Stevens Property Company (B)1 Cincinnati, October 2014, 7:00 a.m. Derek McDonald looked at his notes – three issues were on his mind and he wanted clarity before picking up his boss Rich Stevens later that morning at the airport. See Exhibit I. First, SPC was close to finalizing 2 sponsored funds; the 1st would target value-add properties; the local SPC office would receive ½ of the promote and all of the project level fees. The 2nd fund would target core investments; the local SPC office would receive only property fees, including a modest acquisition fee, and no promote. The funds would have an exclusive on SPC deals “within a box”. Second, Jim was critical to the office’s operations and future success. No partner had been named at SPC since the downturn. Derek was hopeful that Rich would agree to Jim’s promotion sometime in late 2015. Third, Derek had received an offer to run real estate investments from a local ultra-high net worth family. Double the base pay and a small profits interest in deals were very attractive. Staying in Cincinnati long term was a big family plus and he could work more normal hours. It was all very alluring despite his loyalty to SPC, Rich, and his employees in Cincinnati. With some mentoring and help, Jim could step up to take his place although Chicago was Jim’s longer-term location preference. Chicago, Same Day, 8:00 a.m. Rich looked forward to his day trip to Cincinnati. Derek was one of his favorites, and Rich had a list of issues to cover with him: firm strategy, capital, and succession planning. They had finalized Derek’s 2015 Business Plan during his last visit, and the future looked great. A nice 70th birthday celebration with extended family that evening awaited his return. Rich believed the firm could expand both by geography and by product line. SPC was opening its 7th office in Memphis to execute a large build-to-suit transaction. In addition to the firm’s office and industrial focus, he was talking to his college roommate, a seasoned apartment developer, about starting a multi-family business, using the SPC platform. What was the best way to integrate this product line given the lack of internal expertise and SPC’s core value of having entrepreneurial leaders running geographic regions or cities? What reporting structure and compensation plan would promote teamwork, alignment and accountability? Rich wanted Derek’s reaction to the 2 new funds. He thought his partners would be excited to have a stable source of capital and a ‘friendly’ long-term owner to provide stable ongoing property fees. Despite deal economics that were a little light, Rich believed that having the ability to ‘pay cash’ on the spot and not raising capital deal-by-deal more than offset the reduced economics. Although he felt great health-wise, Rich knew that succession planning was a priority. Neither of the other 2 senior partners in the firm wanted to run SPC. There were 3 internal CEO candidates, including Derek, but none were ready to take the helm. Rich wanted to get a sense as to Derek’s long term career aspirations. Cincinnati, Same Day, 9:00 a.m. The knock on his door interrupted Derek’s thoughts. Dani, a financial analyst, looked nervous. “What’s up?” smiled Derek, putting down his pen and notes. “Well, I’m running the numbers for the apartment deal in Kentucky, Carson Park. It’s a really tight deal and I frankly don’t think it will work.” Dani shifted her weight and looked down at her notes. “I put in the most aggressive terminal cap rate conceivable and we are pushing rents hard. But I can’t get the IRR to the hurdle rate required by that PE fund Jim is using to finance the deal. Jim thinks it’s a good deal and a great way to This case was written by Adjunct Professor Asuka Nakahara as the basis for class discussion rather than to illustrate effective or ineffective handling of a business situation. Some names, financial information, and other facts have been disguised or altered to preserve confidentiality or for educational purposes. Copyright 2000, Revised 2005 & 2011, & 2014 (Fall Meeting version) by Asuka Nakahara. All rights reserved. 1 break in with this new capital source. Plus it would check the apartment box for us since we have no real experience there. He said to cut the exit cap by another 25 basis points - after all, cap rates have been compressing – and increase the rental growth assumptions for the later years in our pro forma, and that should do it. He says the fund is pressuring him as their capital commitment expires in 90 days and they really need to get the money out. Doing this deal with them would get us big points, he thinks.” Derek furrowed his brow and leaned back in his chair. “I need that run,” he thought. “He’s the boss and I’ll do whatever but I’m just not sure those assumption changes are realistic. I told Jim I wanted to mention this to you and he was fine with that. What do you want me to do?” Exhibit I Discussion Questions: 1. What is your reaction to Rich’s 3 key leadership issues? Which is the biggest challenge – strategy, capital or succession planning? 2. Do you like the key elements of Rich’s overall corporate strategy – to be an evergreen, entrepreneurial firm, in both the agency and principal businesses, and growing geographically and adding new product lines like multi-family and adding ‘adjacent’ strategies like the fund business? 3. Should Derek accept the job offer? Why? 4. How should Rich respond to Derek’s job offer? 5. What should Derek tell Dani? 2