Steel Street Case Study
Ruthie Americus & Anil Cheerla
Case Facts
 Vincent Colmo (Ex HBS) & cousin Daniel Delconte – partnered to form
River Triangle Associates, a profitable RE investment firm specializing
in buying apartment bldgs & strip malls below replacement costs,
rehab/re-position them and sell them for strong returns.
 Average returns to investors – 14%
 Rents 30% below new construction
 Vincent was responsible for buying, renovating and maintaining
properties while Daniel managed finances and investor relationships
 Project selection based on:

Returns, Renovations within 6-9 months to avoid carrying costs,
Bypass city regulations & Target middle-income market
 With commercial RE unwinding, RTA focused on office properties in
Pittsburgh’s Southside, adjacent to CBD – a hip neighborhood known
for vibrant night life, shopping, cafes and business incubation.
Overview of the Space
 6 story; 1920 building located in Southside
 5 floors of office space; 1 floor (ground floor) of retail
space
 49,000 gross sq. ft.
 Estimated renovation costs are $69/sq. ft.
 Hope to increase rents from $8/sq. ft. to $15/sq. ft.
Pros/Cons
Pros
Cons
• Steel Street renovation is only
• This is River Triangle
expected to costs $69/sq. ft. as
opposed to $150/sq. ft. for new
construction
• Building is in desirable
location and rents will increase
after renovations
• Plan to accrue rent during
renovation phase
Associates first office space
renovation (they are only
experienced at residential
renovations)
• They will need to continue
renting some of the space while
completing construction
(which tenants might not like)
Strategic Advantages of Steel Street
 Located in Southside, a hip neighborhood with many





startups
Limited space availability for new development
Potential to attract large new employers – business
office space combined with retail
Proximity to a new popular retail complex
Replacement cost $69/sq.ft vs. $150 for new office
construction
Market wise – Pittsburgh had a diversified economic
base, low unemployment, no overcapacity, insulation
from RE downturn & growth prospects
Renovation Schedule & Funding
Sources
What went wrong?
Causes
First, the cousins
chose an architect
that had high fees.
Also she thought
their original
budget was too
small to work with
The architect and the
contractors have never worked
together before and there is
some large disconnect between
the architect’s vision for the
building and the contractor’s
work style
Effects
The architect was
getting behind
schedule and her
designs were being
repeated reworked
and costing much
more than the
original estimates
The leasing of the
space was not
going well because
prospective
tenants wanted to
see the finished
space before
signing a lease
The city building inspector
walked through the site and
was not pleased with the
safety of the conditions that
the contractor was working
within
What is next…
After owning the property for almost 1 and months of
construction, in September of 2009 what is next…
1- Find a new construction team
2- Recruit new investors to cover budget shortfalls
3- Ask hedge fund to convert debt into equity
4- Contribute from their personal finances
5- Give incentives to leasing agents and tenants
6- Lose some green elements to the building
Option 1
Option 1: Find a new construction team
Not an option since hiring a new contractor would
result in:
 Additional costs
 Construction delay
 Incoherence with existing work already done
 Threat of losing at least ½ year job with additional
modifications to project scope and schedule
Also, being a lump sum contract, Harper & Polowski agreed for a fixed price, so it
is in the best interests of RTA to continue working with the existing contractor.
Option 2
 Option 2: Recruit
new investors to cover budget
shortfalls
Ruled out because of the following factors:
 Credit markets were in turmoil
 Liquidity was lacking
 The MBS markets were shrinking
 Sponsors did not have office building experience
 Current project situation is not helping anyway
Option 3
 Option 3: Ask hedge fund to convert debt into
equity
 Hedge funds specialize in short-term trading
strategies, are open-ended vehicles permitting both
periodic subscriptions and redemptions.
 So holding a illiquid asset will go against their
business strategy.
 May even argue that given low yield, low volatile
market conditions, Harvard group may find this
equity return attractive.
Option 4
 Option 4: Contribute from their personal finances
 As per the agreement terms, RTA were to extend
financing to the partnership of up to $200,000 as
an uncollateralized 10% interest bearing loan.
 Personal B/S shows that the cousins can part with
capital for additional overruns, but given the risks
involved, our opinion was that they would not make
any new additional investments.
 Initial equity of $563,885 would result in 1,284,886
after 5 years
Option 5
Option 5: Give incentives to leasing agents and
tenants
To compensate for the leasing agent’s slow movement, the
cousins will provide a $20,000 signing bonus to any brokers
who sign leases with tenants for over 5,000 sq. ft.
This added bonus will only decrease the IRR
from 28% to 26%, and will hopefully drastically improve the
leasing situation. Good option, but may have to reduce their
returns overall. Will work to mitigate vacancy by having large,
clients sign up long-term leases with sound credit
Option 6
Option 6: Lose some green elements to the building
 May not be a wise choice as the bldg may not appeal
to new tenants or even existing lease renewals.
 Cannot justify higher rental rates of $15 psf.
 Will not bring in the energy efficiencies expected
 May not compete with other “green” properties in
the market.
Original Pro Forma
Levered Returns
Initial Outlay
Initial Equity
$
(563,885)
Building Renovations
$
(794,000)
2009
$
71,787
Annual Cash Flow
2010
$
197,256
2011
$
232,108
2012
$
232,108
$
232,108
$
3,175,871
Sales Proceeds - Mortgage Repayment
Total Cash Flows
$
(1,357,885)
$
71,787
Annual ROE
IRR
$
197,256
5.29%
28.16%
2013
$
232,108
14.53%
$
232,108
17.09%
$
3,407,979
17.09%
17.09%
Modified Pro Form with Leasing Bonus
Levered Returns
Initial Outlay
2009
2010
2011
2012
2013
$
Initial Equity
Building
Renovations
(563,885)
$
(794,000)
$
Annual Cash Flow
$
71,787
$
37,256
$
72,108
$
232,108
232,108
$
3,175,8
71
Sales Proceeds - Mortgage Repayment
$
$
Total Cash Flows
$
(1,357,885)
Annual ROE
IRR
$
71,787
5.29%
24.44%
$
37,256
2.74%
$
72,108
232,108
5.31%
17.09%
3,407,9
79
17.09%
Looking back: Issues at Stake
• Issues with re-positioning a property
• Problems with development teams
• Impact of weak credit markets on RE financing
• Cost overruns and poor management
• Volatile markets – impact on rental/vacancy rates
• Importance of risk assessment, planning and
mitigation
• Lack of expertise in RE domain – Office properties
What-if analysis
 To understand the impact on RTA returns, we did
sensitivity analysis on the following:
 If vacancy rates fluctuate –
 If rental rates vary
 If additional leasing commissions of $20,000 are provided
 If costs escalate beyond control
 If existing retail tenant breaks lease and collects $25,000 as
damages
 If one of the Banks/Hedge funds withdraws financing
Vacancy & Rental rates
 Vacancy rates vary
Rental rates vary
LC & Increasing Equity
 Brokers incentivized
Cumulative impact (LC+Eq)
Questions???