Real Estate - Bayside Case. Business & Marketing Case Study

Instructions for Bayside Case  
 Background Leasing agent Carla Hernandez is in the midst of negotiations with three potential tenants for Tricon Development's Bayside property, a 95,372 SF class A office building in Kayla Park, California, part of Silicon Valley. It is November 2001 and the local office market is not healthy. Lakeside is only 38% occupied, roughly a year after completion. The process of leasing space at Lakeside is complicated by the weakness in the local market in general and from competition from two nearby competitive buildings for the same tenants Ms. Hernandez is trying to convince to come to Lakeside. 
 Ms. Hernandez is preparing for two upcoming meetings, one with John Clark, the CFO of Quest Financial Services (QFS), a potential tenant, and the other with her boss, Bill Martin. Bill wants Carla to explain the status of current lease negotiations, as well as her plan for leasing the remaining space in Lakeside. Bill will use this information to help him prepare for a meeting he has with Tricon’s partners in this project, whom he has to work with to potentially restructure the financing deal given the poor performance of the property to date relative to original proforma projections. 
 Assignment You are to play the role of Carla Hernandez. As the leasing agent, you are to prepare a detailed, well thought-out, creative, and well written report that you will present to your boss, Bill Martin. This report will contain the following three elements:1   
 1) An overview of the current situation at Bayside and the market in which it is situated, including • Graphs and discussion of new supply, absorption, and vacancy rates based on data provided in Table D. • An estimate of the months of supply of office space under the assumptions that absorption continues at the estimated 2001 rate and that the Kayla market has an 8 percent natural vacancy rate. • A discussion of lease rate, rental concession and TI trends at Bayside and the competitive properties. • An evaluation of the competition – your assessment of how the competition is doing and how Bayside compares to these two properties.  Why would a tenant choose Bayside over either of these?  
                                                1 You have some flexibility in terms of exactly how you structure your report. However, make it visually appealing with appropriate use of headings, subheadings, etc. 2) Lease proposals for prospective tenants • What lease rates and terms should you offer the prospective tenants: QFS, A&G, and BCI? For each of the three firms specify, and briefly justify the elements of, a complete lease package. Your lease proposal should include the following items:  o Size of space. o Gross rental payment – broken down into base rent and expense stop. o Term and any options to renew, including how new rent established. o Tenant improvement (TI). o Free rent. o Any other factors or contract items you feel are required.  • As part of your justification for the lease you propose for QFS, illustrate the calculation of effective annual rent from the perspectives of both Bayside and QFS. Compare these to the numbers for the Sullivan and O’Brien lease that is discussed in the case.2  • Discuss how you plan to negotiate with Mr. Clark of QFS. That is, outline the negotiation strategy and tactics will you employ.  
 3) Financial analysis Carla has a tough job in that she is trying to lease space in a new building that hit the market at the wrong time. She did not have a say in the decision to develop the property yet her job could be in jeopardy if her boss attributes part of the leasing problems at Bayside to her abilities rather than current conditions in the marketplace. In order to fully prepare for her meeting with Bill Martin, Carla decides to go back in time and perform financial analysis of the proposed development immediately prior to the beginning of construction. She thinks that she can show that ground should never have been broken on this development, and hence it is not her skills that are the problem. Carla decides to perform and interpret the following calculations: • A simple comparison of total development costs (Exhibit 2) with estimated property value upon completion and stabilization, where a potential value range is estimated based on NOI in Exhibit 3 and a range of cap rates. • A front door analysis. She assumes a minimum DCR of 1.25 and a 10% interest only loan.  Per the existing situation, there is no equity and no LTV requirement. Should the loan have been undertaken? Why or why not?