Stevens Property Company (A)1
Cincinnati, September 2014. Derek McDonald, Cincinnati City Partner for Stevens Property Company (“SPC”)
took one more look at his business plan presentation. He had opened the office in early 2013, armed with a
financed, entitled office land site, and felt great about what had been achieved but worried if it was enough. On
the other hand, everyone was working very long hours and he didn’t want to burn out his team. The firm CEO
and Founder Rich Stevens would be arriving later that day to review his strategy and plan. See Exhibit I: SPC
Overview, and, Exhibit II: Cincinnati Division 2015 Business Plan.
Derek was an SPC rising star, having held several roles in leasing, finance, and development, after graduating
with his Wharton MBA in 2000. In addition to his deal skills, he had exhibited strong leadership talent as well.
The firm, modeled after Trammell Crow and other entrepreneurial developers, gave its local operating partners
great autonomy, access to capital via the corporate and founders’ balance sheets, low fixed compensation, but
‘above-market’ upside for deal profits and service income.
SPC’s 5 city divisions were expected to build 3 lines of business: development/construction, property
management, and brokerage (project leasing, tenant representation, investment sales). The Chicago corporate
office provided shared services like HR, IT, capital markets, insurance, and purchasing. The divisions paid a
proportionate share of corporate overhead. Each division had its P&L; local SPC partners received a profits
interest from deals, typically paid upon sale. In addition, each deal paid market development and CM fees to
the local office, making that business line extremely lucrative. See Exhibit III: Service Line Summary.
Rich believed that SPC should be an ‘evergreen’ company, with entity value, based on recurring fee revenues,
augmented during upcycles with principal profits on capital. He felt that the inherent conflicts between a
service business and a principal business could be managed. The industry was too cyclical and volatile for a
‘development only’ model in his view.
Corporate Woods, the multi-phase suburban office site, was held in a JV with the land owner; all land carry was
accrued. By contract, a large pension fund would acquire each completed office building at a fixed yield at
C.O., providing roughly a 25% profit margin to cost upon lease up. This arrangement allowed SPC to obtain
nonrecourse construction financing, excepting a completion guarantee provided by the senior partners. The first
building, scheduled to open next month, was already 50% pre-leased, with activity for the rest of the space.
Corporate Woods II was slated to start construction in March, also totally spec.
This deal and financing structure provided the basic economics for the start-up office. Rich and his CFO agreed
to fund $750,000 of working capital to relocate Derek and hang a new shingle. So far, it looked like the
investment would pay off, and this year would be the last year requiring partner capital to fund overhead. See
Exhibit IV: Senior Partner Loan – Repayment & Return Projections.
Derek tied up a 2nd office building site in a different submarket and was under construction on a Class A spec
tower. The large pension fund also agreed to finance this deal nonrecourse on the same terms. A 3rd
development deal, a large multi-phase industrial site was almost under agreement, and the pension fund had
given him a preliminary green light on financing as well. Finally, Derek had begun to pursue a 3rd office site on
the Kentucky side of the river, hoping the pension fund’s appetite would stay robust.
Derek hired Jim Sarazen, a newly minted Wharton MBA, in the summer of 2012, as an Assistant Project
Manager, which was code for doing anything that Derek didn’t have time to do. Officially, Jim was to assist
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.
with development, leasing, and new business pursuit. Before business school, Jim had 5 years prior experience
with a major Chicago developer. Derek viewed Jim as a potential successor and was anxious to get him up the
learning curve. He now had 8 employees.
Derek’s business plan summary showed revenues quintupling since the office’s first year to $2.4 million in
2015, with profits reaching $760,000, a healthy 32% pre-tax, pre-profit sharing margin, the first year to show a
profit. Development and construction fees, including the equity-like incentive fee, comprised 2/3rds of
revenues and 121% of the projected profits. What the income statement didn’t show were the potential incentive
development fees in excess of $5 million from the development pipeline. Although Derek didn’t like the
division’s reliance on development, but there was no other way to build the business quickly. His deals had
very little risk due to the financing structure but there was ‘overhead’ risk. The office was losing money in
property management and leasing due to lack of scale. The modest tenant rep business was breaking even. He
didn’t have much time to build the service business lines and was stretched just handling the deals on the table.
Exhibit I: SPC Overview
Exhibit II: 2015 Business Plan – see next 2 pages
Founded:
Headquarters:
Partners:
Offices:
Exhibit III: Service Line
Summary
Assets*:
1985
Chicago
12
Chicago
Cleveland
Minneapolis
St. Louis
Indianapolis
Cincinnati
9 million SF – Office
7 million SF – Industrial
Capital
Required?
Profit
Margin
Minimal
High
Significant*
Very High
Property Management
Minimal
Low**
Brokerage
Minimal
Medium
Development/Construction
Fee Development
Principal Development
* Can include personal guarantees, particularly for construction
** Can be Medium for larger office projects where onsite costs are reimbursed
* Owned or managed
Exhibit IV: Senior Partner Loan – Repayment & Return Projections
Actual
Senior Partner Investment
Service Business Profit
Deal Profits
Cash Flow to Partners
NPV @ 20%
IRR
Projected
2013
2014*
2015
2016
2017
2018
2019
($850,000)
($747,000)
($600,000)
($418,000)
($850,000)
($600,000)
($100,000)
($92,000)
$825,000
$312,500
$0
$1,500,000
$750,000
$0
$1,500,000
$750,000
$0
$3,000,000
$1,500,000
$0
$2,000,000
$1,000,000
$500,372
32%
Notes:
1. Working capital plus pursuit expenses
2. 20% cost of start up capital
3. Conservatively assume service business breaks even each year from 2016 forward
4. Actual results are through August 31, 2014; Last 4 months of 2014 are forecast
Note: senior partner capital priced at 20%, nonrecourse to Derek.
Discussion Questions:
1. Was Cincinnati a good investment for Rich and his CFO? Why?
2. What do you think of Derek’s strategy and business plan?
3. What advice should Rich give to Derek?