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The Bullard Houses

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ThiscasewascreatedbyRonKarpandrevisedbyMoxTan,DavidGold,AndrewClarkson,PaulCramer,DouglasStone,andBrucePattonfortheHarvardNegotiationProject.CopiesareavailablefromtheTeachingNegotiationResourceCenter(TNRC),onlineatwww.pon.org,byemail:[email protected],orbytelephoneat800-258-4406.Thiscasemaynotbereproduced,revisedortranslatedinwholeorinpartbyanymeanswithoutthewrittenpermissionoftheTeachingNegotiationResourceCenterCoordinator,ProgramonNegotiationatHarvardLawSchool,501PoundHall,Cambridge,MA02138.Pleasehelptopreservetheusefulnessofthiscasebykeepingitconfidential.Copyright©1983,1985,1986,1988,1991,1995,2002,2006,2016,2018bythePresidentandFellowsofHarvardCollege.Allrightsreserved.(Rev.9/18)


TheBullardHouses TeachingNotesOverviewTheDebriefingHandoutdocumentinthissimulationincludesmuchofthesameinformationcontainedinthisTeachingNote.YoucanchoosetodistributetheDebriefingHandoutduringthedebriefbutpleasedonotdistributetheDebriefingHandoutpriortothenegotiation.BasicPointAnalyzeyourBATNAandyourowninterestscarefully.Agreementisnotnecessarilythegoal.Thegoalisagoodoutcome,whichmeansnoagreementunlessyoucanreachanagreementbetterthanyourBATNA.StructureoftheCaseSeller,DowntownRealty,hasthreeofferstopurchasetheBullardHouses,singlestructureof51connectedbrownstonesonan11.5-acreplotthatabutsthedowntownfinancialdistrict.Ofthethreeexistingoffers,thebestwasmadebyGrouse,Inc.,acompanythatwouldturntheBullardHousesintoamarketplaceofrestaurants,boutiques,andgalleriesalongwithpublicmeetingandeventsspaces.Inthisnegotiation,theseller’srepresentativeismeetingwiththerepresentativeforafourthpotentialbuyer,AbsentiaLimited.Thebuyer(whosecretlyrepresentstheMiltonhotelchain)alsohasanoptiononanalternatesite.Thisnegotiationrequireseachpartytocomparetheirexistingofferstoanyoffermadebytheotherparty.Thisrequiresacalculationofthepresentvalueofeachoftheprioroffers(whattheyareworthincurrentdollars)todeterminetheirBATNAandReservationValue.ForboththeSellerandtheBuyer,theirbestalternativeisbetterthananyofferthattheotherpartyisauthorizedtomake.Accordingly,thebestoutcomeforbothpartiesisnoagreement.

TheBullardHouses:TeachingNotes

Copyright©1983,1985,1986,1988,1991,1995,2002,2006,2016,2018bythePresidentandFellowsofHarvardCollege.Allrightsreserved.(Rev9/18) 2

DefinitionsBATNA:Anegotiator’s“BestAlternativeToaNegotiatedAgreement.”Thisisnotadollarfigure,butacourseofaction:whatthenegotiatorwilldointheeventofnoagreement(walkingawayfromadeal).“IwouldselltoXforYprice,”or,“Iwoulddothejobmyself”areexamplesofalternativesanegotiatormightchooseashisorherBATNA.Anegotiator’sbestalternativetoagreementischosenbyconsideringhowwelldifferentpossiblealternativesmeetthenegotiator’sinterests.Inmonetarycases,thisofteninvolvesevaluatingthepresentvalueofvariousalternatives.Here,theSeller’sBATNAistoselltoGrouse,andtheBuyer’sBATNAistoexercisetheoptionontheWorldPlazasite.ReservationValue:Thevalueofanofferinthenegotiationthatwouldbeminimallyacceptable,becauseyouwouldbeindifferentbetweenacceptingitorgoingtoyourBATNA.SeebelowforananalysisoftheBuyer’sandSeller’sreservationvalues.BottomLine:Referstoyourminimallyacceptableoffer.Logicallythisshouldbethesameasyourreservationvalue,butmanypeopleadoptanarbitrarybottomline(perhapsasaresultofinadequatepreparation).Atothertimes,peoplechooseasingleAbottomline@option,ignoringthepossibilityofotheroptionsthatmightmeetyourreservationvalueinunexpectedways.Areservationvaluecangenerallybecalculatedobjectively,whileabottomlineisgenerallymoresubjective.PresentValue:Thisisthemonetaryvalueofanalternativeoroptionintoday’sdollars.Anofferof$1000tobepaidayearfromnowislessvaluablethan$1000paidtoday,becauseifyouhadthatmoneytodayyoucouldearninterestonitfortheyearandyouwouldhavemorethan$1000attheendoftheyear.Therefore,anofferof$1000tobepaidayearfromnowisspecificallyworthtodaytheamountofmoneyyouwouldhavetoinvesttodaysuchthatwithinterestyouwouldhave$1000ayearfromnow.ComputingthepresentvalueofcompetingoffersallowsAapplestoapples@comparisons.DiscountRate:Thereisasecondreasonthatmoneyinhandisworthmorethanthepromiseorchanceofmoneylater:thereisalwayssomeuncertaintyaboutwhetheryouwillactuallybepaidwhenthetimecomes.Theownersofabusinessventuremayaskyoutoinvestandpromisea30%annualreturn,butyoumayfeelthereisa50%chancethattheannualreturnwillbezeroinstead.Thisisyourdiscountrate,andinthiscaseitwouldmaketherealpotentialrateofreturnasyouseeitonly15%[notaccountingforcompoundingandriskprofile].Becausethatisalotbetterthanputtingyourmoneyinabank,youmightbewillingtodoit.Ontheotherhand,amutualfundmightdoaswellorbetter.Discountingdiverseinvestmentsforrelativeriskinessalsofacilitateapplestoapplescomparisons.



ReservationValuesinthisnegotiation:Buyer’sReservationValue=$27.3MSeller’sReservationValue=$27.8-$30.8M

Hence,accordingtothesereservationvalues,noZOPAexists($.5Mgap).(Butseesectionbelow:“DoAnyFactorsExisttoJustifyClosingtheGap?”)



Analysis:EvaluationstobemadebytheSeller:PresentValueofMadisonProperty'soffer:

• Thisofferincludesstocktransfers,profitsharing,andapproximately$12.8millionincashandcashequivalents

• Thepresentvaluecalculationincludedintheconfidentialinstructionsis$20.5to$23.5million.

PresentValueofGentrification,Inc.'soffer:• Thisofferincludesasmallcashpayment,andalargetransferofliquidnotes,

worth$24.28M• Thepresentvaluecalculationincludedintheconfidentialinstructionsis $24.5M--cashandcashequivalents

+$1.0M--premiumfor"almostallcash"$25.5M

PresentValueofGrouse,Inc.'soffer:

• Thisofferincludesa$14.2millioncashpayment,andprofitsharingworthbetween$15.2Mand$17.8M’

• Thepresentvaluecalculationis$29.4to$32MmillionWhatisSeller'sBATNA?

• IfthereisnoagreementwithAbsentia,thenSeller'sbestalternativeistosellBullardHousestoGrouse,Inc.,becausethepresentvalueofGrouse’sofferisthehighestofSeller’sthreeoffers

WhatisSeller'sReservationPrice?

• Grouse,Inc.offersthehighestpricefortheBullardHouses,butSellerwouldacceptbetween$1.2-$1.6Mlessifthepaymentwasallcash.

• IfAbsentiacouldmakeanallcashoffer,thenwecandiscountGrouse'sofferbythemaximumcashpremiumof$1.6M.

Presentvalue: $29.4to$32.0MRangeofcashdiscount: -1.6to-1.2MReservationPrice= $27.8to$30.8M



EvaluationstobemadebytheBuyer:PresentvalueofAlternateSite:

• Acquisitioncostofalternatesiteis$25.3MWhatisbuyer'sBATNA?

• Ifunabletoreachagreementwithseller,thenBuyer’sbestalternativeistobuythealternatesite.

WhatisBuyer'sReservationPrice?

Startwithacquisitioncost $25.3MAddpremiumforlocation +5.0Subtractzoningrisk(10%) -3.0ReservationValue $27.3

DoAnyFactorsExisttoJustifyClosingtheGap?ZoningChangeRisk*Grouse’sofferiscontingentonazoningchange,BUT

-itlookspoliticallypalatable(MORESOthanahotel);AND-Grousehasofferedtocoverallcarryingcosts

Hencedownsideriskisaslightchanceofzoningchangefailure,multipliedbytheexpectedvalueofthedifferencebetweenAbsentiaandthenextbestbuyer.So,assuminga10%riskoffailedzoningchangeandthatGentrificationcansubstituteforAbsentia,theexpectedvalueis:

(0.10)($27.3-$25.5)=$180,000,whichislessthanthe$0.5MgapANDtheSellerhasstrongpoliticalaswellasfinancialinterestswhichitappearstheGrouseproposalwillbetterserve.Evenwithoutattachinganumbertothoseinterests,weknowthatitwidensthevaluegap.(IftheSellerdoesnotlearnofAbsentia’sproposeduse,theyshouldhavegraveconcernsaboutwhattheimpactmightbeontheirpoliticalrelationships.)ALSO,theCityislikelytopreferGrouse’sproposeduseovertheAbsentia’s,soAbsentiashouldincreaseitsestimateoftheriskofnozoningchangeifitlearnsabouttheGrouseproposal.AcontingentdealmightmakesenseifitiscontingentonGrouse’sproposalfallingthroughinawaythatseemspermanentandnon-injurioustotheAbsentiaproposal,thereisdisclosuretoDowntownofAbsentia’splansforahotel,andDowntownissatisfiedthatAbsentia’sotherplanswillnothurtDowntownpolitically.



QuestionsforReviewOntheNegotiation:

- Howmanysettled?Howmanydidn't?

- Takeaminutetoreflect.Whatcontributedtoprogress?Whatseemedtohinderit?Whatmightyoudodifferently?

- AwaytogetatnoZOPA:Downtown:whatwastheleastyou'daccept?Absentia,

whatwasthemostyou'dpay?Nooverlap!OppositeofSallySoprano.[contingentifgrousefalls]

- Doanyfactorsexisttojustifyclosingthegap?

- HaveyoueveragreedtodosomethingthatwasworsethanyourBATNA?

- Whyisitthatpeople(notnecessarilyyouall,butmanyofus)haveatendencyto

dothis?What'stheallure?(experimentsshowthatpeopleoftendothis...) o needforclosure,resolutiono fearofuncertaintyo immediacyofthecurrentnegotiationo fearofhurtingtherelationshipo confusionaboutBATNAo expectationofsettlement,whatwe'resupposedtodoo equationofnotsettlingwithfailureo hadn'tfiguredouttripwirewithpartnero clarityfromprinciples

- Whatcanyoudoduringpreptoensureagainstagreeingtosomethingyoudon't

want?o knowyourBATNAcoldo beawareofthedifferentpsychologicaltendencieso considerwhichonesarestrongestinyourselfandwhyo rehearsefightingthosetendencieso thinkinadvanceabouthowtowalkawaywithouthurtingrelationship.o Andyetyoustillwanttobeabletotrytoinventagreementswherethere

appearstobenozoneofagreement.



OnGeneralSkills:-clearcommunication-listening-generatingoptions-lookingatinterests

- HowdoyoucommunicateyourBATNAwithoutitsoundinglikeathreat?

- HowtocommunicateBATNAstrengthwithoutgivingawayexactnumber?

- Whataretheobjectivecriteriainthiscase?Aren'ttheyjusttheBATNA's?Alsoindustrystandard(aboutwhatpercentoftheincomestreamthebuyerandsellerget).

- Howtohandletheconfidentialityissue?

- Whatdoyoudoiftheyjustrefusetobudge?

o Listen. o Reframefrompositiontocriteria,optionsandinterests.o Trytofindoptions.o Finally,invokeyourBATNA.



TheBullardHouses DebriefingHandout

Analysis

BasicPointAnalyzeyourBATNAandyourowninterestscarefully.Agreementisnotthegoal.Thegoalisagoodoutcome,whichmeansnoagreementunlessyoucanreachanagreementbetterthanyourBATNA.StructureoftheCase Seller,DowntownRealty,hasthreeoffersonthetableasofitsmeetingwiththispotentialbuyer,AbsentiaLimited.Ofthesethreeoffers,thebestwasmadebyGrouse,Inc.,acompanythatwouldturntheBullardHousesintoanotherQuincyMarket.ThecaseinvolvescomparingthecurrentofferstoanyoffermadebyAbsentiaLimited.Thisrequiresacalculationofthepresentvalueofeachoftheprioroffers(whattheyareworthincurrentdollars)todeterminetheSeller’sBATNAandReservationValue.SincetheBuyerhasotheralternativestoadealwithDowntownRealty,theBuyermustalsodeterminetheirBATNAandReservationValue.

TheBullardHouses:DebriefingHandout


Definitions

BATNA:Anegotiator’s“BestAlternativeToaNegotiatedAgreement.”Thisisnotadollarfigure,butacourseofaction,whatthenegotiatorwilldointheeventofnoagreement(walkingawayfromadeal).“IwouldselltoXforyprice,”or,“Iwoulddothejobmyself”areexamplesofalternativesanegotiatormightchooseashisorherBATNA.Anegotiator’sbestalternativetoagreementischosenbyconsideringhowwelldifferentpossiblealternativesmeetthenegotiator’sinterests.Inmonetarycases,thisofteninvolvesevaluatingthepresentvalueofvariousalternatives.

ReservationValue:Thevalueofanofferinthenegotiationthatwouldbeminimallyacceptable,becauseyouwouldbeindifferentbetweenacceptingitorgoingtoyourBATNA.BottomLine:Referstoyourminimallyacceptableoffer.Logicallythisshouldbethesameasyourreservationvalue,butmanypeopleadoptanarbitrarybottomline(perhapsasaresultofinadequatepreparation).Atothertimes,peoplechooseasingleAbottomline@option,ignoringthepossibilityofotheroptionsthatmightmeetyourreservationvalueinunexpectedways.

PresentValue:Thisisthemonetaryvalueofanalternativeoroptionintoday’sdollars.Anofferof$1000tobepaidayearfromnowislessvaluablethan$1000paidtoday,becauseifyouhadthatmoneytodayyoucouldearninterestonitfortheyearandyouwouldhavemorethan$1000attheendoftheyear.Therefore,anofferof$1000tobepaidayearfromnowisspecificallyworthtodaytheamountofmoneyyouwouldhavetoinvesttodaysuchthatwithinterestyouwouldhave$1000ayearfromnow.ComputingthepresentvalueofcompetingoffersallowsAapplestoapples@comparisons.

DiscountRate:Thereisasecondreasonthatmoneyinhandisworthmorethanthepromiseorchanceofmoneylater:thereisalwayssomeuncertaintyaboutwhetheryouwillactuallybepaidwhenthetimecomes.Theownersofabusinessventuremayaskyoutoinvestandpromisea30%annualreturn,butyoumayfeelthereisa50%chancethattheannualrateofreturnwillbezeroinstead.Thisisyourdiscountrate,andinthiscaseitwouldmaketherealpotentialrateofreturnasyouseeitonly15%.Becausethatisalotbetterthanputtingyourmoneyinabank,youmightbewillingtodoit.Ontheotherhand,amutualfundmightdoaswellorbetter.Discountingdiverseinvestmentsforrelativeriskinessalsofacilitateapplestoapplescomparisons.ReservationValuesinthisnegotiation:Buyer’sReservationValue=$27.3MSeller’sReservationValue=$27.8-$30.8M

Hence,accordingtothesereservationvalues,noZOPAexists($.5Mgap).(Butseesectionbelow:“DoAnyFactorsExisttoJustifyClosingtheGap?”)



AnalysisEvaluationstobemadebytheSeller:PresentValueofMadisonProperty'soffer:*Thisofferincludesstocktransfers,profitsharing,andapproximately$12.8millionincashandcashequivalents.*Thepresentvaluecalculationincludedintheconfidentialinstructionsis:

$20.5to$23.5million.

PresentValueofGentrification,Inc.'soffer:*Thisofferincludesasmallcashpayment,andalargetransferofliquidnotes,

worth$24.28M.*Thepresentvaluecalculationincludedintheconfidentialinstructionsis:

$24.5M--cashandcashequivalents+$1.0M--premiumfor"almostallcash"$25.5M

PresentValueofGrouse,Inc.'soffer:*Thisofferincludesa$14.2millioncashpayment,andprofitsharingworthbetween$15.2Mand$17.8M.*Thepresentvaluecalculationis$29.4to$32Mmillion.WhatisSeller'sBATNA?*IfthereisnoagreementwithAbsentia,thenSeller'sbestalternativeistosellBullardHousestoGrouse,Inc.WhatisSeller'sReservationPrice?*GrouseInc.offersthehighestpricefortheBullardHouses,butSellerwouldacceptbetween$1.2-$1.6Mlessifthepaymentwasallcash.*IfAbsentiacouldmakeanallcashoffer,thenwecandiscountGrouse'sofferbythemaximumcashpremiumof$1.6M.

Presentvalue: $29.4to $32.0MRangeofcashdiscount: -1.6to -1.2MReservationPrice= $27.8to $30.8M



EvaluationstobemadebytheBuyer:PresentvalueofAlternateSite:*Acquisitioncostofalternatesiteis$25.3MWhatisbuyer'sBATNA?*Ifunabletoreachagreementwithseller,buyerbestalternativeistobuythealternate

site.Whatisbuyer'sReservationPrice?

Startwithacquisitioncost $25.3MAddpremiumforlocation +5.0Subtractzoningrisk(10%) -3.0ReservationValue $27.3

DoAnyFactorsExisttoJustifyClosingtheGap?ZoningChangeRisk*Grouse’sofferiscontingentonazoningchange,BUT

-itlookspoliticallypalatable(MORESOthanahotel);AND-Grousehasofferedtocoverallcarryingcosts

Hencedownsideriskisaslightchanceofzoningchangefailure,multipliedbytheexpectedvalueofthedifferencebetweenAbsentiaandthenextbestbuyer.So,assuminga10%riskoffailedzoningchangeandthatGentrificationcansubstituteforAbsentia,theexpectedvalueis:

(0.10)($27.3-$25.5)=$180,000,whichislessthanthe$0.5MgapANDtheSellerhasstrongpoliticalaswellasfinancialinterestswhichitappearstheGrouseproposalwillbetterserve.Evenwithoutattachinganumbertothoseinterests,weknowthatitwidensthevaluegap.(IftheSellerdoesnotlearnofAbsentia’sproposeduse,theyshouldhavegraveconcernsaboutwhattheimpactmightbeontheirpoliticalrelationships.)ALSO,theCityislikelytopreferGrouse’sproposeduseovertheAbsentia’s,soAbsentiashouldincreaseitsestimateoftheriskofnozoningchangeifitlearnsabouttheGrouseproposal.AcontingentdealmightmakesenseifitiscontingentonGrouse’sproposalfallingthroughinawaythatseemspermanentandnon-injurioustotheAbsentiaproposal,thereisdisclosuretoDowntownofAbsentia’splansforahotel,andDowntownissatisfiedthatAbsentia’sotherplanswillnothurtDowntownpolitically.



TheBullardHouses GeneralInstructionsTheBullardHousesaresituatedonBayDriveinGothamCity.Gothamhasapopulationof800,000withinthecitylimitsand4millionincludingresidentsinthegreatermetropolitanarea.TheBullardHouses,builtin1884,arelocatedattheedgeofGotham'shistoricaldistrict."Houses"isamisnomer:theyareactuallyasinglestructureof51connectedbrownstonesonan11.5-acreplotthatabutsthedowntownfinancialdistrict(seeattachedmap).

Fornearly50years,theBullardHousesdominatedtheGothamvistaastheirresidentsdominatedthecity'sfinancialandpoliticalstructures.Builtbywhatonehistoriancalled“anassemblageofformerhorsethieves,peddlers,farmers,andfurtrappers,”withfortunesswollenbyCivilWarprofits,theHousesquicklybecameamonumenttoprivilege.Theirsplendorfromwithoutwasrivaledonlybytheeleganceofthesalonsandballroomswithin.TheHousesseemedtobeabovedailylife–evenduringtheGreatDepressionofthe1930stheyremainedabeaconofsuccess.Eventually,however,shiftingeconomicandsociologicaltrendsbroughtanendtotheHouses’proudreignofprivilege.AfterWorldWarIItheswollendemandforhousinginthehistoricaldistrictabated.Theageofitsbuildings,thenarrownessofitsstreets,anditsdeterioratingsewersystemhastenedalong,steepdeclineintocrime-riddendecay.Thewar’sendalsobroughtsuperhighwaysandrapidtransitthatmadeGothamaccessiblefromstillundeveloped,outlyingareas.Finally,air-conditioningbecamewidelyavailable,makingtheoncecrucialbaybreezessuperfluousandsealingtheBullardHouses'fate.ItsoccupantsrelocatedenmassetothelushhillsnorthofGotham.ForthepastsevenyearstheBullardpropertyhasbeenownedbyDowntownRealty,Inc.Downtownboughttheproperty,thenoccupiedbylow-incometenants,hopingtorenovateandconvertthepropertyintocondominiums.WhenGotham'snascentLandmarkCommissiondeclaredthepropertyalandmark,however,thatplanseemedunlikelytobeasprofitableashoped.Nevertheless,Downtownhasproceededtoclear


TheBullardHouses:GeneralInstructions


nearlyallofthetenantsfromthebuildingandhassignedarelocationagreementwiththeremainingfew.Ifallgoesasplanned,theHouseswillbeemptyinsixmonths.DowntownRealty'soriginalpredictionsofadowntownresurgenceprovedcorrect,however.Gothamweatheredtherecentrecessionmagnificentlywithasuccessfulbiotechindustrythatliftedthelocaleconomyoverthebumpsofthenationwideslowdown.Asthisindustryhasprospered,demandhasincreasedfornewskyscrapersinthefinancialdistrict.Biotechconventionshaveincreased,andcurrentmeetingfacilitiesarestrained.Meanwhile,livinginthecityhasbecomefashionableagain,andthehistoricaldistricthasbeenalmostcompletelygentrified.ItisnowthechicestareainGotham.Ironically,inthemidstofthisprosperity,DowntownRealtyhasrunintotrouble.Thezoningclearancefortheirplannedcondodevelopmenthasprovenmoredifficulttogetthanexpected.Gentrificationandthecurrentcondocrazehavedrivenapartmentrentssky-high,forcingmanymiddle-tolower-incomeresidentsofthehistoricaldistricttorelocate.Thishasfueledjealousyandresentmenttowardstheyoungandnewlywealthybiotechprofessionalswhoaremovingintothearea.Beyondadoubt,thiscontributedtotheelectionofapopulistmayor.Atherurging,theGothamCityCouncilpassedtenants’rightsandanti-condolegislationthatstretchedtherelocationprocesstonearlythreetimeslongerthanDowntown'soriginalestimates.Moreover,thelegislationrequiredsignificantcashpaymentstodepartingtenants.Asthenumberoftenantsdwindled,sodidDowntown'scashflow.Taxesrosehowever,andDowntowndiscoveredthatitcostsalmostasmuchtoheatanear-emptybuildingasafullone.Asaresult,withroughlysixmonthsoftenantclearanceremaining,Downtownisinastateoffinancialextremis.First,itisdelinquenton$60,000inbackpropertytaxes.Thecityhasbeguntothreatenataxsale,buttheformalitieswouldtakeatleastayear.Second,itwillbeunabletomakeitsannual$189,000paymentduenextweekonthe20-year,7%note($2millionprincipal)itgavetothepreviousownersoftheproperty.However,thecorporationisinnoimmediatedangeroftriggeringtheaccelerationclausefordefaultonpayment,becauseDowntown'sowners(wealthyindividuals)couldloanitthe$189,000neededbeforethedeadline.Downtown'sownerswanttoselltheBullardHousesassoonaspossible.RetainingthepropertyforanysignificantperiodwouldrequireasubstantialcapitalinfusionbytheownerstoDowntown,whichtheyarereluctanttomake.Furthermore,theynolongerhaveanyinterestindevelopingthispropertythemselvesastheyhavesouredonrehabilitationandwouldprefertospecializeinnewdevelopment.TheyalsoneedthemoneytheyhavetiedupintheHousestofinancenewinvestments.Underthecircumstancesinvestmentloanswouldbehardtocomeby.Downtown'sarchitecturalconsultantbelievesthattheHousescouldbeconvertedintoapproximatelyninetylarge,luxuryduplexesor51magnificentbrownstones.Thismight


TheBullardHouses:GeneralInstructions


bepoliticallyproblematic,however.ConsiderableangerhasbeenarousedbythemovetoresurrecttheHousesasasymbolofwealthandprivilege.Inaspeechlastweek,themayoronceagaindenouncedgentrificationasaheartlessdisplacementofthepoor,suggestingthatifGothamhadthemoney(whichitdoesn't)itwouldpurchasetheHousesbyeminentdomainandletallcitizens,notjusttherich,haveaccesstothelandmark.Landmarkstatus,tenants’rights,andanti-condolegislationhavefrozentheHousesintheirdilapidatedstateforsevenyears.However,whilethepreservationoflandmarksandtenants’rightsarepoliticallypopular,thecurrentrealestateboominthedowntownareaisputtingtheLandmarkCommissionandtheZoningBoard(bothdominatedbyalliesofthemayor)undersignificantpressuretopromotesomedevelopmentoftheHousesassoonaspossible.TheentireBullardparceliszonedresidential,soacondoconversionplanthatpreservedthebuilding'sfacadewouldposenolegalproblems.Eventually,unlesstheyfindabetteralternative,thesetwoadministrativegroupswillprobablyswallowtheirpopulistidealsandapproveaplanforluxuryduplexesorbrownstone.





TheBullardHousesConfidentialInstructionsfortheBuyer’sRepresentativeYouareafast-trackreal-estatelawyerinGothamrepresentingAbsentia,Ltd.,aLiechtensteincorporationownedbyaBahamanianblindtrust.(Suchacomplicatedcorporatestructureisfrequentlyusedtomakeithardforotherstofindoutanactor’strueidentity.Itiscommonlyused,asinthiscase,byareal-estateprincipalwithdeeppocketsandlimitedpurchaseoptionswhofearsbeingheldupforanextortionatepriceifhisorhertrueidentityshouldbecomeknown.)YourundisclosedprincipalistheConradMiltonHotelgroup,apubliclyheldcompanythatownsandoperates83luxuryhotelsworldwide.Forthesereason,ConradMiltonwantsyoutokeeptheiridentitysecret.Youareattemptingabrilliantcoup.Becauseofitslandmarkstatus,demolitionoftheBullardHousesisimpossible.Moreover,thegardenareaistoosmallforittobepartitionedintoaviableseparatebuildinglot,givenGotham'spropertymarginrules.(Suchrulescommonlycallforaminimumsetbackofsomenumberoffeetbetweenthepropertyedgeandthebeginningofanystructure.)Thedifficultyofaccesstoanysuchgardensitealmostsurelyforeclosesthepossibilityofgettingawaiveroftheserestrictions(suchawaiveriscalledavariance),evenifthegardenlandwererezonedascommercial(commercialpropertyusuallyhasasmallersetbackrequirement).Hence,youaregamblingthatDowntownRealtyhaswrittenoffthepossibilityofdevelopingtheBullardpropertyforcommercialuseandthatitissellingwhatitbelievestobethe(muchlessvaluable)righttodeveloponlyluxuryresidentialhousing.Thepropertyiscapableofanotheruse,however.YourarchitectshavedrawnroughplansfortheconstructionofaMiltonHotelonthesite.ThehotelwouldusetheelegantHousesforitslobbyandpublicrooms.AgreatcrystaltowerwouldbebuiltinthegardenconnectingtotherearoftheHouses.Becausetherewouldbenoneedtomarginoffaseparateplot,thissiteforthetowerwouldbeofidealdimensions,wideenoughtopermiteightyroomsperfloor.Halfoftheroomsinthetowerwouldbepremium“bayview”rooms.ThehotelwouldretaintheHouses’prestigiousBayDriveaddressandexcellentaccesstothefinancialdistrict.Evenassumingthesitecanbeacquired,however,makingthiscelebratedlandmarkinto


TheBullardHouses:ConfidentialInstructionsfortheBuyer’sRepresentative

Copyright©1983,1985,1986,1988,1991,1995,2002,2006,2016,2018bythePresidentandFellowsofHarvardCollege.Allrightsreserved.(Rev9/18)

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aMiltonHotelwillnotbeeasy.TheLandmarkCommissionwouldhavetoapprovethetowerconstruction,andtheZoningBoardwouldhavetorezonethesitefromresidentialtohigh-risecommercial.Thesechangesarenotinconceivable,buttheywilldependheavilyonpolitics.Nonetheless,youandyourclientsareoptimisticaboutsecuringtheseadministrativechanges.YoufeelthatyourhotelproposalismorepoliticallyacceptablethantheluxuryresidentialdevelopmentthatDowntownisreportedlyconsidering.YouintendtofantheconsiderableangerthathasbeenexpressedaboutplanstorestrictuseoftheHousestotherichandpowerful.AlthoughMiltonHotelsarecertainlynotpopulistpalaces,anewMiltonwouldbeasorelyneededadditiontocurrentlytightconventionandhotelcapacityinGotham.Moreover,thelobbyandbarswouldatleastbeopentothepublic,unlikethecontemplatedprivateresidences.Overall,thebottomlineisthatyourproposalwillsucceedifitoffersthemayorandhermachinetheonlypoliticallyandeconomicallyviablealternativetoluxurydevelopments.Youcanseenoreasonwhyitwouldn’t:youhaveagoodideaofthepossiblecompetingbidsDowntownmayhavereceived.TheMiltonreal-estatedepartmentbelievesthattheBullardcomplexcouldbedevelopedinseveralways:1.Residentialhousingdevelopment,namelybrownstonesorduplexesMilton'sreal-estatedepartmentandconstructionconsultantsestimatethatsuchacondoconversionwouldultimatelygeneraterevenuestothedeveloperofroughly$76million.Likewise,theyestimateitwouldcostbetween$28millionand$34milliontobuildcondos(notcountingthecostofpurchasingthepropertyfromDowntown).Subtractingcostsfromrevenues,leavesanetrevenuetoapotentialdeveloperforturningtheBullardHousesintoluxurycondosof$42millionto$48million.Fromthisprojectednetrevenue,youcanfigureoutwhatareasonabledevelopermightbewillingtopayDowntownfortheHouses.ThisshouldgiveyouagoodideaofthekindofbidsfortheHousesthatDowntownhasinhandnow—andwhichAbsentiawillhavetobeat.Fromexperience,youknowthat,absentspecialcircumstances(i.e.,opportunitiesforextortion),developerswillsplitthepotentialprofitsinthisdealsomewherebetween40%and60%betweenthebuyingandsellingdeveloper,butusuallyaround50%.Thus,thereisalikelybidrangeinthisdealof$21millionto$24millionfromotherbidders.2.High-risecommercialdevelopmentCompetingbidsforthiskindofusecouldbeconsiderablyhigher(20–25%)thanresidentialdevelopmentbids.YouarebettingbigbucksthatnooneelsehasthoughtofanythingequivalenttotheMiltonHotelscheme.3.Low-risecommercialdevelopmentwithintheHouses'existingstructure(e.g.,asprofessionalofficesandsmallcompanyheadquarters).Suchanoptionwouldrequirezoningchangesthatshouldnotbetoodifficulttogetbutwouldbeunlikelytoyieldbidshigherthanresidentialhousingdevelopment.


TheBullardHouses:ConfidentialInstructionsfortheBuyer’sRepresentative


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Havingalreadynegotiatedanoptiontopurchase(for$25.3million)amorepedestrianbutnonethelessacceptablealternativelocationforaMiltonHotelatasiteinthecenterofthefinancialdistrict(alreadyzonedhigh-risecommercial),youareenteringthenegotiationwithastronghand.ThereisnoquestionthattheBullardnameandaurawouldgivethisventurethetruemajestyandmystiqueforwhichMiltonHotelsareknown.Decidinghowmuchthisauraisworthisnoteasy.Milton'smanagement,withadvicefromtheirinvestmentanalysisdepartment,hastentativelyvaluedthisyearningforprestige,alongwiththeHouses’superiorlocation,asworthamaximumofa$5millionpremium.Therefore,Miltonwouldpresumablybewillingtobidupto$30.3millionfortheHouses.Unfortunately,theriskthatMiltonwillnotgetthenecessaryapprovalsfromthezoningboardandlandmarkcommissionrequiressomediscountingofthisfigure.Inparticular,yourclientsareveryconcernedthatevenaftertheyhavepurchasedthelandforMilton,adisgruntledcompetitorcouldblockthenecessaryzoningchanges.SinceMiltonhasnointerestinanyotherkindofproject,itwouldthenbeforcedtoselltheproperty,probablyataloss.Milton'smanagementhasdecidedthatthisriskwarrantsa10%reductionintheirmaximumbid,makingitonly$27.3million.Thatshouldstillgiveyouplentyofroomtooutbidotheroffers,assuming:(1)therearenoproposalsmorepoliticallyattractivethanMilton's;and(2)Milton'shotelplansremainsecret,sinceprematuredisclosuremightgivesomeangrycivicgroupordevelopertimetoconstructanalternativeplan.AbigbrouhahamightalsocomplicatedevelopmentofMilton'salternativeoptioninthefinancialdistrict.YourclientalsowantstoavoidmakinganoffersohighthatittipsoffDowntownRealtytoyourclient’sunusuallydeeppockets.Ideally,yourclientwouldliketopaylittlemorethantheamountthatislikelytobeDowntown'shighestbidsofar(between$21millionand$24million).Ontheotherhand,yourclientisextremelyinterestedinobtainingthepropertyandiswillingtoofferupto$27.3millionifnecessary.Youdohavetoworkquickly.YouknowthatDowntownhasreceivedseveraloffersandsuspecttheymightbenearadeal.Furthermore,Absentia’soptionontheWorldPlazasiteexpiresinfivedays,soifyouaretosecuretheBullardHouses,youwillneedtoreachanagreementonthegeneraltermsalmostimmediately.YouhavefullauthoritytoreachadealinthisnegotiationandareauthorizedtobecreativewiththefinancingaspectsofAbsentia’soffer(aslongasthetotalpresentvaluedoesnotexceed$27.3million).Ifnecessary,Absentiacanofferthefullamountincash.Miltonisnotinterestedinajointventure.TheywanttheBullardpropertyacquiredwithoutleavingDowntownanyresidualrightsorequityinit.Yourclientwantstokeeptheiridentityandplanssecret.However,ifforsomereasonyoumustdisclosesomeinformationtoreachanagreement,dosoonlyonthebasisofalawyer-to-lawyerguaranteethattheinformationdisclosedwillnotberevealedtoanyone,eventheotherclient.





TheBullardHousesConfidentialInstructionsfortheSeller'sRepresentative YouaretheattorneyforDowntownRealty,Inc.,acloselyheldcorporationwhosesoleassetistheBullardparcel.Downtownpurchaseditfor$8millionalmostsevenyearsagowhentheHouseswerethreatenedwithdestruction.ThepurchasewasinlargeparttheworkofStevenBullard,thegreat-grandsonofIsaiahBullard,whobuiltthefirsttenandmostmagnificentofthebrownstones.StevenconvincedagroupofinvestorstoformDowntownwithhimandbuytheBullardHouses.AlthoughtheinvestmenthasnotturnedoutaswellashehopedandDowntownnowwantstoselltheproperty,StevenremainsconcernedabouttheHouses'fate.Hehaspoliticalambitions,andhewouldnotwanttoseetheBullardHousesusedinanywaythatmightdetractfromhisimage.Foryourpart,youwereneverparticularlyenamoredwiththisinvestment,althoughyourclientschosenottoheedyouradvice.WhenGotham'sLandmarkCommissionvotedunanimouslytodeclaretheHousesalandmark,yourclientsfinallycameclosetoabandoningthem.Ultimately,theyheldon,eventhoughtheyknewthatlandmarkstatuswoulddramaticallyincreasethebureaucraticdifficultiesandoverallcostofmodifyingorrenovatingtheHouses.LandmarkstatusalsolimitedtheoptionsfortheHousesinotherways,particularlywithregardtozoning.Atonepoint,forexample,yourclientshadhopedtopartitionoffthegardenareatouseasaseparatebuildingplot.Unfortunately,althoughthegardenislarge,propertymarginrequirementswouldleaveanyresidentiallotinthegardenimpossiblylongandnarrow.(Marginrequirementsinzoningregulationscommonlycallforaminimumsetbackofsomenumberoffeetbetweentheedgeofthepropertyandthebeginningofanystructure.)Thedifficultyofaccesstothegardenalsomakesitunlikelythatadevelopercouldgettheserestrictionswaived(suchawaiveriscalledavariance),evenifthegardenwasrezonedcommercial.(Commercialpropertyusuallyhasasmallersetbackrequirement.TheentireBullardparceliscurrentlyzonedresidential.)Landmarkstatusonlystrengthenstheseobstacles.Despiteyouradmonishmentstosell,Downtownkeptthepropertyandproceededwithitscondoplan.Now,however,evenStevenagreesthatitistimetosell.Luckily,itappearsthatanumberofdevelopers,includingtwonationallyprominentones,arechompingatthebittobuytheproperty.Youhavethreefirmoffersinhand:


TheBullardHouses:ConfidentialInstructionsfortheSeller’sRepresentative


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1.MadisonPropertiesproposestocreateninetyluxuryapartmentsintheHouses.Theyestimatethatthesecondoswouldsellforbetween$900,000and$1.5millioneach,thusproducinggrossrevenuesofaround$100million,anestimatethatseemsreasonable.Madison'sofferistobuy75%ofDowntown'sstockforcashandothercompensationandleaveDowntownwitha25%shareinallprofitsoftheenterpriseafterconversionandinterimfinancingcosts.(Madison'sproposalwouldfollowgenerallyacceptedaccountingprinciplesincalculatingprofits.)Thespecificup-frontcompensationpackageincludes:

· $11millionincash(whichwouldcountasacostagainstprofits);· immediateassumptionofDowntown'smortgageobligationontheproperty,

whichhasapresentvalueof$1.77million(butDowntown'scurrentownerswouldremainpersonalguarantorsofthenote);and

· paymentofallbacktaxes($60,000).Thepresentvalueofthiscompensationfor75%ofDowntown'sstockwouldthusbe$12.8million.Thepresentvalueofyourclients'futureprofitshare(ascalculatedbydowntown'sarchitecturalconsultant)issomewherebetween$7.7millionand$10.7million.Therefore,thisofferhasatotalpresentvalueof$20.5millionto$23.5million.2.Gentrification,Inc.,aprominentandsuccessfulcompanyownedbyRileyRobins,proposestodevelopthepropertyinto51brownstones.Gentrificationproposestopaythebackduetaxesandnextweek'smortgagepayment,butthebulkoftheirofferisintheformofnotes(wellsecuredbyotherreal-estateholdings)thatDowntowncouldsellinthebondmarketforcash.Thepresentvalueofthesenotesis$24.28million;addinginthecashpayments,thetotalpresentvalueofGentrification'sofferis$24.5million.3.Grouse,Inc.,hasproposedthemostintriguingofferbyfar.TheyproposeacommercialdevelopmentcalledBullardPlace,likeBoston'sQuincyMarketandWashingtonD.C.'sOldPostOffice—amarketplaceoftrendyrestaurants,boutiques,andgalleriessurroundingpublicspacesandfacilitiesforcommunitymeetingsandevents(concerts,debates,etc.).TheGrouseplanwoulddoubletheproperty'susableareawithaseriesofconnectingglasspavilionsaroundreplantedformalgardens.Thisproposalisconditioned,however,onazoningchangeforthepropertytomixed-usecommercial.Grouseisofferingtopay$14.2millionincashfor60%ofDowntown'sstock.Grousewouldsupplyalldevelopmentcapital(includingpayingthebacktaxesandmortgagepayments)asloanstoDowntown.Downtown'scurrentownerswouldthusgetthe$14.2millionincashanda40%shareintheprofitsofBullardPlace.TheywouldremainaspersonalguarantorsofDowntown'scurrentmortgagenote.Accordingtoyourclient,averyconservativeestimateofthepresentvalueofthe40%shareoftheprofitswouldbebetween$15.2millionand$17.8million.ThiswouldgiveGrouse'sofferatotalpresentvalueof$29.4millionto$32million.




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Downtown'sshareholdershavesomeconcernaboutacceptinganofferthatiscontingentonazoningchange,butthatconcernisamelioratedbytwofactors.First,thezoningchangeseemsunlikelytofacemanyobstacles.Grouse'sofferfitsthemayor'spoliticalagendaperfectly;itwouldbehardtoimagineamoreattractiveproposalfromthatpointofview.(Eventhoughtheproposedshopswillbemostlyupscale,thesmallerfoodshops,communitymeetingfacilities,andpublicspacesinsuchdevelopmentsseemtogivethemafeelingofopennessandaccessibilitytothepublicatlarge.)Second,Grousehasagreedtopay,intheeventthatazoningchangeisnotapproved,allcarryingcostsuntilDowntownfindsanotherbuyer.Inotherwords,yourclientshavenothingtolose.Untilmorelegalandpoliticalgroundworkhasbeendone,GrousehasrequestedthatitsidentityremainconfidentialtoallbuttheZoningBoard.Likewise,theywouldliketheircommercialdevelopmentplansonlyrevealedinthemostgeneralway.Absentia,Ltd.Beforeyourclientsmakeanyfinaldecision,theywantyoutohearAbsentia,Ltd.'sbestoffer.TheythinkAbsentiamaybetterGrouse'sofferandperhapsmeetsomeinterestsoftheirsthattheotheroffersdonot.YouknownothingabouttheAbsentiaGroupexceptthatithasretainedoneofGotham'sfast-trackreal-estatelawyers.ThisleadsyoutobelievethatAbsentia'sbackersarewell-financedbutgivesyoulittleotherinformationaboutthem.Youwillwanttofindoutmoreduringthenegotiationwiththeirlawyer.Inconsideringtheseoffers,yourclients'mostimportantinterestisinmaximizingtheamountofmonetaryvaluetheygetfortheBullardproperty,whetheritcomesintheformofcashorothercompensation.However,theyalsohaveotherinterests,someofwhichmightbeworthamodestreductioninmonetaryvaluereceived.Theywould,forexample,liketoproceedinthenearfuturewiththeplansoftheircloselyheldcorporation,UptownRealEstate,Inc.,tobuildacasinoonawaterfrontpropertytheyown.Thus,yourclientshaveapreferenceforcashand/orotherliquidassetsthatcanbeusedtofinancetheireffortsdirectly.(Incomerightscouldbeusedtosecureadevelopmentloan,butitwouldbemorehassle.)Allthingsbeingequal,yourclientshavesaidthattheywouldbewillingtoacceptupto$1.2millionoratmost$1.6milliondollarslessforadealthatoffersallcashup-frontasopposedtorightsinanincomestreamofequivalentvalue.Yourclients'secondmostimportantinterestsarepolitical.First,SteveBullardisconcernedthatthefutureuseofthepropertynothaveanynegativerepercussionsforhispoliticalambitions.Second,Uptown'scasinodevelopmentplanswillrequireazoningvariance,andyourclientsdonotwantanysubsequentdevelopmentoftheHouses,asaresultofDowntown'ssaleoftheproperty,toantagonizetheZoningBoard.Therefore,itisimperativethatanysubsequentdevelopmentbesociallyandpoliticallyappropriate—andpleasingtotheZoningBoard,theLandmarkCommission,andthe




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mayor.Yourclientswouldlovetocomeoutofthiswithsomegoodpresscoverageontheirrolein“saving”thelandmark.KeepinmindthatifforsomereasonyouabsolutelymustdisclosesomethingofGrouse'soffertotheAbsentialawyer,itisimperativethatyouobtainalawyer-to-lawyerguaranteethattheplanswillnotberevealedtoanyone,includingtheotherclient.YouhavemadeanappointmenttomeetwiththeAbsentialawyer.Yourclientsareunreachable(theyaretrekkinginNepal)untiltheirreturnintwoweeks.If,asishoped,AbsentiacancomeupwithabetterpackagethanGrouse,youareauthorizedtoenterintoatentativeagreement.Infact,ifabsolutelynecessary,youareauthorizedtocommitDowntowntoadeal.Althoughgrantingyouthismuchauthorityisabreakwithpastpractice,yourclientsdonotwanttorisklosingagooddeal.(It'salsoasignoftherespecttheyhavedevelopedforyourbusinessjudgement.)


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