Presentation on theme: "Steel Street Case Study Ruthie Americus & Anil Cheerla"— Presentation transcript:
1Steel Street Case Study Ruthie Americus & Anil Cheerla
2Case FactsVincent Colmo (Ex HBS) & cousin Daniel Delconte – partnered to form River Triangle Associates, a profitable RE investment firm specializing in buying apartment bldgs & strip malls below replacement costs, rehab/re-position them and sell them for strong returns.Average returns to investors – 14%Rents 30% below new constructionVincent was responsible for buying, renovating and maintaining properties while Daniel managed finances and investor relationshipsProject selection based on:Returns, Renovations within 6-9 months to avoid carrying costs, Bypass city regulations & Target middle-income marketWith commercial RE unwinding, RTA focused on office properties in Pittsburgh’s Southside, adjacent to CBD – a hip neighborhood known for vibrant night life, shopping, cafes and business incubation.
3Overview of the Space 6 story; 1920 building located in Southside 5 floors of office space; 1 floor (ground floor) of retail space49,000 gross sq. ft.Estimated renovation costs are $69/sq. ft.Hope to increase rents from $8/sq. ft. to $15/sq. ft.
4Plan to accrue rent during renovation phase Pros/ConsProsConsSteel Street renovation is only expected to costs $69/sq. ft. as opposed to $150/sq. ft. for new constructionThis is River Triangle Associates first office space renovation (they are only experienced at residential renovations)Building is in desirable location and rents will increase after renovationsThey will need to continue renting some of the space while completing construction (which tenants might not like)Plan to accrue rent during renovation phase
5Strategic Advantages of Steel Street Located in Southside, a hip neighborhood with many startupsLimited space availability for new developmentPotential to attract large new employers – business office space combined with retailProximity to a new popular retail complexReplacement cost $69/sq.ft vs. $150 for new office constructionMarket wise – Pittsburgh had a diversified economic base, low unemployment, no overcapacity, insulation from RE downturn & growth prospects
7What went wrong? Causes Effects The architect was getting behind schedule and her designs were being repeated reworked and costing much more than the original estimatesThe leasing of the space was not going well because prospective tenants wanted to see the finished space before signing a leaseFirst, the cousins chose an architect that had high fees. Also she thought their original budget was too small to work withThe architect and the contractors have never worked together before and there is some large disconnect between the architect’s vision for the building and the contractor’s work styleThe city building inspector walked through the site and was not pleased with the safety of the conditions that the contractor was working within
8What is next…After owning the property for almost 1 and months of construction, in September of 2009 what is next…1- Find a new construction team2- Recruit new investors to cover budget shortfalls3- Ask hedge fund to convert debt into equity4- Contribute from their personal finances5- Give incentives to leasing agents and tenants6- Lose some green elements to the building
9Option 1 Option 1: Find a new construction team Not an option since hiring a new contractor wouldresult in:Additional costsConstruction delayIncoherence with existing work already doneThreat of losing at least ½ year job with additional modifications to project scope and scheduleAlso, being a lump sum contract, Harper & Polowski agreed for a fixed price, so it is in the best interests of RTA to continue working with the existing contractor.
10Option 2 Ruled out because of the following factors: Option 2: Recruit new investors to cover budget shortfallsRuled out because of the following factors:Credit markets were in turmoilLiquidity was lackingThe MBS markets were shrinkingSponsors did not have office building experienceCurrent project situation is not helping anyway
11Option 3 Option 3: Ask hedge fund to convert debt into equity Hedge funds specialize in short-term trading strategies, are open-ended vehicles permitting both periodic subscriptions and redemptions.So holding a illiquid asset will go against their business strategy.May even argue that given low yield, low volatile market conditions, Harvard group may find this equity return attractive.
12Option 4 Option 4: Contribute from their personal finances As per the agreement terms, RTA were to extend financing to the partnership of up to $200,000 as an uncollateralized 10% interest bearing loan.Personal B/S shows that the cousins can part with capital for additional overruns, but given the risks involved, our opinion was that they would not make any new additional investments.Initial equity of $563,885 would result in 1,284,886 after 5 years
13Option 5 Option 5: Give incentives to leasing agents and tenants To compensate for the leasing agent’s slow movement, the cousins will provide a $20,000 signing bonus to any brokers who sign leases with tenants for over 5,000 sq. ft.This added bonus will only decrease the IRR from 28% to 26%, and will hopefully drastically improve the leasing situation. Good option, but may have to reduce their returns overall. Will work to mitigate vacancy by having large, clients sign up long-term leases with sound credit
14Option 6 Option 6: Lose some green elements to the building May not be a wise choice as the bldg may not appeal to new tenants or even existing lease renewals.Cannot justify higher rental rates of $15 psf.Will not bring in the energy efficiencies expectedMay not compete with other “green” properties in the market.
16Modified Pro Form with Leasing Bonus Levered ReturnsInitial Outlay20092010201120122013Initial Equity$ (563,885)Building Renovations$ (794,000)Annual Cash Flow$ ,787$ ,256$ ,108$ ,108$ ,108Sales Proceeds - Mortgage Repayment$ ,175,871Total Cash Flows$ (1,357,885)$ ,407,979Annual ROE5.29%2.74%5.31%17.09%IRR24.44%
17Looking back: Issues at Stake Issues with re-positioning a propertyProblems with development teamsImpact of weak credit markets on RE financingCost overruns and poor managementVolatile markets – impact on rental/vacancy ratesImportance of risk assessment, planning and mitigationLack of expertise in RE domain – Office properties
18What-if analysisTo understand the impact on RTA returns, we did sensitivity analysis on the following:If vacancy rates fluctuate –If rental rates varyIf additional leasing commissions of $20,000 are providedIf costs escalate beyond controlIf existing retail tenant breaks lease and collects $25,000 as damagesIf one of the Banks/Hedge funds withdraws financing