Pilgrim Assurance Building

Pilgrim Assurance Case

Pilgrim Assurance is a case that involves a sealed bid auction. Therefore, the auctioneers will need to sell the building to the highest bidder involved at a minimum bid of $15 million. David Bailey is given the decision to decide on how much to bid for an office building. Furthermore, he needs to make the decision whether to lease it as office space or to convert this office space into condominiums. In this case, I will analyze the goals and objectives of Bailey as well as the other participants. The sealed bid auction indicates that they are willing to take a chance on the market and try to receive high bids. There is no problem with the government participant besides using permits to do renovations. There is no financing constraints, so the lending is not an issue. In my analysis I did a five year discounting cash flow, NPV and IRR of upgrading the office building as well as condo converting.

That way there will be a good analysis of facts that we can base a decision on. The office conversion I feel is a less risky bet for David. On the other hand, the office rental market is weak and the housing market is hot. However, it is important to note that if Bailey would go with the condo, nearly 14,000 condo were in the process of being constructed. Also it looks like prices might be on the downturn. David’s one objective is to buy the building and upgrade it to office rentals by making square footage improvements, renovating bathrooms and reducing costs by using his network of laborers. This will decrease expenses and increase his revenues. His other objective would be to buy the building and convert it all into condominiums. His goal for the first objective would be to fill up the remainder of the 75,000 sf in the building and keep expenses down by using his own laborers and increasing square footage. His goal for the second objective would be to make sure that he can sell 150 condos to cover his costs of purchasing the building and converting the units. If David would want to play on the less risky side, going with the office rental might be a better option. He already would have a tenant for 100,000 SF of space and the additional 75,000 he would find over the next couple of years. On the other hand if Bailey wants to take on more risk in terms of converting the condo’s he would 150 in his inventory and they could become a problem to sell. It is always easier to rent something than sell a large unit. If Bailey were to convert the building into condos it would cost him $31,800,000 to do the conversion. Then if he charged around $575 (lower than building across the street) for the low floors and $625 for the high floors, this total revenue would be 104,375,000, which after condo conversion fees would be $7,2,575,000 minus other expenses. However, we must not that before he can start selling these condos, it would be 2 years from the date where he bought the building. Therefore, he would lose out on Cash flows year 1 and 2 as seen in the excel sheet from renting the building. In the long run, however, if all of these apartments were the sell, he would make much more. Furthermore, he could also rent whatever he wouldn’t be able to sell. The building is at least worth 15,000,000, though the bids will be much higher. The building was in an attractive location in the heart of downtown a few blocks from the financial district.

Pilgrim was willing to lease back the 100,000 SF it occupied for revenue of $2,600,000. In exhibit one; we have an expense break down of expense per sf. In total $11.25 psf in expenses which is 1,125,000 in expenses for the 100,000 sf and 1,968,750 for the total 175,000. The Boston office market has been soft after 2000, after the high tech bust but Bailey feels optimistic to fill 70,000 of the 75,000 sq feet over the next few years. Five year rental rate would be fixed. 5,000 vacancies. In the past few years in Boston, the employment saw a decline, even though nationwide employment rose.

Rental rates have been on the decline since 2001 however the decrease from 2003 to 2004 has been far less than the decline from 2002 to 2003. However, occupied office rental space was steadily increasing. It is important to note that South Station market had no new supply on the market and occupation was steadily growing however the rent was also lower than the other three markets