Pull the Plug on a Project with an Uncertain Future? by Cody Evans and Chris Mahowald Alex Kozak was sitting in his Moscow apartment waiting for his colleague, Nikolai Krylov, to join their Zoom call. When his video window popped up, Nikolai announced with a smile, "I have good news!" It had been a while since Alex had gotten any of that. In fact, he'd spent the past several weeks holed up in his apartment because of the global pandemic lockdown, and it had begun to feel as if the world was unraveling around him. "I've got a potential buyer," Nikolai said. He and Alex had been working together for the past six years on the development of a 700,000-square-foot commercial office building in Moscow, which they'd dubbed Eastern Square. Alex was leading the project for his company, the New York-based property firm EPM, and Nikolai represented its local joint venture partner, Krasny Invest, which had traded a prime parcel of land close to the Presnensky district and its expertise in navigating Russian bureaucracy for one-third ownership of the project. In late March they'd had to pause work, and Alex had thought they'd be using this virtual meeting to discuss restarting. Selling the development was not on his radar. "It's an investment firm based in Kazakhstan, and they're eager," Nikolai continued, either ignoring or not noticing Alex's shocked look. Alex knew that Krasny Invest was reeling from the abrupt halt in the Russian economy, as were so many others, but he'd thought they would stick this project out. The timeline had been extended, of course, but thanks to the strong architecture, engineering, and construction teams they'd assembled, they were only a year away from completion and already had a prime anchor tenant, a U.S. company opening its first Russian office. Nikolai explained more of the details. The proposed deal with the Kazakhs would monetize the project's $100 million of invested equity plus a small profit. This was only a fraction of the more than $475 million in profit that Alex and Nikolai had projected so confidently back in Januarya healthy increase from the $200 million in profit expected when the project was first conceived. Of course, as Alex well knew, the past few months had introduced many new risks. What would the Moscow real estate market look like in a year? Would the economy recover that quickly? Would people even be going to their offices? Or would companies shrink their footprints and let people work from home? The team had navigated the 2017 slump in the Moscow real estate market. But this crisis was clearly different. "I need to process this," Alex told Nikolai now. "Look, we're all scrambling," Nikolai said. "Between you and me, my company needs the liquidity. But given how the world has changed this yearand specifically how the workplace has changedI think it's smart to get out now. We might not be able to secure an offer like this again. Talk to Alicia." Alicia Mendez was a managing director at a London-based insurance company with $150 billion in investments globally, including a 33% stake in Eastern Square. "I need to talk to my bosses, too," Alex said. "And the construction team." Alex stared out his apartment window. As an American expat with family roots in Poland, he'd come to love Moscow, and he hated to see so much suffering in this city as well as around the world. He believed this project would be a catalyst for the city's further growthand he had put his heart and soul into it. If they sold now, his company and its partners wouldn't lose money, but he'd have wasted six years of his life. What's more, he'd forgo his outsize share of the potential profits. Did he really want to start a new project in this economy? We Can See It Through That evening Alex logged in to his last videoconference of the daythis one with Alicia. An influential partner at her firm, she managed a $30 billion real estate portfolio and had always been fully committed to the Eastern Square project. But like everyone else, she was now worried. "Before we talk about Nikolai's proposal, I want some more info on where things stand with construction," she said. "We had a two-hour meeting with the foreman earlier today; he and his team are set to restart as soon as they get the green light from the city," Alex explained. "But they're understaffed, and new guidelines are restricting the number of people we can have on-site. Their best guess is a year's delay at a minimum." "And worst case?" "He mentioned three years."4 Alicia's eyes widened. She took a breath. "Well, a delay could work in our favor, despite the higher interest costs. It would allow time for the economy to recover, for a vaccine to be developed, for people to return to the office. And the anchor tenant?" "I talked to the COO today, and she said they're deep in planning revisions but as of now still hoping to move forward with the expansion to Moscow. They might not need the full space though. She threw out the idea of 50% capacity." Alicia was silent for a moment. Alex waited. "As you know, we play the long game," she finally said. "Moscow's commercial office sector has long been underserved, especially at this grade." That was what had initially sold her on the project. The city had so few quality office buildings that competition over the existing stock was fierce. And Eastern Square was the most significant development in the pipeline through 2025. "The question is, will there still be demand when the market recovers?" Alicia continued. "Right, of course," Alex said. "That's hard to predict. There are some financial upsidesfalling interest rates, cheaper labor costsbut we need to keep our tenant and also attract others. I think we can still achieve a profit of more than $400 million if we pursue the long game, as you said." "There may be an opportunity to offer new state-of-the-art features like air filtration and touchless entry," Alicia replied. "Those could be critical differentiators.If you feel strongly, I think I can persuade people here to see this thing through, with a fully baked proposal from you on how we can weather the storm. Things may get worse before they get better." Alex nodded and smiled. "I can do that." But as soon as he closed the Zoom window, he asked himself, Can I? He couldn't escape the ominous headlines from cities around the world. If he was having trouble convincing himself, how could he convince others? And even more distressing, should he try? Past Experience It was close to 2:00 am, and Alex, still awake, called his mentor and former business school professor, Jay Huang, who'd spent his career in real estate development before joining academia. "Are you getting any sleep?" Jay asked. "Some," Alex lied. "I manage to fit a few hours in between scenario-planning sessions." Jay knew Moscow well. Right after Russia opened to outside investors, he had bought up land and built numerous high-end properties in the country. He'd left the city soon after the 2008 global financial crisis.7 Russia's economy was hit hard in 2008 when oil prices collapsed and foreign investors withdrew capital from the country. "What are you seeing?" he asked. "Obviously the possible range of outcomes is wide," Alex said. He explained that assumptions about rent and cost of capital could hold or, if things continued to deteriorate, could fall even further below his initial projections. The vacancy rate in Moscow had already spiked from 0.5% to 7% practically overnight. Alex gave Jay more details about the Kazakh investor's offer. "Nikolai says they see this as an opportunity to get a trophy asset at a great price. And they're eager to close the deal soon, which would give Krasny Invest the liquidity it needs. Plus Alicia and I would get a modest return on our investment. The EPM brass wouldn't be angry, but they wouldn't be happy either. This was supposed to be our marquee development for 2021. If it turns out I'm selling at a bargain, it would be a bad move." "What does your boss say?" "He's super busy with other projects in the EPM portfolio. Honestly, most of my counterparts are in a worse position than I am. Besides, you know how EPM operates. I'm the one on the ground, so it's my call: Make it work or cut and run." "If Alicia is willing to stick with you, could you persuade her to buy out Nikolai's company? Or would EPM?" "Us, no. Not now. Alicia, possibly. But I'm not sure I can navigate this without Nikolai. I suspect that the project has gone as smoothly as it has only because he's a drinking buddy of half the town." "I hope you're not beating yourself up," Jay said. "These are strange times, to say the least." "I recognize that this is mostly out of my control, but I'd love to be the person who pulls it off despite the odds. There's no denying that it would have huge upsides for me, from both a financial and a career perspective." "And you're so close to the finish line. This crisis will end. The global economy will recover. Companies will bounce back. The Moscow market will start growing again.Even in the aftermath of 2008, I had success with my projects. These things pass." 8According to an industry report, the value of commercial real estate transactions in Russia increased by 34% in 2019 to a total of $3.8 billion. "Spoken like a true real estate developer." Jay laughed. "You're one of us now." Start Over from Scratch? Early the next morning, when the sun was barely up, Alex put on a mask and walked from his apartment to the Eastern Square site. A few months earlier these streets had bustled with people. Today the few others he passed were in medical or police uniforms and also had their faces covered. It felt like a dystopian future. Would any city ever operate normally again? Were he and Alicia crazy for thinking that a central-city office project could still succeed? He reached his destination. If Covid-19 had never happened, construction workers would have been arriving, putting on their hard hats, and starting up the cranes and lifters for the day. But all was still. He looked up at the shell of the building and felt a tightness in his chest. He'd lined up a well-capitalized investor, a well-connected local partner, a reliable construction team, a premier location, and a world-class tenant. What seemed like the most promising project of his career was now at risk. This development had been his life for six years, and the thought of giving up on it now was difficult to stomach. Beyond the emotional investment, Alex had real dollars to consider. If he could salvage the project, his company's share of the investment would be worth millions, whereas a sale now would mean starting this chapter of his career from scratch. Question: Should Alex push the project forward or take the deal?

Review the attached project scenario. Next, outline how you would go about deciding the case and how uncertainty could be addressed. Finally, recommend which decision you would make as the decision-maker in the case. Your response should have the following sections:

Provide an introduction that highlights the problem in the case.

Summarize the three areas of uncertainty in the case.

Do some research of your own. What are some of the considerations in the case to research that can remove some of the uncertainty? Identify a possible action for each uncertainty.

Provide a recommendation and support with the actions from number 2 above and a final recommendation on the decision.

Cite all of your references used.