Potential real estate moguls at the 2001 Harvard Business School Entrepreneurship Conference received an earful about profiting in a down market, creating value where there is none, and the addiction of playing in a deal-driven industry.
"I call myself a recovering developer," confessed Kevin McCall (HBS MBA '81), president and CEO of Paradigm Holdings, LLC, a Massachusetts-based owner and operator of multi-tenanted office buildings. McCall described the process of locating and developing a property as completely addicting. "Seeing potential in something that no one else saw—that's a ton of fun," he said.
There was general agreement on this point, but land and buildings aren't always part of the equation when it comes to calculating the industry's appeal, added Vincent J. Constantini, founder and managing partner of Roseview Capital Partners, an investment banking firm that provides capital advisory services to mid-sized, privately-held companies.
Constantini cited his development of a company, Boston Financial, as one of his most rewarding projects. "I was able to do some creative, innovative things in order to transform a narrowly focused organization into an integrated real estate financial advisory firm," he said. The 1999 sale of Boston Financial's $8 billion Real Estate Institutional Advisory Practice to the Lend Lease Corporation was extremely successful from a financial standpoint, he added, but the experience of building and developing the firm's people was the most fulfilling of all.
You need to know how to work with people, and that skill is largely experiential and driven by personality.
Peter Palandjian (HBS MBA '93), chairman and CEO of Intercontinental Developers, Inc., recalled the satisfaction of developing the current Boston Stock Exchange building, a structure that was considered something of a white elephant after Fleet Bank moved out. After buying the building for $10 million, Intercontinental invested $6.5 million in the property before selling it just over three years later for $27 million. "There were a lot of eyes on that project," Palandjian said. "It was gratifying on many levels, particularly because we renovated the building to a proper use—it could have just as easily been turned into a health club."
The Next Deal
It was HBS senior lecturer Arthur Segel's role as moderator to ask the tough questions, such as, "What's the biggest career mistake you've made?"
Although panelist responses weren't quite as direct, they did highlight some key issues for would-be moguls. Understanding the ethics and morals of the people you work with is far more important than how well capitalized they are, said Constantini. He said he walked away from a seven-figure transaction after realizing the ethics of the other parties involved were not compatible with his. "There's always the next deal," he said.
"Is there something about the real estate business that attracts more unethical people than usual?" Segel wondered.
"There is the perception that it's very deal-oriented, and that's exciting to people," responded McCall. "The barriers to entry are quite low in this business, too." Real estate, he continued, is a very capital-intensive business, and it's important to consider how one's money is obtained.
"There are many different funding options, from syndicates to institutions, and there are benefits and drawbacks to all of them."
Palandjian suggested that the overriding emphasis on written contracts in the real estate industry can make oral agreements seem less binding than they might in other businesses. The illiquid nature of real estate also allows dealmakers more time to back out of an agreement.
Staying on top of internal dynamics is a key concern as well, added Palandjian, stressing the importance of organizational behavior and human resource issues. "That's the toughest part of the business," he said. "The bad hires and arguments are what get me in the pit of my stomach." Otherwise, he continued, the concepts behind the real estate business are easy to grasp.
So what separates the moguls from the pikers? "You do need an instinct for the deal," said McCall. "You need to know how to work with people, and that skill is largely experiential and driven by personality."
Down Doesn't Mean Out
These days, McCall added, deals have been in short supply. "It's a very cyclical business," he said. "But even a down cycle can provide opportunity for people with their eyes wide open."
Constantini said he favors the hotel and assisted-living businesses. "I would play where everyone isn't. As far as land goes, I'd look for complicated, hard-to-finance parcels."
Given the current economic downturn, corporations that are faring poorly and need to sell off assets are another good source of bargains, said Palandjian. He also likes the high-barrier markets of Austin, Boston, and San Francisco. "It takes fortitude to do it, but would you rather buy office space in San Francisco now or three years ago?" he asked.
"It's all a matter of knowing your own risk profile," said McCall. "Personally speaking, I was crushed in the early '90s; now I play in a very narrow bandwidth of risk."