Case Study | Highest and Best Use

Information and Analysis Define Opportunity
The Trust’s Questions
A major Boston law firm had a trust client with a significant opportunity; the Trust had a great location with an underutilized parcel across the road from a Medical Area. The recent redevelopment of an adjacent parcel for national and regional retail tenants made it clear the market was improving, but what was the best course of action for the Trust, given their unique circumstances?

Understanding the Client’s Needs
When the law firm brought in Horgan & Associates, we began by meeting with the members of the Trust and their attorney to understand their relationship and the Trust’s internal issues and objectives. We reviewed the leases to understand the present operation of the property. We inspected the property, reviewed plans and financial information, and examined the City’s records for documentation and outstanding issues. Based on our discussions and our property review, we drafted a scope of work carefully suited to synthesize the needs of the Trust with the dictates of sound asset management. We met with the Trust and their attorney to review the draft scope and adjusted the emphasis with their input.

A Sound Basis for Planning
Following our preliminary inspection of the physical asset, we brought in contractors and electricians to look at structural and mechanical systems questions. That more detailed review identified a number of issues concerning the status quo that would influence our deliberations. Next we undertook a market analysis. We interviewed the major leasing players in the market to determine activity and demand for space. To comprehend trends in the marketplace, we began to track deals, prospects, changes in supply and demand, and new construction in our market and competing markets. We engaged a retail brokerage house thoroughly conversant with the market and the significant prospects to provide a market study for potential redevelopment. Simultaneously, we used our network to initiate discussions with representatives of major institutions and significant tenants in the area to understand their plans. We met frequently with City of Boston officials to gauge the climate for economic development and regulatory process. We attended neighborhood forums and met with local association representatives to establish a relationship and understanding of their processes.

Charting the Course
We identified and analyzed the physical, programmatic, regulatory and budgetary issues of repositioning the property. With this analysis and an understanding of this dynamic market, we began to explore alternatives. We prepared seven pro formas including some reflecting the assembly of contiguous parcels and a variety of uses. In them we proposed parameters for face rents, term, tenant improvement allowance, lease structure, etc. based on market information. We provided a detailed business plan with budgets including the cost for leasing and required improvements based on structural and mechanical systems specific to the property. Throughout, we were in constant communication with the Trust and the law firm to share our findings and to confirm the course we were taking. Based on information we generated and our presentation of the pro formas to the law firm and the Trust, we prepared discounted cash flows (DCFs) on four of the potential development scenarios. These DCFs sequenced the repositioning of the property and the ongoing operation and upkeep of the property through various redevelopment periods. They illustrated when and how much capital would be needed to accomplish each scenario. They also provided an equivalent basis for comparison of the returns on each investment scenario.
Counsel and Clarity
The advice of their counsel and the information presented by Horgan & Associates clarified the thinking of the Trust. As a result, the Trust is pursuing a redevelopment of its property building on relationships Horgan & Associates formed and utilizing our network for sources of brokerage, construction, and development services. In addition to resolving physical issues with potential code and liability exposure, the Trust will have a property that is on a sound physical footing for years to come. The nature of the new leases to be executed will relieve the Trust of most maintenance responsibilities except in a supervisory capacity. Net Operating Income will more than double once the new development is fully occupied. #

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