Soldiers Field Final Report - WordPress.com

Soldiers Field Development Report

Prepared for Real Estate Develepment and Finance Fundamentals Professor Edward Marchant Harvard Kennedy School of Government Fall 2010 Contributors: Abbai Belai Shiv Chopra Jessica Fain Elisha Goodman Janaki Kibe Sky Milner

Table of Contents 1. Executive Summary 2. Analysis 2.1 Analysis of Strengths and Weaknesses for Asset Types What are the real estate development and investment strengths and weaknesses for potential real estate asset types

at the 9.3 acre Soldiers Field site.

2.2 Best-Use Asset Composition and Design

Which real estate asset type or combination of uses would maximize the economic value of this site for Ms. Harrison, a profit-motivated developer? What would be the approximate building size for each of the proposed uses?

and overcome to maximize development of this site? How are local government officials and neighborhood leaders likely to respond to this unexpected turn of events?

2.3 Entitlement and Development Issues What general zoning/permitting and other potential development issues might Ms. Harrison need to address

2.4 Residual Land Value

Based upon its “highest and best use,” what is the site worth to Ms. Harrison or other similar profit-driven developers? What is the site worth to Harvard?

Suggested negotiating strategy that Harvard should use to negotiate with Ms. Harrison. What negotiating leverage or strengths does Harvard have? What are the five most important “next steps” for the University?

2.6 Minimum Offer

2.5 Negotiating Strategy

What would be the minimum acceptable terms of any offer made to Ms. Harrison by Harvard?

3. Appendix: Development Proposal

Prepared for Real Estate Develepment and Finance Fundamentals Professor Edward Marchant Harvard Kennedy School of Government Fall 2010 Contributors: Abbai Belai - Residential asset type assessment, financial analysis, and negotiation Shiv Chopra - Hospitality asset type assessment, financial modeling and analysis Jessica Fain - Retail/commercial asset type assessment, development and site plan Elisha Goodman - Residential asset type assessment, zoning, project management Janaki Kibe - Retail/commercial asset type assessment, development and site plan Sky Milner - Hospitality asset type assessment, site plan and architectural design

3.1 Context 3.2 Building Height 3.3 Traffic Analysis 3.4 Existing Traffic 3.5 Traffic Volume

3.6 Massing Studies 3.7 Site Plan 3.8 Asset Diagram 3.9 Retail Layout 3.10 Retail Size Comparables

3.11 Construction Phasing

4. Appendix: Financial Exhibits

4.1 Project Summary 4.2 Stress Testing 4.3 Mortgage Underwriting 4.4 Total Project Costs 4.5 Back-of-the Envelope Comparables 4.6 Ten Year Projected Setup

Soldier’s Field Development Report

1. Executive Summary This report was prepared for Harvard University President Drew G. Faust and provides a negotiation strategy and a reasonable offering price for the 9.3-acre parcel in Allston known as Soldiers Field. The current owner is Ms. Catherine Harrison. In order to determine a reasonable offering price, we ascertained the “highest and best use” that Ms. Harrison could develop on the site based on current and projected market conditions for different asset types as well as the specific attributes of the Soldiers Field Site (the “Site”). According to our research, maximum economic value of the Soldiers Field site would be a 506,485 s.f. office/retail complex. This development would be comprised of approximately 90% or 458,400 s.f. of office space and 10% or 47,985 s.f. of retail space. The building footprint dimensions and building height for this development can be seen below.

Exhibit 1.1 Site Plan

Total Building Costs Total Parking Costs Total Asset Costs Usability Factor Usable Square Feet (USF) Average Rent Per USF Gross Rents EGI Operating Costs Per USF Total Operating Costs NOI or Cash Flow from Operations ROTAC

$68,016,114.00 $682,500.00 $68,698,614.00 85.00% 430427 $20.00 $8,526,961.00 $8,100,613.00 $7.00 $2,813,897.00 $5,286,716.00 7.70%

$62,515,254.00 $13,687,500.00 $76,202,754.00 85.00% 430427 $28.00 $12,051,963.00 $11,449,365.00 $22.00 $9,469,400.00 $1,979,965.00 2.60%

$66,994,736.00 $14,632,500.00 $81,627,236.00 90.00% 455747 $32.00 $14,583,888.00 $13,854,694.00 $12.00 $5,468,958.00 $8,385,736.00 10.27%

Based upon this 90/10 mix of office/retail, we determined the residual land value (RLV) for the Soldiers Field Site is $8,746,841. We believe that the maximum offer that Harvard should put to Ms. Catherine Harrison, a profit-motivated developer, is 30% above this residual land value or $11,250,000, reflecting the non-economic value of the site to Harvard. The minimum offer that Ms. Harrison is likely to accept is 15% below the RLV or $7,500,000. While the RLV is based on s.f. the expected income from and a sale in year 10, there are risks that these Parking Other Total Office s.f. Retail s.f.the development future earnings may not be realized as we may predict today. Changes in financing rates, delays in permitting and conPhase I 119400 102400 17000 400 unstructured Internal circulation-1, Park struction, and variations in occupancy and NOI growth rates all have significant effects on the Net Present Value (NPV) Phase II 128000 128000 --600 structured and RLV of the project. Thus, any developer should consider these risks prior to attempting to execute this project as it Phase III 130985 100000 30985 600 structured Internal circulation-2 may affect their negotiation position as far as pricing of the RLV. Phase IV 128000 128000 ------TOTAL 506385 458400 47985 1600 --Harvard University has currently lost a court case relating to the ownership of the land. As a result, the momentum appears to be with Ms. Harrison. However, as a neighbor and local resident, Harvard University has the ability to affect the development of the parcel if Ms. Harrison does not effectively deal with them. Therefore Ms. Harrison cannot ignore Harvard completely. However a parcel of land so integral to the University has value beyond purely its economic value; therefore Harvard must balance the true value of the land with what it would mean for them to lose it, when determining its negotiation strategy. Furthermore, in parallel to the negotiation, Harvard can take steps to encourage Ms. Harrison to agree to a reasonable price.

Exhibit 1.2 Asset Composition BUILDINGS ASSET TYPE OFFICE RETAIL TOTAL PARKING SPACES TYPE SURFACE ABOVE GROUND GARAGE BELOW GROUND GARAGE TOTAL

MAX HEIGHT (NUMBER OF FLOORS) 16 1 --

GROSS SQUARE FEET 458400 47985 506385

% of TOTAL GROSS SQUARE FEET 90.52% 9.47% 100.00%

NUMBER OF SPACES 400 1200 -1600

RESIDUAL LAND VALUE MAXIMUM OFFER THAT HARVARD SHOULD MAKE

MINIMUM OFFER THAT HARRISON SHOULD ACCEPT

$8,746,841.00 $11,250,000

(30% above residual land value) $7,500,000 (15% below residual land value)


2. Analysis 2.1 Analysis of Strength and Weaknesses for Asset Types

The real estate development and investment strengths and weaknesses of this specific 9.3-acre site for potential real estate asset types that are suitable for the site.

The site in question is a 9.3-acre parcel located in Allston on the Cambridge/Allston border currently occupied by Harvard University athletic fields. Below are general characteristics of the site that may influence its potential for development for the four most likely asset types- Residential, Commercial, Hospitality/Conference and Retail: • Site is located in Boston, adjacent to Cambridge, and within close proximity to Harvard University, and to medical, biomedical and design R&D clusters found in the Harvard/ Kendall/MIT area. This is a strength for all four asset types, although competition from Harvard Square and other nearby retail areas may limit retail viability. • Site is close to the Charles River with waterfront views and recreational potential. This is a strength for all four asset types and should result in a higher property value, particularly for upper floor units where views clear the tree line. • Site is close to Massachusetts Turnpike and route 93. This is a strength for all asset types. • Site is flanked by the Soldiers Field Road. Proximity to this highway may translate into unwanted noise for tenants. The highway also creates a significant barrier between the site and the river, creating a property that feels even more isolated than it is. Additionally, the current road layout and lack of access points into the site may require the installation of costly traffic management measures, such as traffic lights. Hospitality/conference and office space only would benefit from highway access; residential and small store retail would have a mixed relationship. • Isolated location of site. The site is surrounded by highways, rivers and sports fields, and there are limited amenities within walking distance to service tenants of the site. This

would present challenges for all four asset types. It also requires a developer to think about mixed uses. These general characteristics, along with strengths and weaknesses specific to the four asset types mentioned above (hospitality/conference, residential, office, and retail) provide clues as to the asset type Ms. Harrison might choose. For example, it is unlikely that Ms. Harrison will choose to develop hospitality/ conference project on the site. While a hospitality/ conference space may not be as affected by nearby highway noise as other asset types, there are already a significant number of hotels in the area and the market is potentially oversaturated. Furthermore, it is more difficult to secure debt financing for hotels and hotels require a much higher level of equity investment than other asset types. Consequently, it is unlikely that Harrison would choose to include hospitality/ conference space in her development.

SOLDIERS FIELD SITE: SITE ASSESSMENT MATRIX Exhibit 2.1.1 Soldiers Field Site: Site Assessment Matrix ASSET TYPE/DESCRIPTION ADVANTAGES Street visibility/Road traffic Highway Access Highway Noise Does Not Matter Proximity to Harvard & R&D Clusters Comparable projects nearby Moderate access to public transit Proximity to Charles River (views, recreation) General well educated population in area River views from upper floors Existing market demand

Office

DISADVANTAGES

Office

Requires a lot of parking Residual noise from sporting events No foot traffic Isolated location, no nearby amenities Proximity to Highway (noise) Proximity to Highway (barrier to the river) Loans are more difficult to secure, higher ratio of equity investment required Not sufficient market demand COMPLEMENTARY USES Office Res Retail Hospitality/Conference

Res X

X X X X X X X

Retail X X

X X

X

X

X

X

X

X X Res

X

Hosp/Conf X X X X X X X X

Retail X

X

X X X

Office

Res

X

X

CRITICAL QUESTIONS/ISSUES Office FOR THIS ASSET TYPE Market demand/saturation X Current vacancy X Current time to lease up of this asset type X Comitment from anchor tenant X Proximity to good schools Proximity to hospitals, entertainment, restaurants, grocery stores, and other amenities Proximity to transit (highway and public transit) X Proximity to airport X Views X Noise from highway Foot traffic increases sales Parking frontingl establishment possible Highway access On a major road - signage opportunities Size of space required by tenant (build to suit X potential) Proximity to similar asset type (clustering) X

Res X X X

Retail X X X

Retail X X X X

X X

Hosp/Conf X

Hosp/Conf X X X

X X X X X X

X

Based on the back of the envelope calculation above, it became apparent quickly that certain asset types would maximize the “highest and best use” of Soldiers Field more so than others.

Hosp/Conf

X X

We also completed a back of the envelope comparison between the following four asset types: residential apartments, hospitality, office, and retail to help determine which asset type Ms. Harrison might choose to develop on site.

X X

X X X

X X X X

X X

X X

X

We were quick to rule out the development of a hospitality project on the site due to the low return on total cost (ROTAC) of hospitality (2.60%) relative to the other asset types. Additionally, hospitality generally requires a significant upfront equity investment, which an investor might be hesitant to commit. Additionally, as aforementioned, the abundance of hotels in the area suggested that the market for hotel/ conference space in Boston/Cambridge may be saturated. With regards to the other three asset types (residential, office and retail), we looked at the ROTAC as the primary criteria for determining the asset mix because we wanted to look at the project on a purely financial returns basis, without making assumptions on its financing terms. As the returns of the office (10.27%) and retail (11.98%) asset types were significantly higher than that of residential apartments (7.70%) we eliminated the residential asset type and narrowed down our potential asset mix to office and retail. The elimination of a potential residential condo development was also prompted by the idea that the residential ownership market may already by saturated—as there are many, comparable projects in the area.


2.2 Best-Use Asset Composition and Design A proposed development that includes retail would do well in this site. Retail would benefit from highway access, good auto traffic, and street visibility—all of which the Soldiers Field Site provides. Although the ROTAC for retail (11.98%) is the highest of the four asset types evaluated, we decided to allocate only 10% of total square footage to retail for a number of reasons. Firstly, the isolated nature of the site means that there will likely be little outside foot traffic. A heavy retail site would require a large amount of parking. If the entire site were made into a retail complex, the site would actually be unable to fit the required amount of parking spaces (4 spaces per 1,000 s.f.) within the developable land area without additional expensive structured parking. Secondly, retail is generally only successful if it is located on the first or second story, unless it is a complete shopping mall complex. However, there are already an abundance of shopping malls in the Boston Metro region: Arsenal Mall, Fresh Pond Mall, Cambridge Side Galleria, Prudential Center, and Landmark Center. As a result, we did not believe there was sufficient market demand to absorb the addition of another mall. A more likely scenario for the site, however, includes a small amount of retail, which primarily services tenants of other asset types on the property. As retail garners the highest return on

investment, it is likely that Harrison will choose to put as much retail on the site as can be supported by site tenants and a minor inflow of off-highway car traffic. We consider 10% of total square footage dedicated to retail to be the maximum amount of retail that can be supported by tenants and a minor inflow of offhighway car traffic. We believe that including a majority office-space component (90%) will maximize the land-value of the site for a number of reasons. Firstly, office space has the second highest ROTA (10.27%) of the four asset types analyzed. Secondly, the demand for office space appears to be stronger than other asset types. According to market reports, Massachusetts’ growing economy is projected to increase demand for office space in the Boston region. Thirdly, the site’s close proximity to Mass Turnpike and Route 93 lends itself to the development of an office complex. Based upon these considerations we believe the “highest and best” use of the land is an office/retail complex composed of 90% office space and 10% retail space.

Exhibit 2.1.2 Back of the Envelope – Comparables (excerpt) Gross Square Feet (GSF) Construction Cost Per SF Total Building Costs Total Parking Costs Total Asset Costs Usability Factor Usable Square Feet (USF) Average Rent Per USF Gross Rents EGI Operating Costs Per USF Total Operating Costs NOI or Cash Flow from Operations ROTAC

Apts. - Rental 506385 $158.00 $68,016,114.00 $682,500.00 $68,698,614.00 85.00% 430427 $20.00 $8,526,961.00 $8,100,613.00 $7.00 $2,813,897.00 $5,286,716.00 7.70%

Hospitality 506385 $145.00 $62,515,254.00 $13,687,500.00 $76,202,754.00 85.00% 430427 $28.00 $12,051,963.00 $11,449,365.00 $22.00 $9,469,400.00 $1,979,965.00 2.60%

Office 506385 $147.00 $66,994,736.00 $14,632,500.00 $81,627,236.00 90.00% 455747 $32.00 $14,583,888.00 $13,854,694.00 $12.00 $5,468,958.00 $8,385,736.00 10.27%

Which real estate asset type or combination of uses would maximize the economic value of this site for Ms. Harrison, a profit-motivated developer? What would be the approximate building size for each of the proposed uses?

Soldiers Field Office/Retail Development As mentioned above, given the current and projected economic conditions and the site characteristics of Soldiers Field, we believe that a development project comprised of 90% office space (458,400 s.f.) and 10% retail space (47,985 s.f.) will maximize the economic value of the site. Economic Conditions Favor Office/Retail Development According to Jones Lang LaSalle, the growth of the Massachusetts economy (5.2%) in the third quarter of 2010 continued to outpace that of the nation (1.6%). Since February 2010, when the Boston Metro economy hit its low point, the area has added 46,000 net new jobs. Job growth, particularly in professional and business services, added 11,100 jobs in the last year, which translates to an increased demand for office space. After months of decline, the Greater Boston office market is finally picking up. Although modest, the average asking rents for toprated space in Boston rose $0.50 a square foot in the third quarter of 2010 to $47.48. According to specialists such as Bob Richards, the president of the real estate services firm Barry Joyce & Partners, the uptick indicates a recovering market: “We’re seeing encouraging signs, and we’re very comfortable saying that things are no longer getting worse.”1 The signing of several recent leases has also been a positive indicator that the market for office space in Boston is rebounding. Biogen Idec’s new 359,000 squarefoot headquarters in Weston, Avid Technologies’ 127,000 square-foot deal in Burlington, Microsoft’s 103,000 square feet at 1 Cambridge Center, the Office of Health and Human Services’ 117,000 square feet at 100 Hancock Street in Quincy, and a wide range of smaller transactions, have led the Greater Boston office market to experience 659,465 square feet of positive absorption in the third quarter.

Lang LaSalle, software makers and other computer technology firms are the most active tenants in the market, with about a dozen companies searching for a combined 465,000 square feet. The need is for flexible spaces that meet the demands of both large and smaller businesses. However, most of the actual growth seems to be coming from smaller users, who are looking for 10,000 to 20,000 square feet. With regard to the retail market, regional household income for 2010 and 2011 is projected to increase to $70,517 and $72,509, respectively.2 National consumer spending growth is also forecast to be positive in 2010 (2.3%), suggesting that the retail market is likely to be on the upswing. Ms. Harrison’s retail development will focus on “convenience retail” catering to the needs of office workers as well as the surrounding neighborhood residents. Potential retail tenants include a gym, dry cleaner, day care center, restaurants, cafes, and a convenience store –all of which have fairly inelastic demands. This type of retail also allows for efficiency by slightly reducing the number of required parking spaces. Site Supports Office/Retail Development According to Grubb and Ellis’ Office Trends Report for the 2010 third quarter, well-located suburbs such as Route 128 and Cambridge will be among the first to benefit from the improving market.3 Soldiers Field site, while not Cambridge proper, has convenient access to the Mass Pike. The site is also close to Route 93, providing for an easy commute for drivers living to the north and south of the site. A new development on this site would want to take advantage of its peninsular location by adding an additional access point so that drivers coming from either Cambridge or Allston/ highway would have easy access. The two access points into the site and substantial on-site parking would make it easy for commuters to reach the site and park on-site.

According to Alex Dauria, a managing director for Jones

Soldier’s Field Development Report Phase I Phase II

Total s.f. 119400 128000

Office s.f. 102400 128000

Retail s.f. 17000 ---

Parking Other 400 unstructured Internal circulation-1, Park 600 structured

1. The Boston Globe. “Office market makes modest gains.” Oct 8 2010. www.boston.com/business/articles/2010/10/08/office_market_makes_modest_gains/. 2. Cushman and Wakefield. Mid-Year 2010. Marketbeat: Greater Boston Retail Report. https://dl-web.dropbox.com/get/SoldiersFieldCase/Retail%20Market%20 Research/Cushman%20and%20Wakefield_retail_boston_2q10.pdf?w=6455274d 3. Grubb and Ellis “Office Trends Report, Third Quarter, 2010 Boston MA” www.grubb-ellis.com/Boston.

For commuters who rely on public transit, the site is located less than 1 mile (20-min walk) from the Harvard Square T-Stop. Furthermore, the 66 and 86 buses run along Western and North Harvard Street—a 0.3 mile or 6 minute walk from Soldiers Field. Thus, the site is ideally located for car commuters and reasonably located for public transit users. Additionally, the proximity to Harvard Business School and its proposed expansion would also be an attractive feature for many businesses, perhaps in a similar fashion to the office market near MIT and Kendall Square. We believe there are great synergies could develop between the institutional neighbors and a Soldiers Field Site office complex. Character Considerations Site planning for the parcel must consider (1) appropriate building heights, (2) road access and internal circulation, (3) parking, and (4) public amenities. Existing building heights in the near vicinity range from 2 to 3 story residential and light manufacturing structures to several 17 to 20 story residential towers along the Charles River. (See Appendix Exhibit 3.1: CONTEXT). Given this context, a developer could reasonably expect to be able to build up to about 20 stories, concentrating the office space within several towers and the retail on the first floors with good street visibility and parking. As seen in the site plan, four towers are proposed, ranging from 8 to 17 stories. The retail spaces would provide amenities almost exclusively for the occupants of the buildings, such as dry cleaning, day care and a sports club, and therefore would not require the typical amount of additional parking called for in stand-alone retail establishments. According to MassDOT, 54,300 cars per day traverse along Soldiers Field Road. During the peak morning and evening hours, 5,537 and 5,613 cars, respectively, use Soldiers Field Road. Our 506,385 s.f. office-retail complex will generate an additional 2,000 cars per day (assuming 1,600 parking spaces plus 400 “kiss and ride” passengers) along Soldiers Field Road. Thus, daily traffic volume and peak traffic in the morning (09:00-10:00 and 18:00-19:00) will be impacted by our proposed development.

In negotiation with the city for permitting, a developer would be required to provide adequate traffic capacity measures, such as the two “slow down” lanes that are shown in the site plan located within the development parcel. [See Appendix Exhibit 3.3 - 3.5] Additionally, Ms. Harrison would want to consider internal circulation within the parcel. In the schematic plan, internal roads account for 3900 linear feet. The internal circulation allows for traffic to traverse the south edge of the site, as well as circle around the curved northern portion. Parking needs for office buildings are high. The proposed officer/retail development would require 1600 parking spots, or roughly 480,000 s.f. of parking at 300 s.f. per space. The size of the site mandates the construction of structured parking to accommodate this amount of parking. The scheme includes 400 unstructured parking spots and 1200 parking spots divided between two multi-story garages. Surface parking would likely be placed in the interior of the site and near the retail operations, and structured parking at the south edge. The structured parking could also serve as a negotiation tool by offering weekend or evening parking for Harvard sporting events or the Harvard Business School. Providing public amenities will also need to factor into Ms. Harrison’s calculations as she is undoubtedly familiar with the nearly decade long master planning process between Harvard and the Allston Community, as discussed in more detail in section 3 below. For example, given that development would be replacing sports facilities and open space, the community is likely to demand recreation opportunities and open space. The site plan includes an interior park space, and the storefront retail offers a potential negotiation tool to accommodate community uses, such as a day care center. Additionally, the developer would be expected to provide landscaping of the site that meets community standards.

Don’t Flood the Market

Apts. - Rental The economic reports above indicated growth in the Gross Square Feetoffice (GSF) Boston market, but warned that the506385 average size of Construction Cost Per needs SF rental space is quite moderate. A$158.00 careful phasing Total Building Costs $68,016,114.00 plan would be essential for a successful office development so that it does not flood the market with a single asset Total Parking Costs $682,500.00 type. The site plan allows for such flexibility. It is based Total Asset Costs $68,698,614.00 on a four-phase structure with approximately 100,000 s.f. Usability Factor 85.00% of office Usable Square Feetspace (USF)in each phase. Thus, the phasing 430427outlined below indicates one potential arrangement, but it could Average Rent Per USF $20.00 be adjusted based on changes in the market or based on Gross Rents $8,526,961.00 specific tenant requests. EGI $8,100,613.00 Operating Costs Per USF $7.00 Phase I would include a 16-floor office tower with a building Total Operating Costs $2,813,897.00 footprint of 6,400 s.f above a one story retail podium with NOI or Cash Flow from Operations $5,286,716.00 a building footprint of 17,000 s.f. It includes 102,400 s.f. ROTAC of office space, 17,000 s.f. of retail, and 400 7.70% unstructured

parking spaces, with the option of accommodating 200 additional parking spaces in the future development areas. Hospitality Office The park area would be constructed during this phase. 506385approximately half of the506385 During this phase, internal $145.00 circulation would also be constructed. Phase $147.00 II consists $62,515,254.00 $66,994,736.00 of an 8-floor office building with a 16,000 s.f. footprint. It includes$13,687,500.00 128,000 s.f. of office space and $14,632,500.00 free standing, above ground 600-car structured parking facility. Phase $76,202,754.00 $81,627,236.00 III consists of a85.00% 10-story office building with a footprint 90.00%of 10,000 s.f. above a one-story retail podium with a455747 footprint 430427 of 30,985 s.f. It$28.00 includes 100,000 s.f. of office, 30,985 $32.00s.f. of retail and a second above ground 600-car structured $12,051,963.00 $14,583,888.00 parking facility. During this phase, the second portion of $11,449,365.00 $13,854,694.00 internal circulation would be constructed. Phase IV consists $22.00 $12.00 of an 8-story building with a footprint of 16,000 s.f. It $9,469,400.00 $5,468,958.00 includes 128,000 s.f. of office space.

$1,979,965.00 2.60%

$8,385,736.00 10.27%

Exhibit 2.2.1 Square Footage by Phase

Phase I Phase II Phase III Phase IV TOTAL

BUILDINGS ASSET TYPE OFFICE RETAIL TOTAL

Total s.f. 119400 128000 130985 128000 506385

Office s.f. 102400 128000 100000 128000 458400

Retail s.f. 17000 --30985 --47985

MAX HEIGHT (NUMBER OF FLOORS) 16 1 --

Parking Other 400 unstructured Internal circulation-1, Park 600 structured 600 structured Internal circulation-2 ----1600 ---

Soldier’sFEET Field Development%Report GROSS SQUARE of TOTAL GROSS SQUARE FEET 458400 90.52% 47985 9.47% 506385 100.00%

2.3 Entitlement and Development Issues

What general zoning/permitting and other potential development issues might Ms. Harrison need to address and overcome to maximize development of this site? How are local government officials and neighborhood leaders likely to respond to this unexpected turn of events?

General zoning and permitting issues There are several general zoning/permitting and other development issues Ms. Harrison might need to address and overcome to maximize development of the site. Permitting Issues: • Historically, the Boston Redevelopment Authority’s Zoning Board of Approvals is difficult to work with and approvals can take a long time. Consequently, Ms. Harrison may find it challenging to secure a change in use permit from the relevant authorities. Delays or denials could pose significant barriers to development and financial loss and/or loss of site control if lenders deny extentions to construction loans. • Additionally, because the property is surrounded by a busy highway, it is likely that Ms. Harrison will be required to conduct a traffic study and there is some risk that Ms. Harrison will be required to install traffic lights or construct other costly traffic management measures. Traffic signal installations are costly, ranging from between $80,000 $100,000. • Zoning will also require a specific number of parking spaces per use (3 parking spaces per 1,000 s.f. of office, 4 parking spaces per 1,000 s.f. of retail) and Ms. Harrison may wish to get a parking variance to reduce the number of parking spaces required. • Ms. Harrison also faces neighborhood residents raising typical NIMBY issues such as increased traffic flows in the area and increased competition for existing parking spaces in the neighborhood. Environmental and Archeological Issues: • Ms. Harrison also faces a risk that the basic environmental assessment will reveal a prior use that may raise an

environmental issue, triggering requirements for more costly assessments or clean up and mitigation measures. • Compounding this danger is the still functioning chemical storage facility nearby. There is a chance that chemicals from this facility have leached onto the Soldiers Field site. Clean up could be costprohibitive or pose a substantial cost, particularly if chemicals have reached the water table. • Ms. Harrison may also have to comply with Chapter 91, also known as “The Massachusetts Public Waterfront Act,” which governs new structures, changes in use, and demolition/removal of structures on lands near the waterfront. In our proposal, we assume that Chapter 91 will not apply to the site. • Like all developers, Ms. Harrison faces the risk that during the archeological survey, an artifact of significant historical merit will be found, triggering a requirement for further study and excavation and possibly preventing development of a portion of the site. Community Challenges: The Harvard Allston Expansion Project and Neighborhood Consent: Any proposed development at this site would be significantly impacted by the current political and community climate in Allston. The Harvard Allston Expansion Project was originally conceived by Harvard as a plan to develop over 200 acres of Harvard-owned land in Allston, just south and adjacent to the existing campus in Cambridge. The Soldiers Field parcel falls within this area, which is now officially a special zoning district for the Institutional Master Plan (IMP) approved by the City. Mayor Menino appointed a 16-person task

force comprised of civic leaders and Allston residents to facilitate the development of an IMP for the expansion. The design team that developed the master plan was Cooper, Robertson & Partners, Gehry Partners, Olin Partnership, Ltd.

Harvard’s Allston Expansion Plan prepared by Cooper, Robertson & Partners, Gehry Partners, Olin Partnership, Ltd. dated January 2007. Those concerns are:

In December 2009, Harvard announced that it would slow its Allston expansion. This included halting construction on the Science Complex, leaving behind a construction site surrounded by a very long fence, indefinitely. It is purported that they are seeking private partners, such as Longwood Medical Center, to share in the development costs of the Science Center. Harvard is also revising its approved master plan with revisions for 2012, putting much of the current proposed programming into question.

• Improved streets

These actions have left many Allston residents feeling anxious about Harvard’s commitment to the plan and they have expressed frustration with the amount of properties left vacant during the extensive planning process for Harvard’s Allston Expansion Plan. Despite Harvard’s announcement on October 15, 2010 that it would resume expansion efforts following a significant financial gift, the community in Allston may still have a residual sentiment that Harvard’s Allston Expansion Plan will not bear fruits for many years. Given this situation, we anticipate that the Allston community’s overall concerns regarding the site will remain consistent with the concerns they expressed in a cooperation agreement, which include: • A Harvard Allston Education Portal • A partnership fund to support local non-profits • A new park

• Accessible open space

• New housing to reduce pressure on the neighborhood • Elimination of industrial uses incompatible with residential life • Management of neighborhood

traffic

cutting

through

the

Local government officials in Allston are also likely to have concerns about how Ms. Harrison’s proposed development will affect the tax base for Allston. The BRA will also be concerned about the general implications on the special institutional zoning district and the traffic impacts of the development. Ms. Harrison’s interests to maximize profits are likely to be contrary to the community interests stated above. Since Ms. Harrison’s initial plans are unlikely to address all of the community’s concerns, the community will likely raise objections and cause delays. For Ms. Harrison, appeasing the community’s objections and/or overcoming these objections translates to cost implications—such as legal fees, many meetings, and uncertainty in a construction scheduled. All of these costs would reduce the estimated value of the land, and thus the amount which Harvard should offer to Ms. Harrison to buy the land from her.

• Workforce development programs • Other public improvements and a community needs assessment. Other concerns the community is likely to raise include issues expressed in the draft Executive Summary of


2.4 Residual Land Value

Based upon its “highest and best use, ”what is the site worth to Ms. Harrison or other similar profit-driven developers? What is the site worth to Harvard?

Assessing the Net Present Value (NPV) of the development plus the initial land acquisition cost derives the Residual Land Value (RLV). As we know what Mrs. Harrison paid for her plot of land, the key determination of value will be the NPV. There are a number of factors that shape the NPV, but the main drivers are the discount factor, the financing rate, the net operating income (NOI) growth rate, and the exit capitalization rate (Cap Rate). In our calculations, we assumed a discount factor of 12%, which is near the project IRR of 14%, and reflects the combination of a debt financing rate of around 6% and an equity return rate of 15-20%. Next, we assumed an NOI growth rate of around 3%, reflecting the growth of the area and the rebounding market. Finally, we assumed an exit cap rate of 5.5%, given an implied entry cap rate of 7.18%, and allowing for roughly 1.5% compression, reflecting the Class A development and value add that the developers would have on the neighborhood. [See Appendix Exhibit 4.2: Stress Testing] To determine the NPV, we looked at the NOI over a 10-year period of time, deducting financing costs and adjusting for amortization, deprecation, and taxes to arrive at our total return (after adjusting for equity invested, as this is a phased project and therefore the future equity must also be discounted). At the end of 10 years, we assumed a sale, with a price determined by dividing the NOI at year 11 by an assumed exit cap rate of 5.5%. After repaying the remaining mortgage and taxes on the sale, we would arrive at Net Cash from Sale at year 10. If we discount all of the interim cash flows and the final sale cash flow by a compounding factor of 12%, we arrive at the Net Present Value (we do not have to deduct the equity invested as it has already been factored into the cash flow schedule.) Given these factors, we estimate an NPV of $6,746,831. Given that Ms. Harrison paid $2,000,000 originally for her plot, we would estimate a total RLV of $8,764,831. Furthermore, if we solve for the discount rate that gives us an NPV of zero, that rate is 14.93%, which is the IRR of the project. Given current interest rates of close to zero in the short term, this is a relatively healthy IRR, but we must look at the risks of achieving these targets before making any investment decisions.

After our initial NPV and RLV calculation, we decided to stress test the RLV to some different risk factors that may arise during development. In particular, we looked at the effect upon RLV of changes in the following variables:

By increasing the vacancy rate by 2.5%, we would see a 53% drop in the RLV. If we increased the vacancy rate by another 2.5% the RLV actually becomes slightly negative. Therefore, inability to hit the occupancy rates has perhaps the most serious effects on profitability of the project.

In conclusion, while the IRR looks healthy, as does the RLV, the project comes with significant risks to development. All of the factors above can lead to financial problems in the project. In combination these risks may prove to make the project non-viable altogether.

Financing Rate By increasing or decreasing the financing rate plus or minus 0.50% (from 5.5% to 6.5%), we see a respective decrease or increase in the RLV of roughly 25% of the base case. This means that the project is relatively sensitive to developments in the loan and financing markets. If interest rates increase more than 0.50%, there will be a real erosion of value in the project. Conversely, a decrease of interest rates will benefit the project significantly. We must remember that the financing can not be locked in until the permits are received, at a minimum, therefore there is at least one year of risk in this respect.

Exhibit 2.4.1 Phasing Schedule

NOI Growth Rates By adjusting our NOI growth rate assumption up and down 0.50% (2.5% and 3.5%), we see a variation in RLV of roughly 35% in both the up and down scenarios. If the NOI grows at less than the 3% assumed growth rate there will be a material negative effect upon profitability and the RLV. Therefore the ability to grow NOI has a significant effect on the valuation of the land. Delays in Permitting By delaying the permitting by one year, we see a drop in RLV of 35%; a two year delay brings a further 30% drop in RLV. Therefore, the ability to get this project permitted and constructed on time again has a significant effect upon the value of the land. Vacancy Rates


2.5 Harvard’s Perspective & Bid

Suggested negotiating strategy that Harvard should use to negotiate with Ms. Harrison. What negotiating leverage or strengths does Harvard have? What are the five most important “next steps” for the University?

Harvard’s Negotiation Strategy To analyze the best negotiation strategy for President Drew Faust, we used the 3D negotiation model developed by Lax and Sebenius1, both of whom are affiliated with Harvard University. The 3D negotiation model refers to the following three components: • 3D: Initiatives that can be taken “away from the table” • 2D: Deal crafting at the table with the aim of looking to create overall value for both parties (otherwise known as value creating) • 1D: Getting the most out of the deal (otherwise known as value claiming) Using this 3D negotiation method, we started by analyzing what is called the “Initial 360”, which outlines the “parties” relevant to the discussion and their positioning, interests, and needs, and then developing a Best Alternative to Negotiated Settlement (BATNA). “Parties” relevant to the negotiation discussion can be divided into “allies” of the University, “adversaries” of the University, and ”recruitables” ( those who the University can recruit to its side but are currently not allies). After outlining the parties involved in the negotiation process, we analyzed the barriers the University faces in achieving its desired outcome. Finally, we synthesized these analyses into an action plan outlining the next steps to be taken by the university—including its pricing strategy with respect to the land. 360 Analysis: Parties relevant to Harvard: • Allies: Harvard (self); professional advisors (us), Harvard Board, Harvard Faculty and Students, Other professional

advisors • Adversaries: Ms. Harrison, Ms. Harrison’s advisors • Recruitables: Boston Redevelopment Authority, local elected officials, Allston Residents (of which Harvard is one) Harvard’s interests and needs: • Control of the land for its own uses though a settlement at the lowest possible price. • Maintaining an ongoing relationship with Harrison is relatively unimportant. • Perception of striking a reasonable deal with respect to the board, happy student faculty groups. • As part of the Allston Harvard Expansion Project, the site is in the path of Harvard’s own development and therefore is a key piece of land worth owning with a premium placed on the site due to its location and current use. • Given the location of the site and Harvard’s desire to maintain its use as athletic fields, it would be a loss for Harvard to lose this key piece of real estate, where other Harvard buildings and facilities will surround it. Harvard’s best alternative to negotiated agreement (BATNA): • No control of land but will not have to pay an unreasonable price. • Can make life painful for Ms. Harrison and her development partners by further litigation and making noise around planning, design and

community issues, especially if the development is not in line with the character of the existing area. Barriers Audit On a 3D level, as Harvard already lost the court case, its next potential venue outside of a negotiated settlement is the courts via an appeal process. Furthermore, as Harvard is a long-time resident and large employer and landholder, it is likely to have good relations with the City’s Planning Department. As a result, it is probable that Harvard would likely be able to hinder the development process if a settlement cannot be reached. President Drew Faust is responsible for looking after the long term interests of Harvard and thus has two important constituents to whom she must be sensitive to: the Board, who will not want to overpay for the Site but will want to retain control over the parcel, and the Student Body, who now use the land as sports fields and is apt to have a sentimental attachment to the site that is difficult to quantify. On a 2D level, the barrier to agreement is consensus on the RLV price (in other words the existence of a Zone of Possible Agreement or ZOPA). Given the legal history of the case, it is unlikely that the parties would be interested in entering into a joint venture for development. Further, Harvard is likely to want to retain the land for their current athletic uses and potentially other uses in the future. The value of the land for Harvard is likely to be higher than the pure current development value for Ms. Harrison due to the long-term view of the institution and the fact that the student body is currently using it. Given the recent market volatility and the effect it has had on Harvard Endowment, the University will probably have a limited appetite to overpay for this property, and may take view that Ms. Harrison may have problems realizing the full value predicted today. Further, Harvard can potentially influence the value of the project if it can delay it via Harvard’sits 3D initiatives, and therefore can weaken Mrs. Harrison’s BATNA. This could force a sale in the future at a better price than today, if in fact the project does have significant delays associated with it. On a 1D level, Harvard should use its leverage as a much

larger institution with deeper pockets and stronger local connections to intimidate Ms. Harrison and prevent her from making unreasonable proposalsproposals. It is clear that the best scenario would be for a transfer of land for a fair price; the key for Harvard is to keep Ms. Harrison from being unreasonable in order to find the Zone of Possible Agreement (ZOPA). Action Steps to be Taken On a 3D level, Harvard should make it public that the court case has been lost as a way to rally the support of the Student Body and the Board in order to pursue the active steps that need to be taken. By aligning these two groups, the Board will likely give President Drew Faust more of a free hand in reaching a negotiated settlement. Further, Harvard should start voicing concerns about a largescale development on the site, and how it could hurt the interests of the community as a whole, thereby galvanizing residents to slow down the development process. They Harvard can win the residents over by voicing a mutual interest in keeping traffic levels low, and assurances thatof any new development in the area by Harvard will address the community’s issues. Finally, Harvard should indicate its interest in repealing the legal decision, and should tmake initial steps toward this end, such as contacting its legal counsel and starting the appeal process. As we have said there is probably limited opportunity to create additional value via creative deal crafting due to the recent legal proceedings and likely mistrust between the parties. As a result, value enhancement of the deal through a joint venture or other means is probably limited. Therefore, Harvard should focus on how to minimize value of the price negotiation itself. Based upon a RLV of $8,746,841, Harvard should probably start with a bid price of $5,570,000 which is 35% lower than the RLV level she would calculate, which is roughly the RLV of the project if it has a one year delay. Harvard should have a target price up to the RLV. However, its reservation price should be $11,250,000, which is 30% higher than the RLV. This number is based on a non-monetary value to Harvard for the need for further land expansion in the future, and

Soldier’s Field Development Report 4. David A. Lax and James K. Sebenius, 3-D Negotiation: Powerful Tools to Change the Game in Your Most Important Business Deals, Harvard Business School Press, 2006

2.6 Ms. Harrison’s Perspective & Bid

What would be the minimum acceptable terms of any offer made to Ms. Harrison by Harvard?

the sentimental value the University community would place on losing such an integral part of the campus to a developer. Above this reservation price, Harvard should consider walking away, after the permission of the Board, and begin its efforts to hinder the project. In this scenario, Harvard may have the opportunity to purchase the project at a later date, if significant delays or other risk factors materialize, making the project non viable. In summary, the next five steps for Harvard should be: 1) Go to the University Board for approval for the negotiation strategy, including the initial bid price and the maximum reservation price, and approach Ms. Harrison with this strategy. 2) Make public in the University the status of the land, galvanize support within the University community, and begin a public relations campaign to keep the University updated on progress in negotiations. 3) Begin an appeal of the earlier legal decision. 4) Approach the Allston community voicing concerns of the development, with assurances that any future development under Harvard’s control will take into account the needs of the community. 5) Begin lobbying local elected officials concerning the development and its potential negative community impacts. , particularly the negative community effects it will have. Reiterate that future development under Harvard’s control will be more in line with community interests.

Ms. Harrison’s Perspective and Bid

Best alternative to negotiated agreement (BATNA)

To analyze the likely negotiation strategy for Ms. Harrison, we will use the 3D negotiation model mentioned before. Again, we started by analyzing what is called the ‘Initial 360’, which outlines the ‘Parties’ relevant to Ms. Harrison and their positioning, interests, and needs, before developing a Best Alternative to Negotiated Settlement (BATNA). Next, we analyzed the barriers that the Ms. Harrison faces in achieving her desired outcome. Finally we synthesized this information into a likely action plan Ms. Harrison may take, including her likely pricing strategy with respect to the land.

• Find a development partner (independent from Harvard), which may require time and have transaction costs. , and develop the property independently with Harvard as a powerful, and unhappy, neighbor

360 Analyses Parties: • Allies: Ms. Harrison (self); professional advisors, potential development partners, potential tenants • Adversaries: Harvard, Us (advisors), lawyers and other employees, faculty and students • Recruitables: Planning authority, Local elected officials, contractors (for employment) Ms. Harrison’s interests and needs: • Wanting the highest possible price for the land. • Maintaining an ongoing relationship with Harvard is relatively unimportant as long as deal can be achieved. It can be important, however, if no deal is struck. • Maintaining a good relationship with Boston elected officials and planning authorities, assuming Ms. Harrison plans to continue doing development work in the city.

Barriers Audit On 3D level, Ms. Harrison’s scope of the problem is to maximize the price of the property. To do so she must have a credible option of carrying out the development herself, which would include determining an executable development and finding a development partner assuming she does not have the capability herself. At this point, Ms. Harrison’s risk is that Harvard may think it has better community and planning relations than her and therefore can use this against her to delay and take value out of the project. Furthermore, she needs to have the local officials and planners on her side, perhaps showing them the ability to generate additional tax revenues tforo the area. On a 2D level, the barrier risk is not being able to agree on the RLV price with Harvard. Given the legal history of the case, it is unlikely that the parties would be interested in entering into a JV joint venture for development; further Harvard is likely to want to retain the land for their athletic fields. On a 1D level, Ms. Harrison should have a firm price to begin the negotiation round. Currently the momentum is with Ms. Harrison as she has the court settlement in her favor; she should take advantage of this. She can expect for Harvard to try to take a heavy-handed approach given the size of the institution; she must be able to counter this by having a strong team around her. Action Steps to be taken Given the above, we can expect Ms. Harrison to get initial soundings from the planning authorities and residents to


improve her BATNA. She would emphasize to them the new jobs she will be attracting to the area, as well as the additional tax revenues the project will bring. She would also make early stage phone calls to potential JV joint venture developers in order to make Harvard know she is serious about developing the site herself. Given an RLV price of $8,746,481, she would need to do everything she can to make sure any project stays on track to keep or enhance the value of the project. As we have said, there is probably limited opportunity to create additional value due to legal mistrust, and value enhancement through a JV joint venture or dovetailing is probably limited. Therefore Ms. Harrison would probably focus on how to maximize value of the price negotiation itself. Based on an RLV of $8,746,481, Ms. Harrison would probably start the negotiations with a sale price of $13,000,000, which is 50% higher than the RLV level she would calculate. This can be considered as Harvard’s opportunity costs of losing control of the land, and can be justified through optimistic growth and refinancing assumptions.

Ms. Harrison’s reserve price should be no lower than the $7,500,000, which is 15% less than the RLV. She should be willing to go below the RLV due to the risk factors in the project, and the fact that Harvard is much better capitalized to take on such risks, compared to her ability to sustain such risks as a developer. However given her positive momentum, she would not be expected to drop much further below this level. Below is a graphic display of the likely pricing ranges for the University and Mrs. Harrison; the overlapping portion is the likely ZOPA, where a deal can be struck.

Exhibit 2.6.1 Zone of Possible Agreement


3. Appendix: Development Proposal


3.1 Context

3.2 Building Heights BUILDING HEIGHTS

19-floor residential tower 7-floor dorm Mt. Auburn cemetary 5-Floor Office Building:

17-floor residential

2-3 Floor Residential

sports complex

5-floor office

2-3 floor residential

18-floor Residential Tower

18-floor residential

20-floor Residential Tower


3 20-floor residential towers

Daily Traffic Volume on Soldiers Field Road West of Western Avenue AM Peak: 09:00-10:00 5,537 cars PM Peak: 18:00-19:00 5,613 cars 23:00 - 24:00

22:00 - 23:00

Source: MassDOT; 5/21/2003 - 5/22/2003

23:00 - 24:00

22:00 - 23:00

1000

21:00 - 22:00

18,200

20:00 - 21:00

5537

19:00 - 20:00

18,200

18:00 - 19:00

I-95

17:00 - 18:00

16:00 - 17:00

15:00 - 16:00

14:00 - 15:00

13:00 - 14:00

12:00 - 13:00

11:00 - 12:00

10:00 - 11:00

09:00 - 10:00

3000

21:00 - 22:00

20:00 - 21:00

5537

19:00 - 20:00

08:00 - 09:00

54,300

54,300

18:00 - 19:00

07:00 - 08:00

06:00 - 07:00

6000

17:00 - 18:00

16:00 - 17:00

31,600

05:00 - 06:00

31,600

15:00 - 16:00

04:00 - 05:00

03:00 - 04:00

02:00 - 03:00

01:00 - 02:00

4000

14:00 - 15:00

13:00 - 14:00

12:00 - 13:00

6000

11:00 - 12:00

00:00 - 01:00

Annual Average Daily Traffic (Current) 2-Way Direction

10:00 - 11:00

EXISTING TRAFFIC PATTERNS 3.4 Existing Traffic

09:00 - 10:00

ALLSTON

08:00 - 09:00

WATERTOWN

07:00 - 08:00

06:00 - 07:00

05:00 - 06:00

2000

04:00 - 05:00

3000

03:00 - 04:00

5000

02:00 - 03:00

5613

01:00 - 02:00

4000

2000

1000

23:00 - 24:00

ROAD NETWORK

22:00 - 23:00

21:00 - 22:00

20:00 - 21:00

19:00 - 20:00

5537

18:00 - 19:00

17:00 - 18:00

16:00 - 17:00

15:00 - 16:00

14:00 - 15:00

13:00 - 14:00

12:00 - 13:00

11:00 - 12:00

10:00 - 11:00

09:00 - 10:00

6000

00:00 - 01:00

Daily Traffic Volume on Soldiers Field Road West of Western Avenue AM Peak: 09:00-10:00 5,537 cars PM Peak: 18:00-19:00 5,613 cars 08:00 - 09:00

07:00 - 08:00

06:00 - 07:00

05:00 - 06:00

04:00 - 05:00

03:00 - 04:00

02:00 - 03:00

01:00 - 02:00

00:00 - 01:00

3.3 Traffic Analysis 3.5 Traffic Volume

CAMBRIDGE

14,500 14,500

5613

5000

22,200

22,200 57,200

57,200

2000

60,000 60,000

0

2400 ft

Daily Traffic Volume on Soldiers Field Road West of Western Avenue AM Peak: 09:00-10:00 5,537 cars PM Peak: 18:00-19:00 5,613 cars 5613

5000

4000

1000

0

3000

0

Source: MassDOT; 5/21/2003 - 5/22/2003


N

Source: MassDOT; 5/21/2003 - 5/22/2003

3.6 Massing Studies Number of Floors Office: 17 Number of Floors Retail: 2 Number of Floors Parking: 4 Number of Parking Stalls Total: 1644

Number of Floors Office: 6 Number of Floors Retail: 2 Number of Floors Parking: 5 Number of Parking Stalls Total: 1631

Parking Office Parking Office

Retail Surface Parking





Parking Office Parking Office




3.7 Site Plan

3.8 Design Breakdown and Explanation


3.11 Construction Phasing

3.9 Retail Layout

1597 sqft

2421 sqft 1549 sqft

1282 sqft

3208 sqft 952 sqft

1597 sqft 1362 sqft

850 sqft

900 sqft

1597 sqft 2149 sqft

1164sqft

1123 sqft

1720 sqft

1597 sqft

1843 sqft 1828sqft

Gym 16000 sqft

Phase 1

Phase 2

Phase 3

Phase 4

3.10 Retail Size Comparables Retailer

Area (sq ft)

Coffee Shop Dry Cleaner Bank Branch Fast Food Restaurant Fast Food Restaurant Restaurnt with Banquet Seating Gym Small Grocery Store

1,000-1,500 sq ft 2,000-3,000 sq ft Flexible, generally Annual Constant 5.00% Negative Negative Negative Negative Flow