The largest tenant of Busse Corporate Center declared bankruptcy. As a consequence, Busse Place was left 38% occupied and overleveraged. Marisa Sanchez, the leasing agent, is facing negotiations on three lease proposals with prospective tenants to take over the vacated space. On the other hand, Collins Properties who owns the building is faced with the challenge of deciding whether to continue funding the building's losses and at the same time lease the space or go into debt restructuring or turn over the building to its lenders by being in default on the loan.
Arthur I Segel; William J. Poorvu; Justin Ginsburgh; Richard Kessler
Harvard Business Review (209154-PDF-ENG)
June 18, 2009
Case questions answered:
Case study questions answered in the first solution:
- When a company seeks to lease space, what are the key considerations involved?
- Table 4 shows the amount of vacant space in 2009, as well as absorption in Q1 of 2009; what was absorption in 2004? On that basis, how long would it take to absorb all the currently vacant space?
- Other than professional concerns, does Sanchez have any other incentive to sign a lease quickly?
- The market is clearly poor; what terms do you suggest she should offer to NTC, Meinecke, and Riggs? I am asking for your suggested lease rate/sq.ft, a period of the lease, TI allowance and Free-rent allowance; explain your reasoning in each case
- Before presenting to these prospective tenants, what steps can Sanchez take to better understand the needs of these three clients, and the advantages she wants to “sell”?
Case study questions answered in the second solution:
- How would you assess the current situation at Busse Place? What leasing strategy should Sanchez propose to Fairchild?
- What lease rates and terms should Sanchez offer to the prospective tenants: Northwest Trust Company, Meineke and Bock, and Riggs Executive Search Group? How should she handle the presentations and negotiations?
- What are the financial implications of your lease proposals? Please fill out exhibit 7. Also use exhibit 7 to identify occupancy, rent, and expense scenarios that would enable the building to become profitable by 2012. Are these scenarios realistic given the market?
- Should the equity investors fund the deficit, attempt to restructure the loan, or default? If they fund the deficit, how much additional equity is required? If they restructure the CMBS loan, what terms should they propose?
- What are the pros and cons of using a CMBS loan versus a portfolio loan to finance the acquisition?
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Case answers for Busse Place
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Question 1: When a company, like Busse Place, seeks to lease space, what are the key considerations involved?
When a company seeks to lease an office space, a lot of thoughts go into the process of finding that place. The company considers vital factors like the rental rates in the area they are looking for. Thus, searching for a more affordable location or only to have the numbers for them to be able to negotiate better deals. They also look for a site which involved everything surrounding the space like its proximity from the business center or to any significant accommodations like airports, train stations. And also, if it is accessible to high ways and if the center is located somewhere easy to access and attractive to other businesses.
Amenities also play an essential role in choosing the location. If the building offers more amenities, that will attract more potential buyers. Moreover, in office buildings, parking plays a critical role. That would be another key factor since the company looking to lease would have employees coming to work in their cars. Additionally, customers also would look for a place to park.
And finally, another factor that sometimes may play a role in such decisions would be the design of the building and how well it is made to fit offices efficiently and to have a good repartition of cubicles and workspace. And the better looking the building, the more it is attractive to the customer.
1500 Higgins Road and Two Schaumburg Place are the two buildings directly competing with Busse Place. How does Busse compare to these?
Busse Place had two significant competitors when it came to office buildings and these competitors where 1500 Higgins Road and Two Schaumburg Place.
1500 Higgins Road was a new building. It is a two-year-old, 240,000-square-foot, 4-story office building in Schaumburg. The building was located at the corner of Higgins and Martingale Roads. The building has a crescent floor plan, an interior atrium and parking space that would fit 850 cars. From its 240,000-square-foot, 180,000 was rentable space.
The building was considered by many brokers to be the prime location in Schaumburg. It was across the street from the regional Schaumburg Square Mall that occupied over 200 shops. And to add to this, even though it was a new building, the owner was very aggressive in matching his asking rent to the current market condition. However, this didn’t help since the building had an occupancy of only 29%.
The other competition was Two Schaumburg Place. It was a 10-year-old, 66,000-square-foot, six-story office building that was located on the corner of Mall Drive and Interstate 290. From this 66,000-square-foot, 52,800 were rentable space, and it has parking for 350 cars. Even though the building seemed to have a good location, the fact that Mall Drive was divided and elevated at this point made it difficult to access the building. Thus, tenants would have to take a long detour to be able to access it.
Even with all this, the building was 62% occupied, and it was owned and operated by Chandler Realty Trust, which was publicly traded. This meant they were excluded from paying corporate income tax and had in counterpart to pay dividends to their shareholder by distributing at least 90% of their taxable income. However, with the slumping economy, the Chandler Realty Trust was pressured to provide these dividends and were willing to reduce rents to lease the vacant space at almost any price, which made it easy for new tenants to negotiate outstanding deals. But even with this advantage for new tenants, the project was plagued by a poor reputation since they had very poor maintenance and difficult management.
We can see that 1500 Higgins Road has a competitive advantage with its location and Two Schaumburg Place with its low prices; however, they did not compare to Busse Place.
Busse Place was developed in the mid-1990s on a 25-acre site next to Northwest Tollway. The building was a bit old. However, it was part of a broader “business community.” The office building consisted of six-stories with a gross area of 95,372-square-foot, of which 82,020 were rentable areas.
In addition to this building, there was a 202-room hotel, 3 retails building of 64,000 square feet, a fitness club, two restaurants, and parking space for up to 500 cars (which were offered with no extra charge since this was the custom in the area). This meant that new tenants would be able to enjoy all these amenities and facilities. The Busse Place complex was…