renter
Income

1/3 Lower Income

$30,000

1/3 Middle Income

$60,000

1/3 Upper Income

$90,000

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

Recreation facilities

$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
presented in Module 3 (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.

You actually do not need to generate numbers for this assignment though they
could be helpful to illustrate point.

There is no “right” answer but your answer must be based on sound
reasoning.

This is a memo to your LPs not to exceed 2,000 words.

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