Case Studies: Asset Management
(Scott Shapiro and Lynne B. Sagalyn, 2013)
In early 2008, two local Seattle developers had the opportunity to purchase a historic hotel in an off-market deal from a non-profit entity. Though the building was being used as a single room occupancy hotel and would require extensive modifications, the building was solid, the location great, and the price per square foot reasonable. Did this deal justify the risks of acquisition, renovation, and repositioning?
(Lynne B. Sagalyn, 2012)
The Madison Building is a prestigious office building in midtown Manhattan. The ownership of the Madison Building is sliced into a fee position and two different leaseholds. The separate ownership positions receive differing income streams. These unaligned structural mechanisms do not produce the best outcomes for the overall value of the building or for the individual ownership entities . . . and also make it near impossible to secure conventional financing that could produce the necessary capital for revenue-enhancing improvements. This case asks students to analyze the quantitative and qualitative elements of the current ownership structure, including the abstracts of the lease agreement and cash flow analyses, to recommend a more advantageous ownership structure for the building.
(Nicholas Beinstock MBA ’96, Chris Schlank, and Lynne B. Sagalyn, 2011)
In early 2010, Savanna Investment Management was presented with the opportunity to underwrite the sale of Manhattan's Bryant Park Tower, which had just gone into payment default. In this case, students are asked to evaluate the unstable macroeconomic environment and its impact on the New York real estate market as well the financing options available to Savanna should they proceed with the deal.
(Andrew Ang, Lynne B. Sagalyn, and Rona Smith '98, 2011)
In this case a consultant to pension funds ponders the unique opportunities and risks she faces as she considers adding real estate to the fund's portfolio for the first time. While the fund already owns REITs, its trustees believe that direct real estate investment could offer protection against the threat of inflation. But the category of real estate includes a wide range of distinct subclasses, including office, retail, industrial, hotel, and rental apartments. In analyzing the situation, students must determine which of these sectors provides the best hedge against inflation, and the risks and returns of the asset class as a whole.
(Jane Yang MBA ’10, Jeffrey Barclay ’83, and Lynne B. Sagalyn, 2010)
In 1999, Taconic Investment Partners, a real estate investment firm, and the New York State Common Retirement Fund became the key investors in a warehouse that occupies an entire block in New York’s Chelsea neighborhood. Four years later, the former warehouse has been transformed into a Class A office property, and outperformed all expectations. In this case, students determine the best strategy for how the partners can harvest some of the value they created. Should they sell, or possibly restructure the deal? If they pursue equity capital, will their current partners find the terms acceptable?
Special thanks to Paul Pariser ’78, Taconic Investment Partners LLC, for assistance preparing this case.
(Jeffrey Barclay MBA ’83 and Yasmine Uzmez MBA ’01, 2009)
In 2001, Forest City Ratner began its search for an equity partner for a pioneering project: a 52-story tower designed by Renzo Piano that would serve as the new headquarters of the New York Times Company. Though many critics in the real estate and investment communities were skeptical of the project, ING Clarion's head of acquisitions thought the deal deserved a closer look. This case teaches students how to evaluate the feasibility of a real-estate development project. Students analyze the maximum area for the site based on zoning regulations, the cost of acquiring the site, and the net operating income at stabilization on the floors that would be jointly owned by the equity partners.
(Camille Douglas and Yasmine Uzmez MBA ’01, 2008)
In 2002, Equity International was considering an investment in the family-owned Mexican homebuilder Homex. While Homex had passed EI's due diligence process with flying colors, the US real estate investment company wanted to make sure this was the right investment. In addition to country and political risk, the investment would be taking on execution risk, and there were questions about how a tight-knit family would react to taking direction from a foreign investor. In this case students study the investment's risk factors and opportunities before projecting the investment's annualized internal rate of return and outlining an investment recommendation.
Special thanks to Gary Garrabant and Thomas McDonald of Equity International for assistance preparing this case.
(John Grassi, Shorenstein Company LP, 1998)
A negotiation case in which students are divided into four teams representative of the major players in this situation: major tenant wishing to terminate its lease early (Nestleé); existing tenant with a right of first offer and right of first refusal (The Gap); landlord (Shorenstein Company); and tenant in a different Shorenstein building who wishes to rent the Nestlé space. The dynamics of the case play on several facts: the tightening market for office space in San Francisco; the options embedded in the leases of both Nestlé and the Gap; and Shorenstein’s desire to capitalize on the situation, assure a steady revenue stream for the property and maintain its long-term tenant relationships.
(David Schore MBA ’93 and Richard Coles, Emmes & Company, 1998)
Advance the calendar three years from EDB (1); it is now September 1997, and Emmes is actively considering what to do with the 147-acre parcel of raw land. To maximize the value of this last remaining asset in the portfolio, should Emmes enter into development of the 147 acres? If the answer to the question turns out to be “no” or “not quite,” how does Emmes extract maximum value out of the land asset? This question is not only a yes/no development decision, however. Emmes is not a developer. The decision turns on the strategic objectives of the company and its capital partners and an evaluation of how best to deploy its capital in an environment where opportunistic investments, if not plentiful, are still available. Students are asked to size up the development potential of the parcel and its timing in order to gain insight into the full range of practical considerations bearing upon the execution of alternative value-creation strategies.
(Jeannie Murphy, Greystone Realty Corporation, 1998)
This case presents a situation in which the physical restructuring of the asset is bound up with the financial structuring of the investment partnership. The property consists of two dated but occupied office buildings in an East Coast downtown where demand for Class A space is strong and little supply is currently scheduled to come on line. The properties are under contract for $10 million by a local developer who is seeking institutional money to complete the deal and has approached an institutional investor, Greystone Realty Corporation, to participate in a joint venture. The property is also one of the few remaining underdeveloped parcels on its street. The time is 1997. Greystone has already determined that the fundamentals of this acquisition/redevelopment opportunity look good enough to aggressively pursue the deal. The students must propose a structure for the deal. The local developer who controls the land is experienced, though Greystone’s capital partner is skeptical about its development capabilities. The deal structure must take into consideration the timing, the redevelopment decision (versus the hold-and-sell option), and the partnership’s arrangement with the local developer.
(Greystone Realty Corporation, 1996)
This case asks students to evaluate an investment opportunity for a $26-million development project, then structure a joint venture between the two coinvestors in the project, an independently managed institutional real estate advisory firm, and an opportunistic investment fund. The fundamentals of the proposed project are compelling, and equity is readily available. The obstacle to what otherwise appears a slam-dunk project is the local developer, who controls the site but has no capacity to carry out the project and will not take a nonequity position in the deal. Students must resolve this problem through the deal structure, aligning interests in such a way as to satisfy all three parties in the proposed transaction.
(David Schore MBA ’93, Emmes & Company, LLC, 1996)
Emmes has a hugely successful investment in a Class A business park. After rapid re-leasing and minimal additional investment, it received an unsolicited acquisition offer. Though there is more value to be captured through further repositioning and possibly new development of vacant parcels, if Emmes sells, the company and its outside equity partners will reap a potential return of 56 percent from a 10-month investment. Should Emmes accept the offer or hold for longer-term gains? That’s the question students must address and analyze. If Emmes decides to sell, the deal would be at a “retraded” price from the buyer’s initial offer. Quantitative and qualitative issues surround the acceptance of a revised price. Clearly, the economics are worse than those prevailing at the original price, but are they still compelling enough to justify a sale. What are the implications of a sale on the investment financials, and how might a sale affect the interests of the outside partners, given that it would occur less than a year after the acquisition? What signal might a response to the retraded price send through the marketplace, and how can a response be crafted positively?
(Institute for Public Administration, 1995)
The Institute for Public Administration (IPA) owns an eight-story building (approximately 33,000 gross square feet) in midtown Manhattan, one-third of which is used for its headquarters. As a private, nonprofit research, consulting, and educational organization, IPA’s role as a landlord has required more time and energy of its president than what is justified by the building’s income stream. The newly appointed president and chairman of the board are eager to better understand the value of IPA’s building as an asset and the various options available to the organization. Given information on the building’s condition, tenant mix, income stream, and operating expenses, students are asked to assess how the value of the asset can be maximized: continuation of status quo, own but relocate and lease the entire building, sell the building and find alternative space elsewhere, sell the building and remain as tenant, or own and sell remaining floors to a new owner under a condominium arrangement.
(MONY Real Estate Investment, 1995)
This case presents a problem of highest-and-best use for a tired jerry-built office/industrial property in a mid–New Jersey market. After several years of vacancy and unsuccessful marketing, MONY’s new asset manager for the property must decide whether to reposition the asset as industrial and office space. The primary analytical question is where can MONY add value? From an asset-management perspective, the main strategic consideration is whether the owners should do the necessary renovations on speculation or wait until a tenant is secured. Students must assess this issue in light of the physical attributes of the building, the characteristics tenants look for in an industrial building, and the market supply-and-demand conditions.
(Greystone Realty Corporation, 1994)
This asset-management case involves a typical buy-or-hold decision for an office building investment. The bottom-line question is whether the manager can realize value through a holding strategy. From a real estate perspective the answer is no because market dynamics are not favorable, and this leads the student to recommend a sale. From a management perspective, however, the politics of the partnership ownership structure makes it difficult to sell the asset. The theme and lesson of the case are that strategy is rooted in understanding the institutional attributes of the situation and asset-management problem to be addressed.
(Prudential Realty Group, 1992)
This case calls for an evaluation of potential disposition strategies for a single asset in the insurance company’s general-account portfolio in midtown Manhattan. The valuation exercise must incorporate the perspectives of several potential investor types (adjacent hotel owner, parking-garage owner, office developer) for whom the highest-and-best use would differ, as well as the institutional context driving the disposition decision.
(Greystone Realty Corporation, 1991)
In this case the asset manager is required to evaluate alternative strategies for repositioning a dated building in northern Virginia. Given market conditions, students are asked to develop long-term options for the asset that take into consideration its position within the client’s real estate portfolio.