There are many different risks and potential issues that can arise from Baupost’s investment into the St. Bart property. The return on the purchase is uncertain, and various legal, environmental, and historical concerns may arise and increase both costs and the time required to develop the land. Nevertheless, the possible income is also significant due to the attractiveness of the project to various parties and the likelihood of economic improvement in the near future. St. Bart’s repeated failed sale attempts also encourage it to consider a lower sale price when combined with its urgent need for money to finance improvement.
As such, the joint venture and the trust can likely reach an arrangement that is satisfactory to both parties. Baupost should try to lower the price as much as possible, and it will probably be able to obtain a figure that will make the investment appealing.
The price of the property can be estimated using the direct capitalization method. The former is uncertain, as the project requires development, and many factors can change over the years. However, it is possible to estimate the figure using averages across the area. According to the case study, the estimated long-term value for comparable sites is between £150 and £300, but the seller’s desperation allows Baupost to consider the lower figure.
As the entire area is 425,000 square feet large, the two items have to be multiplied to produce the total expected net operating income. The resulting number is £63,750,000, but this figure is likely overestimated significantly. A significant portion of the area will have to be reserved for utilities such as roads, lowering the total amount of space available and, consequently, the value.
The figure does not include development costs, which are likely to be much more significant than the price of the land itself. 60% of the area will be taken up by office space, which tends to go at £700 per square foot, and the other 40 will be residential space at £800 per square foot. As such, the overall sales value of the land may be expected to be £314,500,000, though the real figure can differ from the projection significantly. With a projected cap rate of 5.5% to 6%, as is average throughout the area, the net operating income can be assumed to be £17,297,500 to £18,870,000. After subtracting this figure from the acquisition price, it is possible to predict a purchase price of £44,880,000. This figure should be acceptable given the expected income without harming the goodwill of St. Bart’s excessively.
Pricing structure
An appropriate pricing structure can alleviate some of the risks that currently complicate the decision. St. Bart’s current idea of a sale and leaseback agreement is not viable from a buyer’s viewpoint, as the joint venture would have to pay the entire cost upfront but remain unable to utilize the property for the next five years. Helical’s structured transaction idea is more advantageous, as it both divides the payment into smaller, more manageable portions and allows the buyer to begin work immediately. Baupost can use this idea to provide incentives for St. Bart’s employees to leave by tying separate payments to the vacation of specific buildings. With this model, the trust would be interested in leaving each building as soon as possible or whenever its need for funds became severe instead of staying for as long as it is convenient.
There will have to be an initial investment that is not tied to the abandonment of any buildings, which would secure the goodwill of St. Bart’s. The trust can create complications by refusing to abandon buildings and delaying the project, and a starting payment will ensure that it feels partially or entirely committed to the relationship. The move will also provide the organization with the funds it needs to conduct an initial reconstruction and move people out of a building that is no longer necessary. Once the location is vacant, the joint venture can make another payment, allowing the trust to continue the renewal of its facilities. At the same time, the investors will be able to move in and begin working on the new area. The strategy secures a stable partnership and satisfies both parties, avoiding some caveats.
The timing issue
The approaches proposed above alleviate some of the risks identified by Baupost through their design. The timing issue will be partially resolved through St. Bart’s gradual abandonment of the land, as the trust will have a vested interest in constructing its new facilities as soon as possible and moving people out. As such, the joint venture will be able to present its completed facilities to the housing markets sooner, responding to high demand and taking advantage of lower construction costs. To avoid planning issues, the joint venture should submit its application before signing the contract with the trust and wait for the reply.
If the notion of constructing residential housing in the City is rejected, the project will no longer be viable and require significant reconsideration or abandonment. Baupost should consider the possibility in-depth, as demand for housing in the area is uncertain.
The new structure’s approach should reduce the historical and environmental concerns to construction. The land will free up gradually before the three years set by the initial plan, and the joint venture will be able to excavate and investigate it. As such, there will be a period in which any scanning and remediation can happen. The residential demand concerns can be partially resolved by appealing to foreign workers and people who work in high-paying positions nearby. There are numerous positions in the middle of London that are occupied by people who live a significant distance away. With enough marketing, it should be possible for the company to secure sufficient demand to fill the space.
The company’s concerns regarding Helical Bar warrant an investigation into the prospective partner’s prior history and performance. The case study mentions that Baupost has conducted such an inquiry and found the British business’s reputation to be excellent. As such, there should be little concern over the potential dangers of the partnership, as Helical Bar appears to be trustworthy. Concerning demand, the case study mentions that Baupost planned to attract foreign buyers who were interested in settling and working in London.
The location of the land is excellent for offices, and the people who work in the new areas may also be interested in purchasing an apartment nearby. Lastly, the currency concerns will be less relevant to the new financing structure, as they will allow Baupost to hedge its payments in the usual manner. A new cash influx will be required regularly, and the company can provide these smaller sums when necessary without being affected by currency fluctuation as much as it may have been with a three-year delay.