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Starwood Capital
Introduction
no. 1-0068
On a wintry December 2nd afternoon in 2002, D. Arne Arnesen, Managing Director at
Starwood Capital (Starwood) sat in his suburban Greenwich, Connecticut office. Arnesen’s
thoughts swirled, like the snow outside his window, about a deal that had been in the making
since August – a deal that had to close by year’s end if was to happen at all. The transaction
involved Starwood’s purchase of a large Fort Worth, Texas multi-use campus consisting of
three buildings currently owned by Motorola (NYSE: MOT), the telecommunications
equipment and semiconductor manufacturer. The Motorola Campus was located in a region
of North Fort Worth known as Fossil Creek – an area dominated by office/industrial parks
and luxury residential planned unit developments. Motorola had constructed these buildings
for manufacturing and office use. The deal had arrived on Arnesen’s desk in August 2002
from Young Park, the founder and President of Berkeley Investments, Inc. (Berkeley), a
Boston-based real estate investment and asset management firm that had sourced deals for
and successfully partnered with Starwood in the past.
Arnesen, a lawyer by training, joined Starwood in August of 2002, having spent over
twenty-five years working in the real estate industry, originally at Chemical Bank and more
recently with JPMorgan Partners. Having witnessed the real estate boom and bust cycles in
the 1980s and 1990s, Arnesen understood the cyclical nature of the real estate market.
Recently, some commentators had argued that a bubble was forming while others saw plenty
of upside ahead. Arnesen, never a big believer in macro generalizations, was unsure where
the overall market was moving.
Upon a preliminary review of the Motorola transaction, Arnesen thought he had found an
investment with some potential. Also weighing on Arnesen’s mind, however, was the fact
that the Motorola Campus was his first major transaction at Starwood. He had been given the
greenlight to pursue the deal by Jeff Dishner (Tuck ’93), COO and Senior Managing
Director and other members of the Starwood Investment Committee, but he knew that
ultimately it would be viewed as “his” deal.
Starwood and Berkeley had agreed that they liked the investment in principle. Motorola had
done a good job of maintaining the buildings, and for $45 million they were buying a lot of
square footage. Although Motorola was interested in selling this property, the company was
determined to obtain the full market value. Both sides had expended a significant amount of
This case was written by K. Niles Bryant, Tuck ’03, Sara S. Shank, Tuck ’03, and John H. Vogel Jr., Adjunct
Professor, Tuck School of Business at Dartmouth. Some names and numbers have been altered or disguised.
© 2003 Trustees of Dartmouth College. All rights reserved. For permission to reprint, contact the Tuck School of
Business at 603-646-3176.

Starwood Capital no. 1-0068
time and resources in developing the outlines of a transaction. Yet as December 2002
approached, many of the deal terms were not finalized, including the financing for the
transaction. Starwood and Berkeley were nimble organizations accustomed to operating
under time-pressure, but it would take considerable focus and skill to finalize the details and
close by year-end. Indeed, Motorola had insisted that the sale had to happen by the end of
the year or negotiations would have to start over from scratch and it might not sell the
buildings at all.
Starwood Capital
Starwood has been one of the most active and successful investors in real estate since 1991,
closing over 200 transactions since inception. Founded by Barry Sternlicht, a Harvard
Business School graduate with a penchant for deal-making, Starwood incorporated in 1991.
In 1990, Sternlicht, then just 30 years old, found himself out of work, having lost much of
his savings in a messy investment debacle involving his former employer, a Chicago-based
real estate firm. Despite this setback, Sternlicht believed that the real estate market was
about to improve and there were terrific investment opportunities available. During 1990, as
the real estate market deteriorated in the U.S. and Europe, Sternlicht shopped his idea for an
opportunistic, private equity fund that would focus on unloved and therefore potentially
underpriced real estate assets that offered investors the chance for significant upside if and
when the market turned. It was a tough sales pitch especially considering the fortunes that
had been lost in real estate investments the previous two years. Nevertheless Sternlicht
managed to raise $20 million dollars –from the Ziff Brothers, active private equity players,
and from the Burden family, descendants of the Vanderbilts – and so Starwood Capital was
born.
If Sternlicht’s backers were initially wary of putting capital to work in a difficult real estate
market, their concerns were assuaged when Starwood’s first fund generated an astonishing
100% return within 18 months of its inception. Starwood acquired 6,400 apartment units,
merged the entire portfolio into a larger portfolio of apartments, which Sam Zell later took
public as Equity Residential Property Trust (NYSE: EQR). Emboldened by the success of
Starwood’s first fund, Sternlicht then focused his sights on the ailing hotel market, ultimately
leading to the recapitalization, reorganization and expansion of a faltering REIT into
Starwood Hotels & Resorts Worldwide (NYSE: HOT). Today Starwood Hotels and Resorts
is one of the world’s largest owner/operator of hotels with such flags as Sheraton, St. Regis,
Westin, and W Hotels in its portfolio. It employs 105,000 people in its 766 hotel properties.
Starwood Hotels has since been spun off from Starwood Capital, but Sternlicht continues to
serve as Chairman and CEO of both Starwood Hotels and Starwood Capital.
Starwood Capital currently employs approximately 65 people. Since its inception it has
acquired in excess of $8 billion worth of real estate. Starwood has created a series of
private equity funds, which have produced compound annual returns of over 30% since 1991
(see Exhibit 1 for a summary of Starwood’s investment philosophy and track record.).
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Starwood Global Opportunity Fund VI
Starwood Global Opportunity Fund VI closed in March of 2002 and like its predecessor
funds is organized as a limited liability corporation. This fund raised $600 million from
institutional and high net worth investors. In the prospectus, Starwood Capital states, “the
Fund will terminate in eight years from the final closing date, unless extended, at the
discretion of the Manager (Starwood) for up to two consecutive one year periods.”
Like the earlier funds, Starwood’s Fund VI seeks unusual, opportunistic investments. To find
these investments, Dishner, Arnesen and their colleagues closely monitor capital flows,
honing in on areas that are currently out of favor. For example, if most investors are
avoiding hotels or industrial properties then that is precisely where Starwood would look.
Similarly, when capital was flowing out of Thailand because of the devaluation of the Thai
currency, Starwood began buying real estate there. This contrarian approach enables
Starwood to avoid crowded and competitive markets. Flexible in its mandate, Fund VI is
free to invest domestically or internationally in projects ranging from raw land development
to acquisitions of existing projects. The key criteria is that each investment is expected to
yield at least a 20% compound annual return (net of fees).
As a “private equity” investor, Starwood regards real estate as a cyclical commodity with
windows in which to buy, sell or hold, targeting investments in which assets can be
purchased at a discount to replacement cost often from distressed owners who are motivated
by factors beyond price. Common among most private equity partnerships, Starwood and its
Fund investors split the net proceeds through a complex series of allocations. Exhibit 2
describes and illustrates the way that cash flows and residual proceeds are allocated in
Starwood Global Opportunity Fund VI.
Berkeley Investments, Inc. and Binswanger/CBB
For the sourcing of potential transactions, Starwood often relied on referrals from contacts in
the real estate industry and from local partners with whom it has joint ventured in the past.
In keeping with this pattern, Berkeley’s Young Park contacted Arnersen about Motorola’s
Fort Worth campus. Partners like Berkeley have intimate knowledge of their local markets
or specialized expertise on an operational level that enabled them to source and manage
attractive investments. Most of Berkeley’s investments were concentrated in the New
England region, including a recent transaction with Motorola to acquire a property in
Massachusetts. Because of this relationship with Motorola, Berkeley had continued to look
for additional opportunities to purchase real estate that Motorola no longer needs. This
relationship led Berkeley to the current property in Texas, which it hoped to purchase
through a joint venture with Starwood Capital.
Like Starwood, Berkeley was born in the early 1990’s with an opportunistic focus and often
partnered with large private equity funds. In these partnership arrangements, Berkeley would
source, co-invest and help manage the real estate assets that were too large for it to acquire
independently. Berkeley assisted investors like Starwood in a variety of ways including:
acquisitions, dispositions, asset management, portfolio management and new developments.
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Starwood Capital no. 1-0068
In 2002, Berkeley had a portfolio of assets under management of three millions square feet
of commercial and office space worth approximately $300 million.
Berkeley had developed a good, working relationship with Binswanger/CBB, an
international real estate firm known for having extensive contacts with large industrial
companies. In recent years, Binswanger had become the preferred broker for Motorola’s
properties. In 2001, Binswanger/CBB brokered the sale of a large property outside Boston
from Motorola to Berkeley and its partner in the deal, JP Morgan Partners. Motorola was
impressed with Berkeley’s ability to close this transaction within a restricted timeframe,
making the firm a natural choice to consider when Motorola decided to sell several other
properties in 2002. And so, Binswanger/CBB contacted Berkeley with an opportunity to bid
on a national portfolio of Motorola properties, including the Fort Worth Campus, as well as
properties in Atlanta, Georgia and South Florida. Although Berkeley made several offers on
different combinations of these assets, the firm ultimately opted to focus exclusively on the
Fort Worth Campus.
In terms of investment and the allocation of distributions, Berkeley’s arrangement with its
private equity partners like Starwood typically consisted of a 90/10 split – 90% of the equity
investment comes from Starwood and 10% is contributed by Berkeley. Distributions are
then filtered through a highly structured payment arrangement, the goal of which is to
protect Starwood if the investment does poorly and reward Berkeley if the investment does
well. Thus, until Starwood receives a 12% annual return on its investment, Berkeley only
receives a prorata share based on its own equity investment. As the returns improve,
Berkeley’s share of additional profits keeps getting larger so that once the distributions rise
above a 17% IRR, Berkeley receives 20% of the additional proceeds.
Motorola, Inc.
An innovator in electronics and communications equipment, Illinois-based Motorola, Inc.
(NYSE: MOT), benefited greatly from the technology spending boom in the 1990s. Known
best for its manufacturing of wireless telecommunication equipment and semiconductors,
Motorola experienced tremendous growth across its business lines in connection with the
tech-driven run-up of the 1990’s. But like many other technology-centered businesses,
Motorola has experienced a significant decrease in telecom purchase from both consumers
and businesses since 2000.
Revenues slid 11% in 2001 from 2000 levels, and 2001 marked the first unprofitable full
year in the company’s history (see Exhibit 3 for Motorola’s 2000-2002 consolidated
financial statements). Indeed, from its peak of over $60 per share in March of 2000,
Motorola’s stock price had fallen to just over $10 per share by the time Starwood was
considering purchasing the company’s Fort Worth property. Motorola continued to enjoy an
investment grade rating on its debt, but as shown in Table A, in October 2002, the two major
rating agencies were growing concerned.
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Table A: Motorola Credit Ratings as of October, 2002
S&P Moody’s
Senior Unsecured BBB Baa2
Commercial Paper A2 P2
Outlook Stable Negative
Source: Company website
Because of its size, Motorola is a significant owner and lessor of property worldwide. In an
effort to restructure its operations, Motorola took aggressive steps in 2001 and 2002 to trim
its headcount, which then resulted in a need to reduce the company’s real estate holdings
(see Table B below).
Table B: Motorola, Inc. Year End Headcount and Real Estate Commitments
2002E 2001A 2000A 1999A
Global Headcount 97,000 111,000 147,000 121,000
Owned Properties 79 90 95 97
Leased Properties 357 490 571 511
Source: Company filings
The cost reductions associated with employee cutbacks and property dispositions helped
Motorola improve its balance sheet. In the Letter to Stockholders in its 2001 Annual Report,
Motorola highlighted property sales and headcount reductions as key drivers behind its
efforts to regain profitable growth.
From Starwood’s perspective, Motorola’s decision to divest some of its non-core assets was
part of a larger, global trend. Over the last ten years, a number of U.S. corporations have
chosen to reduce their real estate holdings in order to improve their balance sheets, gain
flexibility or simply reduce their involvement in an industry that is not their core business.
For Starwood, this change in corporate behavior has created some good opportunities to
acquire real estate that Starwood can either lease back to the selling corporation or reposition
and release. In the overall, U.S. commercial real estate market, the share of assets owned by
corporations has declined to approximately 30% from about 50%. In contrast, according to
Jeff Dishner, in Europe approximately 75% of all commercial real estate assets are owned by
corporations.
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Starwood Capital no. 1-0068
Fort Worth, Texas
Dallas/Fort Worth
The Dallas/Fort Worth (DFW) market is a dynamic one, ranking as the ninth largest
metropolitan area in the United States and the largest in the state of Texas. In addition to its
size, DFW was the country’s top population and employment growth region among the
major metropolitan areas in the ten-year period ending in 2001, above such hot-spots as
Atlanta, Houston, Los Angeles, and San Francisco. 1 Among the advantages enjoyed by this
region were the lack of personal income taxes, a good transportation system, a pro-business
climate, and a low cost of living. The cost of doing business (taxes, fees, etc.) in the area is
estimated to be about 8% below the national average. Drawn by these conditions, nineteen
Fortune 500 companies are headquartered in the DFW area (including American Airlines,
Exxon Mobil, JC Penney, and Texas Instruments). Over the past three decades, the area has
become a national leader in semiconductors, telecommunications, defense electronics and
computer services, with EDS, Lockheed Martin, Nortel Networks, and MCI among the
area’s top employers. According to a Milken Institute study entitled “America’s High-Tech
Economy,” DFW ranked second nationally in terms of high-tech importance at the peak of
the technology boom.
Because of its dependence on “New Economy” businesses, the DFW area was significantly
impacted by the downturn in the tech/telecom industry in 2000. Texas’ eleven-year
employment growth stalled in 2001, with a net decline of 95,000 jobs statewide. DFW alone
lost approximately 35,000 jobs in that same period and the unemployment rate ballooned
from 4.4% to 6.9%.
North Fort Worth
The Motorola Campus, a three building 1,089,201 square foot complex of Class B flex 2
space is located in the North Fort Worth submarket. The North Fort Worth submarket was
characterized by a limited amount of traditional office space, although H. Ross Perot’s
development company was in the process of building a massive 9,600 acre office complex
which could potentially add several million square feet of space. On the industrial side, the
North Fort Worth submarket was faring a bit better than DFW as a whole, maintaining
vacancy rates of about 10%. Like industrial space generally, the vacancy rates in the North
Forth Worth sub-market for flex space were slightly lower than for the overall DFW market
(see Table C).
Current employment in North Fort Worth submarket is estimated to be approximately
800,000 workers with predicted growth over the next ten years of 2.6%. Employment in this
1 According to Holliday Fenoglio Fowler, L.P., a leading commercial real estate intermediary.
2 Flex space is essentially a hybrid between office and warehouse space. It is particularly attractive to small companies who do
not want to pay the price for class A office space and/or want to keep their whole operation in one place. A typical flex building
might contain 5 or 6 separate businesses. Inside the building, the individual spaces might be built out as 50% office or
showroom space, 20% assembly or manufacturing space and 30% storage space with a truck dock. Flex space is usually
classified as a subset of industrial space.
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area has historically grown by approximately twice the national average although this
growth has slowed in recent years.
Fossil Creek
The Motorola Campus sits within the Fossil Creek submarket of the North Fort Worth
submarket. Fossil Creek is comprised of 154 buildings with a total of 17.8 million square
feet of industrial space. Of overall industrial space, Fossil Creek has 1.6 million square feet
of flex space in 37 buildings, or 12.1% of the total space. A summary of market data for the
DFW, North Fort Worth and Fossil Creek markets appears below in Table C.
Table C: Real Estate Market Data as of 2002 Q2
Statistic
Dallas/Ft
Worth North Ft Worth Fossil Creek
Employment Growth 2001 (34,800)
Median Per Capita Income for 2001 30,000
Total Employment 792,800
Total Office Space (SqFt) 202,596,656 2,989,776 NA
Available Office Space (SqFt) 50,225,253 622,256 NA
Office Vacancy Rates 24.8% 3
20.8% NA
Office Under Construction (SqFt) 1,458,339 0 NA
Mean Office Rents $18.12 4
$22.11 NA
Total Industrial Space (SqFt) 548,000,000 37,000,000 17,800,000
Available Industrial Space (SqFt) 63,500,000 3,400,000 1,700,000
Industrial Vacancy Rates 11.60% 9.00% 9.70%
Industrial Under Construction (SqFt) 5,050,000 964,000 0
Mean Industrial Rents $3.63 $3.95 $3.56
Total Flex Space (SqFt) 112,000,000 2,200,000 1,600,000
Available Flex Space (SqFt) 13,600,000 165,000 128,000
Flex Vacancy Rates 12.10% 7.40% 8.00%
Flex Under Construction (SqFt) 281,000 0 0
Mean Flex Rents $7.87 $8.40 $8.50
Note: Office rents are gross, while Flex and Industrial rents are triple-net (NNN) 5
Source: Reis Observer, First Quarter 2002 for Industrial and CoStar Realty for Office Rents.
3 Vacancy was about 24% in class A and B office space and 29% in class C.
4 In the overall market, quoted class A office rents averaged $21.28, class B rents averaged $17.02 and class C space was
quoted at $14.62 including $5-6 of operating expenses.
5 Triple-net or NNN is a type of lease where the tenant pays, in addition to rent, virtually all of the operating costs associated
with the operation of the property. These costs include: property taxes, insurance, repairs, janitorial, utilities, and maintenance.
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The Motorola Campus
The Motorola Campus is located in the Fossil Creek Business Park – conceived of and
developed by members of Texas’ well-known Hunt family. It is near the intersection of I-
35W and I-820, two of the major highways in the Fort Worth area (see Exhibits 4). The
location is approximately seven miles from downtown Fort Worth and 17.5 miles from the
Dallas/Fort Worth airport. The campus consists of three buildings that total 1,089,201 square
feet on 97.56 acres of land. On the Motorola Campus there is sufficient land to develop
another 250,000 square feet of office, R&D or flex space. One of the most attractive
features of the Campus is its convenient access to and visibility from the highway. The
buildings on the Campus are classified as flex space due to their multi-functional uses. The
business park offers several amenities within a one mile radius including hotels, restaurants,
a golf course, banks, and retail establishments.
Cellular Building
The first of the three buildings being sold by Motorola is the “Cellular Building” which is a
665,545 square foot one and two-story structure. Built in stages from 1977 to 1996, the
Cellular Building is made up of approximately 45% office space, 25%
manufacturing/assembly space, 12% lab space, 9% finished warehouse space and 9%
unfinished space that is being used by Motorola as storage. Motorola proposed that after the
sale it would lease back 100% of the Cellular Building from the eventual buyer. Initially
they offered to sign a five year lease at $7.00 NNN per square foot with rental increases of
2% per year. Motorola also wanted four (4) options to renew the lease, the first option being
for five years and the next three renewals for three years each.
Paging Building
The second building on the property is known as the “Paging Building”. Consisting of
411,561 square feet of R&D space, this building was built at a cost of approximately $100
per square foot in 1995. The intended purpose of the property was to be the primary R&D
and light manufacturing space for Motorola’s paging division. However, as cellular
technology evolved, Motorola decided to divest its paging operation and therefore this
building is currently 100% vacant. The Paging Building can be retrofitted to accommodate
four to eight tenants, although this renovation would cost approximately $4 million.
Learning Building
The third building is the “Learning Building” which is 12,095 square feet and was used by
Motorola as a day care center. This space is currently leased to a national day care provider
called Bright Horizons. Because Motorola wanted a high quality day care provider for its
employees, Bright Horizons was given a favorable lease rate. In 2003 the rate will be $2
NNN per square foot.. For the next four years the rent is scheduled to increase by $1 per year
so that in 2007 the rent will be $6 per square foot. The lease expires in 2008. Arnesen
thought there might be an opportunity to convert this building to office use at a significantly
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higher rent, but for projection purposes, he assumed that in 2008 the tenant would renew at a
$6 rate.
Due Diligence
Physical inspection of the property by Starwood and Berkeley surfaced some issues. These
included: the parking lot needed resurfacing/replacement; two of the eight air handling units
were near the end of their useful life; and a portion of the roof of one of the buildings needed
to be replaced. The total estimated cost for all capital improvements was $1 million. Also,
after re-measurement of the buildings using Building Owners and Managers Association
(BOMA) standards there was a loss of almost 15,000 square feet. Thus, instead of
purchasing 1,104,000 square feet, Arnesen believed the total rentable square footage would
end up being 1,089,201 square feet.
Overall, the property was in good shape. Park’s previous experience with Motorola had
taught him that the company generally built top-notch facilities and maintained them well.
Despite some needed capital improvements, the Motorola Campus appeared to be consistent
with this trend.
Transaction Specifics
Throughout the process, Arnesen met frequently with Jeff Dishner to discuss the investment.
They were both concerned about the empty Paging Building but continued to believe that the
investment had potential. As December approached, Arnesen and Berkeley finally got
Motorola to agree to a higher lease rate and longer term. Motorola agreed to increase the
length of its lease from five years to eight years. It also agreed to annual rental increases of
3% and a triple net lease rent of $7.50.
Projections/Assumptions
With the specifics of the transaction now in place, Arnesen ran what he hoped would be his
final set of projections upon which Starwood could make its decision about whether or not to
make this investment. For simplicity, he would start by looking at the returns at the property
level. Starwood’s investors expected unleveraged returns at the property level to be in the
mid-to-high teens and over 20% on a leveraged basis. For this basic analysis, he assumed
that all the equity would come from one source and all the returns would go to that source.
Arnesen’s view was that if the deal did not work on this basis, it would certainly be even less
attractive once he included partnership distributions to the various parties.
For this proforma Arnesen assumed that the Starwood-Berkeley Partnership would be able to
purchase the property for $45 million plus $2 million in brokers fees and other transactional
costs. After closing, the partnership would need to invest an additional $4 million in
improvements in order to subdivide the Paging Building space for multiple tenants. He
assumed that Motorola would pay the $1 million to repair the roof, the parking lot and the
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other physical items from the inspection. Therefore the total investment would be $51
million.
Next, Arnesen assumed that the Paging Building would lease up at 50,000 square feet per
year with the associated brokerage and tenant fit up costs. He assumed a $7.00 NNN rental
rate on the Paging Building and that this rate would stay flat for the next eight years while
the building leased up. Based on the competition in the marketplace, Arnesen assumed that
he would need to offer new tenants a build out or tenant improvement allowance of $10 per
square foot and would need to pay brokerage fees averaging $5 per square foot. For his
model, Arnesen assumed that operating expenses for the full complex would be $2.70 per
square foot consisting mostly of real estate taxes, insurance and the management fee. 6
Finally, Arnesen projected that tenant improvement and operating expenses would increase
at 3% per year.
The Investment Decision
Arnesen wished that he had more time to investigate the market. If he could lease up the
space at 100,000 square feet per year, he knew the projections would look much better. He
also knew that if he assumed a residual sale at an attractive cap rate, it would boost his
projected return, but he decided that the investment committee would balk at anything lower
than a 9% residual cap rate.
In estimating the amount of financing for his projections, Arneson decided that he would use
a 6% rate, ten-year term and 25-year amortization schedule. He assumed that he would be
able to obtain about a $31 million loan or 60% of the $51 million total acquisition price.
These assumptions were on the conservative side. For example, for fully-leased properties,
there was strong competition from banks and mortgage brokers who were offering rates of
150-250 basis points over 10-year Treasuries 7 and willing to loan 75-80% of the value. If
investors were willing to use floating rate debt, they could obtain a rate of about 3% (200
basis points over LIBOR), with a 25-year amortization schedule for as much as 75-80% of
value of the property. In contrast, for a vacant building, it was hard to find a bank that would
make a loan, and if they did, the lender would charge at least 400 basis points over 10 year
Treasuries and probably limit the loan to about 40% of the building’s value. For a partiallyleased
property like the Motorola Campus, Arneson was confident that he could obtain 60%
leverage and also get a rate comparable to a fully leased building.
Another issue that Starwood always considered when making an investment was the flow of
funds into real estate markets and what was happening in the capital markets (see Exhibit 5).
Because of poor returns in the stock market during the last few years, there had been a flood
6 Arnesen assumed these operating expenses would be reimbursed by the tenants except for the portion that related to the
vacant space. Arnesen also projected a $0.20 per square foot replacement reserve, which would not be passed through to the
tenant and a 5% general vacancy allowance in addition to the vacant space in the Paging Building.
7 In December 2002, 10-year Treasuries were yielding a forty-five year low of approximately 3.9%. LIBOR was at 1%.
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of money from pension funds and other institutional investors looking for the perceived
safety of real estate assets. Although the rental income from the Motorola lease only lasted
eight years, some institutional investors would be very tempted by the cash-on-cash return
they could obtain during that period, especially if the property were heavily leveraged with
floating rate debt. These investors might also be willing to take the risk that Motorola would
renew its lease at the end of eight years or that sometime during that period the market
would improve and they would find another tenant. Arnesen was unsure how pension funds
would react to an investment that was only 60% leased, but the property was certainly an
appropriate size for the institutional market.
Finally, Arnesen knew that everyone had expended a significant amount of time and
resources to get the transaction to this point. He also knew that his decision should not be
guided by the amount of time and effort he had put into the deal. Jeff Dishner had made it
clear that if Arnesen wanted to walk away from this investment, he had that option. “Some
of the best investment decisions we make are decisions not to invest”, Dishner had told him.
On the other hand, Arnesen continued to believe that he was buying real estate at a price that
was less than half what it would cost to build it new. He looked carefully at the photographs
of the buildings and then went back to his spreadsheets, promising himself that he would
make a decision before he left the office.
Case Questions
1. What kind of IRR can Starwood expect to generate from this property (before taking into
consideration the allocations between Starwood Capital, Berkeley and Starwood’s
investors)? Would you recommend that Starwood Capital make this investment? Why or
why not?
2. Is Fort Worth, Texas an attractive real estate market to invest in? What are the key market
factors that Starwood needs to consider in making this investment? What are they betting
on?
3. Motorola both owns and leases real property. If you were in charge of Motorola’s real
estate department, what would be the key factors going forward in deciding whether to
lease or buy new space?
4. This case illustrates the interaction between the real estate markets and the stock and bond
market. In what ways is the real estate market impacted by what is happening in the
stock market?
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Exhibit 1
Starwood Capital’s Investment Philosophy and Track Record
Starwood regards real estate as a cyclical commodity with windows of opportunity in which
to buy, hold or sell. Starwood’s investment strategy is always tailored to the stage of the
investment cycle. In distressed markets, Starwood intends to pursue investments in
undervalued, undercapitalized and mismanaged real estate and real estate related companies.
In mature markets that have generally reached a state of equilibrium, Starwood will achieve
its investment objectives by pursuing opportunities where technology is enabling rapid
growth or through a selective value-added repositioning and development program in niche
markets with strong local partners. In all of its investment activity, Starwood considers the
exit as important as the acquisition.
Starwood’s track record has been built on its ability to remain ahead of its competition,
anticipating capital flows, investing in emerging areas of opportunity, completing complex
transactions and avoiding crowded and competitive markets. Starwood has also
distinguished itself with its operating company focus, which has usually taken one of two
forms: either direct investments in real estate related operating companies where strategy
and/or operations could be enhanced, or the creation of new businesses from scratch by
aggregating investments in certain asset classes, defining strategies, assembling management
teams and building enterprise value. In several cases, these corporate investments have
resulted in public market transactions. Starwood has dubbed its unique investment style,
“Venture Real Estate”. Whatever form they take, Starwood’s investments are defined by a
focus on risk versus reward and relative value investment. 8
SOF
1/1A
SOF
II
Starwood
Mezzanine Starwood
Hotel &
Resorts
Starwood
Westin
SOF IV SOF V
Closing Date Feb. Nov. Nov. 94 Jan. 95 May 95 Feb. 97 April 99
92 93
Capital
Commitments
($ Millions)
$52 $102 $220 $83 $78 $830 $516
Number of
Investments
38 34 9 9 1 44 79
Number of
Properties
38 40 77 33 10 73 NA
Avg. Invest.
Size ($M)
$4 $7 $23 $23 NA $46 NA
Multifamily 98% 27% 23% 0% 0% 6% NA
Hotel 0% 11% 27% 100% 100% 18% NA
Office 0% 34% 18% 0% 0% 61% NA
Percent of IRR
Realized
100% 75% 100% 100% 100% 67% 0%
AnnualizedIRR 96% 21% 25% 78% 135% 28% NA
8 These two paragraphs are excerpted from the Executive Summary of the prospectus for Starwood Global Opportunity Fund
VI. The table above is extracted from a supplement to that prospectus.
Tuck School of Business at Dartmouth 12

Starwood Capital no. 1-0068
Exhibit 2
Starwood Global Opportunity Fund VI
In allocating cash flow and appreciation between Starwood Capital and its investors, this
Fund tries to ensure that there is an appropriate alignment of interests. In particular the
structure of the fund provides strong incentives for Starwood Capital to achieve superior
returns. Before Starwood Capital receives its share of the profits, however, the fund is
designed so that the investors get back their initial investment plus a return on that
investment. 9 In its offering memorandum, Starwood stresses the following points:
1. The Manager will commit at least 1% of the total capital (up to $7.5 million) to the
Fund to be invested pro rata with the Investors. “It is Starwood’s corporate
philosophy that its principals invest in every transaction the firm sponsors and that
they have a significant portion of their net worth in transactions originated by the
firm.” (Starwood Global Opportunity Fund VI, p. 4)
2. No acquisition, disposition or financing fee will be paid to the Manager, and the
Manager shall not participate in investment profits realized on a particular asset,
until the Investors have received their invested capital back on such asset as well as
a 10% preferred return on that amount with respect to that asset. Additionally, 50%
of the profits otherwise distributable to the Manager on a particular asset will be
deferred to protect the return to the Investors.
3. The Fund will pay the Manager a 1.25% annual management fee based on the
funded Capital Commitments. The Fund will also bear the organizational and
offering expenses incurred in the formation of the Fund up to an aggregate amount
of $1 million.
The following simplified example illustrates how cash flow and residual proceeds might be
shared. We will assume that the Fund raises $20 million (including the $200,000 or 1% from
the Manager). The Fund acquires two properties, each for $25 million and structures each
investment with $10 million in equity and $15 million in debt at 6% interest only. 10 We will
further assume that the cash flow before financing is $2.5 million for the first investment and
$2.0 million for the second investment. We will also assume that at the beginning of year
two the Manager sells the first investment for $30 million. Here, in simplified form, is how
the cash flow and residual proceeds would be distributed. In this example we will not
consider the allocation of tax benefits.
9 The information in this exhibit is drawn from the offering statement. It is intended simply to provide a general overview of the
way the investment is structured. In an effort to be concise and clear, many important details and contingencies have been left
out.
10 One of the investment guidelines is that the total capital investment by the Fund in any single asset may not exceed 20%
unless approved by the Advisory Committee, but for this example we will ignore this diversification issue.
Tuck School of Business at Dartmouth 13

Starwood Capital no. 1-0068
Exhibit 2 (Continued)
Example of the Allocation of Cash Flow and Residual Proceeds
Cash Flow Before Taxes for Investment 1 $2,500,000
Cash Flow Before Taxes for Investment 2 2,000,000
Total Cash Flow 4,500,000
Debt Service ($30 million times 6% interest only) (1,800,000)
Asset Management Fee (1.25% on $20 million Capital Commitment) (250,000)
Reserves to be Held at the Property or Fund Level (250,000)
Available for Distribution 2,200,000
10% Preferred Cumulative Return to the Investors ($20 million x10%) (2,000,000)
Sub-total (Profit After 10% Preferred Return) 200,000
Deferred Fee Owed to Starwood (25% of the $2,200,000 Available for
Distribution = $550,000) 11
0
Return of Excess Cash Flow to the Investors (Return of Capital)
Residual Proceeds
200,000
Sale of Investment #1 at the Beginning of Year 2 $30,000,000
Sales Expense (Brokerage, Lawyers, Filing Fees etc. 2%) (600,000)
Net Proceeds 29,400,000
Repayment of the Mortgage (15,000,000)
Sub-Total 14,400,000
Catch-Up Payment to Ensure Investors Receive a 10% Cumulative Return 0
Repayment of the Investors’ Capital Contribution ($10 Million-$200,000 of
Previously Returned Capital)
(9,800,000)
Payment of Deferred Fees to Starwood (550,000)
Sub-total (Profit Available for Distribution) 4,050,000
Investors Share of the Residual Profits (80%) (3,240,000)
Starwood’s Share of the Residual Profits (20%) 810,000
Fees Due to Starwood that get recaptured and distributed to the Investor as a
return of capital. 12
680,000
As this example illustrates, although the overall investment might be described as an 80-20
split of the profits, a much higher percentage of the cash flow and residual proceeds flow to
the investors until they have received their capital investment and their preferred return.
Most of Starwood’s profits will come at the very end, after the final properties are sold.
Thus, Starwood has a strong incentive not only to maximize the returns to the investors, but
to do it in as quickly as possible.
11 This $550,000 fee will only be paid after the investor receives back its full investment plus its 10% preferred return. It is also
important to note that Starwood does all its calculations property by property. In this case we will assume that the $200,000
return of capital all goes against investment number 1.
12 These fees will only be paid to Starwood after the investor receives all of its capital contribution plus a 10% cumulative
return. (Calculation of the amount to be deferred: 50% of the Deferred Fees ($550,000/2) and 50% of Starwood’s Share of the
Residual Profits ($810,000/2).
Tuck School of Business at Dartmouth 14

Starwood Capital no. 1-0068
Exhibit 3: Motorola, Inc. Financial Statements
Tuck School of Business at Dartmouth 15

Starwood Capital no. 1-0068
Exhibit 4: Picture of the Property
Tuck School of Business at Dartmouth 16

Starwood Capital no. 1-0068
Exhibit 4 (con’t): Location of the Property
Tuck School of Business at Dartmouth 17

Starwood Capital no. 1-0068
Exhibit 5
Tuck School of Business at Dartmouth 18