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.
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