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  • Published on: 14th September 2019
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Doral Costa Brief

I. Case Summary


Celia Cabrera, in 2000, is an Acquisitions Partner working for Titan Affiliates. Founded in 1983, Titan Affiliates is a real estate institutional advisory firm that managed approximately $6.0 Billion in institutional capital for its investors such as Eastman Kodak (commonly known as Kodak, as in photography) and Harvard University. Their headquarters based in Boston, Titan has been hired to advise QRS, a public pension fund consisting of nearly 392,000 members and beneficiaries, on whether or not to enter into business with Trammell Crow Company to develop a 277,803 square foot Class A office park.

The site of the proposed development involved two types of zoning classifications: 1) 16.72 acres were to be classified as Office Park District (OPD) and 2) 1.15 acres were zoned as Limited Business (BU-1), or “retail.” The zoning would allow for up to 300,000 gross rentable square feet, 45-60,000 of which would be retail space. Celia has spent the past two days touring the 17.87-acre site of the proposed Doral Costa Office Park location to decide whether or not QRS should invest in the development. However, there is a variety of factors that she must first consider prior to making any concrete decisions.

The Market

The market for offices in Southern Florida can be divided into three sectors:

1) Miami/Dade County

2) the Airport West Submarket

3) “Competitive Set,” an exclusive set of Class A (+/-) office buildings within the Airport West Submarket.

The main reason of rating the building as a Class A – is due to the building being a “pre-fab” design.

The first sector, as stated in Trammell Crow's market research, is the Miami/Dade County market, which held nearly 30 million square feet. This sector had be undergoing declining vacancy rates and rising rental rates during the mid- to late 1990's.

The second sector, the Airport West Submarket, encapsulated the most prominent sector of the office market in Southern Florida and contained roughly 7 million square feet of space. Moreover, the market had maintained steady absorption and vacancy rates while rental rates remained volatile.

The third sector, known as the “Competitive Set” was a submarket of the Airport West business sector. Trammell Crow paid extra attention to this area consisting of close to 1.8 million square feet of space because it represented the highest quality product. They supported their decision due to the fact that the vacancy rates in the sector had been more volatile the past five years in addition to steadily increasing rental rates.

The Location

The location of the office park was chosen by Trammell Crow for a few different reasons. Trammell Crow's marketing materials had indicated that Florida had become one of the fastest growing states within the past two decades. In addition, they forecasted that by the year 2010, Florida's population would increase by 27% to 18.7 million. This increase in population was driven by continuous growth in the manufacturing sector occurring within the surround area.

Trammell Crow also pointed out the geographical importance of the location. Miami is conveniently located between the US border and neighboring Latin American countries. Trammell Crow's research indicated that Miami's most prominent trading partners were those neighboring countries such as Brazil, Colombia, Argentina, et al. The Doral Costa Office Park was found in between the Palmetto and the Florida turnpike, which are two major north-south expressways. It is important to note that during the time the Palmetto was considered the main causeway for the Class A office market in the Airport west submarket and the Florida turnpike was primarily used by commuters going to and from work from the Southwest Broward County, which was one of Florida's fastest growing residential communities.  

The proposed office site was surrounded by residential golf course neighborhoods, including the prominent Doral Country Club, Golf, & Spa Resort. Furthermore, office and retail complexes, along with the Miami International Airport flooded the three miles east of the proposed Doral Costa Site and most of the land west of the interchange was either Everglades or other waterways, making the area one of the last parcels of land left for development.  

That being said, Trammell Crow concluded that the continued diversification of Florida's economic base, the projected population growth, and the internationalization of Miami all offered strong evidence of a prosperous environment needed for the Class A Office Park.

II. Key Issue and Questions the Case Raises

1. Enough demand for grade A commercial office space in the area to have strong expectation that the building could meet a full occupancy?

2. Effects of going public?

3. Did Trammell Crow have any reasons to stay committed to the project if the project went sour?

4. Is the project's location in a place that will allow for a development of this size?

5. How would a possible slowdown in the economy affect the future of the project?

III. Potential Resolutions to These Questions & Issues

1. Enough demand for grade A commercial office space in the area to have strong expectation that the building could meet a full occupancy?

After reviewing the Competitive Set in “Table A” the average vacancy for these grade A office buildings was around 4-5%, which generally is acceptable. Also, local brokers indicated there is also a demand for space of about 785,000 sqft from current tenants such as; HP, American Airlines, First Union, Sun Glass Hut, Air Jamaica, Carnival Cruise Line, and Burger King. So yes, there is enough demand that would provide the appropriate level of vacancy.  

2. Effects of going public for Trammel Crow?

Trammell Crow Company started out as a privately held real estate corporation, owned and operated by partners across the country. As the company went public in 1997, their goals became more focused on maximizing partner wealth, which in turn would maximizing shareholder wealth in the long-term. This became a problem because shareholders are typically more short-term oriented. Especially for a company that has NOT been public, so people are really watching the ups and downs on the stock price. The public opening also affected management's incentive structure, which directly affected quality. In November 1997, Trammell Crow went public at a share price of $22. As of December 31, 1999, shares were selling at an all-time low of $11.63. Rapid growth and bad decision making on Trammell Crow's part caused their company to suffer up until CBRE bought them in 2006.  

3. Did Trammell Crow have any reasons to stay committed to the project if the project went sour?

Trammell Crow did not have any money in the deal as a result, they could leave the project if things went sour with less monetary losses which is a big concern for QRS.

4. Is the project's location in a place that will allow for a development of this size?

Local discussions with brokers indicated that there were tenants currently looking for approximately 785,000 square feet of office space. Assuming only half of the potential tenants mentioned in the article were likely to sign a lease in the next 12 monthly, that leaves the project with a pool of 392,500 sqft of desired space. This project provides 277,803 sqft of space and will be met with a greater demand than supply. On the other hand, Trammell Crow had been expanding the size of its development operations in terms of dollar amounts. During 1999, Crow broke ground on development projects valued at 1.8 billion, reflecting a 38% increase over 1998 development starts of $1.3 billion. So, we see that while growing pains brought down share prices, Trammell at this time still hard at working developing real estate.

5. How would a possible slowdown in the economy affect the future of the project?

A slowdown in the economy could be destructive to a project like this however based on market research there was steady absorption leading all the way up into the late 1990's, with a strong demand for surrounding areas of Miami/Dade county and Airport West. The research showed that Miami/Dade county had been experiencing declining vacancy rates and climbing rental rates up to the start of the project. Over in the prestigious Airport West submarket containing over seven million square feet of office space, absorption rates were hovering at 10% percent and rental rates had been volatile. But overall the conditions of this submarket were not enough to cause alarm. Finally, the “Competitive Set” located within the Airport West submarket has data to suggest that vacancy rates were low and that there was a high demand for grade A office space.

I don't think this project is overly ambitious given the slowing state of the economy.

IV. Deal Structure & Feasibility

The Product

Trammell Crow planned to construct the Doral Costa Office Park in two phases. Phase one included the following; a 128,169-square foot, 4-story building and an 18,859-square foot, 3-story building on an out-parcel. Phase 2 consisted of another 128,169-square foot, 4-story building. The construction of Phase 1 would be instantly and since they are using tilt up construction they would be ready for occupancy in about 12 months. Phase 2 would begin upon completion of Phase 1.

Both of the large buildings featured a “split-core” design unique to the Miami market. This designed allowed one tenant to occupy a 31,000 square foot floor or many traditional sized tenants to lease 2,500 - 5,000 square foot spaces. Trammell Crow's market research indicated that larger tenants were now in the market seeking space. The benefit of the split-core design was that the two main buildings could accommodate a large, tenant in a variety of ways, each of which would give the tenant distinct, contiguous space. Trammell Crow felt that allowing a tenant to either occupy one half of the building or an entire floor would give the building itself a distinct competitive advantage. If a single tenant chose to lease one half of the building it could have its own exterior entrance and signage and control its own elevator.

Since the 1.15-acre out-parcel was zoned for retail use, additional options for development were available. Potential retailers included restaurants, copy centers, and banks. The proposed lease rate for the space was $20 to $25 s/f triple net. Two banks approached them hoping to consolidate factoring operations and retail bank branches in the same building. Generally, bank branch space with drive thru lanes went for about $45 s/f. Net, when adding additional floors for office use at market rental rates gave them an expected rate of $25 s/f net, a higher yield than the initial $16.50 s/f net rental rates that they had projected in the main office buildings.

Lease-Up and Financial Projections:

Trammell Crow received a bid from Itasca Construction Associates, Inc., a company that is very familiar with constructing 4-story buildings using the tilt-up method. Trammell Crow estimated the “soft” costs and other expenses and arrived at a total development cost of $39,747,000 or $143 s/f.


Trammell Crow made the following key assumptions in its proforma and in its 10-year cash flow projection:

• Initial $16.50 s/f triple net rental for the office buildings and $7.50 s/f of expenses.

• 3% annual increase in rents and expenses after stabilized occupancy

• Pre-leasing of 18,859-square foot bank outparcel at a $25 s/f. net rental rate, pre-leasing of 50% of the larger building upon completion of construction and 80% lease-up of the larger buildings at the end of the first year after completion. Phase 2 would follow a similar pattern.

• All interest costs during the construction period were paid for out of the development budget, and not the operating budget, until stabilized occupancy was achieved.

• No tenant improvements or leasing commissions beyond what was budgeted in the development budget

Pryce Elam had termed it “submarining the A market” or “getting right underneath the Class A market and offering a low-cost, high-efficiency alternative to some of the higher end Class A space being delivered.” This was made possible using the “tilt-up” method which lowered the construction costs by 20%.

The Deal:

Trammell Crow suggested that QRS act as a sole owner and put up 40% of the cost in equity. Titan preferred to not structure joint venture agreements due to previous legal problems with minor partnerships. Banks require that the equity be invested in the project before they funded any debt. With that being said, QRS would expect that their equity would be invested at the beginning of both phase 1 and 2. The other 60% would be in debt with a lender who was willing to provide the construction loan at an 8% interest-only rate. Amortization of the principal would not be required. When the construction is completed, the construction loan would be turned into a five-year permanent loan with one five-year renewal on the same terms, loan is pre-payable at any time without penalty, also known as a “take-out” loan.  

The payout would be as followed:

• After the initial capital put forth by QRS is received and a 15% IRR is achieved, a 25%/75% split bonus incentive would be applied with Trammell Crow receiving 25% of the proceeds and QRS would receive a 75% bonus incentive.

• Once QRS achieves a 25% IRR, Trammell Crow's share would increase to 25% - 33% in residual proceeds.

This is also known as a “waterfall payout”.

V. Recommendations

Our recommendation would be that QRS make the investment and build the Doral Costa office park. An abundance of land to build office parks on doesn't' exist in Florida, so take advantage of the situation. The Doral Costa case is dealing with the Miami submarket, which is unique.  This uniqueness is due to it being subject to strict land constraints with only a fifteen-mile distance between the Atlantic Ocean on the East, while towards the west the Everglades National Park. The Everglades are protected by the National Park Service and is home to 1.5 million gross acres of salt and freshwater areas. These areas are often inhabited by a substantial population of crocodiles and alligators. As well as open prairies known for their rich bird life. In summation, Trammell Crow Company has their hands on a piece of land that will hold its value. If QRS chooses to do this deal,  then we would say there is a good chance they will see a healthy return on their investment. Considering Trammell Crow's performance has been steadily declining, which can also be seen by their stock prices over the last year. We would highly encourage QRS to do their due diligence in signing on with Trammell Crow. We recommend that in order to proceed, QRS makes Trammell put money into this project, putting skin in the game really shows other investors that everyone believes in this project and is willing to back up their analyses with personal equity. Without that, it is very obvious that Trammell carries less risk, which would be a very bad situation if the whole project goes south.

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