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By Patricia Craig ’19
Columbia Business School’s case competition team topped 19 other business schools to finish first place in the 2017 National Real Estate Challenge hosted by UT Austin on November 14. The team, Le Tigre Group, consisting of Patricia Craig ’19, Kerry Kartsonis ’19, Patrick Keppenne ’18, Stephan Sakhai ’18, Jay Stewart ’19, and Jose Torres ’18 impressed the judges by negotiating a mezzanine loan modification on a suburban power center.Pictured: Jay Stewart ’19, Jose Torres ’18, Patrick Keppenne ’18, Stephan Sakhai ’18, Kerry Kartsonis ’19, and Patricia Craig ’19
The case provided that the team held a mezzanine debt position on a suburban Class-A power center, at risk of default due to tenant bankruptcies. The team had to decide to accept a modification request, provide a counter offer, or foreclose on the property. Patrick Keppenne ’18 explained that “despite the looming ‘e-pocalyspe’ portrayed in the media, we understood that experiential shopping centers with strong anchors were still performing well in larger suburban markets.” Given financials of the remaining tenants and the strong fundamentals of the property, Le Tigre realized that the asset was still worth retaining. The team used Argus to model conservative lease-up terms, based in extensive research on potential tenants and their typical rents for similar markets. With expected cash flows and expenses, the team built models for accepting the proposed modification, several different counter-offers, foreclosing and operating the property, and foreclosing and selling.
“We knew, with the market and the asset fundamentals, that the center still provided an opportunity to stay within our target returns as a mezzanine lender,” explained Kerry Kartsonis ’19. “When we modeled out the options, our counter offer provided an 11% go-forward IRR and maintained our reputation as a good lender to work with. We wanted to continue to find a way to work with the sponsor and not risk being seen as a predatory lender,” continued Stephan Sakhai ’18. “The risk-adjusted return was right in our sweet spot.”
Le Tigre’s counter offer had 3 primary factors: increasing security by adding 12 outparcels as collateral, increasing returns through a 20% equity kicker, and increasing goodwill with the client by offering to assist with $1M of a $2M paydown of the senior loan principal. These three factors combined as an opportunity to limit risk and capture upside, all while maintaining good relations with a strong operator.
“We wanted to work with the sponsor and didn’t want this to be a take-take-take situation. With the paydown offer, we kept the sponsor at the negotiating table,” offered Jay Stewart ’19.
With regards to the risk of retail, an understanding of the market rates, vacancies, and rental prices guided the underwriting and conservative break-even analyses confirmed that Le Tigre was making sound investment decisions. Per Jose Torres ’18, “Judges were specifically complementary of the depth of modeling done and the desire to work with the sponsor to find the optimal solution.”
The School’s team was selected last fall by the Real Estate Association, and the Paul Milstein Center for Real Estate supported the students’ travel to the competition. Judges from prominent U.S. real estate companies determined the winners and the team was awarded $10,000 for its first-place finish.
Hosted by the Real Estate Finance and Investment Center at McCombs Business School, the UT Austin National Real Estate Challenge is an invitation-only competition for 20 teams from United States MBA programs. The case was sponsored by Invesco, Greystar, and other prominent real estate companies. This annual event is the primary business school case competition to focus on real estate investment.
The Challenge kicks off the MBA case competition season and CBS will be competing in at least 3 other challenges this year.
Patricia Craig ’19 is a first-year student at Columbia Business School. She serves as Assistant Vice President for Case Competitions in the Real Estate Association and Assistant Vice President for Speakers and Panels in the Hospitality and Travel Association. Prior to CBS, Tricia worked at CAST Management Consultants, specializing in financial services and healthcare. Patricia completed her undergraduate degree at the University of Southern California, studying Finance and Business Economics.