Wisconsin Students Compete in Boston

Only a month after being in Boston for the spring REC trip, a team of four MBA students, comprised of two first years (myself and Andrew Boespflug) and two second years (Chad  Broderick and Tess Gruenstein), traveled back to Boston last week for the second round of MIT’s “The Case”.  This competition required each team to propose a site plan and supporting financial analysis for a real-life development site.  This is only the third year that The Case has been running, but the competition has gained a lot of traction in a short period of time; 29 teams registered to participate this year.  This is the Graaskamp Center’s debut at this particular competition.

The case began in mid February, when the participating teams (consisting of a maximum four members) received that case electronically on a Friday at 8am.  Materials included the development scenario, site details and history, and hundreds of pages of supporting documentation.  This particular site had already been through an RFP round back in 2007, and so the original RFP and all the actual submissions were provided as well.  Receiving this amount of information all at once was quite overwhelming, and we had only 6 days to get through the material and develop a plan that satisfied all requirements while generating attractive returns for the interested parties.  We got to work immediately and wrote off any other obligations over the next 6 days…it was clear we were going to need all the time we could get.

This year’s development site was located in San Francisco, and as a native to the area I was very familiar with the completely underutilized plot of prime bayside property.  The site (16 acres of land a pier space just south of AT&T park) is a flat infill location owned by the city that is currently used for parking.  The original RFP, and the stipulations of our case study, called for the developer to create a vibrant, mixed-used project that would serve as a gateway between the downtown/SOMA districts and the developing Mission Bay neighborhood.

The site had two key requirements: a 5 acre park built at the developer’s expense, and at least 2,000 parking spaces available for the Giant’s to use for game days, which would be rented at $100/mo/stall (below market).  These two requirements immediately put the participants at a disadvantage, and we had to make the absolute best use of our developable space in order to maximize returns.  In addition, this area of land is not subject to any zoning restrictions, so the sky was the limit in terms of proposed development.

After 6 days of complete focus and work, our team submitted a proposed mixed use project consisting of 650 residential units, a 200 room hotel, and 175,000 sqft of retail space while delivering the 5 acre park and 2,400 parking spaces.  Market research for the site was limited to free, public information in order to keep a level playing field, and reports from Skanska and Costar/PPR Group were provided as preliminary sources of data.

The hard construction costs provided from Skanska were quite explicit, so there wasn’t much room for variation with these inputs unless we found another free source that had more favorable estimates.  However, this still left capital structure, construction timing, absorption rates, rental rates, efficiency ratios, vacancy rates, interest rates, terminal cap rates….I think you get the idea.  All these inputs had a great impact on what was feasible to build and what expected return could be generated.

We used a top down approach to get an idea of what would be the highest and best use of the land in terms of property type.  We then used absorption and density information to get a sense of how much we could actually build on this land and bring to stabilization within a reasonable amount of time.

Once we arrived at what we determined to be a feasible (albeit slightly aggressive with regards to certain assumptions) site development plan, we calculated the returns for the entire project to be 12%.  We knew this was low (should be closer to 20% given the risk profile), but given the constraints of the site (parking, green space) we felt this was sufficient.  Altering our assumptions to be even more aggressive would increase returns, but we felt that this could cause the proposal to lose credibility in its legitimacy.

We received the good news in March that we were one of 12 teams selected to proceed to the next round of the competition.  These 12 teams were broken out into 3 groups of 4, and each group assigned a room and panel of industry professionals that served as judges for each team in that group.  The teams presented separately in front of only the judges.  We, unfortunately, were selected to go first in our group, which is a tough position to be in given the complexity of the case. 

Although our presentation went smoothly and we fielded the Q&A in appropriate fashion, we ultimately were not selected to proceed to the final round of 3 teams.  During the Q&A the judges expressed that the return of 12% was just too low, and we feel that this is something that ended up holding us back.  Also, as we later found out, none of the teams that went first in their group were selected to go to the next round.

We were, however, able to watch the final three presentations, which were held at the Federal Reserve building.  The final three teams all had impressive and polished presentations, with expected returns all 20%+.  Given the market research that we had performed, the site plans proposed by the teams seemed to be extremely aggressive.  This provided a great learning experience for us, in that sometimes it is the bottom line that truly matters, and how you get there is next in priority.  This is true in many areas of business, not just real estate, and we were able to get a first hand sense of this following the competition.

The case competition was a great experience for our team. While it was disappointing not to make the finals, it was encouraging to see that we were not far off from the top teams in the competition.  We were able to take away some great insights from the judges and from watching the other teams, and have accumulated these thoughts in writing to be referenced during our next case competition endeavor.

Competing in the National Real Estate Challenge

Meet Our Current Students, a continuing series featuring some of our first-year real estate MBA students:

Recently I was fortunate enough to take part in the National Real Estate Challenge, a real estate case competition held annually in Austin, Texas. The competition was held on November 17-18 and was hosted by the McCombs School of Business at the University of Texas. I was part of a six-person team comprised of MBA students in the Graaskamp Center for Real Estate. We competed against nineteen other teams representing leading business schools from around the country. Members of this year’s team were second-year students Chris Hammes, Lindsay Kruger, and Jeff Swhier and first-year students Tess Gruenstein, and Eric Hansch and myself. Lecturer Arif Qureshi was the faculty advisor. The Wisconsin team was one of only a handful of teams that included first-year students.

The case in this year’s competition deviated quite a bit from years past. Usually involving the development of an asset, this year’s case involved the capital restructuring of one firm’s investments in two parcels of lands that were mortgaged by the same lender. One parcel of land was undeveloped and located in a weak market. With the value of the land decreasing, the owner had stopped making debt payments on this parcel. The second parcel was split into two phases, one being undeveloped but entitled for the development of an office building, and on the second sat a recently completed but vacant office building. The second parcel was in a strong market and was expected to begin generating significant cash flow shortly. With loan maturities and loan covenants coming due and no current cash flow, alleviating the lender’s risks as well as keeping the upside potential of the second parcel for the investment firm was the ultimate goal. The case also described a proposal created by the investment firm, laying out their strategy for talks with the lender. Goldman Sachs provided the case which was based on an actual investment they have made.

Each team had 72 hours to read the case and create and complete a PowerPoint presentation explaining the current situation as well as the optimal strategy from the viewpoint of the investment firm. Once the competition began in Texas, the teams were split into groups of five. Each group made a twenty minute presentation before approximately ten real estate professionals who were judges. A ten minute Q&A session followed where the judges tested the participants’ strategy as well as their understanding of the case and the real estate principles involved. One team from each of the five groups was then selected to compete in the final round.

Our team developed a strategy that was quite unique and very different from the investment firm’s proposal. Our strategy involved selling the speculative land and using the proceeds to buy down the risky loans, easing the lender’s concerns. The excess proceeds would be used for tenant improvements on the completed office building, increasing that asset’s potential for significant positive cash flow in the short term. This plan would require no additional equity from investors. Unfortunately, the Wisconsin team did not advance to the finals as we lost out to the eventual champion, the team from Wharton.

While the outcome was not what we had hoped for, the competition was still a very rewarding experience. It allowed us to take what we learn in the classroom and apply it to a real world situation while also forcing us to work with each other’s strengths and weaknesses as a team. An added benefit was meeting and socializing with the students from the other schools as well as the industry professionals. As a first year student, I am excited about the opportunity to compete in this and other case competitions during my remaining time as a student at the Wisconsin School of Business.

Eric Dowling is a first-year MBA student in the James A. Graaskamp Center for Real Estate. Eric plans to combine his previous real estate experience with his MBA education to establish a career in private equity investments.

UW team places 1st in NAIOP case competition

Congratulations to the UW-Madison undergraduate real estate team for placing first at the highly competitive NAIOP 2010 University Real Estate Challenge hosted by the Minnesota chapter.

Our passionate team consisting of Andrew Berger, Alissa Kearney, Scott Larson, Katelyn Murray and Nate Ross worked hard on this project--under the supervision of Arif Qureshi, UW lecturer in commercial real estate development--with the determined goal of WOW'ing the judges and 130+ Minnesota NAIOP Chapter members in attendance. Thank you to everyone who helped prepare our team and provide valuable feedback.

Look for more information on the competition in our May newsletter. Click here to join our email list (via Constant Contact).