STEEL STREET CASE MEMORANDUM Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

STEEL STREET CASE MEMORANDUM Case Study Solution

Evaluate River Triangle's business strategy. Should the Cousins' have invested in Seventeen Steel Street from the beginning? Were the risks worth the returns?

Evaluation of River Triangle’s Business Strategy

The River Triangle Associates had specialized in purchasing the strip malls and the apartment buildings below their replacement costs, re position them and then the cousins tend to sell them for a strong return. The average returns generated by the investors were around 14% but the rents were 30% below than the rents on the new construction apartments. Daniel was responsible for managing the investor and the financial relationships and Vincent was responsible for renovating the purchased properties and then maintaining them.

The business strategy of River Triangle was based on a number of benchmarks and the partners invested only in those projects, which met those benchmarks or were close to it. This showed that they had developed their required returns and the level of the risk they wanted to take. The business strategy comprised of four strong benchmarks. The cousins invested in those properties, which guaranteed strong returns.

The second condition was that a renovation should be completed within 6 to 9 months of the acquisition of the property. This set time frame avoided the high interest charges and the carrying costs which the cousins otherwise had to pay. Third, they would invest in those properties, which would bypass the regulations of the City Hall but through renovations as compared to new construction. Finally, they wanted to take limited business risk by targeting the middle-income market.

Both the partners shared equally between the financial returns of their investments. The company had worked based on the above business strategy and had formed 10 real estate partnerships by 2008. The Florence Courts project is exemplifies the business strategy of River Triangle Associates. Therefore, the business strategy of River Triangle is strong which has high potential for returns and minimum risk.

Risks & Returns of Investment in Seventeen Steel Street

In the initial analysis, the Steel Street has shown that the Seventeen Steel Street property was worth investment because it fitted within the benchmarks of the business strategy of River Triangle. There were a number of risks associated with this investment such as this was the first renovation of River Triangle Associates for the office space because they are experience only in the residential renovations. Apart from this, the second risk was that they would have to rent some of their space while the renovation and construction was going on. The tenants might not like this and this had actually happened.

However, despite these risks, the subject property offered numerous benefits, which exceeded the costs and risks of investment. The renovation of the Seventeen Steel Street property would only cost $ 69 per sq. Ft. as compared to $150 per sq. ft for the new constructions. Secondly, rent could be accrued during the renovation phase and the rents were estimated to increase after the renovations because the building was located in a desirable location.

The building also provided a number of other advantages such as it had the potential to attract new large employers and had high proximity to the new popular retail complex. There was also limited space available in Pitts burg for development and finally market wise, Pitts burg was a favorable market because of its low unemployment, high growth prospects, insulation from real estate downturn and a diversified economic base. Finally, the initial acquisition analysis yielded a return of 20.60% according to the cousins and a return of 27% according to the estimates of Harvard Fund. Therefore, the cousins have made the right decision to invest in this property in the beginning because the risks were worth the returns.

Question 2

Should River Triangle retain its current contractors, assign Donahue the project in a no-bid situation, or rebid the construction contract? What type of construction contract should they (or should they have) negotiated?

As the market had started to soften, the tenants had become reluctant to lease new space and the rents in the area had started to decline. The economic climate was worsening. No new tenants had signed for the vacant space. Apart from this, providing free rents to the tenants would also not be good for the financial returns and losses would be generated. The construction costs had increased and they are much higher now than anticipated.

STEEL STREET CASE MEMORANDUM Harvard Case Solution & Analysis

The contractors were accusing the architects for providing the expensive designs and on the other hand, the architects were accusing the contractors they were incompetent. The architect and the contractor had never worked before and there was a large disconnect between both of them. The work style of the contractor and the architect’s vision were both different. Therefore, the cousins should not retain its current contractors. They should assign the contract to Jack Donahue in a no bid situation as Ohio Contracting is a friend of Delconte and they would take over the job as a favor. However, hiring a new contractor would result in additional costs. Also, rebidding would take more time and again the desired contractor might not be hired. Finally, the new contractor should be hired on a lump-sum contract basis because the size of the contingency budget is low and they can avoid any risks in case of the cost overruns............

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