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You are advising Mr. Bill on the formation of a new venture.
You are advising Mr. Bill on the formation of a new venture. He plans on getting a group of investors together to invest $30 million in cash and have the newly formed entity to borrow an additional $30 million on a recourse basis to acquire a property. The venture is supposed to lose $15 million per year for the first four years then turn a significant profit in later years. If the venture goes as planned, Bill expects a publicly traded corporation to purchase the venture in the form of stock that will be worth 10X the original investment. The chances of this occurring are 40% according to Bill. If this occurs, Bill and his investor group plan to hold the stock for a significant amount of time. Assume Bill and his investor group pay tax at the maximum individual rate and ignore all passive activity loss rules.
A.) What type of entity would you choose for this venture? How does partnership structure benefit you relative to the other options?
