Windham Negotiation: Confidential Information for the Barkley Representative Overview In this simulation you are seeking to buy some real estate at the best terms that you can negotiate. Price is an important element in the cost-value equation, but there are other issues that may be significant as well. Given the scale of your operation and the local housing market, you want to buy just one of these properties - not both. In the end, their relative value depends on what price you are able to negotiate for each; in other words, whichever proves to be the better deal. The other key parties know some of the following information, but some facts are known only to you. Read this case carefully so that you can craft an effective strategy. Background You represent Barkley Homes, a residential developer seeking to expand its activities to the western portion of the state. Of the possible building sites you have evaluated, you currently have two prospects. The first is the old Abbott homestead in Windham Township. The land was owned by the late Edwin Abbott, who died recently at age 96, with no immediate family. His executor is selling the property. Abbott's will provided that the proceeds go the local library. The second piece of land is owned by the Cooperative Savings Bank, which acquired it (and an adjoining parcel) through mortgage foreclosure when the prior owner went bankrupt. The land that interests you is designated Parcel B. It is currently leased to Davis Stables, which trains and boards horses. Some of the land is open; some, heavily wooded. The only structure is a small barn, which does not have much value. Abbott Property (Option 1) The Abbott land consists of approximately 75 acres, including both woodlands and some overgrown fields. There is also an old farmhouse in terrible repair, along with a small barn. The current zoning regulations require two-acres per house lot. According to your landscape architect's preliminary plan, you could fit a maximum of 29 new lots on the land, with the rest of the acreage being used for new roads and common open space. It would not be worthwhile to try to restore the old house, but tearing it down might antagonize local historic preservationists. Instead, you would immediately sell the old house and barn, along with a few acres to buffer it from your development. You figure you could net about $150,000 from such a sale, in view of the poor condition of the farmhouse.For the remaining property, you have calculated the land cost that could be carried by the homes you plan to build and market. This yielded a figure of approximately $50,000 for each of the 29 lots. Thus, the full value of the entire property is $1,600,000 (that is, 29 times $50,000 for the land, plus $150,000 for the run-down house). You would not want to pay that much, however, as doing so would leave you no profit from this aspect of development. You have decided that $1,500,000 is about the very most you can justify paying for the entire property. The executor of the Abbott estate listed the property through a broker with an advertised price of $1,695,000. You believe that this asking price is merely a place to begin negotiations. Now it is your turn make a formal offer. Other people may be interested in buying this property, so you want to make clear that you are a serious prospect. On the other hand, you want to get as good a deal as possible. You also may want to leave yourself some room to bargain. You will meet with the executor in order to make a formal offer and to explain your reasoning behind it. When you arranged that meeting, you asked whether some sort of deal structuring might be possible. Specifically, you asked if the executor would consider "seller-financing," since commercial lending rates on undeveloped land tend to be high. The executor explained that this might be difficult, but agreed to consult with the trustees of the local library (the beneficiary of Edwin Abbott's will). The executor admitted surprise in reporting some interest on their part, but strictly subject to the following conditions: First, at least half of the price would have to be paid in cash. Second, the balance must be paid in ten equal annual installments with floating interest at no less than 1.5 points over the prime lending rate. Third, Barkley would have to secure the note with a mortgage on the land. Privately, you were delighted to hear those terms, but you said that you hoped that they could lower the suggested interest rate and extend the term somewhat. The executor claimed to have no authority to improve those provisions, but you are not convinced this is necessarily true. The reality is that you would have had to pay 2 points over the prime rate if you borrowed from a bank or other commercial lender. The $1,500,000 maximum price you set for yourself assumed this high rate of interest. Therefore, even if the trustees' proposed terms truly are nonnegotiable, you would prefer to use seller-financing for as much of the deal as possible. Specifically, taking into account their proposed 10-year term and rate (1.5 points above prime), you should discount any amount you finance by 20 percent.' In short, seller-financing allows you to do the deal with cheaper money. That may mean more profit for you, or a larger budget for you to acquire the property. As to negotiating the actual purchase price, be prepared to deal with a possible argument that the executor may make to inflate the value of the property. Specifically, the executor may try hard to persuade you that you will benefit by a new "cluster development" law that is being considered by the local zoning authorities. It is true that such if such a law were passed, it allow you to build a moreenvironmentally sensitive development-and to reduce infrastructure costs (roads, utilities, sewers, etc.). Clustering would also yield more open space, an amenity that would enhance marketability of your new homes. If the cluster law were in operation today, you would value each lot at $75,000. Thus, the hypothetical value of the entire property would be $2,325,000 (that is, 29 times $75,000 for the land plus $150,000 for the existing house). The reality, however, is that you do not expect the new cluster law to pass, at least not soon enough to benefit your project. Your experience in other small communities has taught you that land policy issues are often very controversial. If you lobbied for enactment, local people might well resent your action. At best, you estimate that the likelihood of timely enactment of the cluster law is 20 percent. Do not be misled by any optimistic projections that the executor may make. In short, you should thus explain that your company can only value land in respect to what it reasonably anticipates will be lawful. Barkley Homes simply cannot pay a premium for development rights that probably never will materialize. There is one critical issue you have yet to raise with the executor: specifically, it is very important to get title to the land as soon as possible. You are concerned that probate proceedings can be very slow. Ideally, you would like to get control of the property within a month. If the executor cannot move that quickly, you should regard that delay as costing you an additional $100,000. If you cannot get the deal done within two months, the cost of delay is $200,000. If the executor cannot guarantee closing the deal within three months, you should refuse to come to agreement and abandon the Abbott project and try hard to obtain Parcel B