Viking Investments-Sandy-Principal PDF

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Creative Consensus, Inc. box 473, HCR 33, Spruce Head, ME 04859 phone: 207-596-6373 fax: 207-596-0538 email: cci @midcoast.com

VIKING INVESTMENTS (Principals) Leonard Greenhalgh Dartmouth College

ROLE OF SANDY WOOD You live in Edgewater, a small town in Northern Illinois, where you have developed a substantial fine , employing, in good times, up to . (Fine carpentry involves such highly skilled finish work as c g and whereas rough carpentry involves putting up building frames.) You are such businesses in the local area and enjoy a strong , and c

Your business has been chronically short of capital, and you have become overly on . Viking has been a landlord (the company owns the you have been a (for years you have had a renewable loan), and a customer (you have just completed all the fine carpentry on a 100-unit condominium complex developed by Viking). Your dealings with Pat Olafson began several years ago. Pat’s Investments Corporation you the $ that you used to Inc., of which you are the sole shareholder. It is a renewable loan that Pat can call due at any time. (Pat keeps reminding you that this could happen any day.) You wish you were not dependent on this source of cash, because at the rate is one percent higher than the going rate banks are charging business customers of your size. Since the economy turned sour, your profit margin is so low that the extra one percent really hurts. However, you have no choice. You have been at your credit limit with the banks for years, and the Viking loan is simply not replaceable. If it were not for the Viking loan, you would not be able to operate at your present level of business, so you keep

, and thank your lucky stars that Pat hasn’t asked you to pay back the principal. You have also been leasing a building from Viking. You have been paying $ a in high for the local area. The lease offers you the option of terminating or renewing at the end of each year, and you , with Pat’s full approval. Before you gave your days notice (60 days ago), you found a to your other operations for only $ per and you were anxious to move in because the is important now that are so hard to come by. However, the deal for cheaper rental space has since fallen through because the current tenant (the owner’s son) insists on continuing occupancy of that building. The intent to lease to you was put in writing, so you could sue the owner if you had the cash to pay for litigation, but you have no cash reserves at all. You need to ask Local rental prices have decreased due to the poor business conditions, so you should have no trouble negotiating a renewal You heard through local that has , so you should be in a strong bargaining position. Your only other option is to rent a building much farther away at $7,500 per month, which is larger than you need and way above what you can afford, so you must negotiate a renewal of the Viking lease on favorable the way, you are two months behind on rent because your bookkeeper prematurely took the building lease off your accounts payable list. You will pay the

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Creative Consensus, Inc. You normally ask for contingencies Meanwhile, a potentially more serious problem has arisen involving deal has suddenly turned into a real mess and you need to sort it out right away.

and

Investments

Viking Investments has been an important client for the past nine years, and you have never before had any problems in dealing with them. The current problem is that

You need Pat to pay the entire amount due immediately because you bought lumber costing and the deadline for payment is . You know from Fawn, Pat’s secretary, that Pat has the money sitting in a bank account; you need a cashiers’ check right away. You have only (or, more precisely, you will have, when a customer’s check clears later this week), and can't raise more, and you have been staring at the . If you default on payment for these materials once the , with the result that your reputation and credit rating will be permanently impaired. You are particularly anxious not to have any questions arise about your credit or reputation because you are stretched beyond the limit in the current inhospitable lending environment.

The Dispute Your problem with . This led to problems of miscommunication within the Viking organization that Pat is now trying to pin on you. Last year, Viking saw an opportunity in the local real estate market to build condominiums in response to a local housing shortage. A site was selected, plans drawn up and approved by the town, and contracts were put out for bid. Because the recession seemed to be gaining momentum, you gave a .

, to allow for

you have never had a job come out costing less than anticipated, so the 15-20 percent markup has yielded a modest but reasonable profit. keep your crew of skilled workers

Just after Viking had signed all the contracts and begun the foundation work, a developer began work on a 75Pat became very concerned because the rival condominium specifications were very similar to Viking’s, and it was not clear that the local housing market could support two large condominium projects. Pat talked to you about this concern, explaining the Pat said that the Viking complex was going to be on the basis of a " image, and urged you to pay particular attention to this dimension since fine carpentry is one of the most visible aspects of housing to the potential buyer. To emphasize the importance of the quality image, Pat explained that Viking had amended with other For example, appliances were being upgraded to top-of-the-line equipment, higher quality windows were being installed, and landscaping was to be more “ You personally assured Pat that your crew would turn out its very best work on this project. Just before your phase of the work began, Pat took off on an around-the-world vacation, saying that it was time " ." You were envious because you, too, were feeling burned out from the continuing stress of making ends meet in an increasingly competitive market. A prominent source of stress concerns your work crew. You have a core

Because of the slump in the housing market, finding work for them has become increasingly difficult, but you would hate to lay any of them off because they have been loyal workers, and you might lose them permanently. In the past, you have been able to keep this core group busy during slack times by having them work on your own house. You have made several additions to it, and although your purpose is to sell it as a high-

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Creative Consensus, Inc. when the opportunity arises, you and your family have enjoyed living in this wonderful house in the interim. It wouldn't be wise to sell it to raise revenues in the current depressed market, nor can you afford to pay the crew to keep making improvements to it. So these are stressful times, and you wish you were a big-bucks developer like Pat who can take round-the-world trips without worrying about money. Pat's obvious affluence relative particularly galling right now.

to

yours

of an envelope, you

Original bid (for pine and spruce) per unit Lumber:

$5,000

Labor:

$1,000

Other variable costs:

is

Subtotal:

$500 $6,500

7.5% Markup:

$500 $

Proposed amendment (upgrade to oak) per unit There was enough to do all the cabinets, banisters, front doors, and interior trim (baseboards, window and door moldings) in the Viking condominium project. This substitution would produce a large quality improvement at a very small increase in cost.

past Fawn has approved changes in bid specifications that benefited Pat when you asked her to do so (with never a complaint from Pat), so you explained the situation to her. She agreed that upgrading to oak sounded like a good idea, You told her that deadline and that you would come in and see her the next day. When you visited Fawn the next day, you recounted Pat's parting words to you, " You also shared your fear with her that the might be the one working on the competing condominium project. If that happened, Viking might

Fawn was reluctant to make a decision, even though it represented a small increase in total construction costs (probably less than three percent). On the back

$7,000

Labor (oak is harder to work):

$1,340

Other variable costs: Subtotal:

Realizing that the fine oak could give Pat a very obvious over the competing condominium complex, you telephoned Viking immediately. Pat's secretary, Fawn, told you that Pat was on a small Hebrides island off the coast of Scotland and

Lumber (Oak normally costs $12,500):

7.5% Markup:

$500 $8,840 $660

You then explained that , the condominiums built to the original specifications would come out costing Viking a total of around and would be at least $ You then told her that it was up to Viking to make a decision. Instead of getting $160,000, Viking ought to be able to sell the condominiums for $175,000 with luxurious oak trim ( for an of only $ per unit), so both You explained that you were basically trying to help the It was her choice. She said it made sense to her if the She confided that Pat had been working on a deal with a real estate speculator who was joining Pat on the first leg of the round-theworld-trip, and this "sweetener" might clinch the deal. With the decision made, you used Fawn’s telephone . You exercised your option on the

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Creative Consensus, Inc. You had already the and the supplier was simply waiting for confirmation.

2. This contract amendments to this contract shall be effective .

No

You contacted your lawyer who confirmed

your crew had completed its job, right on schedule, and you had mailed the invoice, Pat called you. Sounding very businesslike, but obviously angry, Pat said Viking couldn’t accept WoodCrafters’ cost overruns and read aloud a clause in the contract that said all amendments to the contract must be made in writing and signed by both parties. You were taken by surprise and became flustered as you tried to explain. Pat then said the condominiums had been sold to a speculator and that

You then , who was no more encouraging. All the local banks have become very in their lending policies in the current economic situation, and WoodCrafters -- like other subcontractors in the building industry -- has become viewed as a You have borrowed beyond your limit in order to provide working capital. Your house is mortgaged to the limit, your life insurance policy has no cash surrender value and you have no pension plan, so there is no possibility of further borrowing for WoodCrafters.

. . Pat explained that Viking got no benefit from the higher-quality wood; the sales contract with the speculator was signed and was not re-negotiable. Pat then stated that "Fawn is typing a letter confirming the original deal, and it will be hand-delivered this afternoon. The net amount Viking will owe you is sitting in my bank account and will be released within 30 days of today, the date of receipt of WoodCrafters’ invoice."

Next, you called the to see if you could get . The supplier absolutely citing his own economic problems. The reason that he had made the oak available at such a low cost was that he was desperate to raise cash. He had lost a lot of money when a big subcontractor in a nearby town had gone bankrupt.

As the conversation continued, both of you lost your tempers and insulted each other. When both of you had vented your pent-up anger and frustration, you agreed that the two of you as well as to you and .

The money you owe him, $ , and because of the supplier's predicament, you cannot be even a day late in paying the bill. If you are late, you will be immediately Your

Preparing for your Meeting Actual Costs (per unit) In preparing for your meeting, you wondered what might have t. Perhaps Viking is in financial trouble because of the , and is trying to bleed money out of Getting nowhere trying to speculate about causes for the problem, you re-read the contract, which contained the following that seemed to you to the matter (though hardly encouraging): 1. shall be for any overruns on or In no event shall Viking be obligated to reimburse WoodCrafters for any cost overruns not expressly agreed to by Viking.

Materials:

$7,000

Labor (overtime was needed):

$1,600

Other variable costs:

$500

Total actual cost:

$9,100

Invoice to Viking:

$9,500

Actual profit margin:

$400

You were dismayed to discover that your generosity in trying to help Pat resulted in less net revenue for

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Creative Consensus, Inc. you than if you had stuck to the original specifications (you $ This lets you do

Cash on hand: Receivables (invoice to Viking):

You can’t believe Pat really expects to pay you only $ per (the original bid, prior to Fawn’s agreeing to the changes). Your out-of-pocket costs are $ . A loss of it ($210,000 for the total 100 units) would leave you in You have only $ in because you you would have to sell your family’s beloved house.

Total cash available:

$ 10,000 700,000 - $950,000 $ 710,000 - $960,000

for (non-postponable obligations)

Telephone calls to your bank yielded the following information:

Invoice for oak:

$700,000

Payroll (workers already have their checks in hand):

$160,000

Market value of house in a good market:

$1.1 million

Construction materials invoiced:

$ 50,000

Past due rent:

$ 10,000

Expected sales price in present market:

$800,000

Loan (if called):

$200,000

Total obligations:

Net loss in equity for an immediate sale:

$300,000

Principal needed to pay off first mortgage:

$200,000

Principal needed to pay off second mortgage:

$175,000

Bank’s total claims on house sale revenues:

$375,000

Net proceeds from immediate sale ($800,000 minus $375,000 owed):

With so much at stake, the upcoming meeting is an important one for you. You must make final decisions at this meeting, rather than leaving decisions until later. .

$425,000

The banker added that in today’s lending environment for high-end real estate, the So if , you will have to in so doing, you will

, and

Next, you called a local real estate She said that she had recently had a client who was willing to pay . She checked with her client, and called you back to confirm the offer. Finally, you went to see your reviewed your

$920,000 - $1,120,000

She

Your lawyer advised you that if you declare bankruptcy, the , and will sell them . Your house would be foreclosed on by the bank which would undoubtedly sell it. The would $ of the $ and any that remained would go to the trustee in bankruptcy. The proceeds of these sales will then be divided among your creditors in proportion to the amounts you owe them, . Your lawyer further advised you that if you owe Pat , the trustee in bankruptcy will treat that as an “improper preference in bankruptcy” (Pat getting paid in full when other creditors are not), and will recover the $ . If Pat to , the trustee in bankruptcy will seize and sell either those assets or Pat’s share of those assets.

:

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