Two small family firms may pull off the first Western housing complex in Moscow, by striking alliances with big-name partners.
Alan Senie and Nolan Kerschner knew they had their work cut out for them as they sat around a conference table at the London headquarters of the Morgan Grenfell bank last January. Their goal: to secure $24 million to begin an ambitious and risky project. Alan, a lawyer, and Nolan, a builder, were proposing to create the first Western-style suburban housing in the Soviet Union, something much larger companies had contemplated but never attempted.
They already had two strikes against them as they began their pitch. First, the condominium-style project they were to outline represented the partners' first foray into international housing. In fact, they had rarely ventured out of their home state of Connecticut in the 25 years they had worked together. Second, at an estimated $130 million, this was by far the largest project Alan and Nolan had ever undertaken; perhaps a huge developer like Bechtel could reliably cover such an undertaking, but this tab was a massive one for the little partnership. Although Alan and Nolan were clearly serious, an outsider had to wonder just who these guys thought they were.
The team of Morgan Grenfell bankers certainly wondered even more as they looked at the rest of the development team sitting around the table. There were senior executives from Finn-Stroi, a giant Finnish contractor with 17 years experience in the Soviet Union; Baker & McKenzie, perhaps the top U.S. law firm in Moscow; Ernst & Young, the worldwide accounting firm; and BBDO, the international public relations firm that operates a joint venture in Moscow.
"The Morgan Grenfell people looked around the table," Alan recalls, "and then they looked directly at us, and said, 'Okay, we know who Finn-Stroi is, and we know who Baker & McKenzie is, and we know Ernst & Young and BBDO, but who the hell are you?'"
Alan Senie and Nolan Kerschner, patriarchs of a family law firm and a family contracting company, respectively, had developed several housing projects together. Knowing they would face hurdles at every step on the Soviet project because their small size would raise credibility questions, they figured they had better create an airtight package before they headed out for financing. This included a detailed proposal based on a project they had already built in East Haven, Connecticut. More importantly they had to build alliances with partners who did have a prominent name and the clout that goes along with it.
Perhaps their biggest advantage, however, was the tremendous demand for housing among the expatriate community in Moscow. As U.S. companies have scrambled for opportunities in the newly emerging markets of the Soviet Union and Eastern Europe, they have run up against communist bureaucracy, the lack of raw materials, and the need to absorb worthless local currencies. But nothing has been as vexing as finding decent housing in a city like Moscow.
For example, Gary Burandt, a Young & Rubicam executive who had an 18-month stint as the chief of a joint venture between Y&R and the Soviet state advertising agency, described his stay as "the best job and the worst lifestyle I've ever had." It took a year before he got a cramped one-bedroom apartment in Moscow. And then he still had to endure "roaches, noise, bad plumbing, and questionable electricity."
Moscow is a hardship posting for U.S. executives. And those hardships may adversely affect the willingness of many U.S. companies to participate fully in opening up the Soviet market.
This is where Alan Senie and Nolan Kerschner come in. Their company, Senie Kerschner International Housing Limited (SKIHL), wants to build units that include all the amenities normally lacking in the Soviet Union, including a microwave oven, fireplace, private terrace, walk-in closets, tennis courts, a swimming pool, and a daycare center. The complex they've planned for Moscow would have 528 units, plus shops, an auditorium and conference rooms, a restaurant, medical clinic, and recreation center. Total cost: $130 million. Already some of the world's largest corporations have signed on as potential tenants, including DuPont, Monsanto, Phillips, Mitsubishi, and Johnson & Johnson. Ground-breaking is scheduled for this fall on an 82-acre site between Red Square and the Sheremetievo Airport, 30 miles to the north.
The joint venture brings together two business families. Alan and his son Chris are partners in the law firm of Senie, Stock, and LaChance in Westport, Connecticut that has billings just shy of $1 million a year. Nolan and his son Steven run The Kerschner Cos., a Norwalk, Connecticut, home builder that usually takes on projects worth $30 million to $60 million. Their experience provides a lesson in how imagination, flexibility, and persistence can give a family business a leg up, in a market being eyed hungrily by much larger competitors.
Nolan Kerschner is a no-nonsense guy who arrives for a meeting with a bulging briefcase, a pipe tucked inside his waistband, and his shirttail sticking out of his pants. The 66-year-old chief executive of The Kerschner Cos. and vice-president of SKIHL takes pride in the fact that the Moscow project — called Rosinka, Russian for "morning dew" — will create housing that will become a permanent part of the Soviet landscape. "There is a difference between simply selling products to the Soviets and putting bricks and mortar into the ground there," he says, with some disdain for the former. He is responsible for overseeing construction of Rosinka.
Alan Senie, SKIHL`s president, is a bit more reflective about how two small family businesses can succeed in the Soviet Union. Leveraging the quickness and flexibility of a small family firm with the clout of a big partner is the key. "The size of the firm is almost irrelevant," he says. "It's a question of determination and identifying your niche."
Alan, 67, is the detail-oriented partner, prone to creating long meeting agendas and choosing his words carefully. He handles legal and financial matters for Rosinka. Rosinka is a gamble Alan thinks is worth taking. "Who has experience building low-rise residential housing in Russia?" he asks when pressed. The answer, of course, is no one. "Why shouldn't we do it?"
Yet neither of these men would have gotten into the Soviet market if it hadn't been for 36-year-old Chris Senie, Alan's junior law partner and project manager for Rosinka. Chris first became interested in the Soviet Union during a law school class on the Soviet legal system. The following year, the summer of 1982, he joined a group of U.S. lawyers visiting the communist power.
In 1983 he organized a bicycle tour that brought together Americans and Soviets in a gesture of goodwill. Three dozen cyclists rode for five weeks across the Soviet Union, Europe, and the United States, to promote international relations. Bike for Peace, as it was called, gained a lot of attention. Chris appeared on national television in this country and the tour was widely publicized in the Soviet Union. In 1986, Chris organized a second tour.
By that time Mikhail Gorbachev had initiated the radical reforms that have already changed the Soviet Union so dramatically. In January 1987, for the first time in more than 60 years, new rules went into effect allowing joint ventures between Soviet and Western companies. Chris realized what a rapid increase in Western business in Moscow would mean for local housing there, and approached his father and the Kerschners.
"My initial reaction was that Chris had fallen off the bicycle one too many times," says Steve Kerschner, Nolan's son and president of the Kerschner Cos. (also treasurer of SKIHL). Like his father, Steve is a roll-up-the-shirtsleeves person who is not afraid to say what's on his mind. "But little by little Chris pulled this project together, by himself, until it became something more than just a pipe dream."
Nolan Kerschner was also skeptical of stepping into the Soviet Union. After all, the New England housing market was still strong in 1987 and he had his hands full. Only Alan encouraged his son. Since theirs was a family business, Alan was able to shift much of the firm's workload away from Chris and to the firm's other two attorneys, one his son-in-law.
"We were far better equipped to do this," says Alan, "than some huge or impersonal company, which would have had to run the idea through 10 or 12 committees and probably would have junked it because it looked too hard." Instead, he simply gave his son the green light.
Chris proceeded to join the U.S.-U.S.S.R. Trade and Economic Council and the New England-Soviet Trade Council, making valuable connections at each. He also barraged his father and the Kerschners with articles about U.S. companies entering the Soviet market and finding a lack of facilities in Moscow.
By late 1987, Chris and his father agreed that he should attend an international trade show in Moscow, primarily to explore possible legal work. At about this time, Chris and Steve Kerschner — the two sons — also became project managers for Four Beaches, a large condominium project in East Haven, Connecticut. Soon the idea of legal work took a backseat to Chris's desire to recreate Four Beaches in suburban Moscow.
Over the next year Chris developed a market study to gauge the need for expatriate housing in Moscow. On June 1, 1989, he presented the results to his father and the Kerschners. The study indicated an immediate need for up to 109 housing units for dozens of large companies from the United States, Europe, and Japan. In addition, Chris presented a survey of companies already in Moscow, which, while not in need of housing, had expressed dissatisfaction with their current accommodations. One of those companies was Finn-Stroi, a Finnish contractor, which expressed interest in becoming involved in the project; Chris Senie began a correspondence with them that would later pay off handsomely.
Shortly before completing the survey, Chris learned about USA '89, billed as the largest American trade show ever to be held in the Soviet Union, sponsored by the U.S.-U.S.S.R. Trade and Economic Council. "Armed with the marketing study," Alan says, "the logical next step was to go to the show. It was sort of the make or break next step." Once again being a family business helped. The show was only a few months away, and the Senies and Kerschners decided to spend the estimated $50,000 to attend the show. "That was real crapshooting money," says Alan, adding that it was unlikely that a typical corporation would have taken such a risk so quickly.
Realizing that larger amounts of money were going to be needed, the group created a limited partnership for investors who were willing to take a chance on Rosinka; calling only upon people they knew, Alan and Nolan raised $130,000 within a few months.
So it was that last October Chris Senie and Nolan Kerschner traveled, along with 140 other American firms, to Moscow for USA '89. Unlike the other companies, who were looking to do business with the Soviets, Chris and Nolan were looking to do business with the other companies. They brought a hastily produced but slick brochure that described the project. It was the same material they used to sell Four Beaches in Connecticut, except it was reprinted to say Four Beaches Moscow, the original name of Rosinka. They also brought large renderings of the floor plans that had been used at Four Beaches, and hung them on the walls of their exhibit space. It looked impressive, like a project that was well along.
"Well along" did not describe the situation when Chris got off the plane one week earlier. He had no Soviet partner, no site, no contractor ... only a few phone numbers.
It was then that Chris, with a quiet self-confidence, went to work. One of the phone numbers belonged to Victor Malnev, director of the nearby Zavet Ilyicha collective farm. Chris had been given the number by a member of the New England-Soviet Trade Council, who had said Malnev was looking for a partner to help develop some of the 5,000 acres of open land controlled by his 800-member farming collective. Through an interpreter, Chris arranged to meet Malnev.
Malnev, 40, was cordial but formal.Having dealt with the Soviets on the biketours, Chris knew he couldn't just diveinto details. He knew he had to clearlyestablish two things.
First, he wanted to establish credibility — to convey that he was not just swooping into the Soviet Union in hopes of making a quick buck. He gave Malnev an American book entitled Citizen Diplomats that included a chapter about Chris's Bike for Peace tours, and showed him a photograph from a Soviet magazine of Chris and a Soviet Olympic cyclist on a tandem bike during the tour.
Second, Chris wanted to convey his commitment to a fair business agreement. "I told Malnev that we wanted a 50-50 partnership," says Chris. This was enough for their first encounter. The two men agreed to meet again the next day.
"The next morning Victor was just filled with enthusiasm," Chris says. "There wasn't even any negotiation. Maybe it was chemistry. Maybe some other business people he met struck him as wanting to take advantage," Chris acknowledges. Whatever the reason, a letter of intent was signed. Chris had a Soviet partner and a site.
In the two days remaining before the start of USA '89, Chris had a map of the site drawn, and created a description of the partnership with Zavet Ilyicha. On the first day of the show, representatives of Finn-Stroi came by the SKIHL booth; Chris had written to tell them that he and Nolan would be at USA '89.
"The more we talked the more they were interested in being the general contractor," says Nolan. As they talked, representatives from large U.S. companies were streaming in to the booth, inquiring about availability dates, numbers of bedrooms, and lease prices. "Finn-Stroi saw all these people coming by," says Nolan. "There was a lot of excitement."
Nolan showed the Finn-Stroi executives blueprints for the project and they asked to take them for a day. 'They called back that afternoon," says Nolan, "and said they'd be prepared to sign a proposal." Nolan thinks "the very fact that we had a presence in Moscow and the fact that I was no spring chicken" led Finn-Stroi to take SKIHL seriously.
From there, the dominoes started falling into place. With a partner, a site, and an experienced contractor, Chris and Nolan approached the Moscow office of Baker & McKenzie, a Washington, D.C. law firm that represents some of the largest U.S. companies doing business in the Soviet Union. Their lawyer brought in Ernst & Young (also with a Moscow office) to do a feasibility study. Soon afterward came BBDO Reklama, the Soviet joint venture operated by the international public relations firm. And before the trade show was over, SKIHL had nonbinding reservations for 34 units from 19 top U.S. companies. Word of the project was spreading, and the U.S. State Department and the French Embassy were contemplating large blocks of units. "The hardest decision was to go to USA '89," Alan says, "and the most encouraging thing was the success of it."
Nolan Kerschner is convinced that creating a top-flight international development team and gaining the interest of several multinational companies was not inhibited by his firm's relatively small size. He thinks that being a small family business served them well in negotiations. "The Russians and the Finns realized early on that they were dealing with the principals," Nolan says. "They knew they weren't just dealing with some junior vice-president. The people who could make the tough decisions were right there in front of them."
When it came time to shop for banks to provide the estimated $24 million needed to help finance the first phase of the project (132 units), the Senies and Kerschners had to make one of those tough decisions. Two banks — New York City-based Chase Manhattan and London's Morgan Grenfell — had expressed the most interest.
For the Senies and Kerschners, who had come this far by choosing experienced partners, it was not a time to take a chance on a bank without significant experience in Moscow. "Morgan Grenfell's track record was certainly better than Chase's," says Alan. "They'd done far more deals."
So SKIHL went about trying to impress Morgan Grenfell. They sent the bank Chris's original marketing survey, Ernst & Young's detailed and positive feasibility study, copies of SKIHL's marketing materials, and an informational memorandum bringing them up to date on the project. "Morgan Grenfell told us ours was the most complete presentation that had ever been made to them regarding a project in the Soviet Union," Alan says.
Thus it was at the landmark meeting, when the Morgan Grenfell principals looked directly at Alan Senie and Nolan Kerschner, that they saw two diligent family business leaders. That their names were unknown mattered less and less. As the meeting progressed, the folks from Morgan Grenfell saw further that the families had done their homework on every detail, and that the large, reputable firms they had corralled were equally versed in the project.
"Although Morgan Grenfell hadn't heard of us, they were impressed because we were able to put such a good team together," says Alan. If the bankers wanted to know about the demand for housing in the Soviet Union, BBDO could provide detailed reports on the lack of quality housing for foreigners, and the commitments for units already made to Rosinka. If they wanted toknow about the competition, Ernst & Young could demonstrate how far behind any other housing project would be. If they wanted to know about construction, Finn-Stroi could speak with authority about how the project's first phase could be built in less than a year. Morgan Grenfell agreed to be the team's final participant.
The success of Rosinka still rests on the ability of the Senies and Kerschners to market the project to Western companies. "The clear concern," says Steve Kerschner, "is the complexity of the marketing and how different and much more difficult it is than anything we've ever undertaken."
SKIHL has put together a diverse sales team to make sure they contact all possible customers for Rosinka. They are looking in Europe Japan, the United States, and even among those expatriates already living in the Soviet Union who would like better housing.
At least one SKIHL customer is convinced the project is on the right track. "There's always a risk with something like this, but I have no particular doubts," says James McNally, market operations director for Eastern Europe for Ralston Purina, which is considering leasing some units in Rosinka. "SKIHL has chosen experienced partners. That is probably what has helped attract large American and European companies."
Rosinka will offer units ranging from a 1,200-square-foot suite with three bedrooms, bath, and kitchen for $45,000 a year, to 2,700-square-foot townhouses with five bedrooms, study, and three baths, for $82,000 a year. "Many people are looking forward to it," says Paul Cavanaugh, with DuPont, adding that "like any project in the Soviet Union you have to cross your fingers." If all does go according to plan, the first units will be ready for occupancy in June or July of 1991.
And while the Senies and Kerschners figure they'll have their hands full for some time with Rosinka, they are already thinking about new opportunities. Nolan would like to help the Soviets create a home-building industry more like that in the United States, by encouraging the use of more timber products, instead of only concrete and steel. Alan and Chris see the potential in replicating a project like Rosinka in Eastern European cities such as Prague and Budapest.
There's a profit motive in all of this for both the Senies and the Kerschners, but there's something else as well. As Nolan Kerschner says, "It might just in some small way help us all change from a confrontational world to a nonconfrontational world."
Senie Kerschner International Housing Ltd.
Product: Residential housing in Moscow.
Established: 1989, as a partnership.
President, VP: Nolan Kerschner, Alan Senie.
Family Involvement: Nolan and son Steve, Alan and son Chris.
Goal: Build the first housing in Moscow exclusively for Westerners doing business there.
Financing a Soviet venture
For Senie Kerschner Ltd. (SKIHL), getting the money together to build a project as unprecedented as Rosinka involves a little creative financing.
The key item is the first lien financing, which comes from Morgan Grenfell. The London bank will provide this money after SKIHL has gotten 40 binding six-year leases from companies who haveposted letters of credit equal to threeyears worth of lease payments.
A ruble loan, arranged through the collective farm that is SKIHL's Soviet partner, will be used for materials purchased in the Soviet Union, and for paychecks to Soviet workers. SKIHL investors have committed to $2 million in equity investment, and SKIHL will make a $3 million subordinated loan to the project team at the time of construction.
Before moving into the units, companies will be required to prepay rent for years four, five, and six (prepayment of hard-currency leases is common in the Soviet Union), totaling $55 million. They will then pay rent during the first three years on a quarterly basis, generating $32 million.
Projections verified by Ernst & Young show that Rosinka will be quite profitable if all goes according to plan. After paying off the loans, and paying 30 percent income tax to the Soviet Union, SKIHL stands to make $62 million in profit by the year 2000. According to the viability report, "It is reasonable to assume that profits will continue for the ensuing 40 years."
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