No. 1-0132rev.1 Revised 04/28/2010 John Hancock Tower and Garage On March 31, 2009, Jeff Gronning raised his paddle at the UCC foreclosure auction in New York City, and with a bid of $20.1 million became the new owner of the John Hancock Tower and Garage in Boston. Gronning, Managing Principal for Normandy Real Estate Partners (―Normandy’) represented a partnership (the ―Joint Venture‖) between Normandy and Five Mile Capital Partners (―Five Mile‖). The auction lasted a matter of minutes. Behind that bid, however, was ten months of intensive work by the Joint Venture, including the acquisition of a variety of mezzanine tranches (at substantial discounts) so that it would be very difficult and costly for anyone to outbid them. The John Hancock Tower and Garage foreclosure sale stands as a high profile example of how the commercial real estate market has changed. Three years earlier this trophy property sold at a record breaking price of $1.35 billion. Now, its value had dropped almost in half. As much as any property in the United States, the multiple purchases and sales of the John Hancock Tower and Garage are a reflection of the unprecedented forces driving the commercial real estate market during the first decade of the 21st century. With a total investment of $730.5 million, many industry insiders believed that Normandy and Five Mile made a great investment. Others argued they overpaid. Jeff Gronning and Jim Glasgow, a Partner at Five Mile, believed they had acquired a great asset. It would, however, need creativity, hard work and significant capital to make it a successful investment. Even in this moment of triumph, Gronning, Glasgow and their partners focused on three critical questions: What should they do first? How could they maximize the value of this investment? What could they do to protect themselves if the Boston office market continued to decline? The Property ―When you look out the windows you can see forever,‖ said Jack Connors, chairman of Hill Holiday advertising agency, and a tenant on the 39th floor of the John Hancock Tower. ―If you want to have high expectations and grand plans, it’s a great place to be. You can’t think small in the Hancock Tower.‖i Towering 790 feet into the sky, the 1.8 million square foot, 62-story, class A property is the tallest office building in New England, and Boston’s largest office tower. Located at 200 Clarendon Street, the John Hancock Tower sits in the heart of Boston’s Back Bay office district, across from Copley Plaza and Trinity Church (see Exhibit 1). As Beacon Capital CEO Alan Leventhal put it, ―When you look at Trinity Church reflected in the glass of the tower, you see juxtaposition of old and new that captures what Boston is all about. It’s the This case was written by John D. Goldsmith Jr., Tuck ’09, and by John H. Vogel, Jr., Adjunct Professor, Tuck School of Business at Dartmouth. Some numbers have been disguised. It cannot be used or reproduced without the express written consent of one of the authors. © 2009 Trustees of Dartmouth College. All rights reserved. For permission to reprint, contact the Tuck School of Business at 603-646-3176. John Hancock Tower and Garage no. 1-0132 rev.1 Revised 04/28/2010 heritage of Boston and the future of Boston.‖ii Tenants on the upper floors enjoy unobstructed, 360 degree views of downtown Boston, the Charles River, the Western suburbs and the Boston harbor. The eight-story Hancock Garage is located across the street at 100 Clarendon Street. It houses 28,000 square feet of retail space, and 2,013 parking spaces (see Exhibit 2). The Back Bay submarket is located one mile west of Boston’s Financial District and is comprised of 80 blocks bounded by the Charles River to the north, Prudential Center and Copley Square to the south, Arlington Street to the east, and Massachusetts Avenue to the west. The Back Bay submarket contains a mix of commercial and residential space. It is considered a premier office location with a multitude of transit options, quality space, and amenities such as restaurants, shopping, and theaters. With direct access to the Massachusetts Turnpike, the Hancock Tower has been the home of many of Boston’s leading financial services, consulting, and advertising firms. (See interior office photos in Exhibit 2). A Checkered Past Marking a new era in Boston’s history, the Prudential Center (now commonly known as the ―Pru‖) was dedicated in 1965. At 52 stories, it was the tallest building in the world outside of Manhattan, and nearly twice as tall as the existing corporate headquarters for the Boston based John Hancock Insurance Company (―John Hancock‖). Two years after the Pru’s completion, John Hancock announced plans to build its own tower – 40 feet taller than the Pru. John Hancock selected Henry Cobb from the world famous architectural firm I.M. Pei & Partners, who designed the 62-story glass tower to serve as its corporate headquarters. Criticism was swift and widespread, with the local planning board and the historical societies calling the plans ―an egotistical monument‖ and ―an outrage.‖ John Hancock threatened to move its operations to Chicago if they could not build this tower which forced the city to reluctantly grant approval. Groundbreaking occurred in August 1968, and problems immediately plagued the project. After removing over 250,000 tons of earth, the unstable soils around the building began to sink. Trinity Church, the Copley Plaza Hotel, and nearby streets, sidewalks, and utility lines were affected. Rumors circulated that the tower was sinking and would have to be torn down. After paying damages of $11.6 million to nearby businesses, the project was allowed to continue. Then, starting in 1972, bouts of high winds caused the 500 pound, 5 by 12 foot windows to pop out, crashing to the sidewalks below. For the next four years, wooden canopies covered adjacent sidewalks, police closed off nearby streets when high winds were predicted, and the city hired spotters with binoculars at Copley Square to monitor the windows. At its worst, plywood covered 33 floors of the exterior, and by 1976 all 10,334 panes of glass were replaced and a state of the art monitoring system was installed at a cost of $8 million. Amazingly, nobody got injured from the falling glass. The next problem was that the top floors of the tower swayed to an unsettling degree, and under extreme and rare wind conditions, engineers worried the building might topple over. The solution included the installation of a tuned mass damper which consisted of two 300 ton weights positioned at each side of top floor. Hancock also braced the inner core of the building with 1,500 tons of steel. Building costs soared from $75 to $175 million, and the Tuck School of Business at Dartmouth 2 John Hancock Tower and Garage no. 1-0132 rev.1 Revised 04/28/2010 opening of the John Hancock Tower was delayed five years. The John Hancock Tower was finally dedicated on September 29, 1976. With such an embarrassing history, it is hard to imagine this property slowly evolving into a masterpiece, but in 1994 a Boston Globe Poll of architects and historians rated it Boston’s third best work of architecture, behind only Trinity Church and the Boston Public Library. As Thomas Farragher from the Boston Globe wrote in 2006, ―Today, the city that checks its reflection in the tower’s signature skin has largely dismissed its ugly past as an amusing piece of local lore, like the Bambino’s curse … Few can summon an image of Boston without it—or would want to.‖iii Beacon Capital Although Beacon Capital Partners was incorporated in 1998, its roots in the real estate industry extend back more than sixty years. The first of the ―Beacon Companies‖ was founded by Norman Leventhal in 1946. Leventhal and his brother started as commercial construction contractors and later became full-scale developers. During the 1980s, the Beacon Companies developed and/or constructed over $1 billion worth of commercial properties, including Rowes Wharf, One Post Office Square, Wellesley Office Park and the Meridian Hotel. In May 1994, the Leventhal family put their interests in 15 properties, constituting most of their real estate holdings, into a single company called Beacon Properties Company and went public with Alan Leventhal as President and CEO. During the next three years, Beacon Properties Company grew rapidly through acquisitions, development and redevelopment. By 1997, it was one of the largest office REITs in the United States. In December 1997, Equity Office Properties purchased the Beacon Properties Company for $4 billion, which was then the largest merger of two publicly traded REITs. The acquisition price represented approximately a 60% premium over the Net Asset Value of the properties owned by the Beacon REIT. It also meant that investors who purchased stock at the IPO in May 1994 and sold it in December 1997 received a 245% total return or an annual compounded return of 42%. After the sale of the Beacon REIT, Alan Leventhal started a private equity company called Beacon Capital Partners and raised $470 million in its first fund. Beacon Capital Partners focuses on acquiring office properties in ―knowledge based‖ markets, such as Boston, New York, Washington DC, and San Francisco. Beacon’s Purchase of the John Hancock Tower After suffering over $200 million in investment losses in 2002, John Hancock Financial Services decided to sell the John Hancock Tower and Garage, along with two other Boston office buildings: 197 Clarendon Street and 200 Berkeley Street.