United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended March 31, 1996
or
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition period from ______ to ______
Commission File Number: 0-16024
EASTPOINT MALL LIMITED PARTNERSHIP
Exact Name of Registrant as Specified in its Charter
Delaware 13-3314601
State or Other Jurisdiction of I.R.S. Employer Identification No.
Incorporation or Organization
3 World Financial Center, 29th Floor,
New York, NY Attn: Andre Anderson 10285-2900
Address of Principal Executive Offices Zip Code
(212) 526-3237
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
Consolidated Balance Sheets At March 31, At December31,
1996 1995
Assets
Real estate, at cost:
Land $ 4,166,230 $ 4,166,230
Building 43,241,060 43,241,060
Improvements 7,149,003 7,050,087
54,556,293 54,457,377
Less accumulated depreciation
and amortization (12,188,406) (11,738,595)
42,367,887 42,718,782
Cash and cash equivalents 6,613,801 6,254,501
Restricted cash 2,100,000 2,100,000
Cash-held in escrow 676,662 443,811
Accounts receivable, net of allowance
of $245,670 in 1996 and $80,405 in 1995 631,858 638,436
Accrued interest receivable 241,690 224,567
Deferred rent receivable 311,588 356,656
Note receivable 738,000 738,000
Deferred charges, net of
accumulated amortization of $473,336
in 1996 and $423,597 in 1995 1,497,124 1,510,981
Prepaid expenses 215,478 381,278
Total Assets $ 55,394,088 $ 55,367,012
Liabilities, Minority Interest and Partners' Capital (Deficit)
Liabilities:
Accounts payable and accrued expenses $ 192,969 $ 192,779
Mortgage loan payable 51,000,000 51,000,000
Accrued interest payable 340,425 340,425
Due to affiliates 20,609 22,226
Security deposits payable 46,819 46,819
Deferred income 404,730 415,081
Distribution payable 2,813,163 288,826
Total Liabilities 54,818,715 52,306,156
Minority interest (342,949) (344,786)
Partners' Capital (Deficit):
General Partner (105,084) (80,211)
Limited Partners (4,575 limited
partnership units authorized,
issued and outstanding) 1,023,406 3,485,853
Total Partners' Capital 918,322 3,405,642
Total Liabilities, Minority
Interest and Partners' Capital $ 55,394,088 $ 55,367,012
Consolidated Statement of Partners' Capital (Deficit)
For the three months ended March 31, 1996
Limited General
Partners Partner Total
Balance at December 31, 1995 $ 3,485,853 $ (80,211) $ 3,405,642
Net income 322,585 3,258 325,843
Distributions (2,785,032) (28,131) (2,813,163)
Balance at March 31, 1996 $ 1,023,406 $ (105,084) $ 918,322
Consolidated Statements of Operations
For the three months ended March 31, 1996 1995
Income
Rental income $ 1,651,037 $ 1,708,421
Percentage rent 309,571 297,434
Escalation income 1,018,162 851,594
Interest income 90,977 99,560
Miscellaneous income 42,291 10,208
Total Income 3,112,038 2,967,217
Expenses
Interest expense $ 1,021,275 $ 995,775
Property operating expenses 1,040,861 842,559
Depreciation and amortization 499,550 480,347
Real estate taxes 149,201 144,200
General and administrative 44,556 43,594
Total Expenses 2,755,443 2,506,475
Income before minority interest 356,595 460,742
Minority Interest (30,752) (44,375)
Net Income $ 325,843 $ 416,367
Net Income Allocated:
To the General Partner $ 3,258 $ 4,164
To the Limited Partners 322,585 412,203
$ 325,843 $ 416,367
Per limited partnership unit
(4,575 outstanding) $ 70.51 $ 90.10
Consolidated Statements of Cash Flows
For the three months ended March 31, 1996 1995
Cash Flows From Operating Activities:
Net income $ 325,843 $ 416,367
Adjustments to reconcile net
income to net cash provided by
operating activities:
Minority interest 30,752 44,375
Depreciation and amortization 499,550 480,347
Increase (decrease) in cash arising
from changes in operating assets
and liabilities:
Cash-held in escrow (232,851) (162,634)
Accounts receivable 6,578 151,628
Accrued interest receivable (17,123) (31,231)
Deferred rent receivable 45,068 (24,337)
Deferred charges (35,882) (2,657)
Prepaid expenses 165,800 133,156
Accounts payable and accrued expenses 190 (15,715)
Due to affiliates (1,617) (20,251)
Deferred income (10,351) (13,044)
Net cash provided by operating activities 775,957 956,004
Cash Flows From Investing Activities:
Additions to real estate (98,916) (36,641)
Net cash used for investing activities (98,916) (36,641)
Cash Flows From Financing Activities:
Distributions paid (288,826) (288,826)
Distributions paid-minority interest (28,915) (28,915)
Net cash used for financing activities (317,741) (317,741)
Net increase in cash and cash equivalents 359,300 601,622
Cash and cash equivalents,
beginning of period 6,254,501 5,661,047
Cash and cash equivalents,
end of period $ 6,613,801 $ 6,262,669
Supplemental Disclosure of Cash
Flow Information:
Cash paid during the period for interest $ 1,021,275 $ 995,775
Notes to the Consolidated Financial Statements
The unaudited interim consolidated financial statements should be read in
conjunction with the Partnership's annual 1995 audited consolidated financial
statements within Form 10-K.
The unaudited consolidated financial statements include all adjustments which
are, in the opinion of management, necessary to present a fair statement of
financial position as of March 31, 1996 and the results of operations and cash
flows for the three months ended March 31, 1996 and 1995 and the statement of
partner's capital (deficit) for the three months ended March 31, 1996. Results
of operations for the period are not necessarily indicative of the results to
be expected for the full year.
No significant events have occurred subsequent to fiscal year 1995, and no
material contingencies exist which would require disclosure in this interim
report per Regulation S-X, Rule 10-01, Paragraph (a)(5).
Part 1. Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
At March 31, 1996 the Partnership had a cash balance of $6,613,801, compared to
$6,254,501 at December 31, 1995. The increase is primarily due to cash
provided by operating activities exceeding cash distributions paid during the
first quarter of 1996 and additions to real estate. The Partnership maintains
a restricted cash account representing a loan reserve of $2,100,000 as
established under the terms of its first mortgage loan. Of this balance, $1.1
million represents a portion of the proceeds of the Partnership's first
mortgage loan which was withheld pending resolution of the Fidelity Life
Insurance Company ("Consolidated") dispute (see "Ames Parcel and Consolidated
Release Agreement" below). The remaining balance constitutes additional
collateral which can be used for capital improvements and leasing commissions.
Cash held in escrow totaled $676,662 at March 31, 1996 compared with $443,811
at December 31, 1995. The increase is primarily attributable to additional
fundings made to the real estate tax and insurance escrows as specified under
the terms of the Partnership's first mortgage loan.
Prepaid expenses decreased from $381,278 at December 31, 1995 to $215,478 at
March 31, 1996 primarily as a result of the recognition of real estate tax
expense for the first quarter of 1996.
Distributions payable increased from $288,826 at December 31, 1995 to
$2,813,163 at March 31, 1996. The increase is due to an accrual for a special
cash distribution, in the amount of $546.25 per Unit, which was paid on April
4, 1996.
As of the filing date of this report, the following tenants, or their parent
corporations, at the Mall have filed for protection under the U.S. Bankruptcy
Code:
Tenant Square Footage Leased
Merry Go 'Round* 4,130
No Name** 2,000
Marianne 3,750
Marianne Plus 3,000
Jean Nicole* 4,700
Jeans West 2,400
Rave 2,000
* tenant vacated during the first quarter of 1996
** anticipates vacating in 1996
As of March 31, 1996, these tenants occupied 21,980 square feet, or
approximately 6% of the Mall's leasable area (exclusive of anchor tenants and
office space). Pursuant to the provisions of the U.S. Federal Bankruptcy Code,
these tenants may, with court approval, choose to reject or accept the terms of
their leases. Should any of these tenants exercise the right to reject their
leases, this could have an adverse impact on cash flow generated by the Mall
and revenues received by the Partnership depending on the Partnership's ability
to replace them with new tenants at comparable rents.
Ames Parcel and Consolidated Release Agreement
On April 26, 1990, Ames filed for bankruptcy protection under Chapter 11 of the
Federal Bankruptcy Code. On December 18, 1992, the Bankruptcy Court confirmed
a Plan of Reorganization for Ames (the "Plan") pursuant to which Ames has
assumed its lease at the Mall. Land leased to Ames by the Owner Partnership
together with the building constructed thereon by Ames secured a deed of trust
held by Consolidated, as successor to Southwestern Life Insurance Company. By
filing its bankruptcy petition, Ames was in default under the Consolidated deed
of trust.
On July 14, 1994, the Partnership executed a Release Agreement with
Consolidated. Pursuant to the terms of the Release Agreement, the Partnership
paid Consolidated $2 million in return for the assignment of the deed of trust
and related Ames promissory note, as well as Consolidated's claim in the Ames
bankruptcy case relating to such promissory note. Consolidated's total claims,
in the face amount of approximately $2.3 million, consist of the balances due
on the Ames promissory note, totaling $1.7 million, and another promissory
note. Pursuant to the Release Agreement, the Partnership is entitled to any
recovery based on the Ames promissory note; Consolidated will receive any
recovery on the other note. Various trusts were established through Ames' Plan
of Reorganization by which different classes of claims were to be paid from
different pools of monies. The Trustee for the trust responsible for payment
of Consolidated's claim (the "Subsidiaries Trustee"), had filed an objection to
the allowance of Consolidated's claim, including that portion attributable to
the Ames promissory note. The Partnership pursued legal action in opposition
to the objection. In mid- March 1996, the Trustee and the Partnership settled
the Trustee's objection by reducing and allowing Consolidated's claim in the
approximate amount of $2,050,000 of which $1,530,141.95 is for amounts due
under the Ames promissory note. An Agreed Order approving the settlement was
entered by the Bankruptcy Court on May 1, 1996. At the current time, the
Trustee estimates the Partnership will receive a distribution of between 43%
and 48% on its portion of Consolidated's claim. An interim distribution of
approximately 43% is expected by late May or early June of 1996. For the year
ended December 31, 1994, the Partnership recorded a note receivable in the
amount of $816,000. In 1995, the note receivable was written-down by $78,000
to $738,000 which represents the amount the Partnership expects to receive from
the claim.
The Partnership's mortgage lender withheld certain of the proceeds of the first
mortgage loan until the Partnership resolved the Consolidated dispute. It is
anticipated that these funds, which total $1.1 million, will be released to the
Partnership in 1996 when the first mortgage secured by the Ames parcel, which
has been retained by the Partnership pending a final decision on Consolidated's
claims, is extinguished. These funds are held in escrow with interest payable
to the Partnership.
Cash Distributions
A distribution for the fourth quarter of 1995, in the amount of $62.50 per
Unit, was paid on February 9, 1996. On April 4, 1996, the Partnership paid a
special cash distribution, funded by its cash reserves, in the amount of
$546.25 per Unit. A regular cash distribution for the first quarter of 1996 ,
in the amount of $62.50 per Unit, will be paid on or about May 15, 1996. The
level, timing, and amount of future distributions will be reviewed on a
quarterly basis after an evaluation of the Mall's performance and the
Partnership's current and future cash needs.
Results of Operations
For the three months ended March 31, 1996 and 1995, net cash flow from
operating activities totaled $775,957 and $956,004, respectively. The decrease
is primarily due to the Partnership receiving less cash in the 1996 period
related to accounts receivable and increased funding to cash held in escrow.
For the three months ended March 31, 1996, the Partnership recognized net
income of $325,843 compared to $416,367 for the three months ended March 31,
1995. The decrease in net income is primarily attributable to an increase in
property operating expenses, a decrease in rental income and, to a lesser
degree, minor increases in all other expense categories, partially offset by an
increase in escalation income.
The Partnership generated total income for the three months ended March 31,
1996 of $3,112,038 compared to $2,967,217 for the same period in 1995. Rental
income decreased for the three months ended March 31, 1996 compared to the same
period in 1995 reflecting a write-off of deferred rent related to two tenants
during the first quarter of 1996. Escalation income represents the income
received from Mall tenants for their proportionate share of common area
maintenance and real estate tax expenses. Escalation income increased for the
three months ended March 31, 1996 compared to the same period in 1995 mainly
due to an increase in common area maintenance expenses which are charged back
to tenants.
Property operating expenses increased to $1,040,861 for the three months ended
March 31, 1996 compared to $842,559 for the corresponding period in 1995. This
increase is was the result of higher common area maintenance expenses, which
are charged back to tenants, and increased bad debt expense related to the
tenants that have filed for bankruptcy protection.
Total Mall tenant sales (exclusive of anchor tenants) were $8,681,000 for the
two months ended February 29, 1996, compared to $8,564,000 for same period in
1995. Sales for tenants (exclusive of anchor tenants) which operated at the
Mall for each of the last two years were $8,042,000 and $8,242,000,
respectively. As of March 31, 1996, the Mall was 93% occupied, excluding
anchor tenants and office space, compared to 94% at March 31, 1995.
Part II Other Information
Items 1-5 Not applicable.
Item 6 Exhibits and reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule
(99) Limited Appraisal of Real Property for Eastpoint Mall as of
January 1, 1996, as prepared by Cushman & Wakefield, Inc.
(b) Reports on Form 8-K - On February 16, 1996 based upon,
among other things, the advice of Partnership counsel,
Skadden, Arps, Slate, Meagher & Flom, the General Partner
adopted a resolution that states, among other things, if a
Change of Control (as defined below) occurs, the General
Partner may distribute the Partnership's cash balances not
required for its ordinary course day-to-day operations.
"Change of Control" means any purchase or offer to purchase
more than 10% of the Units that is not approved in advance
by the General Partner. In determining the amount of the
distribution, the General Partner may take into account all
material factors. In addition, the Partnership will not be
obligated to make any distribution to any partner and no
partner will be entitled to receive any distribution until
the General Partner has declared the distribution and
established a record date and distribution date for the
distribution. The Partnership filed a Form 8-K disclosing
this resolution on February 29, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EASTPOINT MALL LIMITED PARTNERSHIP
BY: EASTERN AVENUE INC.
General Partner
Date: May 15, 1996 BY: /s/ Paul L. Abbott
Director, President, Chief Executive Officer
Chief Financial Officer and Chief Operating
Officer Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Mar-31-1996
<CASH> 6,613,801
<SECURITIES> 0
<RECEIVABLES> 1,430,806
<ALLOWANCES> 245,670
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 54,556,293
<DEPRECIATION> 12,188,406
<TOTAL-ASSETS> 55,394,088
<CURRENT-LIABILITIES> 213,578
<BONDS> 51,000,000
<COMMON> 0
0
0
<OTHER-SE> 918,322
<TOTAL-LIABILITY-AND-EQUITY> 55,394,088
<SALES> 0
<TOTAL-REVENUES> 3,112,038
<CGS> 0
<TOTAL-COSTS> 1,190,062
<OTHER-EXPENSES> 544,106
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,021,275
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 325,843
<EPS-PRIMARY> 70.51
<EPS-DILUTED> 0
</TABLE>
COMPLETE APPRAISAL OF
REAL PROPERTY
Eastpoint Mall
Eastern Avenue and North Point Boulevard
Baltimore, Baltimore County, Maryland
IN A SELF-CONTAINED REPORT
As of January 1, 1996
Eastpoint Mall Limited Partnership
388 Greenwich Street
28th Floor
New York, New York 10013
Cushman & Wakefield, Inc.
Valuation Advisory Services
51 West 52nd Street, 9th Floor
New York, NY 10019
March 14, 1996
Eastpoint Mall Limited Partnership
388 Greenwich Street
28th Floor
New York, New York 10019
Re: Complete Appraisal of Real Property
Eastpoint Mall
Eastern Avenue and North Point Boulevard
Baltimore, Baltimore County, Maryland
Gentlemen:
In fulfillment of our agreement as outlined in the Letter of
Engagement, Cushman & Wakefield, Inc. is pleased to transmit our
Summary Report estimating the market value of the leased fee
estate in the referenced real property.
As specified in the Letter of Engagement, the value opinion
reported below is qualified by certain assumptions, limiting
conditions, certifications, and definitions, which are set forth
in the report.
This report was prepared for the Eastpoint Mall Limited
Partnership (Client) and it is intended only for the specified
use of the Client. It may not be distributed to or relied upon
by other persons or entities without written permission of the
Appraiser.
The property was inspected by and the report was prepared by Jay
F. Booth. Brian J. Booth provided significant assistance in the
preparation of the report and cash flows but did not inspect the
property. Richard W. Latella, MAI inspected the property and has
reviewed and approved the report.
This is a Complete Appraisal in a Summary Report which is
intended to comply with the reporting requirements set forth
under Standards Rule 2-2(b) of the Uniform Standards of
Professional Appraisal Practice of the Appraisal Foundation. The
results of the appraisal are being conveyed in a Summary Report
according to our agreement. As such, the report presents only a
summary discussion of the data, reasoning, and analyses used in
the appraisal process at hand. Supporting documentation is
retained in the appraisers' file. The depth of discussion
contained in this report is specific to the needs of the Client
and is intended for the use stated. The appraiser is not
responsible for unauthorized use of this report. We are
providing this report as an update to our last analysis which was
prepared as of January 1, 1995. As such, we have primarily
reported only changes to the property and its environs over the
past year.
As a result of our analysis, we have formed an opinion that the
market value of the leased fee estate in the referenced property,
subject to the assumptions, limiting conditions, certifications,
and definitions, as of January 1, 1996, was:
EIGHTY ONE MILLION DOLLARS
$81,000,000
This letter is invalid as an opinion of value if detached from
the report, which contains the text, exhibits, and an Addenda.
Respectfully submitted,
CUSHMAN & WAKEFIELD, INC.
/s/ Jay F. Booth
Jay F. Booth
Retail Valuation Group
/s/ Brian J. Booth
Brian J. Booth
Valuation Advisory Services
/s/ Richard W. Latella
Richard W. Latella, MAI
Senior Director
Retail Valuation Group
Maryland Certified General
Real Estate Appraiser License No. 10462
JFB:BJB:RWL:emf
C&W File No. 96-9064-2
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
Property Name: Eastpoint Mall
Location: Eastern Avenue and North
Point Boulevard
Baltimore, Baltimore County, Maryland
Interest Appraised: Leased fee
Date of Value: January 1, 1996
Date of Inspection: January 16, 1996; January 18, 1996
Ownership: Eastpoint Mall Limited Partnership
Land Area: 67.121+/- Acres
Zoning: BM-CT Business Major - Town
Center Core
Highest and Best Use
If Vacant: Retail/commercial
use built to its maximum
feasible F.A.R.
As Improved: Continued retail/
commercial use as a regional
shopping center.
Improvements
Type: Single level regional mall.
Year Built: 1956; the mall was
enclosed in 1972; renovated
in 1981; and expanded with
Sears, atrium offices, and
food cafe in 1991.
GLA:
Ames 58,442+/- SF
Hochschild's 140,000+/- SF
Sears1 87,734+/- SF
J.C. Penney2 168,969+/- SF
Total Anchor Stores 455,145+/- SF
Enclosed Mall 242,076+/- SF
Atrium Office Space 55,435+/- SF
Outdoor Tenants3 110,587+/- SF
Total GLA 863,243+/- SF
1 Includes T.B.A.
2 Ground lease.
3 Includes free-standing and exterior stores.
Condition: Good
Operating Data and Forecasts
Current Occupancy: 80.4% based on mall shop GLA, mall
offices, atrium office space, and outdoor tenants.
Forecasted Stabilized Occupancy: 95.0%
Forecasted Date of Stabilized Occupancy: July 2000
Operating Expenses C&W Forecast (1996): $3,459,317
Owner's Budget (1996): $4,041,017
Value Indicators
Sales Comparison Approach: $81,000,000 to $83,000,000
Income Approach Direct Capitalization: $83,800,000
Discounted Cash Flow: $81,000,000
Investment Assumptions
Income Growth Rates
Retail Rent Growth:
Flat - 1997
+2.0% - 1998
+3.0% - 1999
+3.5% - 2000-2005
Office Rents:
Flat - 1997-1999
+2.0% - 2000-2005
Expense Growth Rate:
+3.5% - 1997-2005
Sales Growth Rate:
Flat - 1996
+2.0% - 1997
+3.0% - 1998
+3.5% - 1999-2005
Tenant Improvements-New
Atrium Office Tenants: $20.00/SF
Mall Tenants: $8.00/SF
Tenant Improvements-Renewing
Atrium Tenants: $4.00/SF
Mall Tenants: $1.50/SF
Vacancy between Tenants
Mall Space: 6 months
Office Space: 6 months
Renewal Probability
Mall Space: 70%
Office Space: 50%
Going-In Capitalization Rate: 8.75% - 9.25%
Terminal Capitalization Rate: 9.00% - 9.50%
Cost of Sale at Reversion: 2.00%
Discount Rate: 12.00% - 12.50%
Value Conclusion: $81,000,000
Resulting Indicators
Going-In Overall Rate: 9.62%
Price per Square Foot of Owned GLA: $116.67 (based on 694,274 SF)
Exposure Time Implicit in Value Conclusion: Not more than 12 months
Special Risk Factors: None
Special Assumptions:
1. Throughout this analysis we have relied on information provided by
ownership and management which we assume to be accurate. Negotiations are
currently underway with additional mall tenants and we are advised that a
few existing tenants will be leaving the mall as a result of parent
company bankruptcies. All tenant specific assumptions are identified
within the body of this report.
2. Our cash flow analysis and valuation has recognized that all signed as
well as any pending leases with a high probability of being consummated
are implemented according to the terms presented to us by Shopco. Such
leases are identified within the body of this report.
3. We note that there remains a substantial amount of vacancy in the atrium
office area. There has been some interest in the space although only two
leases have come to fruition. We would expect that, upon leasing of this
space, all build out for tenant occupancy will be performed in a
workmanlike manner with quality materials consistent with that observed
throughout the balance of the mall.
4. During 1990, the Americans With Disabilities Act (ADA) was passed
by Congress. This is Civil Rights legislation which, among other things,
provides for equal access to public placed for disabled persons. It
applies to existing structures as of January 1992 and new construction as
of January 1993. Virtually all landlords of commercial facilities and
tenants engaged in business that serve the public have compliance
obligations under this law. While we are not experts in this field, our
understanding of the law is that it is broad- based, and most existing
commercial facilities are not in full compliance because they were
designed and built prior to enactment of the law. During this
assignment, we noticed no additional "readily achievable barrier removal"
problems, but we recommend a compliance study be performed by qualified
personnel to determine the extent of non-compliance and cost to cure.
5. We are not aware of any environmental hazards or conditions on or about
the property that would detract from its market value. Our physical
inspection gave us no reason to suspect that such conditions might exist.
However, we are not experts in the detection of environmental
contaminants, or the cost to cure them if they do exist. We recommend
that appropriate experts be consulted regarding these issues. Our
analysis assumes that there are no environmental hazards or conditions
affecting the property.
6. The forecasts of income, expenses and absorption of vacant space are not
predictions of the future. Rather, they are our best estimates of current
market thinking on future income, expenses and demand. We make no
warranty or representation that these forecasts will materialize.
7. Please refer to the complete list of assumptions and limiting
conditions included at the end of this report.
TABLE OF CONTENTS
Page
SUMMARY OF SALIENT FACTS AND CONCLUSIONS 3
PHOTOGRAPHS OF SUBJECT PROPERTY 1
INTRODUCTION 3
Identification of Property 3
Property Ownership and Recent History 3
Purpose and Intended Use of the Appraisal 3
Extent of the Appraisal Process 3
Date of Value and Property Inspection 4
Property Rights Appraised
Definitions of Value, Interest Appraised,
and Other Pertinent Terms 4
Legal Description 5
REGIONAL ANALYSIS 6
NEIGHBORHOOD ANALYSIS 14
RETAIL MARKET ANALYSIS 15
THE SUBJECT PROPERTY 24
HIGHEST AND BEST USE 26
VALUATION PROCESS 27
SALES COMPARISON APPROACH 28
INCOME APPROACH 44
RECONCILIATION AND FINAL VALUE ESTIMATE 80
ASSUMPTIONS AND LIMITING CONDITIONS 82
CERTIFICATION OF APPRAISAL 84
ADDENDA 85
PHOTOGRAPHS OF SUBJECT PROPERTY
Main entrance to Eastpoint Mall.
Back side of mall; food court entrance and Sears.
Value City store.
Ames store.
INTRODUCTION
Identification of Property
The Eastpoint Mall is a single-level regional center located in the
northeast quadrant of the Baltimore MSA. It is anchored by four department
stores and includes a total gross leasable area of 863,243+/- square feet.
Included in this area are the "atrium offices" which have been built out in
shell form in the former Hutzler's store area. The atrium offices contain
55,435+/- square feet on two levels and connect with the lower-level mall
offices. Since our last inspection, there have been no major physical
changes to the property other than tenant changes within the mall. The
renovated mall, along with Sears and food court, held its grand reopening
in October 1991. Sears joins J.C. Penney, Ames and Hochschild's Value
City as anchors to the center. The partnership owns all of the anchor
stores in fee, with the exception of J.C. Penney which is on a ground lease.
Property Ownership and Recent History
Title to the subject property is held by Eastpoint Mall L.P.
who acquired the mall in November 1985 from Bellweather
Properties. An expansion parcel (5.121+/- acres) was acquired from
Baltimore Gas and Electric Foundation, Inc. for $640,125 during
1990. The site was purchased to provide for additional parking
needed as part of the new construction. No other sales
transactions have occurred on the property in the last three
years.
Purpose and Intended Use of the Appraisal
The purpose of this limited appraisal is to provide a market
value estimate of the leased fee estate in the subject property
as of January 1, 1996. Our analysis reflects conditions
prevailing as of that date. Our last appraisal was completed as
of January 1, 1995 and we have focused our analysis on changes to
the property and market conditions since that time. The function
of this appraisal is to provide an independent valuation analysis
and to assist in monitoring ownership's investment in the
property.
Extent of the Appraisal Process
In the process of preparing this appraisal, we:
- - - Inspected the exterior of the building and the site improvements and a
representative sample of tenant spaces;
- - - Interviewed representatives of the property management company, Shopco;
- - - Reviewed leasing policy, concessions, tenant build-out allowances and history
of recent rental rates and occupancy with the mall manager;
- - - Reviewed a detailed history of income and expenses as well as a budget
forecast for 1996, including the budget for planned capital expenditures and
repairs;
- - - Conducted market research of occupancies, asking rents, concessions
and operating expenses at competing retail properties, including
interviews with on-site managers and a review of our own data base from
previous appraisal files;
- - - Prepared an estimate of stabilized income and expenses (for capitalization
purposes);
- - - Prepared a detailed discounted cash flow (DCF) analysis using Pro-Ject +plus
software for the purpose of discounting the forecased net income stream into
a present value of the leased fee estate for the center;
- - - Conducted market inquiries into recent sales of similar regional malls to
ascertain sale prices per square foot, net income multipliers, and
capitalization rates. This process involved telephone interviews with
sellers, buyers and/or participating brokers;
- - - Prepared Sales Comparison and Income Approaches to value; Reconciled the
value indications and concluded a final value estimate for the subject in its
"as is" condition; and
- - - Prepared a Complete Appraisal of real property, with the results conveyed in
this Summary Report.
Date of Value and Property Inspection
On January 16, 1996 Jay F. Booth inspected the subject
property and its environs. Richard W. Latella, MAI also
inspected the property on January 18, 1996. Our date of value is
January 1, 1996.
Property Rights Appraised
Leased Fee Estate.
Definitions of Value, Interest Appraised, and Other Pertinent Terms
The definition of market value taken from the Uniform
Standards of Professional Appraisal Practice of the Appraisal
Foundation, is as follows:
The most probable price which a property should bring in
a competitive and open market under all conditions
requisite to a fair sale, the buyer and seller, each
acting prudently and knowledgeably, and assuming the
price is not affected by undue stimulus. Implicit in
this definition is the consummation of a sale as of a
specified date and the passing of title from seller to
buyer under conditions whereby:
1. Buyer and seller are typically motivated;
2. Both parties are well informed or well advised, and acting in what they
consider their own best interests;
3. A reasonable time is allowed for exposure in the open market;
4. Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
5. The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
Exposure Time
Under Paragraph 3 of the Definition of Market Value, the
value estimate presumes that "A reasonable time is
allowed for exposure in the open market". Exposure time
is defined as the estimated length of time the property
interest being appraised would have been offered on the
market prior to the hypothetical consummation of a sale
at the market value on the effective date of the
appraisal. Exposure time is presumed to precede the
effective date of the appraisal.
The following definitions of pertinent terms are taken from
the Dictionary of Real Estate Appraisal, Third Edition (1993),
published by the Appraisal Institute.
Leased Fee Estate
An ownership interest held by a landlord with the rights
of use and occupancy conveyed by lease to others. The
rights of the lessor (the leased fee owner) and the
leased fee are specified by contract terms contained
within the lease.
Market Rent
The rental income that a property would most probably
command on the open market, indicated by the current
rents paid and asked for comparable space as of the date
of appraisal.
Market Value As Is on Appraisal Date
The value of specific ownership rights to an identified
parcel of real estate as of the effective date of the
appraisal; related to what physically exists and is
legally permissible and excludes all assumptions
concerning hypothetical market conditions or possible
rezoning.
Legal Description
A legal description is retained in our files.
MAP OF BALTIMORE/WASHINGTON AREA
REGIONAL ANALYSIS
Baltimore Metropolitan Area
The subject property is located in Carroll County, which lies
approximately 25 miles northwest of the city of Baltimore. It is
part of a much larger area known as the Baltimore Standard
Metropolitan Area. The Baltimore Standard Metropolitan Area
(MSA) is defined by the U.S. Department of Commerce, Bureau of
the Census, to include Baltimore City and the counties of
Baltimore, Howard and Anne Arundel, Harford, Carroll and Queen
Anne's. Queen Anne's County was added to the Baltimore MSA in
1983. In total, the Baltimore MSA encompasses 2,618 square
miles.
Population Base
A significant indicator of change within a regional economy
is the rate of growth of decline in an area's population base.
This has a direct and obvious effect on real estate values.
Since the supply of land is fixed, the demand for real property
will be affected by an increase or decrease in the population
base. The pattern, in turn, is reflected in values for the whole
spectrum of property types within the region.
In addition to the more obvious relationship changes in
population and property values, there are a variety of other
factors which should also be considered. Accordingly, the
specific location of the subject property relative to the trends
within the population base must be closely examined. For
example, a city with a declining population base may be
experiencing a rise in property values due to its growing
importance as an employment center. Also, the average household
size within an area, when considered along with population
trends, gives a good indication of potential demand for housing
as well as goods and services within the area. The chart below
illustrates the continuing movement from the city into the
outlying counties. Carroll County demonstrated an overall rate
of growth of 45.0 percent in the 1980-1995 period, equivalent to
a 2.50 percent compound annual rate of growth. The Baltimore MSA
had a modest 12.5 percent increase in population growth since
1980.
Population Changes
Baltimore MSA
1995 1980 Percent
Baltimore MSA 2,475,052 2,199,497 12.5
Anne Arundel 463,733 370,775 25.1
Baltimore 715,986 655,615 9.2
County
Baltimore City 693,249 786,741 (11.9)
Carroll 139,691 96,356 45.0
Harford 206,517 145,930 41.5
Howard 219,313 118,572 85.0
Queen Ann's 36,563 25,508 43.3
Source: CACI: The Sourcebook of County Demographics
It is anticipated that this growth trend will continue into
the foreseeable future. According to the CACI, the Baltimore MSA
is anticipated to increase its population by 4.5 percent to
2,587,057. The more rural counties such as Carroll, Harford and
Howard will continue to see the largest percentage increases.
Employment Characteristics
Until 1960, the majority of Baltimore's workforce was
employed by the manufacturing industries. Centered around the
Port of Baltimore, shipping and steel manufacturing were among
the major economic activities in the region. With the
redirection of the national economy, many firms such as Bethlehem
Steel, General Motors and Maryland Dry Dock began to suffer and
consequently laid off several thousand workers or ceased
operations all together.
Baltimore has been slowly restructuring its economy and this
has created new jobs to fill the void left by the deterioration
of the smoke-stack industries. The following chart illustrates
the shifting of employment from the manufacturing sector to the
service sector during the past three decades.
Employment Trends
Baltimore MSA
1960 1990 1995 *
% of % of % of
Nos. Total Nos. Total Nos. Total
Construction 37.5 6.0 73.5 6.3 130.3 10.9
Manufacturing 199.0 31.6 126.9 10.9 103.9 8.7
Util./Transp./Post. 55.4 8.8 56.3 4.9 55.8 4.7
Retail/Wholesale 126.7 20.1 274.9 23.7 264.2 22.1
Finance/Insururance 32.8 5.2 75.8 6.5 70.7 5.9
Service 82.8 13.2 333.6 28.7 357.4 30.0
Government 94.8 15.1 219.4 18.9 211.0 17.7
Total 629,000 100.0 1,160,400 100.0 1,193,300 100.0
* Preliminary data through November
Source: U.S. Department of Labor, Bureau of Labor Statistics
Over the period 1990-1995 (Nov), the metropolitan area added
only 32,800 jobs, an increase of 2.8 percent or .70 percent per
annum. Compared to gains in other comparably sized metropolitan
areas, this growth could be characterized as anemic.
According to WEFA, a recognized economic consulting firm,
Metropolitan Baltimore has been faring worse than the state as a
whole and appears to be losing jobs in 1995. What is different
about this year's performance is that the suburbs appear to be
losing jobs while the city is apparently showing its first job
increase in six years. Nevertheless, the metro area is now one
of the weakest in the nation. Manufacturing continues to shed
jobs and non-manufacturing has not been able to offset the
weakness in manufacturing in 1995. Since April the MSA has lost
11,000 jobs and year-over-year job growth was negative by August.
Tourism has kept retail trade activity in the positive column,
but there is no sector of its economy generating sufficient
stimulus to pull it forward.
In the past, the traditional sources of job growth in the
Baltimore economy were manufacturing and transportation.
Manufacturing employment in Baltimore has been in decline for the
past fifteen years and that trend does not appear to be changing.
In fact, the Baltimore manufacturing sector has surrendered
23,000 jobs since 1990, and while the rate of decline is expected
to slow, the erosion of manufacturing jobs from the local economy
is expected to continue. While transportation, another important
industry to Baltimore's economy, is not in decline, it is not
creating jobs. Efforts to stabilize the Port of Baltimore have
met with some success and railway operations are still a
significant component of the local transportation sector. But
the realty is that the transportation industry nationally is not
expected to grow significantly and among older port cities,
Baltimore still has a cost disadvantage. As of November 1995,
the unemployment rate for Baltimore was 5.0 percent versus 4.5
percent for Maryland.
Baltimore's private sector economy is now more broad based
than five years ago with services, manufacturing and technology
related businesses represented. This economic diversity
manifests itself in the varied type of industries based in the
region. The manufacturing industry still maintains a presence,
along with high-tech contractors, educational institutions,
retailers and financial institutions.
Top Ten Private Employers
Baltimore MSA
Company Name No. of
Employees
The John Hopkins University & 21,000
Hospital
Westinghouse Electric Company 15,900
MNC Financial 9,500
Bethlehem Steel Company 8,000
Baltimore Gas & Electric Company 7,900
Giant Food, Inc. 6,400
C&P Telephone Company 5,300
University of Maryland Medical 4,500
System
Blue Cross & Blue Shield of 4,500
Maryland
University of Maryland at 4,500
Baltimore
Source: Baltimore Business Journal Books of Lists
Currently, the State of Maryland ranks third in total number
of U.S. biotech firms. Specific areas of concentration include
agriculture, pharmaceuticals, biotech supplies and medical
supply, service and device companies. Collectively, the
Baltimore/Washington area has more scientists and engineers than
any other region of the country.
The Baltimore region is a major center for life science
research, business and commerce. Acting as a catalyst in this
evolutionary movement is Johns Hopkins University, the largest
federally supported research university in the United States and
along with its world renowned medical institutions, the region's
top employer. Other institutions participating and expanding
into life science research include the University of Maryland
Baltimore, Morgan State University, the Maryland Biotechnology
Institute and the National Institute of Health (NIH). The NIH
has awarded more federal funds to the Baltimore-Washington Common
Market for biomedical research and development than any other
CMSA in the nation. The following chart outlines the amount and
geographic distribution of these federal research and
developmental funds.
Total R & D National
Institution Funds Rank
(000's)
Johns Hopkins University* $648,385 1
MIT $287,157 2
Cornell University $286,733 3
Stanford University $295,994 4
University of Wisconsin $285,982 5
University of MD, College Park $159,510 26
University of MD, Baltimore $75,000 65
* Figures include the Applied Physics Laboratory
Not surprising, these large amount of funds have attracted
the private sector involved in biotechnology research. As
mentioned, the state ranks third in the nation in the percent
concentration of biotech firms. Such companies as Nova
Pharmaceuticals, Martek, Crop Genetics and major divisions of
Becton Dickinson and W.R. Grace operate within the Baltimore
region.
Income
The long term ability of the population within an area to
satisfy its material desires for goods and services directly
affects the price levels of real estate and can be measured
indirectly through retail sales. One measure of the relative
wealth of an area is average household disposable income which is
available for the purchase of food, shelter, and durable goods.
In order to present a reliable comparison of the relative wealth
of the component jurisdictions in the Baltimore MSA, we have
examined the effective buying power income of the region as
reported by Sales & Marketing Management's Survey of Buying
Power. Effective buying income is essentially income after all
taxes or disposable income.
According to the Survey of Buying Power - 1995, the Baltimore
MSA had a median household Effective Buying Income (EBI) of
$41,802, ranking it as the 48th highest metropolitan area in the
country. Among components, the median household EBI varied from
a low of $28,596 in the City of Baltimore to a household high of
$58,786 in Howard County.
Effective Buying Income
Baltimore MSA
(000's) Median
Total EBI Household
EBI
BALTIMORE MSA $ 44,323,057 $41,802
Anne Arundel $ 9,031,127 $49,671
Baltimore County $ 14,065,979 $42,930
Baltimore City $ 9,445,953 $28,596
Carroll $ 2,474,685 $47,894
Harford $ 3,581,952 $45,731
Howard $ 5,113,691 $58,786
Queen Anne's $ 609,670 $39,088
Source: Sales & Marketing Management, 1995 Survey of Buying Power
An additional measure of the area's economic vitality can be
found in income level distribution. Approximately 39.2 percent
of all households have effective buying income in excess of
$50,000. This ranges from a high of 61.4 percent in Howard
County to a low of 23.1 percent in the City of Baltimore,
mirroring median household EBI. This would rank the area as
18th in the country in this income category. Other east coast
metropolitan areas are ranked as indicated: New York (1),
Washington (4), Philadelphia (5), Boston (6), Nassau/Suffolk (8),
with Chicago being second.
A region's effective buying income is a significant statistic
because it conveys the effective wealth of the consumer. This
figure alone can be misleading, however, if the consumer does not
spend money. Coupling Baltimore's EBI with the area's
significant retail sales and strong buying power index, it is
clear that residents do spend their money in the retail
marketplace. The Baltimore MSA ranks 19th in retail sales, 19th
in effective buying income and 19th in buying power. These
statistics place the Baltimore MSA in the top 5 percent in the
country.
Retail Sales
Retail sales in the Baltimore Metropolitan Area are currently
estimated to exceed $20 billion annually. As previously stated,
Baltimore ranked nineteenth nationally in total retail sales for
1994, the last year for which statistics are currently available.
Retail sales in this metropolitan area have increased at a
compound annual rate of 4.15 percent since 1989.
Retail Sales
Baltimore Metropolitan Area
(In Thousands)
Metropolitan
Year tan % Change
Baltimore
1989 $16,905,854 ---
1990 $17,489,333 +3.45%
1991 $17,484,100 -0.03%
1992 $18,446,721 +5.51%
1993 $19,610,884 +6.31%
1994 $20,720,649 +5.66%
Compound Annual Change +4.15%
Source: Sales and Marketing Management 1990-1994
Transportation
Baltimore is centrally located in the Mid-Atlantic Region and
has convenient access to both east coast and midwest markets.
The area is served by an extensive transportation network which
consists of highway, rail lines, airports, seaports, and public
transportation.
The Baltimore MSA is traversed by a series of multi-lane
highways. Interstate 95 runs north-south connecting the
Northeast corridor with Florida and, along with the Baltimore-
Washington Expressway, provides a link between the Baltimore and
Washington beltways. Interstate 83 provides access to New York
and Canadian markets. Interstate 70 connects the Port of
Baltimore with Pittsburgh and the Midwest. Finally, all major
materials are accessible from Interstate 695, Baltimore's five
lane beltway. The following chart illustrates Baltimore's close
proximity to the east coast and midwest markets.
Highway Distance from Baltimore
Boston 392
Chicago 668
New York 196
Philadelphia 96
Pittsburgh 218
Richmond 143
Washington, D.C. 37
Source: Department of Economic & Community Development
The Baltimore region is served by five major and three
shortline railroads including AMTRAK, Chessie System Railroads,
ConRail, and Norfolk Southern Railroad. Nearly 610 railroad
route miles traverse the region. AMTRAK service, originating out
of Pennsylvania Station, provides access to the Northeast
corridor, including Washington, Philadelphia, New York and
Boston. Frequent commuter service between Washington, D.C. and
Baltimore is provided by Maryland rail commuter (MARC), which
operates between Baltimore, Camden, and Pennsylvania Stations and
Washington Union Station, making intermediate stops at, among
others, Baltimore/Washington International Airport (BWI). These
stations are linked to their respective center cities by metro-
rail and metro-bus systems.
Baltimore's buses connect nearly 80 miles of the city and
provide access to Annapolis, Maryland's state capital. The newly
completed subway system links Baltimore's downtown region with
the northwesterly suburbs, traveling 14 miles, originating at the
Inner Harbor and terminating at Owings Mill. A multi-million
dollar addition has been approved that will extend the existing
subway from the Inner Harbor to Johns Hopkins Hospital. Proposed
is a 27 mile long light rail system which will connect Hunt
Valley to the north with Glen Burnie to the south, plus a spur to
BWI Airport. This rail line will be a state-of-the-art, above
ground rail system, electrically powered by overhead wires. The
new line will run through downtown Baltimore and the Inner Harbor
and will share a common station with the existing subway line at
Charles Center.
The Baltimore/Washington Airport (BWI) is located in the
southerly portion of the Baltimore SMA in Anne Arundel County,
ten miles from downtown Baltimore. The modern airport hosts 18
passenger airlines that provide direct air service to 135 cities
in the United States and Canada. U.S. Air is the major carrier
at BWI, having 45 gates with over 170 flights a day in and out of
BWI. BWI also provides service to air freight carriers with its
100,000 square foot Air Cargo Complex. When compared with Dulles
and Washington National Airport, BWI services 28.6 percent of
commercial passengers, 38.1 percent of commercial operations, and
57.3 percent of freight customers. BWI has spawned the
development of 15 new business parks and several hotels, has
created nearly 10,000 jobs, and has generated a statewide
economic impact of $1.7 billion in the form of business sales
made, goods and services purchased, and wages and taxes paid.
Baltimore's water port stretches over 45 miles of developed
waterfront and reaches a depth of 42 feet. With its six million
square feet of warehouse and five million square feet of cold
storage, the port receives 4,000 vessels yearly. These extensive
facilities can accommodate general, container, bulk and break
bulk cargoes; it is the second busiest containerized cargo port
in the Mid-Atlantic and Gulf-Coast regions. Additionally, the
port is the second largest importer and exporter of cars and
trucks in the United States. The Port of Baltimore is closer to
the midwest than any other east coast port and within an
overnight drive of one-third of the nation's population. These
are some of the reasons that the port has become a preferred
destination for Pacific rim countries.
Conclusions
The overall outlook for the Metropolitan Baltimore Area is
cautiously optimistic. The economic trends of the past 20 years
have profoundly impacted the development of the Baltimore MSA.
The service sector has filled the void left by the demise of the
heavy industries albeit with lower paying jobs. The
manufacturing industries, after a long decline, have begun to
stabilize. With resources being directed into urban industrial
parks and enterprise zones, basic industry will continue to play
an integral role in the region's economy. However, the future is
in the high-tech/bio-tech industries. Funds have been allocated
by the government to join private institutions, such as Johns
Hopkins and private sector technical firms, in order to make
Baltimore a national center for research and development.
A healthy economy is the key ingredient to a healthy real
estate market. Over the past several years, growth in the
Baltimore-Washington real estate market has been considered
strong, with rapid escalation in the values of both land and
buildings. On as national and international level, the Baltimore-
Washington market is recognized as one of the stronger real
estate markets. However, within the past 30 months, the real
estate market has slowed somewhat. Most real estate analysts
anticipate a two to three year period of slow to moderate growth
before the current market is back in balance.
From a real estate perspective, increasing consumer
confidence can have only positive effects on housing and those
who manufacture and distribute consumer goods. Thus, residential
real estate, manufacturing plants, distribution facilities and
retail complexes serve to benefit. Low interest rates are a
bonus to the real estate market through lending criteria remain
selective. Chronic lagging job growth, particularly among office
workers, continues to adversely affect the office rental market.
Baltimore's housing activity declined by more than the
statewide average since the mid-1980s as manufacturing job losses
were concentrated in the metro area. This devastated employment
in the construction sector. There was a modest recovery in
housing starts from the recession trough of 11.7 million units in
1991, but they only reached 13.8 million in 1993. Job losses
since April 1995 have depressed housing activity as housing
permits are down by 14.3 percent year-to-date. Non-residential
construction is providing some support to the overall
construction sector due to the work on several large projects.
Non-residential permit values are up 85 percent through August
from 1994 levels.
Thus, over a long term, the Baltimore region benefits from a
diversified economic base which should protect the region from
the effects of wide swings in the economy. The region's
strategic location along the eastern seaboard and its reputation
as a major business center should further enhance the area's long
term outlook. Thus, while the current short term economic
outlook may cause real estate values to remain stable, a more
optimistic long term outlook should have positive influences upon
real estate values.
Summary
- Baltimore is the nineteenth largest metropolitan area in the country.
Just by sheer size, the region represents a broad marketplace for all
commodities including real estate.
- The region's economy is diversified with the service industries now the
largest single sector; manufacturing has stabilized after three decades
of decline. The outlook for continued expansion and investment in the
biotechnology field is excellent led by the renowned John Hopkins
University.
- Regional economic trends point toward an era of modest growth which, over
time, should eventually alleviate the current imbalance between supply
and demand for some types of real property. However, only those with a
desirable location and functional design will outperform inflation in
the general economy.
NEIGHBORHOOD ANALYSIS
General
Eastpoint Mall is located in Baltimore County on the northern
portion of the Dundalk peninsula, one mile east of Baltimore City
limits. It is conveniently located between Eastern Avenue, North
Point Boulevard, and Interstate 695. Although it has access and
visibility from Eastern Avenue and North Point Boulevard, which
both have access off Interstate 695, the property is not visible
from the interstate.
Land Use Patterns
Immediately surrounding the Eastpoint Mall is a diverse mix
of land uses, including office, retail, residential, and
industrial. Directly opposite Eastpoint Mall on Eastern Avenue
is an older neighborhood shopping center with a mix of discount
retailers. Across North Point Boulevard are some office users,
most notably Eastpoint Office Park consisting of approximately
92,000+/- square feet of Class B+/- office space.
The surrounding residential areas are made up of older, well-
kept single- and multi-family homes. There is a balance of
schools, churches, services and neighborhood amenities indicating
stability of the area. Although industrial parks and the
Baltimore City Sewage Treatment Plant are nearby, these uses are
geographically isolated so as not to affect the character of the
surrounding residential neighborhoods.
Summary
The outlook for the immediate neighborhood is one of cautious
optimism. The neighborhood is relatively mature and built-up.
The subject's most promising growth potential is seen in
capturing a greater market share from its principal competitors,
the Golden Ring Mall and the White Marsh Mall. The addition of a
10-screen theater complex across Eastern Avenue should help to
generate additional traffic for the area.
RETAIL MARKET ANALYSIS
Trade Area Analysis
Overview
A retail center's trade area contains people who are likely
to patronize that particular property. These customers are drawn
by a given class of goods and services provided by a particular
tenant mix. The fundamental drawing power comes from the
strength of anchor tenants at the center, as well as the
national, regional, and local tenants which complement and
support the anchors. A successful combination of these elements
creates a destination for customers seeking a variety of goods
and services, as well as comfort and convenience of an integrated
shopping environment.
In order to define and analyze the market potential for a
property such as the subject, it is important to first establish
boundaries of the trade area from which the subject will draw its
customers. In some cases, defining the trade area may be
complicated by the existence of other retail facilities on main
thoroughfares within trade areas that are not clearly defined, or
whose trade areas overlap with that of the subject. Therefore,
transportation and access, location of competition, and
geographical boundaries tend to set barriers for the subject's
potential trade area.
Scope of Trade Area
Traditionally, a retail center's sales are principally
generated from within its primary trade area, which is typically
within reasonably close geographic proximity to the property
itself. Generally, between 55.0 and 65.0 percent of a center's
sales are generated from within its primary trade area. The
secondary trade area generally refers to more outlying areas
which provide less frequent customers. Residents within the
secondary trade area would be more likely to shop closer to home
due to time and travel constraints. An additional 20.0 to 25.0
percent of a center's sales will be generated from secondary
areas. Finally, tertiary or peripheral trade areas refer to more
distant locations from which occasional customers reside. These
residents may be drawn to the center by a particular service or
store which is not found locally. Industry experience shows that
between 10.0 and 15.0 percent of a center's sales are derived
from customers residing outside the trade area. This potential
is commonly referred to as inflow.
Trade Area Definition
A complete discussion of the subject's potential trade area
is beyond the scope of this assignment. Our Original Appraisal
provided a detailed analysis of the potential boundaries for the
subject's potential draw, along with complete discussions of area
competition. The analysis concluded that Eastpoint's primary and
secondary trade areas most closely resemble those zip codes
presented in a study by Stillerman & Jones (1993). This trade
area has been identified as containing a total of 11 zip codes
that are bounded roughly by Joppa Road (north), St. Paul Street
(west), and the Chesapeake Bay (south and east).
The Primary Market segment, which generally falls within a 3-
mile radius of the center, includes the major zip code
communities of Dundalk, Essex, Rosedale, and Highlandtown. In
the 1993 Stillerman survey, it was estimated that approximately
55.0 percent of the subject's shoppers reside within the Primary
Market area. Eastpoint's Primary Market zip codes are as
follows:
Primary Trade Area
Zip Code City/Location
21202 21221
21205 21222
21213 21224
21219 21231
Source: Stillerman & Jones
The Secondary Market encompasses several additional
communities that generally fall within an 8 to 10 minute drive of
the property, approximately a 5 to 6 mile radius of the subject
site. The following chart lists Secondary Market zip codes:
Secondary Trade Area
Zip Code Zip Code Zip Code
21206 21220 21237
Source: Stillerman & Jones
We have utilized this zip code-based survey in order to
analyze the subject's trade area. To lend additional
perspective, we have separated the trade area into the Primary
and Secondary segments. The table on the Facing Page presents an
overview of the subject's Primary and Secondary trade areas as
reported by Equifax National Decision Systems. A complete report
is included in the Addenda to this appraisal.
TABLE ILLUSTRATING DEMOGRAPHIC STATITICS IN EASTPOINT
MALLS'S TRADE AREA, BALTIMORE MSA, STATE OF MARYLAND AND UNITED STATES
Population
Over the course of the past five years, population within the
Primary Trade Area has been declining at a compound annual rate
of 0.10 percent per year. Current estimates show a Primary
Market population of 277,947. Through 2000, population is
projected to grow at an annual rate of 0.22 percent per year.
Population within the Secondary Market is estimated at 115,463
and has been growing at a rate of 0.20 percent per annum since
1990. Secondary Market population growth is forecasted to grow
by 0.39 percent per year through 2000.
The graphic on the following page presents forecasted
population growth within the subject's Primary and Secondary
trade areas over the next five years. As can be seen, areas to
the east in Baltimore County are projected to see the highest
growth. The majority of the trade area is expected to see only
moderate growth through 2000. Nonetheless, it is important to
recognize that this total trade area contains nearly 393,410
people with fair to moderate aggregate purchasing power. As with
other areas of the Baltimore MSA, population growth has been
occurring in outlying suburban areas.
MAP ILLUSTRATING PROJECTED POPULATION GROWTH FROM 1995 - 2000
IN EASTPOINT MALL'S TOTAL TRADE AREA
Household Trends
Household formation within the subject's Primary Trade Area
has been growing at a faster pace than population growth. This
is a national phenomenon generally brought on by higher divorce
rates, younger individuals postponing marriage, and population
living longer on average. Between 1990 and 1995, the Primary
Trade Area added 3,662 households, a 3.5 percent increase or 0.69
percent per year. Over the next five years, household formation
is projected to increase at an annual rate of 0.72 percent per
year.
Household formation is an important statistic for retailers
in that household units provide the demand necessary for the
purchase of goods and services. With household persons per
household is declining. Accordingly, household size is
forecasted to continue to decrease from its present figure of
2.57 persons per unit, to 2.50 persons per household in 2000.
Trade Area Income
Another significant statistic for retailers is the income
potential within the Primary Trade Area. The subject's Primary
Market shows an average household income of about $35,448, with a
per capita income of $14,113. The Secondary Market has an
average household income of $40,731. By comparison, the
Baltimore MSA has an average household income of $52,158, while
the United States has an average of about $46,791.
Provided on a Following Page is a graphic presentation of
average household income within the Primary and Secondary trade
areas of the subject's market. As can be seen, areas to the
north, south and east have the highest levels of income.
MAP ILLUSTRATING 1995 AVERAGE HOUSEHOLD INCOME
IN EASTPOINT MALL'S TOTAL TRADE AREA
Retail Sales
Retail sales and sales growth are also indicators which
retailers watch closely. Retail sales provide important insight
into regional economic trends and the relative health of
surrounding areas. The following table charts historic retail
sales trends within the subject's region.
Retail Sales Trends (000)
Baltimore State of Washington
Year County Baltimore Maryland D.C.
MSA MSA
1985 $5,402,509 $13,681,848 $28,863,392 $25,219,988
1990 $6,971,038 $17,489,333 $36,836,986 $32,925,657
1993 $7,872,419 $19,610,884 $40,363,984 $39,205,140
1994 $7,974,328 $20,720,649 $44,183,971 $43,632,568
CAGR: 85-94 +4.42% 4.72% 4.84% 6.28%
CAGR: 90-94 +3.42% 4.33% 4.65% 7.29%
Source: Sales & Marketing Management "Survey of Buying Power"
From the survey, it is evident that retail sales within
Baltimore County have been growing at a compound annual rate of
3.42 percent since 1990, lower than the Baltimore MSA and
Washington D.C.
Subject Property Sales
While retail sales trends within the MSA and region lend
insight into the underlying economic aspects of the market, it is
the subject's sales history that is most germane to our analysis.
Mall Shop Sales
Sales reported for mall shops at the subject property can be
broken down into various components, including total shop sales,
comparable or same-store sales (mature sales), and new store
sales. Total mall shop sales include new tenants, mature tenants,
and those tenants which are terminated during the year. The
following table tracks sales at the subject property based upon
total mall shop GLA.
Subject Mall Shop Sales
Total Applicable Sales
Year Sales % GLA Per Sq. %
(000) Change Ft. Change
1989 $50,077 -- 276,302 $181.20 --
1990 $56,912 +13.65% 297,486 $191.30 + 5.57%
1991 $52,848 -7.14% 320,680 $164.80 -13.85%
1992 $60,987 +15.40% 341,091 $178.80 +8.50%
1993 $64,290 +5.42% 341,242 $188.40 +5.37%
1994 $69,459 +8.04% 327,020 $212.40 +12.74%
1995 $70,338 +1.27% 327,001 $215.10 +1.27%
CAGR: 89-95 -- 5.83% -- -- 2.90%
CAGR: 92-95 -- 4.87% -- -- 6.35%
Includes all mall shop sales; does not reflect mature or same-store sales.
Aggregate mall shop sales have increased at a compound annual
rate of 5.83 percent per year since 1989. In this regard, sales
increased from approximately $50.1 million in 1989 to $70.3
million in 1995. Abstracting a unit rate for each year based
upon total reporting GLA, sales in 1995 reportedly increased to
$215.10 per square foot. This figure is skewed, however, due to
the inclusion of partial year tenants, both new and terminating
stores.
A better gauge of mall shop sales can be measured by same-
store or "Mature Sales" as reported by Shopco. These comparable
store sales reflect annual performance for stores open and
reporting sales for the full prior year period. The following
chart shows "Mature Sales" for the subject property.
Mature Store Sales
Year Sales Per Sq. Ft. % Change
1991 $201.50 --
1992 $209.50 + 3.97%
1993 $209.80 + 0.14%
1994 $235.30 + 12.15%
1995 $235.10 - 0.09%
Includes mature store sales only; excludes new tenants & terminated tenants.
From the data, it is clear that same-store sales at the
subject property have increased substantially over previous
years, declining slightly over 1994 figures. For 1995, mature
store sales reached $235 per square foot at the subject property.
Department Store Sales
Department store sales at the subject property reportedly
reached $74.8 million in 1995, reflecting a 2.5 percent increase
over 1994 figures. The indicated overall sales average per
square foot is $164. The following chart shows a history of
anchor store sales for the subject.
Subject Anchor Sales (000)
Year Value Ames JC Penney Sears
City
1989 $18,729 $ 9,012 $14,827 --
1990 $23,669 $ 8,198 $14,282 --
1991 $25,240 $ 9,059 $13,287 $ 4,964
1992 $26,505 $ 8,908 $14,122 $12,281
1993 $28,002 $10,365 $15,326 $14,860
1994 $29,384 $10,620 $15,566 $17,364
1995 $29,177 $ 9,897 $17,738 $17,968
CAGR: 89-95 7.67% 1.57% 3.03% --
CAGR: 92-95 3.25% 3.57% 7.90% 13.52%
As can be seen, department store sales have grown at a
compound annual rate of about 6.55 percent per year since 1992.
Sears has shown the strongest overall growth at 13.52 percent,
while JC Penney has had growth of 7.90 percent per annum. JC
Penney is on ground lease terms and not part of owned GLA.
Primary Competition
As further discussion of the subject's position in the
market, it is necessary that we briefly review the nature of area
competition. The subject property competes most directly with
the Galleria Ring Mall and the White Marsh Mall.
The Galleria Ring Mall continues to be Eastpoint's most
direct competition located 3+/- miles northeast of the subject at
Interstate 695 and Routes 7 and 40. The mall was built in 1974
and renovated in 1992. Total GLA is about 718,988+/- square feet
on two-levels. Golden Ring is anchored by Caldor (144,610 square
feet), Hecht's (149,600 square feet), and Montgomery Ward
(168,688 square feet), with theaters and a free-standing strip.
Occupancy is reported to be around 95.0 percent, with average
mall shop sales of $221 per square foot, up from about $213 per
square foot in 1993. Four theaters were added to the mall in
1994 and crime continues to be a problem for this center.
The White Marsh Mall, approximately 6+/- miles to the north, is
the subject's other competitive center, competing for portions of
Eastpoint's secondary trade area and upper-end shoppers. The
mall is situated on 140+/- acres at Silver Spring Road and
Interstate 95 and contains approximately 1,145,000+/- square feet.
Anchors include Hecht's (120,000 square feet), JC Penney (132,000
square feet), Macy's (195,000 square feet), and Sears (163,000
square feet). The former Woodward & Lothrop store (164,000
square feet) is still vacant following its closing and management
reports that there are no negotiations underway for the space.
This two-level, enclosed mall was constructed in 1981 and
contains approximately 180+/- mall shops. Average mall shop sales
are reported to be slightly over $300 per square foot, with
occupancy near 100.0 percent. White Marsh is firmly positioned
as a higher-end center with a complimentary mix of tenants
serving a more upscale shopper. A considerable amount of
development has been occurring around White Marsh. In 1994, the
mall added a Warner Brothers superstore and additional theaters.
These two properties compete most directly with Eastpoint and
create formidable boundaries to the subject's potential trade
area.
Proposed Competition
To the best of our knowledge, there are no proposed retail
centers that would compete directly with the subject property.
Secondary Competition
The subject property is also influenced to some degree by
secondary competition within the surrounding areas, including
large community centers, big box users, and discounters.
Conclusion
We have analyzed the retail trade area for the subject
property, along with profiles of the Baltimore MSA and Baltimore
County. This type of analysis is necessary in order to make
reasonable assumptions regarding the continued performance of the
subject property. Our trade area profile has been based upon a
zip code-based survey of shoppers frequenting the property.
The following points summarize our key conclusions regarding
the subject property and its trade area:
- The subject enjoys an accessible location within the heart of the
nation's 14th largest MSA.
- Despite existing competition, Eastpoint Mall is an established mall with
a history of customer loyalty. Its strategic location dominates the
southeast portion of Baltimore County and northeast quadrant of
Baltimore City.
- Baltimore County has the largest population in the MSA outside of the
City of Baltimore. Generally, its economy has become increasingly
diversified over the last decade. Throughout the 1980s the county
gained in affluence. With approximately 29 percent of the MSA's
population, the county has averaged over 40 percent of the
metropolitan area's retail sales.
- The subject's trade area has declined slightly in population, primarily
as a result of the outmigration of residents from Baltimore City.
- Competition exists most directly with the Golden Ring Mall. Golden
Ring, together with the subject, have similar merchandising themes
targeted to the middle income, blue collar residents that form the
basis for the trade area. The subject's expansion, renovation and
remerchandising has been timely and should continue to result in
increased market share. Indications show that Golden Ring has suffered
at the expense of Eastpoint. Concurrently, we see a pronounced shift
in tenants offering better merchandising that, in our opinion, more
firmly positions the subject's competitive structure relative to Golden
Ring and the White Marsh Mall.
- In view of the projected continued erosion of the City of Baltimore's
population, management has redirected marketing efforts to focus on
areas within and proximate to the trade area that have the most
potential for growth. Continued efforts should be made to carefully
select tenants that fit the profile of the customer base.
On balance, it is our opinion that, with competent management
and aggressive marketing, the subject property should remain a
viable retail entity into the foreseeable future. Our outlook
for the subject's region continues to be positive, with below
average prospects for growth.
THE SUBJECT PROPERTY
Property Description
Eastpoint Mall contains a total GLA of 863,243+/- square feet.
Of this total, the enclosed mall consists of 297,511+/- square feet
and separate freestanding structures contain 565,732+/- square
feet, including anchors, free-standing buildings, and outdoor
tenants. The existing 67.121+/- acre site provides parking for
over 4,500 cars.
The subject has successfully positioned itself against its
competition through renovation and remerchandising over the past
two to three years. The addition of natural light and the
inclusion of tasteful pastel colors and neon accent lighting has
transformed the mall's image from bland to a more contemporary
atmosphere. One of the biggest changes has been the
transformation of the former Hutzler's space to contain the
mall's new food court on the main concourse level as well as the
atrium offices on the remaining two levels. These offices
consist of a total rentable area of 55,435+/- square feet and are
targeted to smaller service and professional firms. While the
food court has caught on and is doing well, the offices continue
to have difficulty in attracting tenants. We relate this to the
fact that an office use in a traditional mall is typically a
difficult concept to market. In addition, the general location
is considered secondary in relation to other quadrants of the MSA
that contain the bulk of the regions' office component.
Since our previous report there have been no major changes to
the subject property. Several lease transactions have taken
place along with lease renewals for some existing tenants. We
are advised that management has considered bringing in Service
Merchandise as a so-called fifth anchor on the former Firestone
outpad. Service Merchandise would occupy a 50,000+/- square foot
store on ground lease terms. Although we have not reflected a
deal of this nature, the addition would create additional draw to
the center.
Structurally and mechanically, improvements appear to be in
good condition. Our review of the local environs reveals that
there are no external influences which negatively impact the
value of the subject property. Although crime has been an
increasingly visible problem at area malls, the subject has taken
appropriate action to combat such an image problem with
heightened security measures.
Real Property Taxes and Assessments
The gross assessment for the subject for the fiscal tax year
(July 1994 through June 1995) is $16,912,090. Real estate taxes
for the 1994/1995 tax period are $586,457.95. Taxes are
increased on July 1st for the next fiscal tax period. Ownership
has budgeted $598,600 for real estate taxes in calendar year
1996, comparable to the 1995 budget. This figure includes the
projected increase in taxes on July 1st. We have utilized their
projection in our cash flow.
Zoning
The subject property is zoned BM-CT, Business Major - Town
Center by Baltimore County. Based on conversations with the
county zoning office, the subject's current retail/commercial use
is in conformance with the intent of this district.
We know of no deed restrictions, private or public, that
further limit the subject property's use. The research required
to determine whether or not such restrictions exist, however, is
beyond the scope of this appraisal assignment. Deed restrictions
are a legal matter and only a title examination by an attorney or
title company can usually uncover such restrictive covenants.
Thus, we recommend a title search to determine if any such
restrictions do exist.
HIGHEST AND BEST USE
According to the Dictionary of Real Estate Appraisal, Third
Edition (1993), a publication of the Appraisal Institute, the
highest and best use is defined as:
The reasonably probable and legal use of vacant land or
an improved property, which is physically possible,
appropriately supported, financially feasible, and that
results in the highest value. The four criteria the
highest and best use must meet are legal permissibility,
physical possibility, financial feasibility, and maximum
profitability.
We evaluated the site's highest and best use both as
currently improved and as if vacant in the Original Report.
After considering all the uses which are physically possible,
legally permissible, financially feasible, and maximally
productive, it is our opinion that a concentrated retail use
built to its maximum feasible F.A.R. is the highest and best use
of the mall site as though vacant. Similarly, we have considered
the same criteria with regard to the highest and best use of the
site as improved. After considering all pertinent data, it is
our conclusion that the highest and best use of the site as
improved is for its continued retail/commercial use. We believe
that such a use will yield to ownership the greatest return over
the longest period of time.
VALUATION PROCESS
Appraisers typically use three approaches in valuing real
property: The Cost Approach, the Income Approach and the Sales
Comparison Approach. The type and age of the property and the
quantity and quality of data effect the applicability in a
specific appraisal situation.
The Cost Approach renders an estimate of value based upon the
price of obtaining a site and constructing improvements, both
with equal desirability and utility as the subject property.
Historically, investors have not emphasized cost analysis in
purchasing investment grade properties such as regional malls.
The estimation of obsolescence for functional and economic
conditions as well as depreciation on improvements makes this
approach difficult at best. Furthermore, the Cost Approach fails
to consider the value of department store commitments to regional
shopping centers and the difficulty of site assemblage for such
properties. As such, the Cost Approach will not be employed in
this analysis due to the fact that the marketplace does not
rigidly trade leased shopping centers on a cost/value basis.
The Sales Comparison Approach is based on an estimate of
value derived from the comparison of similar type properties
which have recently been sold. Through an analysis of these
sales, efforts are made to discern the actions of buyers and
sellers active in the marketplace, as well as establish relative
unit values upon which to base comparisons with regard to the
mall. This approach has a direct application to the subject
property. Furthermore, this approach has been used to develop
investment indices and parameters from which to judge the
reasonableness of our principal approach, the Income Approach.
By definition, the subject property is considered an income/
investment property. Properties of this type are historically
bought and sold on the ability to produce economic benefits,
typically in the form of a yield to the purchaser on investment
capital. Therefore, the analysis of income capabilities are
particularly germane to this property since a prudent and
knowledgeable investor would follow this procedure in analyzing
its investment qualities. Therefore, the Income Approach has
been emphasized as our primary methodology for this valuation.
This valuation concludes with a final estimate of the subject's
market value based upon the total analysis as presented herein.
SALES COMPARISON APPROACH
Methodology
The Sales Comparison Approach provides an estimate of market
value by comparing recent sales of similar properties in the
surrounding or competing area to the subject property. Inherent
in this approach is the principle of substitution, which holds
that, when a property is replaceable in the market, its value
tends to be set at the cost of acquiring an equally desirable
substitute property, assuming that no costly delay is encountered
in making the substitution.
By analyzing sales that qualify as arms-length transactions
between willing and knowledgeable buyers and sellers, market
value and price trends can be identified. Comparability in
physical, locational, and economic characteristics is an
important criterion when comparing sales to the subject property.
The basic steps involved in the application of this approach are
as follows:
1. Research recent, relevant property sales and current offerings
throughout the competitive marketplace;
2. Select and analyze properties considered most similar to the subject,
giving consideration to the time of sale, change in economic conditions
which may have occurred since date of sale, and other physical,
functional, or locational factors;
3. Identify sales which include favorable financing and calculate the cash
equivalent price; and
4. Reduce the sale prices to a common unit of comparison, such as price per
square foot of gross leasable area sold;
5. Make appropriate adjustments between the comparable properties and the
property appraised; 6. Interpret the adjusted sales data and draw a
logical value conclusion.
The most widely-used, market-oriented units of comparison for
properties such as the subject are the sale price per square foot
of gross leasable area (GLA) purchased, and the overall
capitalization rate extracted from the sale. This latter measure
will be addressed in the Income Approach which follows this
methodology. An analysis of the inherent sales multiple also
lends additional support to the Sales Comparison Approach.
Market Overview
The typical purchaser of properties of the subject's caliber
includes both foreign and domestic insurance companies, large
retail developers, pension funds, and real estate investment
trusts (REIT's). The large capital requirements necessary to
participate in this market and the expertise demanded to
successfully operate an investment of this type, both limit the
number of active participants and, at the same time, expand the
geographic boundaries of the marketplace to include the
international arena. Due to the relatively small number of
market participants and the moderate amount of quality product
available in the current marketplace, strong demand exists for
the nation's quality retail developments.
Most institutional grade retail properties are existing,
seasoned centers with good inflation protection. These centers
offer stability in income and are strongly positioned to the
extent that they are formidable barriers to new competition.
They tend to be characterized as having three to five department
store anchors, most of which are dominant in the market. Mall
shop sales are at least $300 per square foot and the trade area
offers good growth potential in terms of population and income
levels. Equally important are centers which offer good upside
potential after face-lifting, renovations, or expansion. With
new construction down substantially, owners have accelerated
their renovation and remerchandising programs. Little
competition from over-building is likely in most mature markets
within which these centers are located. Environmental concerns
and "no-growth" mentalities in communities continue to be serious
impediments to new retail developments.
Over the past 18+/- months, we have seen real estate investment
return to favor as an important part of many institutional
investors' diversified portfolios. Banks are aggressively
competing for business, trying to regain market share lost to
Wall Street, while the more secure life insurance companies are
also reentering the market. The re-emergence of real estate
investment trusts (REITs) has helped to provide liquidity within
the real estate market, pushing demand for well-tenanted, quality
property, particularly regional malls. Currently, REITs are one
of the most active segments of the industry and are particularly
attractive to institutional investors due to their liquidity.
The market for dominant Class A institutional quality malls
is tight, as characterized by the limited amount of good quality
product available. It is the consensus that Class A property
would trade in the 7.0 to 8.0 percent capitalization rate range.
Conversely, there are many second tier and lower quality malls
offered on the market at this time. With limited demand from a
much thinner market, cap rates for this class of malls are felt
to be in the much broader 8.5 to 15.0 percent range. Reportedly,
there are 50+/- malls on the market currently. Pessimism about the
long term viability of many of these lower quality malls has been
fueled by the recent turmoil in the retail industry. It is felt
that the subject resides on the better quality end of this latter
category.
To better understand where investors stand in today's
marketplace, we have surveyed active participants in the retail
investment market. Based upon our survey, the following points
summarize some of the more important " hot buttons " concerning
investors:
1. Occupancy Costs - This " health ratio " measure is of fundamental
concern today. Investors like to see ratios under 13.0 percent
and become quite concerned when they exceed 15.0 percent. This
appears to be by far the most important issue to an investor
today. Investors are looking for long term growth in cash flow
and want to realize this growth through real rent increases. High
occupancy costs limit the amount of upside through lease
rollovers.
2. Market Dominance - The mall should truly be the dominant mall in
the market, affording it a strong barrier to entry. Some
respondents feel this is more important than the size of the
trade area itself.
3. Strong Anchor Alignment - Having at least three department stores,
two of which are dominant in that market. The importance of the
traditional department store as an anchor tenant has returned to
favor after several years of weak performance and confusion as to
the direction of the industry. As a general rule, most
institutional investors would not be attracted to a two-anchor
mall.
4. Dense Marketplace - Several of the institutional investors favor
markets of 300,000 to 500,000 people (at least 150,000
households) or greater within a 5 to 7 mile radius. Population
growth in the trade area is also very important. One advisor
likes to see growth 50.0 percent better than the U.S. average.
Another investor cited that they will look at trade areas of
200,000+/- but that if there is no population growth forecasted in
the market, a 50+/- basis point adjustment to the cap rate at the
minimum is warranted.
5. Income Levels - Household incomes of $50,000+ which tends to be
limited in many cases to top 50 MSA locations.
6. Good Access - Interstate access with good visibility and a
location within or proximate to the growth path of the community.
7. Tenant Mix - A complimentary tenant mix is important. Mall shop
ratios of 35+/- percent of total GLA are considered average with
75.0 to 80.0 percent allocated to national tenants. Mall shop
sales of at least $250 per square foot with a demonstrated
positive trend in sales is also considered to be important.
8. Physical Condition - Malls that have good sight lines, an updated
interior appearance, and a physical plant in good shape are looked
upon more favorably. While several developers are interested in
turn-around situations, the risk associated with large capital
infusions can add at least 200 to 300 basis points onto a cap
rate.
9. Environmental Issues - The impact of environmental problems cannot
be understated. There are several investors who won't even
look at a deal if there are any potential environmental issues
no matter how seemingly insignificant.
10. Operating Covenants - Some buyers indicated that they would not be
interested in buying a mall if the anchor store operating
covenants were to expire over the initial holding period.
Others weigh each situation on its own merit. If it is a
dominant center with little likelihood of someone coming into
the market with a new mall, they are not as concerned about the
prospects of loosing a department store. If there is a chance
of loosing an anchor, the cost of keeping them must be weighed
against the benefit. In many of their malls they are finding
that traditional department stores are not always the optimum
tenant but that a category killer or other big box use would be
a more logical choice.
In the following section we will discuss trends which have
become apparent over the past several years involving sales of
regional malls.
Regional Mall Property Sales
Evidence has shown that mall property sales which include
anchor stores have lowered the square foot unit prices for some
comparables, and have affected investor perceptions. In our
discussions with major shopping center owners and investors, we
learned that capitalization rates and underwriting criteria have
become more sensitive to the contemporary issues affecting
department store anchors. Traditionally, department stores have
been an integral component of a successful shopping center and,
therefore, of similar investment quality if they were performing
satisfactorily.
During the 1980's a number of acquisitions, hostile take-
overs and restructurings occurred in the department store
industry which changed the playing field forever. Weighted down
by intolerable debt, combined with a slumping economy and a shift
in shopping patterns, the end of the decade was marked by a
number of bankruptcy filings unsurpassed in the industry's
history. Evidence of further weakening continued into 1991-1992
with filings by such major firms as Carter Hawley Hale, P.A.
Bergner & Company, and Macy's. In early 1994, Woodward & Lothrop
announced their bankruptcy involving two department store
divisions that dominate the Philadelphia and Washington D.C.
markets. Recently, most of the stores were acquired by the May
Department Stores Company, effectively ending the existence of
the 134 year old Wanamaker name, the nation's oldest department
store company. More recently, however, department stores have
been reporting a return to profitability resulting from increased
operating economies and higher sales volumes. Sears, once marked
by many for extinction, has more recently won the praise of
analysts. Federated Department Stores has also been acclaimed as
a text book example on how to successfully emerge from
bankruptcy. They have merged with Macy's and more recently
acquired the Broadway chain to form one of the nation's largest
department store companies.
With all this in mind, investors are looking more closely at
the strength of the anchors when evaluating an acquisition. Most
of our survey respondents were of the opinion that they were
indifferent to acquiring a center that included the anchors
versus stores that were independently owned if they were good
performers. However, where an acquisition includes anchor
stores, the resulting cash flow is typically segregated with the
income attributed to anchors (base plus percentage rent) analyzed
at a higher cap rate then that produced by the mall shops.
However, more recent data suggests that investors are
becoming more troubled by the creditworthiness of the mall shops.
With an increase in bankruptcies, store closures and
consolidations, we see investors looking more closely at the
strength and vulnerabilities of the in-line shops. As a result,
there has been a marked trend of increasing capitalization rates.
TABLE SHOWING 1995 REGIONAL MALL SALES
TABLE SHOWING 1994 REGIONAL MALL SALES
Cushman & Wakefield has extensively tracked regional mall
transaction activity for several years. In this analysis we will
show sales trends since 1991. Summary charts for the older sales
(1991-1993) are provided in the Addenda. The more recent sales
(1994/1995) are provided herein. These sales are inclusive of
good quality Class A or B+/- properties that are dominant in their
market. Also included are weaker properties in second tier
cities that have a narrower investment appeal. As such, the mall
sales presented in this analysis show a wide variety of prices on
a per unit basis, ranging from $59 per square foot up to $556 per
square foot of total GLA purchased. When expressed on the basis
of mall shop GLA acquired, the range is more broadly seen to be
$93 to $647 per square foot. Alternatively, the overall
capitalization rates that can be extracted from each transaction
range from 5.60 percent to rates in excess of 11.0 percent.
One obvious explanation for the wide unit variation is the
inclusion (or exclusion) of anchor store square footage which has
the tendency to distort unit prices for some comparables. Other
sales include only mall shop area where small space tenants have
higher rents and higher retail sales per square foot. A shopping
center sale without anchors, therefore, gains all the benefits of
anchor/small space synergy without the purchase of the anchor
square footage. This drives up unit prices to over $250 per
square foot, with most sales over $300 per square foot of salable
area. A brief discussion of historical trends in mall
transactions follows.
- The fourteen sales included for 1991 show a mean average price per
square foot sold of $282. On the basis of mall shop GLA sold, these
sales present a mean of $357. Sales multiples range from .74 to 1.53
with a mean of 1.17. Capitalization rates range from 5.60 to 7.82
percent with an overall mean of 6.44 percent. The mean terminal
capitalization rate is approximately 100 basis points higher, or 7.33
percent. Yield rates range between 10.75 and 13.00 percent, with a mean
of 11.52 percent for those sales reporting IRR expectancies.
- In 1992, the eleven transactions display prices ranging from $136 to
$511 per square foot of GLA sold, with a mean of $259 per square foot.
For mall shop area sold, the 1992 sales suggest a mean price of $320
per square foot. Sales multiples range from .87 to 1.60 with a mean of
1.07. Capitalization rates range between 6.00 and 7.97 percent with the
mean cap rate calculated at 7.31 percent for 1992. For sales reporting
a going-out cap rate, the mean is shown to be 7.75 percent. Yield
rates range from 10.75 to around 12.00 percent with a mean of 11.56
percent.
- For 1993, a total of sixteen transactions have been tracked. These
sales show an overall average sale price of $242 per square foot based
upon total GLA sold and $363 per square foot based solely upon mall GLA
sold. Sales multiples range from .65 to 1.82 and average 1.15.
Capitalization rates continued to rise in 1993, showing a range between
7.00 and 10.10 percent. The overall mean has been calculated to be
7.92 percent. For sales reporting estimated terminal cap rates, the
mean is also equal to 7.92 percent. Yield rates for 1993 sales range
from 10.75 to 12.50 percent with a mean of 11.53 percent for those
sales reporting IRR expectancies. On balance, the year was notable for
the number of dominant Class A malls which transferred.
- Sales data for 1994 shows fourteen confirmed transactions with an
average unit price per square foot of $197 per square foot of total GLA
sold and $288 per square foot of mall shop GLA. Sales multiples range
from .57 to 1.43 and average .96. The mean going-in capitalization
rate is shown to be 8.37 percent. The residual capitalization rates
average 8.13 percent. Yield rates range from 10.70 to 11.50 percent
and average 11.17 percent. During 1994, many of the closed
transactions involved second and third tier malls. This accounted for
the significant drop in unit rates and corresponding increase in cap
rates. Probably the most significant sale involved the Riverchase
Galleria, a 1.2 million square foot center in Hoover, Alabama. LaSalle
Partners purchased the mall of behalf of the Pennsylvania Public School
Employment Retirement System for $175.0 million. The reported cap rate
was approximately 7.4 percent.
- Cushman & Wakefield has researched 14 mall transactions for 1995. With
the exception of Sale No. 95-1 (Natick Mall) and 95-2 (Smith Haven
Mall), by and large the quality of malls sold are lower than what has
been shown for prior years. For example, the average transaction price
has been slipping. In 1993, the peak year, the average deal was nearly
$133.8 million. Currently, it is shown to be $90.7 million which is
even skewed upward by Sale Nos. 95-1 and 95-2. The average price per
square foot of total GLA is calculated to be $152 per square foot. The
range in values of mall GLA sold are $93 to $607 with an average of
$275 per square foot. Characteristic of these lesser quality malls
would be higher initial capitalization rates. The range for these
transactions is 7.47 to 11.1 percent with a mean of 9.14 percent, the
highest average over the past five years. Most market participants
feel that continued turmoil in the retail industry will force cap rates
to move higher over the ensuing year.
While these unit prices implicitly contain both the physical
and economic factors affecting the real estate, the statistics do
not explicitly convey many of the details surrounding a specific
property. Thus, this single index to the valuation of the
subject property has limited direct application. The price per
square foot of mall shop GLA acquired yields one common form of
comparison. However, this can be distorted if anchor and/or
other major tenants generate a significant amount of income. The
following chart summarizes the range and mean for this unit of
comparison by year of sale.
Transaction Price/SF Price/ Sales
Year Unit Rate SF Multiple
Range * Mean
1991 $203 - $556 $357 1.17
1992 $226 - $511 $320 1.07
1993 $173 - $647 $363 1.15
1994 $129 - $502 $288 .96
1995 $93 - $607 $264 .98
* Includes all sales by each respective year.
As discussed, one of the factors which may influence the unit
rate is whether or not anchor stores are included in the total
GLA which is transferred. Thus, a further refinement can be made
between those malls which have transferred with anchor space and
those which have included only mall GLA. Chart A, shown below
makes this distinction.
CHART A
Regional Mall Sales
Involving Mall Shop Space Only
1991 1992 1993 1994
Sale Unit NOI Sale Unit NOI Sale Unit NOI Sale Unit NOI
No. Rate Per No. Rate Per No. Rate Per No. Rate Per
SF SF SF SF
91-1 $257 $15.93 92-2 $348 $25.27 93-1* $355 $23.42 94-1 $136 $11.70
91-2 $232 $17.65 92-9 $511 $33.96 93-4 $471 $32.95 94-3 $324 $22.61
91-5 $203 $15.89 92-11 $283 $19.79 93-5 $396 $28.88 94-12 $136 $14.00
91-6 $399 $24.23 93-7 $265 $20.55 94-14 $241 $18.16
91-7 $395 $24.28 93-14 $268 $19.18
91-8 $320 $19.51
91-10 $556 $32.22
Mean $337 $21.39 Mean $381 $26.34 Mean $351 $25.00 Mean $209 $16.62
* Sale included peripheral GLA.
From the above we see that the mean unit rate for sales
involving mall shop GLA only has ranged from approximately $209
to $381 per square foot. We recognized that these averages may
be skewed somewhat by the size of the sample. To date, there
have been no 1995 transactions involving only mall shop GLA.
Alternately, where anchor store GLA has been included in the
sale, the unit rate is shown to range widely from $53 to $410 per
square foot of salable area, indicating a mean of $227 per square
foot in 1991, $213 per square foot in 1992, $196 per square foot
in 1993, $193 per square foot in 1994 and $145 per square foot in
1995. Chart B following depicts this data.
CHART B
Regional Mall Sales
Involving Mall Shops and Anchor GLA
1991 1992 1993
Sale Unit NOI Sale Unit NOI Sale Unit NOI
No. Rate Per No. Rate Per No. Rate Per
SF SF SF
91-3 $156 $11.30 92-1 $258 $20.24 93-2 $225 $17.15
91-4 $228 $16.50 92-3 $197 $14.17 93-3 $135 $11.14
91-9 $193 $12.33 92-4 $385 $29.43 93-6 $224 $16.39
91-11 $234 $13.36 92-5 $182 $14.22 93-7 $ 73 $ 7.32
91-12 $287 $17.83 92-6 $203 $16.19 93-9 $279 $20.66
91-13 $242 $13.56 92-7 $181 $13.60 93-10 $ 97 $ 9.13
91-14 $248 $14.87 92-8 $136 $ 8.18 93-11 $289 $24.64
92-10 $161 $12.07 93-12 $194 $13.77
93-13 $108 $ 9.75
93-14 $322 $24.10
93-15 $214 $16.57
Mean $227 $14.25 Mean $213 $16.01 Mean $196 $15.51
CHART B
Regional Mall Sales
Involving Mall Shops and Anchor GLA
1994 1995
Sale Unit NOI Sale Unit NOI
No. Rate Per SF No. Rate Per SF
94-2 $296 $23.12 95-1 $410 $32.95
94-4 $133 $11.69 95-2 $272 $20.28
94-5 $248 $18.57 95-3 $ 91 $ 8.64
94-6 $112 $ 9.89 95-4 $105 $ 9.43
94-7 $166 $13.86 95-5 $ 95 $ 8.80
94-8 $ 83 $ 7.63 95-6 $ 53 $ 5.89
94-9 $ 95 $ 8.57 95-7 $ 79 $ 8.42
94-10 $155 $13.92 95-8 $ 72 $ 7.16
94-11 $262 $20.17 95-9 $ 96 $ 9.14
94-13 $378 $28.74 95-10 $212 $17.63
95-11 $ 56 $ 5.34
95-12 $ 59 $ 5.87
95-13 $143 $11.11
95-14 $287 $22.24
Mean $193 $15.62 Mean $145 $12.35
* Sale included peripheral GLA.
Analysis of Sales
Within Chart B, we have presented a summary of recent
transactions (1991-1995) involving regional and super-regional-
sized retail shopping malls from which price trends may be
identified for the extraction of value parameters. These
transactions have been segregated by year of acquisition so as to
lend additional perspective on our analysis. Comparability in
both physical and economic characteristics are the most important
criteria for analyzing sales in relation to the subject property.
However, it is also important to recognize the fact that regional
shopping malls are distinct entities by virtue of age and design,
visibility and accessibility, the market segmentation created by
anchor stores and tenant mix, the size and purchasing power of
the particular trade area, and competency of management. Thus,
the "Sales Comparison Approach", when applied to a property such
as the subject can, at best, only outline the parameters in which
the typical investor operates. The majority of these sales
transferred either on an all cash (100 percent equity) basis or
its equivalent utilizing market-based financing. Where
necessary, we have adjusted the purchase price to its cash
equivalent basis for the purpose of comparison.
As suggested, sales which include anchors typically have
lower square foot unit prices. In our discussions with major
shopping center owners and investors, we learned that
capitalization rates and underwriting criteria have become more
sensitive to the contemporary issues dealing with the department
store anchors. As such, investors are looking more closely than
ever at the strength of the anchors when evaluating an
acquisition.
As the reader shall see, we have attempted to make
comparisons of the transactions to the subject primarily along
economic lines. For the most part, the transactions have
involved dominant or strong Class A centers in top 50 MSA
locations which generally have solid, expanding trade areas and
good income profiles. Some of the other transactions are in
decidedly inferior second tier locations with limited growth
potential and near term vacancy problems. These sales tend to
reflect lower unit rates and higher capitalization rates.
"As Is" Valuation of Subject
Because the subject is theoretically selling both mall shop
GLA and owned department stores, we will look at the recent sales
involving both types in Chart B more closely. As a basis for
comparison, we will analyze the subject based upon projected NOI.
The first year NOI has been projected to be $11.23 per square
foot (CY 1996), based upon 694,274+/- square feet of owned GLA.
Derivation of the subject's projected net operating income is
presented in the "Income Approach" section of this report as
calculated by the Pro-Ject model. With projected NOI of $11.23
per square foot, the subject falls toward the low-middle of the
range exhibited by the comparable sales.
Since the income that an asset will produce has direct
bearing on the price that a purchaser is willing to pay, it is
obvious that a unit price which falls toward the middle of the
range indicated by the comparables would be applicable to the
subject. The subject's anticipated net income can be initially
compared to the composite mean of the annual transactions in
order to place the subject in a frame of reference. This is
shown on the following chart.
Sales Mean Subject Subject
Year NOI Forecast Ratio
1991 $14.25 $11.23 78.8%
1992 $16.01 $11.23 70.1%
1993 $15.51 $11.23 72.4%
1994 $15.62 $11.23 71.9%
1995 $12.35 $11.23 90.9%
With first year NOI forecasted at approximately 70.6 to 90.9
percent of the mean of these sales in each year, the unit price
which the subject property would command should be expected to
fall within a relative range.
Net Income Multiplier Method
Many of the comparables were bought on expected income, not
gross leasable area, making unit prices a somewhat subjective
reflection of investment behavior regarding regional malls. In
order to quantify the appropriate adjustments to the indicated
per square foot unit values, we have compared the subject's first
year pro forma net operating income to the pro forma income of
the individual sale properties. In our opinion, a buyer's
criteria for the purchase of a retail property is predicated
primarily on the property's income characteristics. Thus, we
have identified a relationship between the net operating income
and the sales price of the property. Typically, a higher net
operating income per square foot corresponds to a higher sales
price per square foot. Therefore, this adjustment incorporates
factors such as location, tenant mix, rent levels, operating
characteristics, and building quality.
Provided below, we have extracted the net income multiplier
from each of the improved sales. We have included only the
recent sales data (1995). The equation for the net income
multiplier (NIM), which is the inverse of the equation for the
capitalization rate (OAR), is calculated as follows:
NIM = Sales Price
Net Operating Income
Net Income Multiplier Calculation
Net
Sale NOI/SF Price/SF Income
No. Multiplier
95-1 $32.95 $410 12.44
95-2 $20.28 $272 13.41
95-3 $ 8.64 $ 91 10.53
95-4 $ 9.43 $105 11.13
95-5 $ 8.80 $ 95 10.80
95-6 $ 5.89 $ 53 9.00
95-7 $ 8.42 $ 79 9.38
95-8 $ 7.16 $ 72 10.06
95-9 $ 9.14 $ 96 10.50
95-10 $17.63 $212 12.02
95-11 $ 5.34 $ 56 10.49
95-12 $ 5.87 $ 59 10.05
95-13 $11.11 $143 12.87
95-14 $22.24 $287 12.90
Mean $12.35 $145 11.11
Valuation of the subject property utilizing the net income
multipliers (NIMs) from the comparable properties accounts for
the disparity of the net operating incomes ($NOI's) per square
foot between the comparables and the subject. Within this
technique, each of the adjusted NIM's are multiplied by the $NOI
per square foot of the subject, which produces an adjusted value
indication for the subject. The net operating income per square
foot for the subject property is calculated as the first year of
the holding period, as detailed in the Income Approach section of
this report.
Adjusted Unit Rate Summary
Subjec Net Indicated
Sale t Income Price
No. NOI/SF Multiplier $/SF
95-1 $11.23 12.44 $139.70
95-2 $11.23 13.41 $150.59
95-3 $11.23 10.53 $118.25
95-4 $11.23 11.13 $124.99
95-5 $11.23 10.80 $121.28
95-6 $11.23 9.00 $101.07
95-7 $11.23 9.38 $105.34
95-8 $11.23 10.06 $112.97
95-9 $11.23 10.50 $117.92
95-10 $11.23 12.02 $134.98
95-11 $11.23 10.49 $117.80
95-12 $11.23 10.05 $112.86
95-13 $11.23 12.87 $144.53
95-14 $11.23 12.90 $144.87
Mean $11.23 11.11 $124.77
From the process above, we see that the indicated net income
multipliers range from 9.00 to 13.41 with a mean of 11.11. The
adjusted unit rates range from $101 to $151 per square foot of
owned GLA with a mean of $125 per square foot. The comparables
with $NOIs/SF comparable to the subject show multipliers between
10.50 and 12.87, resulting in adjusted unit rates for the subject
from $118 to $145 per square foot.
We recognize that the sale price per square foot of gross
leasable area, including land, implicitly contains both the
physical and economic factors of the value of a shopping center.
Such statistics by themselves, however, do not explicitly convey
many of the details surrounding a specific income producing
property like the subject. Nonetheless, the process we have
undertaken here is an attempt to quantify the unit price based
upon the subject's income producing potential.
Considering the above average characteristics of the subject
relative to the above, we believe that a unit rate range of $118
to $122 per square foot is appropriate. Applying this unit rate
range to 694,274+/- square feet of owned GLA results in a value of
approximately $81.90 million to $84.70 million for the subject as
shown:
694,274 SF 694,274 SF
x $118 x $122
$81,900,000 $84,700,000
Rounded Value Estimate - Market Sales Unit Rate Comparison
$81,900,000 to $84,700,000
Sales Multiple Method
Arguably, it is the mall shop GLA sold and its intrinsic
economic profile that is of principal concern in the investment
decision process. A myriad of factors influence this rate,
perhaps none of which is more important than the sales
performance of the mall shop tenants. Accordingly, the
abstraction of a sales multiple from each transaction lends
additional perspective to this analysis.
The sales multiple measure is often used as a relative
indicator of the reasonableness of the acquisition price. As a
rule of thumb, investors will look at a sales multiple of 1.0 as
a benchmark, and will look to keep it within a range of .75 to
1.25 times mall shop sales performance unless there are
compelling reasons why a particular property should deviate.
The sales multiple is defined as the sales price per square
foot of mall GLA divided by average mall shop sales per square
foot. As this reasonableness test is predicated upon the
economics of the mall shops, technically, any income (and hence
value) attributed to anchors that are acquired with the mall as
tenants should be segregated from the transaction. As an income
(or sales) multiple has an inverse relationship with a
capitalization rate, it is consistent that, if a relatively low
capitalization rate is selected for a property, it follows that a
correspondingly above-average sales (or income) multiple be
applied. In most instances, we are not privy to the anchor's
contributions to net income. As such, the sales multiples
reported may be slightly distorted to the extent that the imputed
value of the anchor's contribution to the purchase price has not
been segregated.
Sales
Multiple
Summary
Sale Going-In OAR Sales
No. Multiple
95-1 8.04% 1.46
95-2 7.47% 1.04
95-3 9.50% 1.02
95-4 9.00% 1.09
95-5 9.23% 0.83
95-6 11.10% 0.60
95-7 10.70% 1.31
95-8 10.00% .61
95-9 9.53% .89
95-10 8.31% 1.57
95-11 9.50% 0.39
95-12 10.03% 0.62
95-13 7.79% 1.06
95-14 7.76% 1.23
Mean 9.14% 0.98
The sales that are being compared to the subject show sales
multiples that range from 0.39 to 1.57 with a mean of about 0.98.
As is evidenced, the more productive malls with higher sales
volumes on a per square foot basis tend to have higher sales
multiples. Furthermore, the higher multiples tend to be in
evidence where an anchor(s) is included in the sale.
Based upon forecasted 1996 performance, as well as
anticipated changes to the market area, the subject is projected
to produce comparable sales of $235 per square foot for all
reporting tenants.
In the case of the subject, the overall capitalization rate
being utilized for this analysis is considered to be in the mid-
to low-range of those rates exhibited by the comparable sales.
As such, we would be inclined to utilize a multiple above the
mean indicated by the sales. As such, we will utilize a higher
sales multiple to apply to just the mall shop space. Applying a
ratio of say, 0.85 to 0.90 percent to the forecasted sales of
$235 per square foot, the following range in value is indicated.
Unit Sales Volume (Mall Shops) $235 $235
Sales Multiple x 0.85 x 0.90
Adjusted Unit Rate $199.75 $211.50
Mall Shop GLA x 344,388 x 344,388
Value Indication $68,790,000 $72,840,000
The analysis shows an adjusted value range of approximately
$66.14 to $72.44 million. Inherent in this exercise are mall
shop sales which are projections based on our investigation into
the market which might not fully measure investor's expectations.
It is clearly difficult to project with any certainty what the
mall shops might achieve in the future, particularly as the lease-
up is achieved and the property brought to stabilization. While
we may minimize the weight we place on this analysis, it does,
nonetheless, offer a reasonableness check against the other
methodologies. We have also considered in this analysis the fact
that the owned anchors are forecasted to contribute approximately
$425,500 in rent in 1996 and about $700,000 in overage rent. If
we were to capitalize this revenue separately at a 11.0 percent
rate, the resultant effect on value is approximately $10,230,000.
Arguably, department stores have qualities that add certain
increments of risk over and above regional malls, wherein risk is
mitigated by the diversity of the store types. A recent Cushman
& Wakefield survey of free-standing retail building sales
consisting of net leased discount department stores, membership
warehouse clubs, and home improvement centers, displayed a range
in overall capitalization rates between 8.8 and 10.9 percent with
a mean of approximately 9.6 percent. All of the sales occurred
with credit worthy national tenants in place. The buildings
ranged from 86,479 to 170,000 square feet and were located in
high volume destination retail areas.
Trends indicate that investors have shown a shift in
preference to initial return and, as will be discussed in a
subsequent section, overall capitalization rates have been
showing increases over the past several years. Moreover, when
the acquisition of a shopping mall includes anchor department
stores, investors will typically segregate income attributable to
the anchors and analyze these revenues with higher capitalization
rates than those revenues produced by the mall shops. Therefore,
based upon the preceding discussion, it is our opinion that
overall capitalization rates for department stores are reasonably
reflected by a range of 9.5 to 11.0 percent. We have chosen the
high point of the range due to the locational attributes of the
subject's trade area and characteristics of the subject property.
In the same manner, we can capitalize income attributable to
the Atrium Office and Mall Office space which is forecasted to
bring about $141,465 in minimum rent in 1996. Utilizing a
capitalization rate of 12.0 percent, an allocated value of
$1,180,000 can be placed on the offices.
Therefore, adding the anchor and office income's implied
contribution to value of $11.41 million, the resultant range is
shown to be approximately $80.2 to $84.3 million. Giving
consideration to all of the above, the following value range is
warranted for the subject property based upon the sales multiple
analysis.
Estimated Value - Sales Multiple Method
Rounded to $80,200,000 to $84,300,000
Conclusion "As Is"
We have considered all of the above relative to the physical
and economic characteristics of the subject. It is difficult to
relate the subject to comparables that are in such widely
divergent markets with different cash flow characteristics. The
subject has average/ comparable sales levels compared to its
peers, with a typical anchor alignment and fair representation of
national tenants.
We also recognize that an investor may view the subject's
position as being vulnerable to competition.
After considering all of the available market data in
conjunction with the characteristics of the subject property, the
indices of investment that generated our value ranges are as
follows:
Unit Price Per Square Foot
Salable SF: 694,274+/-
Price Per SF of Salable Area: $118 to $122
Indicated Value Range: $81,900,000 to $84,700,000
Sales Multiple Analysis
Indicated Value Range $80,200,000 to $84,300,000
The parameters above show a value range of approximately
$80.2 to $84.7 million for the subject.
Based on our total analysis, relative to the strengths and
weaknesses of each methodology, it would appear that the Sales
Comparison Approach indicates a market value within the more
defined range of $81.0 to $83.0 million for the subject as of
January 1, 1996.
INCOME APPROACH
Introduction
The Income Approach is based upon the economic principle that
the value of a property capable of producing income is the
present worth of anticipated future net benefits. The net income
projected is translated into a present value indication using the
capitalization process. There are various methods of
capitalization that are based on inherent assumptions concerning
the quality, durability and pattern of the income projection.
Where the pattern of income is irregular due to existing
leases that will terminate at staggered, future dates, or to an
absorption or stabilization requirement on a newer development,
discounted cash flow analysis is the most accurate.
Discounted Cash Flow Analysis (DCF) is a method of estimating
the present worth of future cash flow expectancies by
individually discounting each anticipated collection at an
appropriate discount rate. The indicated market value by this
approach is the accumulation of the present worth of future
projected years' net income (before income taxes and
depreciation) and the present worth of the reversion (the
estimated property value at the end of the projection period).
The estimated value of the reversion at the end of the projection
period is based upon capitalization of the next year's projected
net operating income. This is the more appropriate method to use
in this assignment, given the step up in lease rates and the long
term tenure of retail tenants.
A second method of valuation, using the Income Approach, is
to directly capitalize a stabilized net income based on rates
extracted from the market or built up through mortgage equity
analysis. This is a valid method of estimating the market value
of the property as of the achievement of stabilized operations.
In the case of the subject, operations are considered to be
slightly below stabilization. Nonetheless, we have utilized the
direct capitalization method to help support our valuation
process.
Discounted Cash Flow Analysis
The Discounted Cash Flow (DCF) produces an estimate of value
through an economic analysis of the subject property in which the
net income generated by the asset is converted into a capital sum
at an appropriate rate. First, the revenues which a fully
informed investor can expect the subject to produce over a
specified time horizon are established through an analysis of the
current rent roll, as well as the rental market for similar
properties. Second, the projected expenses incurred in
generating these gross revenues are deducted. Finally, the
residual net income is discounted into a capital sum at an
appropriate rate which is then indicative of the subject
property's current value in the marketplace.
In this Income Approach to the valuation of the subject, we
have utilized a 10 year holding period for the investment with
the cash flow analysis commencing on January 1, 1996. Although
an asset such as the subject has a much longer useful life,
investment analysis becomes more meaningful if limited to a time
period considerably less than the real estate's economic life,
but of sufficient length for an investor. A 10-year holding
period for this investment is long enough to model the asset's
performance and benefit from its continued lease-up and
performance, but short enough to reasonably estimate the expected
income and expenses of the real estate.
The revenues and expenses which an informed investor may
expect to incur from the subject property will vary, without a
doubt, over the holding period. Major investors active in the
market for this type of real estate establish certain parameters
in the computation of these cash flows and criteria for decision
making which this valuation analysis must include if it is to be
truly market-oriented. These current computational parameters
are dependent upon market conditions in the area of the subject
property as well as the market parameters for this type of real
estate which we view as being national in scale.
By forecasting the anticipated income stream and discounting
future value at reversion into a current value, the
capitalization process may be applied to derive a value that an
investor would pay to receive that particular income stream.
Typical investors price real estate on their expectations of the
magnitude of these benefits and their judgment of the risks
involved. Our valuation endeavors to reflect the most likely
actions of typical buyers and sellers of property interest
similar to the subject. In this regard, we see the subject as a
long term investment opportunity for a competent owner/developer.
An analytical real estate computer model that simulates the
behavioral aspects of property and examines the results
mathematically is employed for the discounted cash flow analysis.
In this instance, it is the PRO-JECT Plus+ computer model. Since
investors are the basis of the marketplace in which the subject
property will be bought and sold, this type of analysis is
particularly germane to the appraisal problem at hand. On the
Facing Page is a summary of the expected annual cash flows from
the operation of the subject over the stated investment holding
period.
A general outline summary of the major steps involved may be
listed as follows:
1. Analysis of the income stream: establishment of an economic (market)
rent for tenant space; projection of future revenues annually based
upon existing and pending leases; probable renewals at market rentals;
and expected vacancy experience;
2. Estimation of a reasonable period of time to achieve stabilized
occupancy of the existing property and make all necessary improvements
for marketability;
3. Analysis of projected escalation recovery income based upon an analysis
of the property's history as well as the experiences of reasonably
similar properties;
4. Derivation of the most probable net operating income and pre-tax cash
flow (net income less reserves, tenant improvements, leasing
commissions and any extraordinary expenses to be generated by the
property) by subtracting all property expenses from the effective gross
income; and
5. Estimation of a reversionary sale price based upon capitalization of the
net operating income (before reserves, tenant improvements and leasing
commissions or other capital items) at the end of the projection
period.
Following is a detailed discussion of the components which
form the basis of this analysis.
Potential Gross Revenues
The total potential gross revenues generated by the subject
property are composed of a number of distinct elements: minimum
rent determined by lease agreement; additional overage rent based
upon a percentage of retail sales; reimbursement of certain
expenses incurred in the ownership and operation of the real
estate; and other miscellaneous revenues.
The minimum base rent represents a legal contract
establishing a return to investors in the real estate, while the
passing of certain expenses onto tenants serves to maintain this
return in an era of continually rising costs of operation.
Additional rent based upon a percentage of retail sales
experienced at the subject property serves to preserve the
purchasing power of the residual income to an equity investor
over time. Finally, miscellaneous income adds an additional
source of revenue in the complete operation of the subject
property. In the initial year of the investment, 1996, it is
projected that the subject property will generate approximately
$11,636,884 in potential gross revenues, equivalent to $16.76 per
square foot of total appraised (owned) GLA of 694,274 square
feet. These forecasted revenues may be allocated to the
following components:
Revenue
Summary
Initial Year
of
Investment - 1996
Revenue Component Amount Unit Rate* Income Ratio
Minimum Rent $ 6,599,512 $ 9.51 56.71%
Overage Rent $ 1,163,093 $ 1.68 9.99%
Expense $ 3,348,279 $ 4.82 28.77%
Recoveries
Miscellaneous Income $ 526,000 $ 0.76 4.52%
Total $ 11,636,884 $ 16.76 100.0%
* Reflects total owned GLA of 694,274 SF
Minimum Rental Income
Minimum rent produced by the subject property is derived from
that paid by the various tenant types. The projection utilized
in this analysis is based upon the actual rent roll and our
projected leasing schedule in place as of the date of appraisal,
together with our assumptions as to the absorption of the vacant
space, market rent growth, and renewal/turnover probability. We
have also made specific assumptions regarding the re-tenanting of
the mall based upon deals that are in progress and have a strong
likelihood of coming to fruition. In this regard, we have worked
with Shopco management and leasing personnel to analyze each
pending deal on a case by case basis. We have incorporated all
executed leases in our analysis. For those pending leases that
are substantially along in the negotiating process and are
believed to have a reasonable likelihood of being completed, we
have reflected those terms in our cash flow. These transactions
represent a reasonable and prudent assumption from an investor's
standpoint.
The rental income which an asset such as the subject property
will generate for an investor is analyzed as to its quality,
quantity and durability. The quality and probable duration of
income will affect the amount of risk which an informed investor
may expect over the property's useful life. Segregation of the
income stream along these lines allows us to control the
variables related to the center's forecasted performance with
greater accuracy. Each tenant type lends itself to a specific
weighting of these variables as the risk associated with each
varies.
The minimum rents forecasted at the subject property are
essentially derived from various tenant categories: major tenant
revenue consisting of base rent obligations of owned department
stores and mall tenant revenues consisting of all in-line mall
shops. As a sub-category of in-line shop rents, we have
separated food court rents and kiosk revenues.
In our investigation and analysis of the marketplace, we have
surveyed, and ascertained where possible, rent levels being
commanded by competing centers. However, it should be recognized
that large retail shopping malls are generally considered to be
separate entities by virtue of age and design, accessibility,
visibility, tenant mix, and the size and purchasing power of its
trade area. Consequently, the best measure of minimum rental
income is its actual rent roll leasing schedule.
As such, our a analysis of recently negotiated leases for new
and relocation tenants at the subject provides important insight
into perceived market rent levels for the mall. Insomuch as a
tenant's ability to pay rent is based upon expected sales
achievement, the level of negotiated rents is directly related to
the individual tenant's perception of their expected performance
at the mall. This is particularly true for the subject where
sales levels have fallen over the past year.
Mall Shops
Rent from all interior mall tenants comprise the majority of
minimum rent. Aggregate rent from these tenants is forecasted to
be $5,038,586, or $21.55 per square foot. Minimum rent may be
allocated to the following components:
Minimum Rent Allocation
Interior Mall Shops
1996 Applicable Unit Rate
Revenue GLA * (SF)
Mall Shops $4,542,651 225,710 SF $20.13
Kiosks $ 156,266 1,645 SF $94.99
Food Court $ 339,669 6,446 SF $52.69
Total $5,038,586 233,801 SF $21.55
* Represents leasable area as opposed to actual leased or occupied area;
exclusive of anchor space.
In-Line Shops
Our analysis of market rent levels for in-line shops has
resolved itself to a variety of influencing factors. Although it
is typical that larger tenant spaces are leased at lower per
square foot rates and lower percentages, the type of tenant as
well as the variable of location within the mall can often
distort this size/rate relationship.
The following chart presents an analysis of in-line shop
rents based upon existing leases on an annualized basis for 1996:
1996 Leases In-Place *
Size Annualized Applicable Rent/SF
Category Rent GLA
<750 $ 238,146 5,199 $45.81
751 - 1,200 $ 421,688 11,308 $37.29
1,201 - 2,000 $ 830,558 28,288 $29.36
2,001 - 3,500 $ 1,608,962 72,772 $22.11
3,501 - 5,000 $ 907,630 45,436 $19.98
5,001 - 10,000 $ 418,887 36,476 $11.48
>10,000 $ 160,800 10,050 $16.00
Total $ 4,586,671 209,529 $21.89
* Includes existing leases for calendar year 1996.
Partial year tenants have been annualized to reflect the full 12 months
As can be seen, lease rates generally have an inverse
relationship with suite size and show an overall average rent of
$21.89 per square foot.
New Tenant Activity
New tenants to the mall and/or proposed leases can be
summarized in the following bullet points:
- R.C. Richards leased 2,833 square feet in October 1995 at $18.00 per
square foot. The lease increases to $20.00 in 1998 and $22.00 in 2002.
- Rave agreed to 10 ten-year lease terms of 2,000 square feet beginning
August 1995 at an initial rent of $16.00 per square foot.
- Shoe Express will open in 2,650 square feet in March 1996 for a five year
term. The initial rent of $22.00 per square foot steps to $25.00 in
1989.
- Penn Optics has opened in 2,000 square feet at a rent of $27.50 per
square foot. The lease steps to $30.00 in year four and $32.50 in year
eight.
- Lane Bryant renewed their lease for an additional year through January
1997 (6,880 square feet).
- H & R Block has leased the first 2,500 square feet of atrium office space
for a five year term beginning at $10.00 per square foot.
- Ultra Zone will lease the second atrium office space to open in June
1996. Ultra will take 9,000 square feet for $10.00 per square foot,
increasing to $12.00 in 2001. We are also advised that there are
several negotiations underway for other spaces in the mall, including
several possible renewals. These deals are still speculative, however,
and have not been reflected in this analysis.
Vacating Tenants
The following is a list of tenants who have vacated Eastpoint
the past year or who are planning to leave at lease expiration.
- Arby's (3,000 SF); reporting poor sales and wishes to vacate.
- Ms. Batter's Box (510 SF).
- NY Pizza Kitchen (5,000 SF); lease terminated before opening; several
negotiations currently underway for the space.
- Pro Image (1,050 SF); slow payments; will vacate.
- Answers (3,467 SF).
- Dr. Miller (800 SF); office tenant.
- Deli-Licious (530 SF); food court.
- Glamour Shots (1,050 SF); reporting poor sales.
- Salad Gourmet (600 SF); reporting financial difficulties
Recent Leasing By Size
Since existing rents can be skewed by older leases within the
mall, an analysis of recent leasing activity can provide a better
understanding of current rental rates. The chart on the Facing
Page presents an overview of recent in-line shop leasing for the
subject property.
TABLE ILLUSTRATING RECENT LEASING ACTIVITY - MALL SHOP
TENANTS BY SIZE - EASTPOINT MALL (BALTIMORE, MARYLAND)
As shown, twenty-five leases reflect an overall average rent
of $16.32 per square foot. The highest rent is attained from
Group 1 (Tenants < 750 SF) with an average of $44.62 per square
foot. The averages generally decline by size category to $12.37
for Group 7 (Tenants > 10,000 SF). It is noted that Catherines,
Baltimore Gas, and Golden Corral are not interior mall tenants.
Market Comparisons - Occupancy Cost Ratios
In further support of developing a forecast for market rent
levels, we have undertaken a comparison of minimum rent to
projected sales and total occupancy costs to sales ratios.
Generally, our research and experience with other regional malls
shows that the ratio of minimum rent to sales falls within the
7.0 to 10.0 percent range in the initial year of the lease, with
7.5 percent to 8.5 percent being most typical. By adding
additional costs to the tenant, such as real estate tax and
common area maintenance recoveries, a total occupancy cost may be
derived. Expense recoveries and other tenant charges can add up
to 100 percent of minimum rent and comprise the balance of total
tenant costs.
The typical range for total occupancy cost-to-sales ratios
falls between 11.0 and 15.0 percent. As a general rule, where
sales exceed $250 to $275 per square foot, 14.0 to 15.0 percent
would be a reasonable cost of occupancy. Experience and research
show that most tenants will resist total occupancy costs that
exceed 15.0 to 18.0 percent of sales. However, ratios of upwards
to 20.0 percent are not uncommon. Obviously, this comparison
will vary from tenant to tenant and property to property.
In higher end markets where tenants are able to generate
sales above industry averages, tenants can generally pay rents
which fall toward the upper end of the ratio range. Moreover, if
tenants perceive that their sales will be increasing at real
rates that are in excess of inflation, they will typically be
more inclined to pay higher initial base rents. Obviously, the
opposite would be true for poorer performing centers in that
tenants would be squeezed by the thin margins related to below
average sales. With fixed expenses accounting for a significant
portion of the tenants contractual obligation, there would be
little room left for base rent.
In this context, we have provided an occupancy cost analysis
for several regional malls with which we have had direct insight
over the past year. This information is provided on the
Following Page. On average, these ratio comparisons provide a
realistic check against projected market rental rate assumptions.
TABLE COMPARING OCCUPANCY COSTS FOR
VARIOUS MSAs AROUND THE UNITED STATES
TABLE CALCULATING AVERAGE MALL SHOP RENT
AT EASTPOINT MALL
From this analysis we see that the ratio of base rent to
sales ranges from 7.1 to 10.6 percent, while the total occupancy
cost ratios vary from 9.6 to 17.3 percent when all recoverable
expenses are included. The surveyed mean for the malls and
industry standards analyzed is 8.3 percent and 13.4 percent,
respectively. Some of the higher ratios are found in older malls
situated in urban areas that have higher operating structures due
to less efficient layout and designs, older physical plants, and
higher security costs, which in some malls can add upwards of
$2.00 per square foot to common area maintenance.
These relative measures can be compared with two well known
publications, The Score (1996) by the International Council of
Shopping Centers and Dollars & Cents of Shopping Centers (1995)
by the Urban Land Institute. The most recent publications
indicate base rent-to-sales ratios of approximately 7.0 to 8.0
percent and total occupancy cost ratios of 10.1 and 12.3 percent,
respectively.
In general, while the rental ranges and ratio of base rent to
sales vary substantially from mall to mall and tenant to tenant,
they do provide general support for the rental ranges and ratio
which is projected for the subject property.
Conclusion - Market Rent Estimate for In-Line Shops
Previously, in the Retail Market Analysis section of the
appraisal, we discussed the subject's sales potential.
Comparable mall sales in calendar year 1995 reportedly remained
flat at $235 per square foot. In light of the mall's
performance, we are forecasting sales to remain flat in 1996.
Based upon a ratio of 7.5 to 8.0 percent, an average rent for the
subject between $18.00 and $19.00 is indicated.
The following chart presents a comparison of existing leases
with recent leasing and our projected market rental rate for each
property.
In-Line Rent Comparisons and Conclusions
Size Leases In- Recent C&W
Category Place Leasing Conclusion
< 750 $45.81 $44.62 $40.00
751 - 1,200 $37.29 $36.34 $30.00
1,201 - 2,000 $29.36 $24.23 $24.00
2,001 - 3,500 $22.11 $17.83 $20.00
3,501 - 5,000 $19.98 $16.68 $16.00
5,001 - 10,000 $11.48 $11.15 $14.00
> 10,000 $16.00 $12.37 $12.00
Average/Total $21.89 $16.32 $19.22
After considering all of the above, we have developed a
weighted average rental rate of approximately $19.22 per square
foot based upon a relative weighting of tenant space by size.
The average rent is a weighted average rent for all in-line mall
tenants only. This average market rent has been allocated to
space as shown on the Facing Page.
Occupancy Cost - Test of Reasonableness
Our weighted average rent of $19.22 can next be tested
against total occupancy costs in the mall based upon the standard
recoveries for new mall tenants. Our total occupancy cost
analyses can be found on the following chart.
Total Occupancy Cost Analysis - 1996
Tenant Cost Estimated Expenses/SF
Economic Base Rent $ 19.22
(Weighted Average)
Occupancy Costs (A)
Common Area Maintenance (1) $ 11.67
Real Estate Taxes (2) $ 1.70
Other Expenses (3) $ 1.35
Total Tenant Costs $ 33.94
Projected Average Sales $ 235.00
(1995)
Rent to Sales Ratio 8.18%
Cost of Occupancy Ratio 14.44%
(A) Costs that are occupancy sensitive will decrease for new tenants on
a unit rate basis as lease-up occurs and the property stabilizes. Average
occupied area for mall tenant reimbursement varies relative to each
major recovery type.
(1) CAM expense is based on average occupied area (GLOA). Generally, the
standard lease clause provides for a 15 percent administrative
factor less certain exclusions including anchor contributions.
The standard denominator is based on occupied (leased)
versus leasable area. A complete discussion of the standard
recovery formula is presented later in this report.
(2) Tax estimate is based upon an average occupied area (GLOA)
which is the recovery basis for taxes. It is exclusive of majors
contributions (department stores and tenants over 10,000 SF)
(3) Other expenses include tenant contributions for Mall HVAC ($1.35).
Total costs, on average, are shown to be 14.4 percent of
projected average 1996 retail sales which we feel is moderately
high but manageable.
Food Court
The food court has not seen any recent leases and has shown
signs of some tenants paying high occupancy costs. In total,
nine food court tenants occupy an average of 657 square feet.
The average rent is currently $57.41 per square foot, with
average sales of $577. Due to increased competition and
occupancy costs, we have ascribed a rental rate of $50.00 per
square foot for food court tenants. Food court tenants pay
additional recoveries for common seating charges.
TABLE SHOWING FOOD COURT RENT & SALES PRODUCTIVITY
EASTPOINT MALL (BALTIMORE, MARYLAND)
Kiosks
We have also segregated permanent kiosks within our analysis
since they typically pay a much higher unit rent. Sunglass
Source is the most recent kiosk lease at $25,000 ($166.67 per
square foot). The average kiosk lease is about $26,000 or $165
per square foot. Based on the above, we have ascribed an initial
market rent of $25,000 per annum for a permanent kiosk.
Concessions
Free rent is an inducement offered by developers to entice a
tenant to locate in their project over a competitor's. This
marketing tool has become popular in the leasing of office space,
particularly in view of the over-building which has occurred in
many markets. As a rule, most major retail developers have been
successful in negotiating leases without including free rent.
Our experience with regional malls shows that free rent is
generally limited to new projects in marginal locations without
strong anchor tenants that are having trouble leasing, as well as
older centers that are losing tenants to new malls in their trade
area. Management reports that free rent has been a relative non-
issue with new retail tenants. A review of the most recent
leasing confirms this observation. It has generally been limited
to one or two months to prepare a suite for occupancy when it has
been given.
Accordingly, we do not believe that it will be necessary to
offer free rent to retail tenants at the subject. It is noted
that, while we have not ascribed any free rent to the retail
tenants, we have, however, made rather liberal allowances for
tenant workletters which acts as a form of inducement to convince
a tenant to locate at the subject. These allowances are liberal
to the extent that ownership has been relatively successful in
leasing space "as is" to tenants. We have made allowances of
$8.00 per square foot to new tenants (currently vacant) and for
future turnover space. We have also ascribed a rate of $1.50 per
square foot to rollover space. This assumption offers further
support for the attainment of the rent levels previously cited.
Absorption
Finally, our analysis concludes that the current vacant in-
line retail space will be absorbed over a two year period through
October 1997. We have identified 16,861 square feet of vacant in-
line space, net of newly executed leases and pending deals which
have good likelihood of coming to fruition. This is equivalent
to 7.5 percent of mall shop GLA. In total, vacancy at the
subject is approximately 65,142 square feet, including outdoor
tenants and office space. Office space is projected to be
absorbed through July 2000, although 32,075 square feet of atrium
office space is never projected to be leased.
TABLE ILLUSTRATING LEASE-UP/ABSORPTION PROJECTIONS
FOR EASTPOINT MALL
The chart on the Facing Page details our projected absorption
schedule. The absorption of the in-line space over a three year
period is equal to 2,838 square feet per quarter. We have
assumed that the space will all lease at 1996 base date market
rent estimates as previously referenced. Effectively, this
assumes no rent inflation for absorption space.
Based on this lease-up assumption, the following chart tracks
occupancy through 2000, the first full year of fully stabilized
occupancy. This occupancy includes mall shop tenants and office
space, but excludes anchors, outpad tenants, and the 32,075
square feet of atrium offices which are never leased.
Annual Average Occupancy (Mall GLA)
1996 89.49%
1997 90.73%
1998 93.91%
1999 97.26%
2000 98.86%
Atrium Offices
The atrium offices were completed in 1991 with a total
leasable area of 55,435+/- square feet. An outside broker had been
obtained to market the space but no deals were done. We have
interviewed the broker and are advised that, while there was a
sufficient amount of activity and interest, the overall economy
coupled with the subject's secondary and atypical location made
leasing difficult. In 1993 there was an internal deal for 6,000+/-
square feet to the Metropolitan Clinic. The rent was to begin at
$7.00 per square foot with subsequent step-ups throughout its ten
year term. This deal never came to fruition, however.
More recently, two deals have been completed for atrium
office space. The first is All State who has leased 2,500 square
feet on a five year term beginning at $10.00 per square foot.
The second is Ultra Zone who will open in 9,000 square feet in
June 1996. Ultra's lease starts at $10.00 per foot and steps to
$12.00 after five years (tenant receiving six months free rent).
The subject's only real competition is the Eastpoint Office
Park at 1100 Old North Point Boulevard which is reportedly near
full occupancy. Existing rents are quoted from $9.50 to $13.50
per square foot.
We have forecasted a market rate of $10.00 per square foot
for the subject. The rate implies that the lessee is responsible
for a portion of operating expenses. Shopco has indicated that
taxes will be passed through on a full pro-rata basis, while
common area maintenance will be consistent with the CAM charges
to outside tenants. Lease terms for the atrium office are
forecasted at five years and are expected to have one step.
Management would have to initially spend approximately $20.00 per
square foot in the form of a workletter to get this space ready
for a tenant occupancy. We have also assumed that five months
free rent will be offered to the tenants. Finally, we have
assumed that atrium office space will be leased to a stabilized
level of only 40+/- percent (23,255+/- square feet) over an
approximate four year period through July 2000.
Lower Level Office
Other categories of minimum rent consist of the lower level
mall offices (which have been renovated). These offices consist
of eight suites ranging in size from 680+/- to 1,180+/- square feet.
They are primarily occupied by doctors and professional service
firms. This space has also traditionally been leased similar to
the in-line space. We have reflected a market rent of $12.00 per
square foot for this space. Similar to the atrium office, we
have assumed that five months free rent will be given for five
year deals.
Outside Tenants
Outside tenants consist of the strip of shops connected to
the mall as well as such other users as Mercantile Bank,
Eastpoint Bowling, Golden Corral (January 1996) and Staples. In
a major new deal, Baltimore Gas and Electric moved from an in-
line space of 4,130+/- square feet and expanded into 10,800+/- square
feet of renovated space in the outside strip. The ten year lease
started at $15.74 per square foot and increases by 2.5 percent
per annum. Market rent for these spaces has been determined on a
case-by-case basis. Overall, in 1996, outdoor tenants are
forecasted to generate nearly $1,038,961 in minimum rent.
Department Stores
The final category of minimum rent is related to the four
anchor tenants. Anchor store revenues are forecasted to amount
to $425,500 in calendar year 1996.
In February 1993, Ames Department Store began a new lease
agreement, paying an annual rent of $204,000, resulting in a
rental rate of $3.49 per square foot. This rate changes to $4.40
per square foot ($257,000) in February 1999 for the remainder of
the term (May 2004). In addition, Ames pays overage rent based
upon .50 percent of gross sales over a $4,800,000 breakpoint.
Total anchor store rental revenues are therefore shown to be
approximately $0.93 per square foot of department store area or
6.4 percent of total minimum rent in 1996. The following
schedule summarizes anchor rent obligations.
Eastpoint Mall
Schedule Anchor Tenant Revenues
Tenant Demised Area Expiration with Annual Unit Rate
(SF) Options Rent
JC Penney 168,969 8/2001 ** $ 1,500 $0.01
Ames 58,442 5/2004 $ 204,000 $3.49
Hochschilds 140,000 11/2009 $ 220,000 $1.57
Sears 87,734 8/2041 -- --
Total 455,145 $ 425,500 $0.93
* Ground lease obligation only.
** We assume that they will extend their lease at the same terms and
conditions.
Rent Growth Rates
Market rent will, over the life of a prescribed holding
period, quite obviously follow an erratic pattern. A review of
investor's expectations regarding income growth shows that
projections generally range between 3.0 and 4.0 percent for
retail centers. Cushman & Wakefield's Winter 1995 survey of
pension funds, REITs, bank and insurance companies, and
institutional advisors reveals that current income forecasts are
utilizing average annual growth rates between zero and 5.0
percent. The low and high mean is shown to be 2.8 and 3.9
percent, respectively. (see Addenda for survey results). The
Peter F. Korpacz Investor Survey (Fourth Quarter 1995) shows
slightly more conservative results with average annual rent
growth of 3.16 percent.
It is not unusual in the current environment to see investors
structuring no growth or even negative growth in the short term.
The Baltimore metropolitan area in general has been negatively
impacted by the last recession and cuts in jobs. Sales at many
retail establishments have been down this past year. The subject
has also been impacted by the global problems of many of its
retailers who have closed their units. The tenants' ability to
pay rent is closely tied to its increases in sales. However,
rent growth can be more impacted by competition and management's
desire to attract and keep certain tenants that increase the
mall's synergy and appeal. As such, we have been conservative in
our rent growth forecast.
Market Rent Growth Rate Forecast
Period Annual Growth
Rate *
1996-1997 Flat
1998 +2.0%
1999 +3.0%
Thereafter +3.5%
* Indicated growth rate over the previous year's rent
Releasing Assumption
The typical lease term for new in-line retail leases in
centers such as the subject generally ranges from five to twelve
years. Market practice dictates that it is not uncommon to get
rent bumps throughout the lease terms either in the form of fixed
dollar amounts or a percentage increase based upon changes in
some index, usually the Consumer Price Index (CPI). Often the
CPI clause will carry a minimum annual increase and be capped at
a higher maximum amount.
For new leases in the regional malls, ten year terms are most
typical. Essentially, the developer will deliver a "vanilla"
suite with mechanical services roughed in and minimal interior
finish. This allows the retailer to finish the suite in
accordance with their individual specifications. Because of the
up-front costs incurred by the tenants, they require a ten year
lease term to adequately amortize these costs. In certain
instances, the developer will offer some contribution to the cost
of finishing out a space over and above a standard allowance.
Upon lease expiration, it is our best estimate that there is
a 70.0 percent probability that an existing tenant will renew
their lease while the remaining 30.0 percent will vacate their
space at this time. While the 30.0 percent may be slightly high
by some historic measures, we think that it is a prudent
assumption in light of what has happened over the past year.
Furthermore, the on-going targeted remerchandising will result in
early terminations and relocations that will likely result in
some expenditures by ownership. An exception to this assumption
exists with respect to existing tenants who, at the expiration of
their lease, have sales that are substantially below the mall
average and have no chance to ever achieve percentage rent. In
these instances, it is our assumption that there is a 100 percent
probability that the tenant will vacate the property. This is
consistent with ownership's philosophy of carefully and
selectively weeding out under-performers.
As stated above, it is not uncommon to get increases in base
rent over the life of a lease. Our global market assumptions for
non-anchor tenants may be summarized as shown on the following
page.
Renewal Assumptions
Lease Free Tenant Lease
Tenant Type Term Rent Steps Rent Alterations Commissions
Mall Shops 10 yrs. 10% in 4th & No Yes Yes
8th years
Kiosks 5 yrs. 10% in 4th year No No Yes
Food Court 10 yrs. 10% in 4th & No Yes Yes
8th years
Outdoor Tenants 5-10 yrs. Varying steps No Yes Yes
Mall Offices 5 yrs. Flat Yes Yes Yes
Atrium Offices 5 yrs. One step Yes Yes Yes
The rent step schedule upon lease expiration applies in most
instances. However, there is one exception to this assumption
with respect to tenants who are forecasted to be in a percentage
rent situation during the onset renewal period. This could occur
due to the fact that a tenant's sales were well above its
breakpoint at the expiration of the base lease. In these
instances, we have assumed a flat rent during the ensuing lease
term. This conservative assumption presumes that ownership will
not achieve rent steps from a tenant who is also paying overage
rent from day one of the renewal term. Nonetheless, we do note
that ownership has shown some modest success in some instances in
achieving rent steps when a tenant's sales place him in a
percentage rent situation from the onset of a new lease.
Upon lease rollover/turnover, space is forecasted to be
released at the higher of the last effective rent (defined as
minimum rent plus overage rent if any) and the ascribed market
rent as detailed previously increasing by our market rent growth
rate assumption.
Conclusion - Minimum Rent
In the initial full year of the investment (CY 1996), it is
projected that the subject property will produce approximately
$6,599,512 in minimum rental income. This estimate of base
rental income is equivalent to $9.51 per square foot of total
owned GLA. Alternatively, minimum rental income accounts for
56.7 percent of all potential gross revenues. Further analysis
shows that over the holding period (CY 1996-2005), minimum rent
advances at an average compound annual rate of 2.7 percent. This
increase is a synthesis of the mall's lease-up, fixed rental
increases, as well as market rents from rollover or turnover of
space.
Overage Rent
In addition to minimum base rent, many tenants at the subject
property have contracted to pay a percentage of their gross
annual sales over a pre-established base amount as overage rent.
Many leases have a natural breakpoint although a number have
stipulated breakpoints. The average overage percentage for small
space retail tenants is in a range of 5.0 to 6.0 percent, with
food court and kiosk tenants generally at 8.0 to 10.0 percent.
Anchor tenants typically have the lowest percentage clauses with
ranges of 1.5 to 3.0 percent being common.
Traditionally, it takes a number of years for a retail center
to mature and gain acceptance before generating any sizeable
percentage income. As a center matures, the level of overage
rents typically becomes a larger percentage of total revenue. It
is a major ingredient protecting the equity investor against
inflation.
In the Retail Market Analysis section of this report, we
discussed the historic and forecasted sales levels for the mall
tenants. Because the mall has seen some decline in sales over
the past year, it is difficult to predict with accuracy what
sales will be on an individual tenant level. As such, we have
employed the following methodology:
- For existing tenants who report sales, we have forecasted that sales
will continue at our projected sales growth rate as discussed herein.
- For tenants who do not report sales or who do not have percentage
clauses, we have assumed that a non- reporting tenant will always
occupy that particular space.
- For new tenants, we have projected sales at the forecasted average for
the center at the start of the lease. In 1996 this would be
approximately $235 per square foot.
Thus, in the initial full year of the investment holding
period, overage revenues are estimated to amount to $1,163,093
(net of any recaptures) equivalent to $1.68 per square foot of
total GLA and 9.9 percent of potential gross revenues. On
balance, our forecasts for overage rent are deemed to be
reasonable, with stability added due to the fact that most
overage comes from anchor department stores.
Sales Growth Rates
In the Retail Market Analysis section of this report, we
discussed that retail specialty store sales at the subject
property have declined over the past year.
Retail sales in the Baltimore MSA have been increasing at a
compound annual rate of 4.72 percent per annum since 1985,
according to Sales and Marketing Management, while sales in
Baltimore County have been growing by 4.42 percent per year.
According to both the Cushman & Wakefield and Korpacz surveys,
major investors are looking at a range of growth rates of 0
percent initially to a high of 5 percent in their computational
parameters. Most typically, growth rates of 3 percent to 4
percent are seen in these surveys.
Nationally, total retail sales have been increasing at a
compound annual rate of 6.2 percent since 1980 and 4.9 percent
per annum since 1990. Between 1990 and 1994, GAFO sales have
grown at a compound annual rate of 5.83 percent per year.
Through 2000, total retail sales are forecasted to increase by
4.12 percent per year nationally, while GAFO sales are projected
to grow by 5.04 percent annually.
After considering all of the above, combined with the
potential for increased competition in the subject market, we
have forecasted that sales for existing tenants will remain flat
through 1997. Subsequently, we have forecasted an increase of
2.0 percent in 1998, 3.0 percent in 1999, and 3.5 percent
thereafter.
Sales Growth Rate Forecast
Period Annual
Growth Rate
1996-1996 Flat
1997 2.0%
1998 3.0%
Thereafter 3.5%
In all, we believe we have been conservative in our sales
forecast for new and turnover tenants upon the expiration of an
initial lease. At lease expiration, we have forecasted a 30.0
percent probability that a tenant will vacate.
For new tenants, sales are established based upon the mall's
average sales level. Generally, for existing tenants, we have
assumed that sales continue subsequent to lease expiration at
their previous level unless they are under-performers that prompt
a 100 percent turnover probability; then sales are reset to the
corresponding mall overage.
In most instances, no overage rent is generated from new
tenants due to our forecasted rent steps which serve to change
the breakpoint.
Expense Reimbursement and Miscellaneous Income
By lease agreement, tenants are required to reimburse the
lessor for certain operating expenses. Included among these
operating items are real estate taxes, common area maintenance
(CAM) and a common seating charge for food court tenants.
Miscellaneous income is essentially derived from specialty
leasing for temporary tenants, Christmas kiosks and other
charges, including special pass-throughs. We also account for
utility income under miscellaneous revenues. In the first full
year of the investment, it is projected that the subject property
will generate approximately $3,348,279 in reimbursements for
these operating expenses, $206,000 in utility and HVAC income,
and $320,000 in other miscellaneous income.
Common area maintenance and real estate tax recoveries are
generally based upon the tenants pro-rata share of the expense
item. Because it is an older center, there exists numerous
variations to the calculation procedure of each. We have relied
upon ownership's calculation for the various recovery formula's
for taxes and CAM. At rollover, all of the tenants are assumed
to be subject to the standard lease form described herein. The
standard lease provides for the recovery of CAM expenses plus a
15.0 percent administrative fee.
Common Area Maintenance
Under the standard lease, mall tenants pay their pro-rata
share of the balance of the CAM expense after anchor
contributions are deducted and an administrative charge of 15.0
percent is added. Provided below is a summary of the standard
clause that exists for a new tenant at the mall.
Common Area Maintenance Recovery Calculation
CAM Actual hard cost for year exclusive Expense of interest and
depreciation
Add 15% Administration fee
Add Interest and depreciation inclusive of allocated portion of
renovation expense
Less Contributions from department stores and mall tenants over
10,000+/- square feet
Equals: Net pro-ratable CAM billable to mall tenants on the basis of gross
leasable occupied area (GLOA).
We note that management has the ability to recover both
interest and depreciation expenses as well as the cost of the
renovation.
Department stores make nominal contributions for common area
maintenance (except for Hochschilds who pays nothing). Anchor
tenants also make contribution to taxes. JC Penney pays the
taxes assessed on its building directly. Sears pays a pro-rata
share of any increase in taxes after the end of the third lease
year. Other tenants have various contribution methods. In
general, the mall standard will be for mall tenants to pay their
pro-rata share based upon average occupied area during the year.
The standard lease provides for the exclusion of tenants in
excess of 10,000+/- square feet from the calculation when computing
a tenant's pro-rata share. This has the effect of excluding
Lerners New York and certain exterior tenants. The category in
the cash flow forecast entitled CAM-Anchor Tenants is essentially
comprised of the CAM contribution of the anchor tenants. Under
the standard lease, mall tenants pay their pro-rata share of the
balance of the CAM expense after the CAM Pool contribution plus
an administrative charge of 15 percent.
Certain exterior tenants also pay differing amounts of CAM,
some of which is reflective of the costs of exterior maintenance
only. Lower level office tenants have been, and we assume will
continue to be, assessed a CAM charge as part of the interior
mall. The atrium office tenants are expected to be treated
differently since they are not really part of the mall. Based on
our discussions with management, we have reflected a CAM rate of
2.89 per square foot which is approximately what outside tenants
are charged.
Real Estate Taxes
Mall tenants pay real estate tax recoveries based upon a pro-
rata share of the expense after anchor and major tenant
contributions are deducted (Staples and Eastpoint Bowling). JC
Penney is assessed separately, while Sears pays a pro-rata share
of increases after their third lease year. The new standard
billing for tenants also excludes tenants in excess of 10,000
square feet.
Other Recoveries
Other recoveries consist of insurance income, common seating
charges, utility charges, temporary leasing, and miscellaneous
income. Insurance billings are generally relegated to older
leases within the mall. The newer lease structure covers the
cost of insurance within the CAM charge.
Common seating charges are assessed to food court tenants for
operation of the food court area. This charge is in addition to
the regular mall common area maintenance.
The final revenue categories consist of utility income,
temporary leasing of in-line space, revenue from temporary kiosks
at Christmas time, and miscellaneous income. Utility income
consists of HVAC income which is a charge many tenants pay as a
contribution toward the maintenance of the HVAC plant;
electricity income which results in a profit to the mall owner;
and water billings which are essentially pass throughs of the
actual cost.
Temporary leasing is related to temporary tenants that occupy
vacant in-line space. Shopco has been relatively successful with
this procedure at many of their malls. Other sources of
miscellaneous revenues include temporary seasonal kiosk rentals,
forfeited security deposits, phone revenues, and interest income.
Our forecast of $526,000 for these additional revenues is net of
a provision for vacancy and credit loss. Overall, it is our
assumption that these other revenues will increase by 3.0 percent
per annum over the holding period.
Allowance for Vacancy and Credit Loss
The investor of an income producing property is primarily
interested in the cash revenues that an income-producing property
is likely to produce annually over a specified period of time
rather than what it could produce if it were always 100 percent
occupied with all tenants paying rent in full and on time. It is
normally a prudent practice to expect some income loss, either in
the form of actual vacancy or in the form of turnover, non-
payment or slow payment by tenants. We have reflected a 5.0
percent stabilized contingency for both stabilized and unforeseen
vacancy and credit loss. Please note that this vacancy and
credit loss provision is applied to all mall tenants equally and
is exclusive of all revenues generated by anchor stores.
We have phased in the 5.0 percent factor as the mall leases
up based upon the following schedule.
1996 4.0%
1997 4.5%
Thereafter 5.0%
In this analysis we have also forecasted that there is a 70.0
percent probability that an existing retail tenant will renew
their lease. Office tenants are projected to have a 50.0 percent
probability. Upon turnover, we have forecasted that rent loss
equivalent to six months would be incurred to account for the
time and/or costs associated with bringing space back on line.
Thus, minimum rent as well as overage rent and certain other
income has been reduced by this forecasted probability.
We have calculated the effect of the total provision of
vacancy and credit loss on the in-line shops. Through the 10
years of this cash flow analysis, the total allowance for vacancy
and credit loss, including provisions for downtime, ranges from a
low of 6.1 percent (2000) of total potential gross revenues to a
high of 14.5 percent (1996). On average, the total allowance for
vacancy and credit loss over the 10 year projection period
averages 8.7 percent of these revenues.
Total Rent
Loss Forecast
*
Year Loss Provision
1996 14.5%
1997 13.8%
1998 11.1%
1999 7.7%
2000 6.1%
2001 6.4%
2002 7.0%
2003 6.2%
2004 6.2%
2005 8.0%
Avg. 8.7%
* Includes phased global vacancy provision for unseen vacancy and credit
loss as well as weighted downtime provision of lease turnover.
Note: Excludes department stores and 32,075 square foot atrium office space
never leased.
As discussed, if an existing mall tenant is a consistent
under-performer with sales substantially below the mall average,
then the turnover probability applied is 100 percent. This
assumption, while adding a degree of conservatism to our
analysis, reflects the reality that management will continually
strive to replace under performers. On balance, the aggregate
deductions of all gross revenues reflected in this analysis are
based upon overall long-term market occupancy levels and are
considered what a prudent investor would allow for credit loss.
The remaining sum is effective gross income which an informed
investor may anticipate the subject property to produce. We
believe this is reasonable in light of overall vacancy in this
subject's market area as well as the current leasing structure at
the subject.
Effective Gross Income
In the initial full year of the investment, CY 1996,
effective gross revenues ("Total Income" line on cash flow) are
forecasted to amount to approximately $11,254,894, equivalent to
$16.21 per square foot of total owned GLA.
Effective Gross Revenue Summary
Initial Year of Investment - 1996
Aggregate Unit Income
Sum Rate Ratio
Potential Gross Income $11,636,884 $16.76 100.0%
Less: Vacancy and ($ 381,990) ($ 0.55) 3.3%
Credit Loss Effective
Gross Income $11,254,894 $16.219 6.7%
Expenses
Total expenses incurred in the production of income from the
subject property are divided into two categories: reimbursable
and non-reimbursable items. The major expenses which are
reimbursable include real estate taxes, common area maintenance,
common seating charges, and utility/HVAC expenses. The non-
reimbursable expenses associated with the subject property
include certain general and administrative expenses, ownership's
contribution to the merchants association/marketing fund,
management charges, and miscellaneous expenses. Other expenses
include a reserve for the replacement of short-lived capital
components, alteration costs associated with bringing space up to
occupancy standards, leasing commissions, and a provision for
capital expenditures.
The various expenses incurred in the operation of the subject
property have been estimated from information provided by a
number of sources. We have reviewed the subject's component
operating history for prior years as well as the 1996 Budget for
these expense items. This information is provided in the
Addenda. We have compared this information to published data
which are available, as well as comparable expense information.
Finally, this information has been tempered by our experience
with other regional shopping centers.
TABLE COMPARING OPERATING EXPENSE STATISTICS FOR REGIONAL
AND SUPER-REGIONAL MALLS ON THE EAST COAST
Expense Growth Rates
Expense growth rates are generally forecasted to be more
consistent with inflationary trends than necessarily with
competitive market forces. The Winter 1995 Cushman & Wakefield
survey of regional malls found the low and high mean from each
respondent to be 3.75 percent. The Fourth Quarter 1995 Korpacz
survey reports that the range in expense growth rates runs from
3.0 percent to 5.0 percent with an average of 3.98 percent, down
13 basis points from one year ago. Unless otherwise cited,
expenses are forecasted to grow by 3.5 percent per annum over the
holding period.
Reimbursable Operating Expenses
We have analyzed each item of expense individually and
attempted to project what the typical investor in a property like
the subject would consider reasonable, based upon informed
opinion, judgment and experience. The following is a detailed
summary and discussion of the reimbursable operating expenses
incurred in the operation of the subject property during the
initial year of the investment holding period.
Common Area Maintenance - This expense category includes
the annual cost of miscellaneous building maintenance
contracts, recoverable labor and benefits, security,
insurance, landscaping, snow removal, cleaning and
janitorial, exterminating, supplies, trash removal,
exterior lighting, common area energy, gas and fuel,
equipment rental, interest and depreciation, and other
miscellaneous charges. In addition, ownership can
generally recoup the cost of certain extraordinary
capital items from the tenants. Typically, this is
limited to certain miscellaneous capital expenditures.
In malls where the CAM budget is high, discretion must be
exercised in not trying to pass along every charge as
tenants will resist. As discussed, the standard lease
agreement allows management to pass along the CAM expense
to tenants on the basis of occupied gross leasable area.
Furthermore, the interest and depreciation expense is a
non-operating item that serves to increase the basis of
reimbursement from mall tenants. Mall renovation costs
may also be passed along. Most tenants are subject to a
15.0 percent administrative surcharge although some are
assessed 25.0 percent. Historically, the annual CAM
expense (before anchor contributions) can be summarized
as follows:
Historical CAM Expense
Year Budget Amount
1993 $1,680,000
1994 $1,700,000
1995 $1,940,000
1996 Budget $1,900,000
The 1996 CAM budget is shown to be $1,900,000. An
allocation of this budget by line item provided in the
Addenda. We have utilized an expense of $1,900,000 for
1996 which is equivalent to $5.52 per square foot of mall
shop area (344,388 square feet).
Ownership is now assessing an annual charge for the cost
of the mall renovation. We understand that it has met
with some tenant resistance. However, we are advised
that management has been successful in passing this
expense on to new mall tenants as well. As such, we have
continued to utilize the $2.00 per square foot
assessment. We have projected this pass through to
continue through 2006, resulting in a fifteen year
amortization of 1991 mall renovation costs.
TABLE COMPARING COMMON AREA MAINTENANCE EXPENSE FOR
VARIOUS MSAs AROUND THE UNITED STATES
Real Estate Taxes - The projected taxes to be incurred in
1996 are equal to $600,000. As discussed, the standard
recovery for this expense is charged on the basis of
average occupied area of non-major mall tenant GLA.
Taxes are charged to the mall tenants after first
deducting department store contributions. We have grown
this expense at a higher rate of 4.0 percent per year.
Food Court CAM (Common Seating) - The cost of maintaining
the food court is estimated at $195,000 in the initial
year of the holding period. Included here are such items
as payroll for administration, maintenance and security,
supplies, and other miscellaneous expenses. On the basis
of food court gross leasable area of 6,446+/- square feet,
this expense is equal to $30.25 per square foot. As
articulated, food court tenants are assessed a separate
charge for this expense which typically carries a 15.0
percent administrative charge.
Non-Reimbursable Expenses
Total non-reimbursable expenses at the subject property are
projected from accepted practices and industry standards. Again,
we have analyzed each item of expenditure in an attempt to
project what the typical investor in a property similar to the
subject would consider reasonable, based upon actual operations,
informed opinion, and experience. The following is a detailed
summary and discussion of non-reimbursable expenses incurred in
the operation of the subject property for the initial year.
Unless otherwise stated, it is our assumption that these expenses
will increase by 3.5 percent per annum thereafter.
General and Administrative - Expenses related to the
administrative aspects of the mall include costs
particular to operation of the mall, including salaries,
travel and entertainment, and dues and subscriptions. A
provision is also made for professional services (legal
and accounting fees and other professional consulting
services). In 1996, we reflect general and
administrative expenses of $130,000.
Utilities - The cost for such items as HVAC, electrical
services, and gas and water to certain areas not covered
under common area maintenance is estimated at $85,000 in
1996. As discussed, most tenants pay a set charge for
HVAC.
Marketing - These costs include expenses related to the
temporary tenant program, including payroll for the
promotional and leasing staff. It also contains
ownership's contribution to the merchant association
which is net of tenant contributions. In the initial
year, the cost is forecasted to amount to $110,000.
Miscellaneous - This catch-all category is provided for
various miscellaneous and sundry expenses that ownership
will typically incur. Such items as unrecovered repair
costs, preparation of suites for temporary tenants,
certain non-recurring expenses, expenses associated with
maintaining vacant space, and bad debts in excess of our
credit loss provision would be included here. In the
initial year, these miscellaneous items are forecasted to
amount to approximately $50,000.
Management - The annual cost of managing the subject
property is projected to be 4.5 percent of minimum and
percentage rent. In the initial year of our analysis,
this amount is shown to be $349,317. Alternatively, this
amount is equivalent to approximately 3.1 percent of
effective gross income. Our estimate is reflective of a
typical management agreement with a firm in the business
of providing professional management services. This
amount is considered typical for a retail complex of this
size. Our investigation into the market for this
property type indicates an overall range of fees of 3 to
5 percent. Since we have reflected a structure where
ownership separately charges leasing commissions, we have
used the mid-point of the range as providing for
compensation for these services.
Alterations - The principal component of this expense is
ownership's estimated cost to prepare a vacant suite for
tenant use. At the expiration of a lease, we have made a
provision for the likely expenditure of some monies on
ownership's part for tenant improvement allowances. In
this regard, we have forecasted a cost of $8.00 per
square foot for turnover space (initial cost growing at
expense growth rate) weighted by our turnover probability
of 30.0 percent. We have forecasted a rate of $1.50 per
square foot for renewal (rollover) tenants, based on a
renewal probability of 70.0 percent. The blended rate
based on our 70/30 turnover probability is therefore
$3.45 per square foot. It is noted that ownership has
been moderately successful in releasing space in its "as
is" condition. Evidence of this is seen in our
previously presented summary of recent leasing activity
at the mall. The provisions made here for tenant work
lends additional conservatism our analysis. These costs
are forecasted to increase at our implied expense growth
rate.
Alterations for atrium office space is projected to be
$20.00 per square foot for new tenants and $4.00 per
square foot for renewal tenants. After the initial lease-
up of atrium offices, new tenants will receive $15.00 per
square foot, with renewal tenants still at $4.00. Lower
level mall office space is forecasted to have alteration
costs of $5.00 per square foot for new tenants and no Tis
for renewals. These office rates are based upon our
renewal probability of 50.0 percent.
Leasing Commissions - Ownership has recently been
charging leasing commissions internally. A typical
structure is $3.50 per square foot for new tenants and
$1.50 per square foot for renewal tenants. These rates
are increased by $0.50 and $0.25 per square foot,
respectively, every five years. This structure implies a
payout up front at the start of a lease. The cost is
weighted by our 70/30 percent renewal/turnover
probability. Thus, upon lease expiration, a leasing
commission charge of $2.10 per square foot would be
incurred.
Office Leasing commissions are based upon a percentage of
gross rent. For this analysis, 20.0 percent of first
year rent is paid out for leasing commissions.
Capital Expenditures - Ownership has budgeted for certain
capital expenditures which represent items outside of the
normal repairs and maintenance budget. As of this
writing, the capital expenditure budget has not been
fully approved but we can make some provisions with
reasonable certainty for certain repairs. It is our
opinion that a prudent investor would make some provision
for necessary repairs and upgrades. To this end, we have
reflected expenditures of $150,000 in 1996, $100,000 in
1997, and $75,000 in 1998.
Replacement Reserves - It is customary and prudent to set
aside an amount annually for the replacement of short-
lived capital items such as the roof, parking lot and
certain mechanical items. The repairs and maintenance
expense category has historically included some capital
items which have been passed through to the tenants.
This appears to be a fairly common practice among most
malls. However, we feel that over a holding period some
repairs or replacements will be needed that will not be
passed on to the tenants. Due to the inclusion of many
of the capital items in the maintenance expense category,
the reserves for replacement classification need not be
sizeable. This becomes a more focused issue when the CAM
expense starts to get out of reach and tenants begin to
complain. For purposes of this report, we have estimated
an expense of between $0.10 and $0.15 per square foot of
owned GLA during the first year ($90,000), thereafter
increasing by our expense growth rate.
Net Income/Net Cash Flow
The total expenses of the subject property, including
alterations, commissions, capital expenditures, and reserves, are
annually deducted from total income, thereby leaving a residual
net operating income or net cash flow to the investors in each
year of the holding period before debt service. In the initial
year of investment, the net operating income is forecasted to be
equal to approximately $7.8 million which is equivalent to 69.3
percent of effective gross income. Deducting other expenses
including capital items results in a net cash flow before debt
service of approximately $7.3 million.
Operating Summary
Initial Year of Investment - 1996
Aggregate Unit Rate* Operating
Sum Ratio
Effective Gross Income $ 11,254,894 $16.21 100.0%
Operating Expenses $ 3,459,317 $ 4.98 30.7%
Net Operating Income $ 7,795,577 $11.22 69.3%
Other Expenses $ 478,279 $ 0.69 4.3%
Cash Flow $ 7,317,298 $10.54 65.0%
* Based on total owned GLA of 694,274 square feet.
Our cash flow model has forecasted the following compound annual growth
rates over the ten year holding period 1996-2005.
Net Operating 2.9%
Income:
Cash Flow: 2.8%
Growth rates are shown to be 2.9 and 2.8 percent,
respectively. We note that this annual growth is a result of
lease-up, rent steps, and turnover in the property. We believe
these rates are reasonable forecasts for a property of the
subject's calibre.
Investment Parameters
After projecting the income and expense components of the
subject property, investment parameters must be set in order to
forecast property performance over the holding period. These
parameters include the selection of capitalization rates (both
initial and terminal) and application of the appropriate discount
or yield rate, also referred to as the internal rate of return
(IRR).
Selection of Capitalization Rates
Overall Capitalization Rate
The overall capitalization rate bears a direct relationship
between net operating income generated by the real estate in the
initial year of investment (or initial stabilized year) and the
value of the asset in the marketplace. Overall rates are also
affected by the existing leasing schedule of the property, the
strength or weakness of the local rental market, the property's
position relative to competing properties, and the risk/return
characteristics associated with competitive investments.
The trend has been for rising capitalization rates. We feel
that much of this has to do with the quality of the product that
has been selling. Sellers of the better performing dominant
Class A malls have been unwilling to waver on their pricing.
Many of the malls which have sold over the past 18 to 24 months
are found in less desirable second or third tier locations or
represent turnaround situations with properties that are posed
for expansion or remerchandising. With fewer buyers for the top
performing assets, sales have been somewhat limited.
Overall Capitalization Rates
Regional Mall Sales
Year Range Mean Basis Point Change
1988 5.00% - 8.00% 6.16% --
1989 4.58% - 7.26% 6.05% -11
1990 5.06% - 9.11% 6.33% +28
1991 5.60% - 7.82% 6.44% +11
1992 6.00% - 7.97% 7.31% +87
1993 7.00% -10.10% 7.92% +61
1994 6.98% -10.29% 8.37% +45
1995 7.47% -11.10% 9.14% +79
The data above shows that, with the exception of 1989, the
average cap rate has shown a rising trend each year. Between
1988 and 1989, the average rate declined by 11 basis points.
This was partly a result of dramatically fewer transactions in
1989 as well as the sale of Woodfield Mall at a reported cap rate
of 4.58 percent. In 1990, the average cap rate jumped 28 basis
points to 6.33 percent. Among the 16 transactions we surveyed
that year, there was a marked shift of investment criteria
upward, with additional basis point risk added due to the
deteriorating economic climate for commercial real estate.
Furthermore, the problems with department store anchors added to
the perceived investment risk.
1992 saw owners become more realistic in their pricing as
some looked to move product because of other financial pressures.
The 87 basis point rise to 7.31 percent reflected the reality
that, in many markets, malls were not performing as strongly as
expected. A continuation of this trend was seen in 1993 as the
average rate increased by 61 basis points. The trend in deals
over the past two year period shows a respective rise in average
cap rates of 45 and 59 basis points. For the year, 1994
transactions were a mix of quality, ranging from premier,
institutional grade centers (Biltmore Fashion Park, Riverchase
Galleria), to B-centers such as Corte Madera Town Center and
Crossroads Mall. The continuation of this trend into 1995 is in
evidence as owners of the better quality malls are either
aggressively pricing them or keeping them off of the market until
it improves further. Also, the beating that REIT stocks
experienced has forced up their yields, thereby putting pressure
on the pricing levels they can justify.
Much of the buying over the past 18 to 24 months has been
opportunistic acquisitions involving properties selling near or
below replacement cost. Many of these properties have languished
due to lack of management focus or expertise, as well as a
limited ability to make the necessary capital commitments for
growth. As these opportunities become harder to find, we believe
that investors will again begin to focus on the stable returns of
the dominant Class A product.
The Cushman & Wakefield's Winter 1995 survey reveals that
going-in cap rates for regional shopping centers range between
7.0 and 9.0 percent with a low average of 7.47 and high average
of 8.25 percent, respectively; a spread of 78 basis points.
Generally, the change in average capitalization rates over the
Spring 1995 survey shows that the low average decreased by 3
basis points, while the upper average increased by 15 points.
Terminal, or going-out rates are now averaging 8.17 and 8.83
percent, representing a decrease of 22 basis points and 23 basis
points, from Spring 1995 averages.
Cushman & Wakefield Valuation Advisory Services
National Investor Survey - Regional Malls (%) Investment
Investment Winter 1994 Spring 1995 Winter 1995
Parameters Low High Low High Low High
OAR/Going-In 6.50-9.50 7.50-9.50 7.00-8.50 7.00-8.00 7.00-8.00 7.50-9.00
7.6 8.4 7.5 8.1 7.47 8.25
OAR/Terminal 7.00-9.50 7.50-10.50 7.50-8.75 8.00-9.25 7.00-9.00 8.00-10.00
8.0 8.8 7.95 8.6 8.17 8.83
IRR 10.0-11.50 10.0-13.0 10.0-11.50 11.0-12.0 10.0-11.5 10.5-12.0
10.5 11.5 10.7 11.4 10.72 11.33
The Fourth Quarter 1995 Peter F. Korpacz survey finds that
cap rates have remained relatively stable. They recognize that
there is extreme competition for the few premier malls that are
offered for sale which should exert downward pressure on rates.
However, most of the available product is B or C quality which
are not attractive to most institutional investors. The survey
did, however, note a dramatic change for the top tier investment
category of 20 to 30 true "trophy" assets in that investors think
it is unrealistic to assume that cap rates could fall below 7.0
percent.
NATIONAL REGIONAL MALL MARKET
FOURTH QUARTER 1995
KEY INDICATORS CURRENT LAST
Free & Clear QUARTER QUARTER YEAR AGO
Equity IRR
RANGE 10.00%-14.00% 10.00%-14.00% 10.00%-14.00
AVERGAE 11.55% 11.55% 11.60%
CHANGE (Basis Points) -- 0 -5
Free & Clear Going-In Cap Rate
RANGE 6.25%-11.00% 6.25%-11.00% 6.25%-11.00%
AVERAGE 7.86% 7.84% 7.73%
CHANGE (Basis Points) -- +2 +13
Residual Cap Rate
RANGE 7.00%-11.00% 7.00%-11.00% 7.00%-11.00%
AVERAGE 8.45% 8.45% 8.30%
CHANGE (Basis Points) - 0 +15
Source: Peter Korpacz Associates, Inc. - Real Estate Investor Survey Fourth
Quarter - 1995
As can be seen from the above, the average IRR has decreased
by 5 basis points to 11.55 percent from one year ago. However,
it is noted that this measure has been relatively stable over the
past three months. The quarter's average initial free and clear
equity cap rate rose 13 basis points to 7.86 percent from a year
earlier, while the residual cap rate increased 15 basis points to
8.45 percent.
Most retail properties that are considered institutional
grade are existing, seasoned centers with good inflation
protection that offer stability in income and are strongly
positioned to the extent that they are formidable barriers to new
competition. Equally important are centers which offer good
upside potential after face-lifting, renovations, or expansion.
With new construction down substantially, owners have accelerated
renovation and re-merchandising programs. Little competition
from over-building is likely in most mature markets within which
these centers are located. Environmental concerns and "no-
growth" mentalities in communities are now serious impediments to
new retail development.
Finally, investors have recognized that the retail landscape
has been fundamentally altered by consumer lifestyles changes,
industry consolidations and bankruptcies. This trend was
strongly in evidence as the economy enters 1996 in view of the
wave of retail chains whose troublesome earnings are forcing
major restructures or even liquidations. (The reader is referred
to the National Retail Overview in the Addenda of this report).
Trends toward more casual dress at work and consumers growing pre-
occupation with their leisure and home lives have created the
need for refocused leasing efforts to bring those tenants to the
mall that help differentiate them from the competition. As such,
entertainment, a loosely defined concept, is one of the most
common directions malls have taken. A trend toward bringing in
larger specialty and category tenants to the mall is also in
evidence. The risk from an owners standpoint is finding that mix
which works the best.
Nonetheless, the cumulative effect of these changes has been
a rise in rates as investors find it necessary to adjust their
risk premiums in their underwriting.
Based upon this discussion, we are inclined to group and
characterize regional malls into the general categories
following:
Cap Rate Range Category
7.0% to 7.5% Top 20 to 25+/- malls in the country.
7.5% to 8.5% Dominant Class
A investment grade property, high sales
levels, relatively good health ratios,
excellent demographics (top 50 markets),
and considered to present a significant
barrier to entry within its trade area.
8.5% to 10.5% Somewhat broad
characterization of investment quality
properties ranging from primary MSAs to
second tier cities. Properties at the
higher end of the scale are probably
somewhat vulnerable to new competition
in their market.
10.5% to 12.0% Remaining
product which has limited appeal or
significant risk which will attract only
a smaller, select group of investors.
Conclusion - Initial Capitalization Rate
Eastpoint Mall is one of the dominant malls in its region.
In addition, to its four strong anchor stores. Mall shops are
well merchandised and should continue to enjoy high occupancy
levels. The trade area is moderately affluent and stable,
although very little growth is projected for the area. The
following points summarize some of our perceptions regarding the
mall:
- The trade area is stable. However, with little growth projected, the
potential to increase sales and rents become a factor in forecasting
income growth.
- The potential for future competition is unlikely in the region/trade
area.
- Investors would likely place little emphasis on potential income from
atrium office space, focusing more on in-place income and near-term
returns.
- Occupancy costs are considered to be reasonable.
On balance, we believe that a property with the sought after
characteristics of the subject would potentially trade at an
overall rate between 8.75 and 9.25 percent based on first year
income if it were operating on a stabilized basis.
Terminal Capitalization Rate
The residual cash flows generated annually by the subject
property comprise only the first part of the return which an
investor will receive. The second component of this investment
return is the pre-tax cash proceeds from the resale of the
property at the end of a projected investment holding period.
Typically, investors will structure a provision in their analyses
in the form of a rate differential over a going-in capitalization
rate in projecting a future disposition price. The view is that
the improvement is then older and the future is harder to
visualize; hence a slightly higher rate is warranted for added
risks in forecasting. On average, our rate survey shows a 38
basis point differential.
Therefore, to the range of stabilized overall capitalization
rates, we have added 25 basis points to arrive at a projected
terminal capitalization rate ranging from 9.00 to 9.50 percent.
This provision is made for the risk of lease-up and maintaining a
certain level of occupancy in the center, its level of revenue
collection, the prospects of future competition, as well as the
uncertainty of maintaining the forecasted growth rates over such
a holding period. In our opinion, this range of terminal rates
would be appropriate for the subject. Thus, this range of rates
is applied to the following year's net operating income before
reserves, capital expenditures, leasing commissions and
alterations as it would be the first received by a new purchaser
of the subject property. Applying a rate of say 9.25 percent for
disposition, a current investor would dispose of the subject
property at the end of the investment holding period for an
amount of approximately $111.0 million based on 2006 net income
of approximately $10.3 million.
From the projected reversionary value to an investor in the
subject property, we have made a deduction to account for the
various transaction costs associated with the sale of an asset of
this type. These costs consist of 2.0 percent of the total
disposition price of the subject property as an allowance for
transfer taxes, professional fees, and other miscellaneous
expenses including an allowance for alteration costs that the
seller pays at final closing. Deducting these transaction costs
from the computed reversion renders pre-tax the net proceeds of
sale to be received by an investor in the subject property at the
end of the holding period.
Net Proceeds at Reversion
Less Costs of Sale
Net Income 2006 Gross Sale Price and Net Proceeds
Miscellaneous Expenses @ 2.0%
$10,268,596 $111,011,849 $2,220,237 $108,791,612
Selection of Discount Rate
The discounted cash flow analysis makes several assumptions
which reflect typical investor requirements for yield on real
property. These assumptions are difficult to directly extract
from any given market sale or by comparison to other investment
vehicles. Instead, investor surveys of major real estate
investment funds and trends in bond yield rates are often cited
to support such analysis.
A yield or discount rate differs from an income rate, such as
cash-on-cash (equity dividend rate), in that it takes into
consideration all equity benefits, including the equity reversion
at the time of resale and annual cash flow from the property.
The internal rate of return is the single-yield rate that is used
to discount all future equity benefits (cash flow and reversion)
into the initial equity investment. Thus, a current estimate of
the subject's present value may be derived by discounting the
projected income stream and reversion year sale at the property's
yield rate.
Yield rates on long term real estate investments range widely
between property types. As cited in Cushman & Wakefield's Winter
1995 survey, investors in regional malls are currently looking at
broad rates of return between 10.0 and 12.00 percent, down
slightly from our last two surveys. The indicated low and high
means are 10.72 and 11.33 percent, respectively. Peter F.
Korpacz reports an average internal rate of return of 11.55
percent for the Fourth Quarter 1995, down 5 basis points from
the year ago level.
The yield rate on a long term real estate investment can also
be compared with yield rates offered by alternative financial
investments since real estate must compete in the open market for
capital. In developing an appropriate risk rate for the subject,
consideration has been given to a number of different investment
opportunities. The following is a list of rates offered by other
types of securities.
Market Rates and February, 1996
Bond Yields (%)
--------------------------------------
Reserve Bank 5.00
Discount Rate
Prime Rate (Monthly 8.25
Average)
3-Month Treasury Bills 4.86
U.S. 10-Year Notes 6.06
U.S. 30-Year Bonds 6.47
Telephone Bonds 7.70
Municipal Bonds 5.68
Source: New York Times
This compilation of yield rates from alternative investments
reflects varying degrees of risk as perceived by the market.
Therefore, a riskless level of investment might be seen in a
three month treasury bill at 4.86 percent. A more risky
investment, such as telephone bonds, would currently yield a much
higher rate of 7.70 percent. The prime rate is currently 8.25
percent, while the discount rate is 5.00 percent. Ten year
treasury notes are currently yielding around 5.06 percent, while
30-year bonds are at 6.47 percent.
Real estate investment typically requires a higher rate of
return (yield) and is much influenced by the relative health of
financial markets. A retail center investment tends to
incorporate a blend of risk and credit based on the tenant mix,
the anchors that are included (or excluded) in the transaction,
and the assumptions of growth incorporated within the cash flow
analysis. An appropriate discount rate selected for a retail
center thus attempts to consider the underlying credit and
security of the income stream, and includes an appropriate
premium for liquidity issues relating to the asset.
There has historically been a consistent relationship between
the spread in rates of return for real estate and the "safe" rate
available through long-term treasuries or high-grade corporate
bonds. A wider gap between return requirements for real estate
and alternative investments has been created in recent years due
to illiquidity issues, the absence of third party financing, and
the decline in property values.
Investors have suggested that the regional mall market has
become increasingly "tiered" over the past two years. The
country's premier malls are considered to have the strongest
trade areas, excellent anchor alignments, and significant
barriers of entry to future competitive supply. These and other
"dominant" malls will have average mall shop sales above $300 per
square foot and be attractive investment vehicles in the current
market. It is our opinion that the subject would attract high
interest from institutional investors if offered for sale in the
current marketplace. There is not an abundance of regional mall
assets of comparable quality currently available, and many
regional malls have been included within REITs, rather than
offered on an individual property basis. However, we must
further temper our analysis due to the fact that there remains
some risk that the inherent assumptions employed in our model
come to full fruition.
Finally, application of these rate parameters to the subject
should entail some sensitivity to the rate at which leases will
be expiring over the projection period. Provided below is a
summary of the forecasted lease expiration schedule for the
subject. A complete expiration report is included in the
Addenda.
Lease Expiration Schedule *
Calendar No. of GLA Cumulative %
Year Leases (SF)
1996 9 16,647 4.1%
1997 17 49,223 16.1%
1998 8 13,940 19.6%
1999 14 24,031 25.5%
2000 7 12,167 28.4%
2001 22 46,748 39.9%
2002 18 29,807 47.2%
2003 11 39,600 56.9%
2004 7 45,152 68.0%
2005 12 31,527 75.7%
* Excludes department stores.
From the above, we see that a moderate percentage (28.4
percent) of the GLA will expire by 2000. The largest expiration
year is 1997 when leases totaling 49,223 square feet of the
center will expire. Over the total projection period, the mall
will turnover about 75.7 percent of mall shop space. Overall,
consideration is given to this in our selection of an appropriate
risk rate. We would also note that much of the risk factored
into such an analysis is reflected in the assumptions employed
within the cash flow model, including rent and sales growth,
turnover, reserves, and vacancy provisions.
We have briefly discussed the investment risks associated
with the subject. On balance, it is our opinion that an investor
in the subject property would require an internal rate of return
between 12.00 and 12.50 percent.
Present Value Analysis
Analysis by the discounted cash flow method is examined over
a holding period that allows the investment to mature, the
investor to recognize a return commensurate with the risk taken,
and a recapture of the original investment. Typical holding
periods usually range from 10 to 20 years and are sufficient for
the majority of institutional grade real estate such as the
subject to meet the criteria noted above. In the instance of the
subject, we have analyzed the cash flows anticipated over a ten
year period commencing on January 1, 1996.
A sale or reversion is deemed to occur at the end of the 10th
year (December 31, 2005), based upon capitalization of the
following year's net operating income. This is based upon the
premise that a purchaser in the 10th year is buying the following
year's net income. Therefore, our analysis reflects this
situation by capitalizing the first year of the next holding
period.
The present value is formulated by discounting the property
cash flows at various yield rates. The yield rate utilized to
discount the projected cash flow and eventual property reversion
has been based on an analysis of anticipated yield rates of
investors dealing in similar investments. The rates reflect
acceptable expectations of yield to be achieved by investors
currently in the marketplace shown in their current investment
criteria and as extracted from comparable property sales.
Cash Flow Assumptions
Our cash flows forecasted for the mall have been presented.
To reiterate, the formulation of these cash flows incorporate the
following general assumptions in our computer model:
1. The pro forma is presented on a calendar year basis commencing on
January 1, 1996. The present value analysis is based on a 10 year
holding period commencing from January 1, 1996. This period reflects
10 years of operations and follows an adequate time for the property to
proceed through an orderly lease-up and continue to benefit from any
remerchandising. In this regard, we have projected that the investment
will be sold at the year ending December 31, 2005.
2. Existing lease terms and conditions remain unmodified until their
expiration. At expiration, it has been assumed that there is an 70.0
percent probability that existing retail tenants will renew their
lease. Office tenants are projected to have a 50.0 percent
probability. Executed and high probability pending leases have been
assumed to be signed in accordance with negotiated terms as of the date
of valuation.
3. 1996 base date market rental rates for existing tenants have been
established according to tenant size with consideration given to
location within the mall, the specific merchandise category, as well as
the tenants sales history. Lease terms throughout the total complex
vary but for new in-line mall tenants are generally 5 to 12 years.
While some have been flat, others have one or two step-ups over the
course of the term. Upon renewal, it is assumed that new leases are
written for an average of 10 years with a rent step of 10.0 percent in
years 4 and 8. An exception exists in the instance where a tenant is
determined to be paying base rent which is above market, or where
percentage rent is being generated in the base lease and is forecasted
to continue over the ensuing period. In these instances, we have
assumed that a flat lease will be written. Kiosk leases are written
for 5 year terms with a 10.0 percent rent increase after 36 months.
Office leases are also written for five years.
4. Market rents have been established for 1996 based upon an overall
average of about $19.22 per square foot for in-line mall shop space.
Subsequently, it is our assumption that market rental rates for mall
tenants will remain flat through 1997, increasing by 2.0 percent in
1998, 3.0 percent in 1999, and 3.5 percent per year thereafter.
5. Most tenants have percentage rental clauses providing for the payment
of overage rent. We have relied upon average sales data as provided by
management. In our analysis, we have forecasted that sales will remain
flat and then grow by 2.0 percent in 1997, 3.0 percent in 1998, and 3.5
percent per year throughout the balance of the holding period.
6. Expense recoveries are based upon terms specified in the various lease
contracts. The standard lease contract for real estate taxes and
common area maintenance billings for interior mall tenants is based
upon a tenants pro rata share with the latter carrying an
administrative surcharge of 15.0 percent. Pro-rata share is generally
calculated on leased (occupied) area as opposed to leasable area.
Department store contributions are deducted before pass through to the
mall shops. HVAC charges are for mall HVAC.
7. Income lost due to vacancy and non- payment of obligations has been
based upon our turnover probability assumption as well as a global
provision for credit loss. Upon the expiration of a lease, there is
30.0 percent probability that the retail tenant will vacate the suite.
At this time we have forecasted that rent loss equivalent to 6 months
rent would be incurred to account for the time associated with bringing
the space back on-line. Office tenants have a 50.0 percent renewal
probability. In addition, we have forecasted an annual global vacancy
and credit loss of gross rental income which we have stepped-up to a
stabilized level of 5.0 percent. This global provision is applied to
all tenants excluding anchor department stores.
8. Specialty leasing and miscellaneous income consists of several
categories. Specialty leasing is generated by the mall's successful
temporary in-line tenant program which fill in during periods of
downtime between permanent in-line tenants. Miscellaneous income is
generated by chargebacks for tenant work, forfeited security deposits,
stroller rentals, telephones, etc. We have grown all miscellaneous
revenues by 3.0 percent per annum.
9. Operating expenses have been developed from management's budget from
which we have recast certain expense items. Expenses have also been
compared to industry standards as well as our general experience in
appraising regional malls throughout the northeast. Operating expenses
are generally forecasted to increase by 3.5 percent per year except for
management which is based upon 4.5 percent of minimum and percentage
rent annually. Taxes are forecasted to grow at 4.0 percent per year.
Alteration costs are assumed to escalate at our forecasted expense
inflation rate.
10. A provision for initial capital reserves of approximately $90,000 equal
to approximately $0.13 per square foot of total owned GLA has been
reflected. An alteration charge of $8.00 per square foot has been
utilized for new mall tenants. Renewal tenants have been given an
allowance of $1.50 per square foot. Leasing commissions reflect a rate
structure of $3.50 per square foot for new leases and $1.50 per square
foot for renewal leases. Office tenants have a different schedule for
alterations and commissions. A contingency provision for other capital
expenditures has been made for the first three years.
For a property such as the subject, it is our opinion that an
investor would require an all cash discount rate in the range of
12.00 to 12.50 percent. Accordingly, we have discounted the
projected future pre-tax cash flows to be received by an equity
investor in the subject property to a present value so as to
yield 12.00 to 12.50 percent at 25 basis point intervals on
equity capital over the holding period. This range of rates
reflects the risks associated with the investment. Discounting
these cash flows over the range of yield and terminal rates now
being required by participants in the market for this type of
real estate places additional perspective upon our analysis. A
valuation matrix for the subject appears on the following table:
Valuation Matrix (000)
Terminal Cap Discount Rate
Rate
12.00% 12.25% 12.50%
9.00% $83,166 $81,868 $80,597
9.25% $82,193 $80,917 $79,667
9.50% $81,272 $80,015 $78,785
Through such a sensitivity analysis, it can be seen that the
present value of the subject property varies from approximately
$78.8 to $83.2 million. Giving consideration to all of the
characteristics of the subject previously discussed, we feel that
a prudent investor would require a yield which falls near the
middle of the range outlined above for this property.
Accordingly, we believe that based upon all of the assumptions
inherent in our cash flow analysis, an investor would look toward
as IRR around 12.25 percent and a terminal rate around 9.25
percent as being most representative of the subject's value in
the market.
In view of the analysis presented here, it becomes our
opinion that the discounted cash flow analysis indicates a market
value of $81.0 million for the subject property as of January 1,
1996. The indices of investment generated through this indicated
value conclusion are shown on the Facing Page.
DISCOUNTED CASH FLOW ANALYSIS
Eastpoint Mall (Baltimore, Maryland)
Cushman & Wakefield, Inc.
Year Net Discount Present Value Composition Annual Cash
No. Year Cash Flow Factor 12.25% of Cash Flows of Yield on Cash Returns
1 1996 $7,317,298 x 0.8908686 = $6,518,751 8.06% 9.03%
2 1997 $7,470,914 x 0.7936469 = $5,929,267 7.33% 9.22%
3 1998 $7,893,429 x 0.7070351 = $5,580,931 6.90% 9.74%
4 1999 $8,456,066 x 0.6298753 = $5,326,267 6.58% 10.44%
5 2000 $8,717,550 x 0.5611362 = $4,891,732 6.05% 10.76%
6 2001 $8,872,105 x 0.4998986 = $4,435,153 5.48% 10.95%
7 2002 $8,898,840 x 0.4453439 = $3,963,045 4.90% 10.99%
8 2003 $9,261,835 x 0.3967429 = $3,674,568 4.54% 11.43%
9 2004 $9,548,132 x 0.3534458 = $3,374,747 4.17% 11.79%
10 2005 $9,420,071 x 0.3148738 = $2,966,133 3.67% 11.63%
Total Present Value of Cash Flows: $46,660,595 57.67% 10.60%
Total Avg.
Reversion Year NOI/Income / Terminal OAR = Reversion
11 2006 $10,268,596 / 9.25% $111,011,849
Less: Cost of Sale 2.00% ($2,220,237)
Less: Tls & Commissions $0
Net Reversion $108,791,612
x Discount Factor 0.3148738
Total Present Value of Reversion $34,255,626 42.33%
Total Present Value of Cash Flows & Reversion: $80,916,221 100.00%
Rounded Value via Discounted Cash Flow: $81,000,000
Owned Net Rentable Area: 694,274
Value per Square Foot (Owned GLA): $116.67
Owned Mall Shop Area: 344,388
Value per Square Foot (Shop GLA)*: $235.20
Year One NOI (12 months): $7,795,577
Implicit Going-In Capitalization Rate: 9.62%
Compound Annual Growth Rate
Concluded Value to Reversion Value: 3.20%
Compound Annual Growth Rate
Net Cash Flow: 2.56%
*Excludes Anchors, Mall Offices, and Atrium Offices
We note that the computed equity yield is not necessarily the
true rate of return on equity capital. This analysis has been
performed on a pre-tax basis. The tax benefits created by real
estate investment will serve to attract investors to a pre-tax
yield which is not the full measure of the return on capital.
Direct Capitalization
To further support our value conclusion at stabilization
derived via the discounted cash flow, we have also utilized the
direct capitalization method. In direct capitalization, an
overall rate is applied to the net operating income of the
subject property. In this case, we will again consider the
indicated overall rates from the comparable sales in the Sales
Comparison Approach as well as those rates established in our
Investor Survey.
In view of our total analysis, we would anticipate that at
the subject would trade at an overall rate of approximately 8.75
to 9.25 percent applied to first year income. Applying these
rates to first year net operating income before reserves,
alterations, and other expenses for the subject of $7,795,577
results in a value of approximately $84,280,000 to $89,090,000.
From this range we would be inclined to conclude at a value of
$85,000,000 by direct capitalization which is indicative of an
overall rate of 8.42 percent.
However, it is our opinion that a prudent investor in the
property would consider the capital expenditures and leasing
costs through 1999 in the final value estimate. By discounting
commissions, alterations, and capital expenditures at 12.25
percent through 1999, a deduction of about $1,210,000 is
indicated. Applying this to $85.0 million results in a value
estimate of roughly $83.79 million. Thus, the indicated value
via direct capitalization as of January 1, 1996, was $83,800,000.
RECONCILIATION AND FINAL VALUE ESTIMATE
Application of the Sales Comparison and Income Approaches
used in the valuation of the subject property has produced
results which fall within a reasonably acceptable range.
Restated, these are:
Methodology Market Value
Conclusion
Sales Comparison Approach $81,000,000 - $83,000,000
Income Approach
Discounted Cash Flow $81,000,000
Direct Capitalization $83,800,000
This is considered a narrow range in possible value given the
magnitude of the value estimates. Both approaches are well
supported by data extracted from the market. There are, however,
strengths and weaknesses in each of these two approaches which
require reconciliation before a final conclusion of value can be
rendered.
Sales Comparison Approach
The Sales Comparison Approach arrived at a value indicted for
the property by analyzing historical arms-length transaction,
reducing the gathered information to common units of comparison,
adjusting the sale data for differences with the subject and
interpreting the results to yield a meaningful value conclusion.
The basis of these conclusions was the cash-on-cash return based
on net income and the adjusted price per square foot of gross
leasable area sold. An analysis of the subject on the basis of
its implicit sales multiple was also utilized.
The process of comparing historical sales data to assess what
purchasers have been paying for similar type properties is weak
in estimating future expectations. Although the unit sale price
yields comparable conclusions, it is not the primary tool by
which the investor market for a property like the subject
operates. In addition, no two properties are alike with respect
to quality of construction, location, market segmentation and
income profile. As such, subjective judgment necessarily become
a part of the comparative process. The usefulness of this
approach is that it interprets specific investor parameters
established in their analysis and ultimate purchase of a
property. In light of the above, the writers are of the opinion
that this methodology is best suited as support for the
conclusions of the Income Approach. It does provide useful
market extracted rates of return such as overall rates to
simulate investor behavior in the Income Approach.
Income Approach
Discounted Cash Flow Analysis
The subject property is highly suited to analysis by the
discounted cash flow method as it will be bought and sold in
investment circles. The focus on property value in relation to
anticipated income is well founded since the basis for investment
is profit in the form of return or yield on invested capital.
The subject property, as an investment vehicle, is sensitive to
all changes in the economic climate and the economic expectations
of investors. The discounted cash flow analysis may easily
reflect changes in the economic climate of investor expectations
by adjusting the variables used to qualify the model. In the
case of the subject property, the Income Approach can analyze
existing leases, the probabilities of future rollovers and
turnovers and reflect the expectations of overage rents.
Essentially, the Income Approach can model many of the dynamics
of a complex shopping center. The writers have considered the
results of the discounted cash flow analysis because of the
applicability of this method in accounting for the particular
characteristics of the property, as well as being the tool used
by many purchasers.
Capitalization
Direct capitalization has its basis in capitalization theory
and uses the premise that the relationship between income and
sales price may be expressed as a rate or its reciprocal, a
multiplier. This process selects rates derived from the
marketplace, in much the same fashion as the Sales Comparison
Approach, and applies this to a projected net operating income to
derive a sale price. The weakness here is the idea of using one
year of cash flow as the basis for calculating a sale price.
This is simplistic in its view of expectations and may sometimes
be misleading. If the year chosen for the analysis of the sale
price contains an income stream that is over or understated, this
error is compounded by the capitalization process. Nonetheless,
real estate of the subject's calibre is commonly purchased on a
net capitalization basis. Overall, this methodology was given
important consideration in our total analysis.
Conclusions
We have briefly discussed the applicability of each of the
methods presented. Because of certain vulnerable characteristics
in the Sales Comparison Approach, it has been used as supporting
evidence and as a final check on the value conclusion indicated
by the Income Approach methodology. The value exhibited by the
Income Approach is consistent with the leasing profile of the
mall. Overall, it indicates complimentary results with the Sales
Comparison Approach, the conclusions being supportive of each
method employed, and neither range being extremely high or low in
terms of the other.
As a result of our analysis, we have formed an opinion that
the market value of the leased fee estate in the referenced
property, subject to the assumptions, limiting conditions,
certifications, and definitions, as of January 1, 1996, was:
EIGHTY ONE MILLION DOLLARS
$81,000,000
ASSUMPTIONS AND LIMITING CONDITIONS
"Appraisal" means the appraisal report and opinion of value
stated therein; or the letter opinion of value, to which these
Assumptions and Limiting Conditions are annexed.
"Property" means the subject of the Appraisal.
"C&W" means Cushman & Wakefield, Inc. or its subsidiary which
issued the Appraisal.
"Appraiser(s)" means the employee(s) of C&W who prepared and
signed the Appraisal.
This appraisal is made subject to the following assumptions and
limiting conditions:
1. This is a Summary Appraisal Report which is intended to comply with the
reporting requirements set forth under Standards Rule 2-2)b) of the
Uniform Standards of Professional Appraisal Practice for a Summary
Appraisal Report. As such, it presents only summary discussions of the
data, reasoning, and analyses that were used in the appraisal process to
develop the appraiser's opinion of value. Supporting documentation
concerning the data, reasoning, and analyses is retained in the
appraiser's file. The depth of discussion contained in this report is
specific to the needs of the client and for the intended use stated below.
The appraiser is not responsible for unauthorized use of this report.
We are providing this report as an update to our last analysis which was
prepared as of January 1, 1995. As such, we have primarily reported only
changes to the property and its environs over the past year.
2. No opinion is intended to be expressed and no responsibility is assumed for
the legal description or for any matters which are legal in nature or require
legal expertise or specialized knowledge beyond that of a real estate
appraiser. Title to the Property is assumed to be good and marketable and
the Property is assumed to be free and clear of all liens unless otherwise
stated. No survey of the Property was undertaken.
3. The information contained in the Appraisal or upon which the
Appraisal is based has been gathered from sources the Appraiser assumes to be
reliable and accurate. Some of such information may have been provided by the
owner of the Property. Neither the Appraiser nor C&W shall be responsible
for the accuracy or completeness of such information, including the
correctness of estimates, opinions, dimensions, sketches, exhibits and
factual matters.
4. The opinion of value is only as of the date stated in the Appraisal.
Changes since that date in external and market factors or in the
Property itself can significantly affect property value.
5. The Appraisal is to be used in whole and not in part. No part of the
Appraisal shall be used in conjunction with any other appraisal.
Publication of the Appraisal or any portion thereof without the prior
written consent of C&W is prohibited. Except as may be otherwise stated in
the letter of engagement, the Appraisal may not be used by any person other
than the party to whom it is addressed or for purposes other than that for
which it was prepared. No part of the Appraisal shall be conveyed to
the public through advertising, or used in any sales or promotional
material without C&W's prior written consent. Reference to the
Appraisal Institute or to the MAI designation is prohibited.
6. Except as may be otherwise stated in the letter of engagement, the
Appraiser shall not be required to give testimony in any court or
administrative proceeding relating to the Property or the Appraisal.
7. The Appraisal assumes (a) responsible ownership and competent management
of the Property; (b) there are no hidden or unapparent conditions of the
Property, subsoil or structures that render the Property more or less
valuable (no responsibility is assumed for such conditions or for arranging
for engineering studies that may be required to discover them); (c) full
compliance with all applicable federal, state and local zoning and
environmental regulations and laws, unless noncompliance is stated,
defined and considered in the Appraisal; and (d) all required licenses,
certificates of occupancy and other governmental consents have been or can
be obtained and renewed for any use on which the value estimate contained
in the Appraisal is based.
8. The forecasted potential gross income referred to in the Appraisal may
be based on lease summaries provided by the owner or third parties. The
Appraiser assumes no responsibility for the authenticity or completeness of
lease information provided by others. C&W recommends that legal advice be
obtained regarding the interpretation of lease provisions and the contractual
rights of parties.
9. The forecasts of income and expenses are not predictions of the future.
Rather, they are the Appraiser's best estimates of current market thinking on
future income and expenses. The Appraiser and C&W make no warranty
or representation that these forecasts will materialize. The real estate
market is constantly fluctuating and changing. It is not the Appraiser's
task to predict or in any way warrant the conditions of a future real
estate market; the Appraiser can only reflect what the investment community,
as of the date of the Appraisal, envisages for the future in terms of
rental rates, expenses, supply and demand.
10. Unless otherwise stated in the Appraisal, the existence of
potentially hazardous or toxic materials which may have been used in
the construction or maintenance of the improvements or may be located at or
about the Property was not considered in arriving at the opinion of value.
These materials (such as formaldehyde foam insulation, asbestos insulation
and other potentially hazardous materials) may adversely affect the
value of the Property. The Appraisers are not qualified to detect such
substances. C&W recommends that an environmental expert be employed to
determine the impact of these matters on the opinion of value.
11. Unless otherwise stated in the Appraisal, compliance with the
requirements of the Americans With Disabilities Act of 1990 (ADA) has not
been considered in arriving at the opinion of value. Failure to comply
with the requirements of the ADA may adversely affect the value of the
property. C&W recommends that an expert in this field be employed.
CERTIFICATION OF APPRAISAL
We certify that, to the best of our knowledge and belief:
1. Richard W. Latella, MAI and Jay F. Booth inspected the property. Brian J.
Booth did not inspect the property but has contributed to the underlying
analysis.
2. The statements of fact contained in this report are true and correct.
3. The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are our personal,
unbiased professional analyses, opinions, and conclusions.
4. We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
5. Our compensation is not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the amount
of the value estimate, the attainment of a stipulated result, or the
occurrence of a subsequent event. The appraisal assignment was not based
on a requested minimum valuation, a specific valuation or the approval of a
loan.
6. No one provided significant professional assistance to the persons signing
this report.
7. Our analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the Uniform Standards of Professional
Appraisal Practice of the Appraisal Foundation and the Code of Professional
Ethics and the Standards of Professional Appraisal Practice of the Appraisal
Institute.
8. The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
9. As of the date of this report, Richard W. Latella has completed the
requirements of the continuing education program of the Appraisal
Institute.
/s/ Jay F. Booth /s/ Brian J. Booth
Jay F. Booth Brian J. Booth
Retail Valuation Group Valuation Advisory Services
/s/ Richard W. Latella
Richard W. Latella, MAI
Senior Director
Retail Valuation Group
Maryland Certified General
Real Estate Appraiser License No. 10462
ADDENDA
NATIONAL RETAIL OVERVIEW
OPERATING EXPENSE BUDGET (1996)
TENANT SALES REPORT (1995)
PRO-JECT LEASE ABSTRACT REPORT
PRO-JECT PROLOGUE ASSUMPTIONS REPORT
PRO-JECT TENANT REGISTER REPORT
PRO-JECT LEASE EXPIRATION REPORT
ENDS FULL DATA REPORT FOR PRIMARY AND TOTAL TRADE AREA
REGIONAL MALL SALES (1991-1993)
CUSHMAN & WAKEFIELD INVESTOR SURVEY
APPRAISERS' QUALIFICATIONS
PARTIAL CLIENT LIST
CUSHMAN & WAKEFIELD, INC.
NATIONAL RETAIL OVERVIEW
Prepared by: Richard W. Latella, MAI
NATIONAL RETAIL MARKET OVERVIEW
Introduction
Shopping centers constitute the major form of retail activity in the United
States today. Approximately 55 percent of all non- automotive retail sales
occur in shopping centers. It is estimated that consumer spending
accounts for about two-thirds of all economic activity in the United States.
As such, retail sales patterns have become an important indicator of
the country's economic health.
During the period 1980 through 1995, total retail sales in the United
States increased at a compound annual rate of 6.16 percent. Data for the
period 1990 through 1995 shows that sales growth has slowed to an annual
average of 4.93 percent. This information is summarized on the following
chart. The Commerce Department reports that total retail sales fell
three-tenths of a percent in January 1996.
Total U.S. Retail Sales(1)
Year Amount Annual Change
(Billions)
1980 $ 957,400 N/A
1985 $1,375,027 N/A
1990 $1,844,611 N/A
1991 $1,855,937 .61%
1992 $1,951,589 5.15%
1993 $2,074,499 6.30%
1994 $2,236,966 7.83%
1995 $2,346,577 4.90%
Compound Annual
Growth Rate +6.16%
1980-1995
CAGR: 1990 - 1995 +4.93%
(1)1985 - 1995 data reflects recent revisions by the U.S. Department of
Commerce: Combined Annual and Revised Monthly Retail Trade.
Source: Monthly Retail Trade Reports Business Division, Current Business
Reports, Bureau of the Census, U.S. Department of Commerce.
The early part of the 1990s was a time of economic stagnation and
uncertainty in the country. The gradual recovery, which began as the
nation crept out of the last recession, has shown some signs of weakness as
corporate downsizing has accelerated. But as the recovery period reaches into
its fifth year and the retail environment remains volatile, speculation
regarding the nation's economic future remains. It is this uncertainty which
has shaped recent consumer spending patterns.
Personal Income and Consumer Spending
Americans' personal income advanced by six-tenths of a percent in
December, which helped raise income for all of 1995 by 6.1 percent, the
highest gain since 6.7 percent in 1990. This growth far outpaced the 2.5
percent in 1994 and 4.7 percent in 1993. Reports for February 1996 however,
reported that income grew at an annual rate of eight-tenths of a percent,
the biggest gain in thirteen months, and substantially above January's anemic
growth rate of one-tenth of a percent.
Consumer spending is another closely watched indicator of economic
activity. The importance of consumer spending is that it represents
two-thirds of the nation's economic activity. Total consumer spending rose
by 4.8 percent in 1995, slightly off of the 5.5 percent rise in 1994 and 5.8
percent in 1993. These increases followed a significant lowering on
unemployment and bolstered consumer confidence. The Commerce Department
reported that Americans spent at an annual rate of $5.01 trillion in January
1996, a drop of five-tenths of a percent. It was the third drop in five
months.
Unemployment Trends
The Clinton Administration touts that its economic policy has dramatically
increased the number of citizens who have jobs. Correspondingly, the
nation's unemployment rate continues to decrease from its recent peak in
1992. Selected statistics released by the Bureau of Labor Statistics are
summarized as follows:
Selected Employment Statistics
Civilian Labor Force Employed
Total Workers Total Workers Unemployment
Year(1) (000) % Change (000) % Change Rate
1990 124,787 .7 117,914 .5 5.5
1991 125,303 .4 116,877 -.9 6.7
1992 126,982 1.3 117,598 .6 7.4
1993 128,040 .8 119,306 1.5 6.8
1994 131,056 2.4 123,060 3.1 6.1
1995 132,337 .98 124,926 1.5 5.6
CAGR 1.18 1.16
1990-1995
(1)Year ending December 31
Source: Bureau of Labor Statistics U.S. Department of Labor
During 1995, the labor force increased by 1,281,000 or approximately
1.0 percent. Correspondingly, the level of employment increased by
1,866,000 or 1.5 percent. As such, the year end unemployment rate dropped by
five-tenths of a percent to 5.6 percent. For 1995, monthly job growth averaged
144,000. On balance, over 8.0 million jobs have been created since the
recovery began.
Housing Trends
Housing starts enjoyed a good year in 1994 with a total of 1.53 million
starts; this up 13.0 percent from 1.45 million in 1993. Multi-family was up
60.0 percent in 1994 with 257,00 starts. However, the National Asociation of
Homebuilders forsees a downshift in activity throughout 1995 resulting from the
laggard effect of the Federal Reserves's policy of raising interest rates. The
.50 percent increase in the federal funds rate on February 1, 1995 was the
seventh increase over the past thirteen months, bringing it to its highest
level since 1991. Sensing a retreat in the threat of inflation, the Fed
reduced the Federal Funds rate by 25 basis points in July 1995 to 5.75 percent.
Total housing starts rose by 6.0 percent to a seasonally adjusted annual
rate of 1.42 million units. Since family housing starts in November were at
1,102,00 units while multi-family jumped by 77,000 at an annual rate.
Applications for building permits rose by 3.2 percent to a rate of 1.28
million. The median new home price of new homes sold in the first nine months
of 1995 was $132,000. The median was $130,000 for all of 1994. The Commerce
Department reported that construction spending rose 2.9 percent in October to
an annual rate of $207.7 billion, compared to $217.9 billion in all of 1994.
The home ownership rate seems to be rising, after remaining stagnant over
the last decade. For the third quarter of 1995, the share of households that
own their homes was 65 percent, compared to 64.1 percent for a year earlier.
Lower mortgage rates are cited as a factor.
Gross Domestic Product
The report on the gross domestic product (GDP) showed that output for
goods and services expanded at an annual rate of just .9 percent in the
fourth quarter of 1995. Overall, the economy gained 2.1 percent in 1995, the
weakest showing in four years since the 1991 recession. The .9 percent
rise in the fourth quarter was much slower than the 1.7 percent expected
by most analysts. The Fed sees the U.S. economy expanding at a 2.0 to 2.25
percent pace during 1996 which is in-line with White House forecasts.
The following chart cites the annual change in real GDP since 1990.
Real GDP
Year % Change
1990 1.2
1991 - .6
1992 2.3
1993 3.1
1994 4.1
1995 * 2.1
* Reflects new chain weighted system of measurement. Comparable
1994 measure would be 3.5%
Source: Bureau of Economic Analysis
Consumer Prices
The Bureau of Labor Statistics has reported that consumer prices rose
by only 2.5 percent in 1995, the fifth consecutive year in which inflation
was under 3.0 percent. This was the lowest rate in nearly a decade when
the overall rate was 1.1 percent in 1986. All sectors were down
substantially in 1995 including the volatile health care segment which
recorded inflation of only 3.9 percent, the lowest rate in 23 years.
The following chart tracks the annual change in the CPI since 1990.
Consumer Price Index(1)
Year CPI % Change
1990 133.8 6.1
1991 137.9 3.0
1992 141.9 2.9
1993 145.8 2.7
1994 149.7 2.7
1995 153.5 2.5
(1) All Urban Workers
Source: Dept. of Labor, Bureau of Labor Statistics
Other Indicators
The government's main economic forecasting gauge, the Index of Leading
Economic Indicators shows that the vibrant 1994 economy continues to cool off.
The index is intended to project econoic growth over the next six months. The
Conference Board, an independent business group, reported that the index
rose two-tenths of a percent in December 1995, breaking a string of three
straight declines. It has become apparent that the Federal Reserve's
conservative monetary policy has had an effect on the economy and some
economists are calling for a further reduction in short term interest rates.
The Conference Board also reported that consumer confidence rebounded in
February 1996, following reports suggesting lower inflation. The board's
index of consumer confidence rose 9 points to 97 over January when
consumers worried about the government shutdown, the stalemate over the
Federal budget and the recent flurry of layoff announcements by big
corporations.
In another sign of increasingly pinched household budgets, consumers
sharply curtailed new installment debt in September 1995, when installment
credit rose $5.4 billion, barely half as much as August. Credit card
balances increased by $2.8 billion, the slimmest rise of the year. For the
twelve months through September 1995, outstanding credit debt rose 13.9
percent, down from a peak of 15.3 percent in May. Still, installment debt
edged to a record 18.8 percent of disposable income, indicating that
consumers may be reaching a point of discomfort with new debt.
The employment cost index is a measure of overall compensation
including wages, salaries and benefits. In 1995 the index rose by only 2.9
percent, the smallest increase since 1980. This was barely ahead of
inflation and is a sign of tighter consumer spending over the coming
year.
Economic Outlook
The WEFA Group, an economic consulting company, opines that the current
state of the economy is a "central bankers" dream, with growth headed
toward the Fed's 2.5 percent target, accompanied by stable if not
falling inflation. They project that inflation will remain in the 2.5 to
3.0 percent range into the foreseeable future. This will have a direct
influence on consumption (consumer expenditures) and overall inflation rates
(CPI).
Potential GDP provides an indication of the expansion of output, real
incomes, real expenditures, and the general standard of living of the
population. WEFA estimates that real U.S. GDP will grow at an average annual
rate between 2.0 and 2.5 percent over the next year and at 2.3 percent
through 2003 as the output gap is reduced between real GDP and potential GDP.
After 2003, annual real GDP growth will moderate, tapering to 2.2 percent per
annum.
Consumption expenditures are primarily predicated on the growth of
real permanent income, demographic influences, and changes in relative
prices over the long term. Changes in these key variables explain much of
the consumer spending patterns of the 1970s and mid-1980s, a period during
which baby boomers were reaching the asset acquisition stages of their lives;
purchasing automobiles and other consumer and household durables. Increases in
real disposable income supported this spending spurt with an average annual
increase of 2.9 percent per year over the past twenty years. Real
consumption expenditures increased at an average annual rate of 3.1 percent
during the 1970s and by an average of 4.0 percent from 1983 to 1988. WEFA
projects that consumption expenditure growth will slow to 2.0 percent per year
by 2006 as a result of slower population growth and aging. It is also
projected that the share of personal consumption expenditures
relative to GDP will decline over the next decade. Consumer spending as a
share of GDP peaked in 1986 at 67.4 percent after averaging about 63.0
percent over much of the post- war period. WEFA estimates that consumption's
share of aggregate output will decline to 64.5 percent by 2003 and 62.7
percent by 2018.
Retail Sales
In their publication, NRB/Shopping Centers Today 1994 Shopping
Center Census, the National Research Bureau reports that overall retail
conditions continued to improve for the third consecutive year in 1994.
Total shopping center sales increased 5.5 percent to $851.3 billion in 1994,
up from $806.6 billion in 1993. The comparable 1993 increase was 5.0
percent. Retail sales in shopping centers (excluding automotive and
gasoline service station sales) now account for about 55.0 percent of
total retail sales in the United States.
Total retail sales per square foot have shown positive increases
over the past three years, rising by 8.7 percent from approximately $161 per
square foot in 1990, to $175 per square foot in 1994. It is noted that the
increase in productivity has exceeded the increase in inventory which bodes
well for the industry in general. This data is summarized on the following
table.
Selected Shopping Center Statistics
1990-1994
% Compound
1990 1991 1992 1993 1994 Change Annual
1990-93 Growth
Retail Sales in
Shopping Centers * $706.40 $716.90 $768.20 $806.60 $851.30 20.5% 4.8%
Total Leasable
Area** 4.4 4.6 4.7 4.8 4.9 11.4% 2.7%
Unit Rate $160.89 $157.09 $164.20 $169.08 $175.13 8.7% 2.1%
*Billions of Dollars
** Billions of Square Feet
Source: National Research Bureau
To put retail sales patterns into perspective, the following
discussion highlights key trends over the past few years.
- As a whole, 1993 was a good year for most of the nation's major
retailers. Sales for the month of December were up for most,
however, the increase ranged dramatically from 1.1 percent at
Kmart to 13.3 percent at Sears for stores open at least a year.
It is noted that the Sears turnaround after years of slippage
was unpredicted by most forecasters.
- With the reporting of December 1994 results, most retailers
posted same store gains between 2.0 and 6.0 percent. The
Goldman Sachs Retail Composite Comparable Store Sales Index, a
weighted average of monthly same store sales of 52 national
retail companies rose 4.5 percent in December. The weakest
sales were seen in women's apparel, with the strongest sales
reported for items such as jewelry and hard goods. Most
department store companies reported moderate increases in same
store sales, though largely as a result of aggressive
markdowns. Thus, profits were negatively impacted for many
companies.
- For 1994, specialty apparel sales were lackluster at best, with
only .4 percent comparable sales growth. This is of concern to
investors since approximately 30.0 percent of a mall's small
shop space is typically devoted to apparel tenants. Traditional
department stores experienced 3.4 percent same store growth in
1994, led by Dillard's 5.0 percent increase. Mass merchants'
year-to-year sales increased by 6.7 percent in 1994, driven by
Sears' 7.9 percent increase. Mass merchants account for 35.0 to
55.0 percent of the anchors of regional malls and their
resurgence bodes well for increased traffic at these centers.
- Sales at the nation's largest retailer chains rose tepidity in
January, following the worst December sales figures since the
1990-91 recession in 1995. Same store sales were generally
weak in almost all sectors, with apparel retailers being
particularly hard hit. Some chains were able to report
increases in sales but this generally came about through
substantial discounting. As such, profits are going to suffer
and with many retailers being squeezed for cash, 1996 is
expected to be a period of continued consolidations and
bankruptcy. The Goldman Sachs composite index of same store
sales grew by 1.1 percent in January 1996, compared to a 4.7
percent for January 1995.
Provided on the following chart is a summary of overall and same store
sales growth for selected national merchants for the most recent period.
Same Store Sales for the Month of January 1996
% Change From Previous Year
Name of Retailer Overall Same Store Basis
Wal-Mart +16.0% + 2.6%
Kmart + 4.0% + 7.7%
Sears, Roebuck & Company + 4.0% + 0.6%
J.C. Penney - 3.0% - 4.3%
Dayton Hudson Corporation + 8.0% + 2.0%
May Department Stores + 7.0% + 0.7%
Federated Department Stores + 3.0% + 5.1%
The Limited Inc. + 6.0% - 2.0%
Gap Inc. +48.0% + 6.0%
Ann Taylor - 1.0% - 17.0%
Source: New York Times
According to the Goldman sachs index, department store sales fell by 1.1
percent during January, discount stores rose by 4.5 percent, and specialty hard
goods retailers fell by 4.7 percent.
The outlook for retail sales growth is one of cautious optimism.
Some analysts point to the fact that consumer confidence has resulted
in increases in personal debt which may be troublesome in the long run.
Consumer loans by banks rose 13.9 percent in the twelve months that ended
on September 30, 1995. But data gathered by the Federal Reserve on
monthly payments suggest that debt payments are not taking as big a bite out
of income as in the late 1980s, largely because of the record refinancings at
lower interest rates in recent years and the efforts by many Americans to
repay debts.
GAFO and Shopping Center Inclined Sales
In a true understanding of shopping center dynamics, it is important to
focus on both GAFO sales or the broader category of Shopping Center Inclined
Sales. These types of goods comprise the overwhelming bulk of goods and
products carried in shopping centers and department stores and consist of
the following categories:
- General merchandise stores including department and other stores;
- Apparel and accessory stores;
- Furniture and home furnishing stores; and
- Other miscellaneous shoppers goods stores.
Shopping Center Inclined Sales are somewhat broader and include such
classifications as home improvement and grocery stores.
Total retail sales grew by 7.8 percent in the United States in 1994 to
$2.237 trillion, an increase of $162 billion over 1993. This followed an
increase of $125 billion over 1992. Automobile dealers captured $69+/-
billion of total retail sales growth last year, while Shopping Center
Inclined Sales accounted for nearly 40.0 percent of the increase ($64
billion). GAFO sales increased by $38.6 billion. This group was led
by department stores which posted an $18.0 billion increase in sales. The
following chart summarizes the performance for this most recent comparison
period.
Retail Sales by Major Store Type
1993-1994 ($MIL.)
1993-1994
Store Type 1994 1993 % Change
GAFO:
General Merchandise $282,541 $264,617 6.8%
Apparel & Accessories 109,603 107,184 2.3%
Furniture & Furnishings 119,626 105,728 13.1%
Other GAFO 80,533 76,118 5.8%
GAFO Subtotal $592,303 $553,647 7.0%
Convenience Stores:
Grocery $376,330 $365,725 2.9%
Other 21,470 19,661 9.2%
Subtotal $397,800 $385,386 3.2%
Drug 81,538 79,645 2.4%
Convenience Subtotal $479,338 $465,031 3.1%
Other:
Home Improvement &
Building Supplies Stores $122,533 $109,604 11.8%
Shopping Center-Inclined 1,194,174 1,128,282 5.8%
Subtotal 526,319 456,890 15.2%
Automobile Dealers 142,193 138,299 2.8%
Gas Stations 228,351 213,663 6.9%
Eating and Drinking Places 145,929* 137,365* 6.2%
All Other
Total Retail Sales $2,236,966 $2,074,499 7.8%
* Estimated sales
Source: U.S. Department of Commerce and Dougal M. Casey: Retail Sales and
Shopping Center Development Through The Year 2000 (ICSC White Paper)
GAFO sales grew by 7.0 percent in 1994 to $592.3 billion, led by furniture
and furnishings which grew by 13.1 percent. From the above it can be
calculated that GAFO sales accounted for 26.5 percent of total retail sales
and nearly 50.0 percent of all shopping center-inclined sales.
The International Council of Shopping Centers (ICSC) publishes a Monthly Mall
Merchandise Index which tracks sales by store type for more than 400 regional
shopping centers. The index shows that sales per square foot rose by 1.8
percent to $256 per square foot in 1994. The following chart identified the
most recent year-end results.
Index Sales per Square Foot
1993-1994 Percent Change
Store Type 1994 1993 ICSC Index
GAFO:
Apparel & Accessories:
Women's Ready-To-Wear $189 $196 - 3.8%
Women's Accessories and 295 283 + 4.2%
Specialties 231 239 - 3.3%
Men's and Boy's Apparel 348 310 +12.2%
Children's Apparel 294 292 + 0.4%
Family Apparel 284 275 + 3.3%
Women's Shoes 330 318 + 3.8%
Men's Shoes 257 252 + 1.9%
Family Shoes 340 348 - 2.2%
Shoes (Misc.) $238 $238 - 0.2%
SUBTOTAL
Furniture & Furnishings:
Furniture & Furnishings $267 $255 + 4.5%
Home Entertainment &
Electronics 330 337 - 2.0%
Miscellaneous 291 282 + 3.3%
SUBTOTAL $309 $310 - 0.3%
Other GAFO:
Jewelry $581 $541 + 7.4%
Other 258 246 + 4.9%
SUBTOTAL $317 $301 + 5.3%
TOTAL GAFO $265 $261 + 1.6%
NON-GAFO
FOOD:
Fast Food $365 $358 + 2.0%
Restaurants 250 245 + 2.2%
Other 300 301 - 0.4%
SUBTOTAL $304 $298 + 1.9%
OTHER NON-GAFO:
Supermarkets $236 $291 -18.9%
Drug/HBA 254 230 +10.3%
Personal Services 264 253 + 4.1%
Automotive 149 133 +12.2%
Home Improvement 133 127 + 4.8%
Mall Entertainment 79 77 + 3.2%
Other Non-GAFO Misc. 296 280 + 5.7%
SUBTOTAL $192 $188 + 2.4%
TOTAL NON-GAFO $233 $228 + 2.5%
TOTAL $256 $252 + 1.8%
Note: Sales per square foot numbers are rounded to whole dollars. Three
categories illustrated here have limited representation in the ICSC sample:
Automotive, +12.2%; Home Improvement, +4.8%; and Supermarkets, -18.9%.
Source: U.S. Department of Commerce and Dougal M. Casey.
GAFO sales have risen relative to household income. In 1990 these sales
represented 13.9 percent of average household income. By 1994 they rose to 14.4
percent. Projections through 2000 show a continuation of this trend to 14.7
percent. On average, total sales were equal to nearly 55.0 percent of
household income in 1994.
Determinants of Retail Sales Growth and U.S. Retail Sales by Key
Store Type 1990 1994 2000(P)
Determinants
Population 248,700,000 260,000,000 276,200,000
Households 91,900,000 95,700,000 103,700,000
Average Household Income $37,400 $42,600 $51,600
Total Census Money Income $3.4 Tril. $4.1 Tril. $5.4 Tril.
% Allocations of Income to Sales
GAFO Stores 13.9% 14.4% 14.7%
Convenience Stores 12.9% 11.7% 10.7%
Home Improvement Stores 2.8% 3.0% 3.3%
Total Shopping Center-
Inclined Stores 29.6% 29.1% 28.8%
Total Retail Stores 54.3% 54.6% 52.8%
Sales ($Billion)
GAFO Stores $472 $592 $795
Convenience Stores 439 479 580
Home Improvement Stores 95 123 180
Total Shopping Center-
Inclined Stores $1,005 $1,194 $1,555
TOTAL RETAIL SALES $1,845 $2,237 $2,850
Note: Sales and income figures are for the full year; population
and household figures are as of April 1 in each respective year.
P = Projected.
Source: U.S. Census of Population, 1990; U.S. Bureau of the Census Current
Population Reports: Consumer Income P6-168, 174, 180, 184 and 188; Berna Miller
with Linda Jacobsen, "Household Futures", American Demographics, March 1995;
Retail Trade sources already cited; and Dougal M. Casey: ICSC White Paper
GAFO sales have risen at a compound annual rate of approximately
6.8 percent since 1991 based on the following annual change in sales.
1990/91 2.9%
1991/92 7.0%
1992/93 6.6%
1993/94 7.0%
According to a recent study by the ICSC, GAFO sales are expected to
grow by 5.0 percent per annum through the year 2000, which is well above the
4.1 percent growth for all retail sales. This information is presented in the
following chart.
Retail Sales in the United States, by Major Store Type
1994 2000(P) Percent Change
Compound
Store Type ($ Billions) ($ Billions) Total Annual
GAFO:
General Merchandise $ 283 $ 370 30.7% 4.6%
Apparel & Accessories 110 135 22.7% 3.5%
Furniture/Home Furnishings 120 180 50.0% 7.0%
Other Shoppers Goods 81 110 35.8% 5.2%
GAFO Subtotal $ 592 $ 795 34.3% 5.0%
CONVENIENCE GOODS:
Food Stores $ 398 $ 480 20.6% 3.2%
Drugstores 82 100 22.0% 3.4%
Convenience Subtotal $ 479 $ 580 21.1% 3.2%
Home Improvement 123 180 46.3% 6.6%
Shopping Center-
Inclined Subtotal $1,194 $1,555 30.2% 4.5%
All Other 1,043 1,295 24.2% 3.7%
Total $2,237 $2,850 27.4% 4.1%
Note: P = Projected. Some figures rounded.
Source: U.S. Department of Commerce, Bureau of the Census and Dougal M. Casey.
In considering the six-year period January 1995 through December
2000, it may help to look at the six-year period extending from January
1989 through December 1994 and then compare the two time spans.
Between January 1989 and December 1994, shopping center- inclined
sales in the United States increased by $297 billion, a compound growth rate
of 4.9 percent. These shopping center- inclined sales are projected to
increase by $361 billion between January 1995 and December 2000, a compound
annual growth rate of 4.5 percent. GAFO sales, however, are forecasted to
increase by 34.3 percent or 5.0 percent per annum.
Industry Trends
According to the National Research Bureau, there were a total of 40,368
shopping centers in the United States at the end of 1994. During this year,
735 new centers opened, an 10.0 percent increase over the 667 that opened in
1993. The upturn marked the first time since 1989 that the number of openings
increased. The greatest growth came in the small center category (less than
100,000 square feet) where 457 centers were constructed. In terms of GLA
added, new construction in 1994 resulted in an addition of 90.16 million
square feet of GLA from approximately 4.77 billion to 4.86 billion square
feet. The following chart highlights trends over the period 1987 through
1995.
Census Data: 8-Year Trends
No. of Total Total Average Average % Change New % Increase
Year Centers GLA Sales GLA per Sales in Sales Cen- in Total
(Billions) Center per SF per SF ters Centers
- - ---- ------ ------------- ------------ ------- ------- ------- ----- ----------
1987 30,641 3,722,957,095 $602,294,426 121,502 $161.78 2.41% 2,145 7.53%
1988 32,563 3,947,025,194 $641,096,793 121,212 $162.43 0.40% 1,922 6.27%
1989 34,683 4,213,931,734 $682,752,628 121,498 $162.02 -0.25% 2,120 6.51%
1990 36,515 4,390,371,537 $706,380,618 120,235 $160.89 -0.70% 1,832 5.28%
1991 37,975 4,563,791,215 $716,913,157 120,179 $157.09 -2.37% 1,460 4.00%
1992 38,966 4,678,527,428 $768,220,248 120,067 $164.20 4.53% 991 2.61%
1993 39,633 4,770,760,559 $806,645,004 120,373 $169.08 2.97% 667 1.71%
1994 40,368 4,860,920,056 $851,282,088 120,415 $175.13 3.58% 735 1.85%
Compound
Annual +4.01% +3.88% +5.07% -.13% +1.14% N/A N/A N/A
Growth
Source: National Research Bureau Shopping Center Database and Statistical Model
From the chart we see that both total GLA and total number of centers have
increased at a compound annual rate of approximately 4.0 percent since 1987.
New construction was up 1.85 percent in 1994, a slight increase over 1993 but
still well below the peak year 1987 when new construction increased by
7.5 percent. Industry analysts point toward increased liquidity among
shopping center owners, due in part to the influx of capital from securitized
debt financiang and the return of lending by banks and insurance companies.
REITs have also been a source of capital and their appetite for new product has
provided a convenient take out vehicle.
Among the 40,368 centers in 1994, the following breakdown by
size can be shown.
U.S. Shopping Center Inventory, January 1995
Square Feet
Number of Centers (Millions)
----------------- ---------------
Size Range (SF) Amount Percent Amount Percent
--------------- ------ ------- ------ -------
Under 100,000 25,450 63% 1,266 25%
100,000-400,000 13,035 32% 2,200 45%
400,000-800,000 1,210 3% 675 15%
Over 800,000 673 2% 750 15%
Total 40,368 100% 4,865 100%
Source: National Research Bureau (some numbers slightly rounded).
According to the National Research Bureau, total sales in shopping
centers have grown at a compound rate of 5.07 percent since 1987. With
sales growth outpacing new construction, average sales per square foot
have been showing positive increases since the last recession. Aggregate
sales were up 5.5 percent nationwide from $806.6 billion (1993) to $851.3
billion (1994). In 1994, average sales were $175.13 per square foot, up
nearly 3.6 percent over 1993 and 1.14 percent on average over the past seven
years. The biggest gain came in the super- regional category (more than 1
million square feet) where sales were up 5.05 percent to $193.13 per square
foot.
The following chart tracks the change in average sales per square foot
by size category between 1993 and 1994.
Sales Trends by Size Category
1993-1994
Average Sales Per Square Foot
Category 1993 1994 % Change
Less than 100,000 SF $193.10 $199.70 +3.4%
100,001 to 200,000 SF $156.18 $161.52 +3.4%
200,001 to 400,000 SF $147.57 $151.27 +2.5%
400,001 to 800,000 SF $157.04 $163.43 +4.1%
800,001 to 1,000,000 SF $194.06 $203.20 +4.7%
More than 1,000,000 SF $183.90 $193.13 +5.0%
Total $169.08 $175.13 +3.6%
Source: National Research Bureau
Empirical data shows that the average GLA per capita is increasing.
In 1994, the average for the nation was 18.7. This was up 17 percent from
16.1 in 1988 and more recently, 18.5 square feet per capita in 1993. Among
states, Florida has the highest GLA per capita with 28.1 square feet and South
Dakota has the lowest at 9.40 square feet. The estimate for 1995 is for an
increase to 19.1 per square foot per capita. Per capita GLA for regional malls
(defined as all centers in excess of 400,000 square feet) has also been rising.
This information is presented on the following chart.
GLA per
Capita All Regional
Year Centers Malls
1988 16.1 5.0
1989 17.0 5.2
1990 17.7 5.3
1991 18.1 5.3
1992 18.3 5.5
1993 18.5 5.5
1994 18.7 5.4
Source: International Council of Shopping Center: The Scope of The Shopping
Center Industry and National Research Bureau
The Urban Land Institute, in the 1995 edition of Dollars and Cents of
Shopping Centers, reports that vacancy rates range from a low of 2.0 percent
in neighborhood centers to 14.0 percent for regional malls. Super-regional
malls reported a vacancy rate of 7.0 percent and community centers were 4.0
percent based upon their latest survey.
The retail industry's importance to the national economy can also be seen
in the level of direct employment. According to F.W. Dodge, the construction
information division of McGraw-Hill, new projects in 1994 generated $2.6
billion in construction contract awards and supported 41,600 jobs in
construction trade and related industries. This is nearly half of the
construction employment level of 95,360 for new shopping center development in
1990. It is estimated that 10.18 million people are now employed in shopping
centers, equal to about one of every nine non-farm workers in the country.
This is up 2.9 percent over 1991.
Market Shifts - Contemporary Trends in the Retail Industry
During the 1980s, the department store and specialty apparel store
industries competed in a tug of war for consumer dollars. Specialty stores
emerged largely victorious as department store sales steadily declined as a
percentage of total GAFO sales during the decade, slipping from 47.0
percent in 1979 to 44.0 percent in 1989. During this period, many
anchor tenants teetered from high debt levels incurred during
speculative takeovers and leveraged buyouts of the 1980s. Bankruptcies and
restructuring, however, have forced major chains to refocus on their
customer and shed unproductive stores and product lines. At year end 1994,
department store sales, as a percentage of GAFO sales, were approximately 37.5
percent.
The continued strengthening of some of the major department store chains,
including Sears, Federated/Macy's, May and Dayton Hudson, is in direct
contrast to the dire predictions made by analysts about the demise of the
traditional department store industry. This has undoubtedly been brought
about by the heightened level of merger and acquisition activity in the 1980s
which produced a burdensome debt structure among many of these entities.
When coupled with reduced sales and cash flow brought on by the recession,
department stores were unable to meet their debt service requirements.
Following a round of bankruptcies and restructurings, the industry has
responded with aggressive cost-cutting measures and a focused merchandising
program that is decidedly more responsive to consumer buying patterns. The
importance of department stores to mall properties is tantamount to a
successful project since the department store is still the principal
attraction that brings patrons to the center.
On balance, 1994/95 was a continued period of transition for the retail
industry. Major retailers achieved varying degrees of success in meeting the
demands of increasingly value conscious shoppers. Since the onset of the
national economic recession in mid-1990, the retail market has been
characterized by intense price competition and continued pressure on profit
margins. Many national and regional retail chains have consolidated
operations, closed underperforming stores, and/or scaled back on expansion
plans due to the uncertain spending patterns of consumers.
Consolidations and mergers have produced a more limited number of retail
operators, which have responded to changing spending patterns by
aggressively repositioning themselves within this evolving market. Much of
the recent retail construction activity has involved the conversion of existing
older retail centers into power center formats, either by retenanting or
through expansion. An additional area of growth in the retail sector is in
the "supercenter" category, which consists of the combined grocery and
department stores being developed by such companies as Wal- Mart and Kmart.
These formats require approximately 150,000 to 180,000 square feet in order
to carry the depth of merchandise necessary for such economies of scale and
market penetration.
Some of the important developments in the industry over the past year can
be summarized as follows:
- The discount department store industry emerged as arguably
the most volatile retail sector, lead by regional chains in the
northeast. Jamesway, Caldor and Bradlees each filed for Chapter
11 within six months and Hills Stores is on the block. Jamesway
is now in the process of liquidating all of its stores. Filene's
Basement was granted relief from some covenant restrictions and
its stock price plummeted. Ames, based in Rocky Hill,
Connecticut, will close 17 of its 307 stores. Kmart continues to
be of serious concern. Its debt has been downgraded to junk bond
status. Even Wal-Mart, accustomed to double digit sales growth,
has seen some meager comparable sales increases. These trends
are particularly troubling for strips since these tenants are
typical anchors.
- The attraction of regional malls as an investment has
diminished in view of the wave of consolidations and bankruptcies
affecting in-line tenants. Some of the larger restructurings
include Melville with plans to close up to 330 stores, sell
Marshalls to TJX Companies, split into three publicly traded
companies, and sell Wilsons and This End Up; Petrie Retail, which
operates such chains as M.J. Carroll, G&G, Jean Nicole, Marianne
and Stuarts, has filed for bankruptcy protection; Edison Brothers
(Jeans West, J. Riggins, Oak Tree, 5-7-9 Shops, etc.) announced
plans to close up to 500 stores while in Chapter 11; J. Baker
intends to liquidate Fayva Shoe division (357 low-price family
footwear stores); The Limited announced a major restructuring,
including the sale of partial interests in certain divisions;
Charming Shoppes will close 290 Fashion Bug and Fashion Bug Plus
stores; Trans World Entertainment (Record Town) has closed 115 of
its 600 mall shop locations. Other chains having trouble include
Rickel Home Centers which filed Chapter 11; Today's Man, a 35
store Philadelphia based discount menswear chain has filed; nine
subsidiaries of Fretta, including Dixon's, U.S. Holdings and
Silo, filed Chapter 11; and Clothestime, also in bankruptcy will
close up to 140 of its 540 stores. Merry-Go-Round, a chain that
operates 560 stores under the names Merry-Go-Round, Dejaiz and
Cignal is giving up since having filed in January 1994 and will
liquidate its assets. Toys "R" Us has announced a global
reorganization that will close 25 stores and cut the number of
items it carries to 11,000 from 15,000. Handy Andy, a 50 year
old chain of 74 home improvement centers which had been in
Chapter 11, has decided to liquidate, laying off 2,500 people.
- Overall, analysts estimate that 4,000 stores closed in 1995 and as many
as 7,000 more will close in 1996. Mom-and-Pop stores, where 75 percent
of U.S. retailers employ fewer than 10 people have been declining for
the past decade. Dun and Bradstreet reports that retail failures are up
1.4 percent over Last year - most of them small stores who don't have
the financial flexibility to renegotiate payment schedule.
- With sales down, occupancy costs continue to be a major
issue facing many tenants. As such, expansion oriented retailers
like The Limited, Ann Taylor and The Gap, are increasingly
shunning mall locations for strip centers. This has put further
pressure on mall operators to be aggressive with their rent
forecasts or in finding replacement tenants.
- While the full service department store industry led by Sears has seen
a profound turnaround, further consolidation and restructuring
continues. Woodward & Lothrop was acquired by The May Department
Stores Company and JC Penney; Broadway Stores was acquired by
Federated Department Stores; Elder Beerman has filed Chapter 11 and
will close 102 stores; Steinbach Stores will be acquired by Crowley,
Milner & Co.; Younkers will merge with Proffitts; and Strawbridge and
Clothier has hired a financial advisor to explore strategic
alternatives for this Philadelphia based chain.
- Aside from the changes in the department store arena, the most notable
transaction in 1995 involved General Growth Properties' acquisition of
the Homart Development Company in a $1.85 billion year-end deal.
Included were 25 regional malls, two current projects and several
development sites. In November, General Growth arranged for the sale
of the community center division to Developers Diversified for
approximately $505 million. Another notable deal involved Rite Aid
Corporation's announcement that it will acquire Revco Drug Stores in a
$1.8 billion merger to form the nation's largest drug store company
with sales of $11 billion and 4,500+/- stores.
- As of January 1, 1995 there were 311 outlet centers with 44.4 million
square feet of space. Outlet GLA has grown at a compound annual rate
of 18.1 percent since 1989. Concerns of over-building, tenant
bankruptcies, and consolidations have now negatively impacted this
industry as evidenced by the hit the outlet REIT stocks have taken.
Outlet tenants have not been immune to the global troubles impacting
retail sales as comparable store sales were down 3.1 percent through
November 1995.
- Category Killers and discount retailers have continued to drive the
demand for additional space. In 1995, new contracts were awarded for
the construction or renovation of 260 million square feet of stores
and shopping centers, up from 173 million square feet in 1991
according to F.W. Dodge, matching the highest levels over the past two
decades. It is estimated that between 1992 and 1994, approximately
55.0 percent of new retail square footage was built by big box
retailers. In 1994, it is estimated that they accounted for 80.0
percent of all new stores. Most experts agree that the country is
over-stored. Ultimately, it will lead to higher vacancy rates and
place severe pressure on aging, capital intensive centers. Many
analysts predict that consolidation will occur soon in the office
products superstores category where three companies are battling for
market share - OfficeMax, Office Depot and Staples.
- Entertainment is clearly the new operational requisite for property
owners and developers who are incorporating some form of entertainment
into their designs. With a myriad of concepts available, ranging from
mini-amusement parks to multiplex theater and restaurant themes, to
interactive high-tech applications, choosing the right formula is a
difficult task.
Investment Criteria and Institutional Investment Performance
Investment criteria for mall properties range widely. Many firms and
organizations survey individuals active in this industry segment in
order to gauge their current investment criteria. These criteria can be
measured against traditional units of comparison such as price (or value)
per square foot of GLA and overall capitalization rates.
The price that an investor is willing to pay represents the current or
present value of all the benefits of ownership. Of fundamental importance is
their expectation of increases in cash flow and the appreciation of the
investment. Investors have shown a shift in preference to initial return,
placing probably less emphasis on the discounted cash flow analysis (DCF). A
DCF is defined as a set of procedures in which the quantity,
variability, timing, and duration of periodic income, as well as the quantity
and timing of reversions, are specified and discounted to a present
value at a specified yield rate. Understandably, market thinking has
evolved after a few hard years of reality where optimistic cash flow
projections did not materialize. The DCF is still, in our opinion, a valid
valuation technique that when properly supported, can present a realistic
forecast of a property's performance and its current value in the marketplace.
Equitable Real Estate Investment Management, Inc. reports in their
Emerging Trends in Real Estate - 1996 that their respondents give
retail investments generally poor performance forecasts in their latest
survey due to the protracted merchant shakeout which will continue into 1996.
While dominant, Class A malls are still considered to be one of the best
real estate investments anywhere, only 13.0 percent of the respondents
recommended buying malls. Rents and values are expected to remain flat
(in real terms) and no one disputes their contention that 15 to 20 percent of
the existing malls nationwide will be out of business by the end of the
decade. For those centers that will continue to reposition themselves,
entertainment will be an increasingly important part of their mix.
Investors do cite that, after having been written off, department
stores have emerged from the shake-out period as powerful as ever. The
larger chains such as Federated, May and Dillard's, continue to acquire the
troubled regional chains who find it increasingly difficult to compete
against the category killers. Many of the nations largest chains are
reporting impressive profit levels, part of which has come about from their
ability to halt the double digit sales growth of the national discount
chains. Mall department stores are aggressively reacting to power and
outlet centers to protect their market share. Department stores are
frequently meeting discounters on price.
While power centers are considered one retail property type currently in
a growth mode, most respondents feel that the country is over-stored and
value gains with these types of centers will lag other property types,
including malls, over five and ten year time frames.
The following chart summarizes the results of their current survey.
Retail Property Rankings and Forecasts
Invest Potential
Investment Potential 1996 Predicted Value Gains
Property -------------------- Rent ---------------------
Type Rating1 Ranking2 Increase 1 Yr. 5Yrs. 10Yrs.
Regional Malls 4.9 8th 2.0% 2% 20% 40%
Power Centers 5.3 6th 2.3% 1% 17% 32%
Community Centers 5.4 5th 2.4% 2% 17% 33%
1 Scale of 1 to 10
2 Based on 9 property types
The NCREIF Property Index represents data collected from the Voting
Members of the National Council of Real Estate Investment Fiduciaries. As
shown in the following table, data through the third quarter of 1995 shows
that the retail index posted a positive 1.23 percent increase in total
return. Increased competition in the retail sector from new and expanding
formats and changing locational references has caused the retail index to trail
all other property types. As such, the -2.01 percent decline in value
reported by the retail subindex for the year were in line with investors'
expectations.
Retail Property Returns
NCREIF Index
Third Quarter 1995 (%)
Period Income Appreciation Total Change in CPI
3rd Qtr. 1995 1.95 - .72 1.23 .46
One Year 8.05 -2.01 5.92 2.55
Three Years 7.54 -3.02 4.35 2.73
Five Years 7.09 -4.61 2.23 2.92
Ten Years 6.95 .54 7.52 3.53
Source: Real Estate Performance Report
National Council of Real Estate Investment Fiduciaries
It is noted that the positive total return continues to be affected by
the capital return component which has been negative for the last five years.
However, as compared to the CPI, the total index has performed relatively
well.
Real Estate Investment Trust Market (REITs)
To date, the impact of REITs on the retail investment market has been
significant, although the majority of Initial Property Offerings (IPOs)
involving regional malls, shopping centers, and outlet centers did not enter
the market until the latter part of 1993 and early 1994. It is noted that
REITs have dominated the investment market for apartment properties and have
evolved into a major role for retail properties as well.
As of November 30, 1995, there were 297 REITs in the United States, about
79.0 percent (236) which are publicly traded. The advantages provided by
REITs, in comparison to more traditional real estate investment opportunities,
include the diversification of property types and location, increased liquidity
due to shares being traded on major exchanges, and the exemption from corporate
taxes when 95.0 percent of taxable income is distributed.
There are essentially three kinds of REITs which can either be
"open-ended", or Finite-life (FREITs) which have specified liquidation
dates, typically ranging from eight to fifteen years.
- Equity REITs center around the ownership of properties where
ownership interests (shareholders)receive the benefit of returns
from the operating income as well as the anticipated appreciation
of property value. Equity REITs typically provide lower yields
than other types of REITs, although this lower yield is
theoretically offset by property appreciation.
- Mortgage REITs invest in real estate through loans. The return to
shareholders is related to the interest rate for mortgages placed by
the REIT.
- Hybrid REITs combine the investment strategies of both the equity and
mortgage REITs in order to diversify risk.
The influx of capital into REITs has provided property owners with an
significant alternative marketplace of investment capital and resulted in a
considerably more liquid market for real estate. A number of
"non-traditional" REIT buyers, such as utility funds and equity/income
funds, established a major presence in the market during 1993/94.
1995 was not viewed as a great year for REITs relative to the advances seen
in the broader market. Through the end of November, equity REITs
posted a 9.3 percent total return according to the National Association
of Real Estate Investment Trusts (NAREIT). The best performer among equity
REITs was the office sector with a 29.4 percent total return. This was
followed by self-storage (27.3%), hotels (26.7%), triple-net lease
(20.6%), and health care (18.8%). Two equity REIT sectors were in the red -
outlet centers and regional malls.
Retail REITs
As of November 30, 1995, there were a total of 47 REITs specializing
in retail, making up approximately 16 percent of the securities in the REIT
market. Depending upon the property type in which they specialize, retail
REITs are divided into three categories: shopping centers, regional
malls, and outlet centers. The REIT performance indices chart shown as
Table A on the following page, shows a two-year summary of the total retail
REIT market as well as the performance of the three composite categories.
Table A - REIT Performance Indicies
Y-T-D Total Dividend No. of REIT Market
Return Yield Securities Capitalization*
----------- ----------- -------------- ----------------
As of November 30, 1995
----------------------------------------------------------
Total Retail 0.49% 8.36% 47 $14,389.1
Strip Centers 2.87% 8.14% 29 $ 8,083.3
Regional Malls -2.47% 9.06% 11 $ 4,886.1
Outlet Centers -2.53% 9.24% 6 $ 1,108.7
-------------------------------------------------------
As of November 30, 1994
-------------------------------------------------------
Total Retail -3.29% 8.35% 46 $12,913.1
Strip Center -4.36% 7.98% 28 $ 7,402.7
Regional Malls 2.84% 8.86% 11 $ 4,459.1
Outlet Centers -16.58% 8.74% 7 $ 1,051.4
* Number reported in thousands
Source: Realty Stock Review
As can be seen, the 47 REIT securities have a market
capitalization of approximately $14.4 billion, up 11.5 percent from the
previous year. Total returns were positive through November 1995,
reversing the negative return for the comparable period 12 months earlier. It
is noted that the positive return was the result of the strength of the
shopping center REITs which constitute nearly 60 percent of the market
capitalization. Total retail REITs dividend yields have remained constant over
the last year at approximately 8.36 percent. Regional mall and shopping
center REITs dominate the total market, making up approximately 85 percent of
the 47 retail REITs.
While many of the country's best quality malls and shopping centers have
recently been offered in the public market, this heavily capitalized
marketplace has provided sellers with an attractive alternative to the more
traditional market for large retail properties.
Regional Mall REITs
The accompanying exhibit Table B summarizes the basic
characteristics of eight REITs and one publicly traded real estate
operating company (Rouse Company) comprised exclusively or predominantly of
regional mall properties. Excluding the Rouse Company (ROUS), the IPOs have
all been completed since November 1992. The nine public offerings with
available information have a total of 281 regional or super regional malls
with a combined leasable area of approximately 229 million square feet. This
figure represents more than 14.0 percent of the total national supply of
this product type.
The nine companies are among the largest and best capitalized domestic real
estate equity securities, and are considerably more liquid than more
traditional real estate related investments. Excluding the Rouse Company,
however, these companies have been publicly traded for only a short period,
and there is not an established track record. General Growth was the star
performer in 1995 with a 15 percent increase in its stock price following the
acquisition of the Homart retail portfolio from Sears for $1.85 billion -
the biggest real estate acquisition of the decade.
Table B Regional Mall REIT analysis
Cushman & Wakefield, Inc.
REIT Portfolio CBL CWN EJD GGP MAC ROUS SPG TCO URB
- - --------------------------------------------------------------------------------
Company Overview
- - --------------------------------------------------------------------------------
Total Retail Cen. 95 23 51 40 16 67 56 19 12
-Super Reg.* 5 1 28 14 4 27 21 16 7
-Regional 11 22 23 25 10 27 35 3 2
-Community 79 - 11 1 2 13 55 - 3
-Other - - - - - - 3 - -
Tot. Mall GLA** 17,129 12,686 44,460 28,881 10,620 44,922 39,329 22,031 8,895
Tot.Mall Shop GLA**6,500 4,895 15,300 12,111 - 19,829 15,731 9,088 2,356
Avg. Total GLA/Cen.**180 552 872 722 664 670 702 1,160 741
Avg. Shop GLA/Cen.** 68 213 300 303 - 296 281 478 196
- - --------------------------------------------------------------------------------
Mall Operations
- - --------------------------------------------------------------------------------
Reporting year 1994 1994 1994 1994 1994 1994 1994 1994 1994
Avg. Sales PSF
of Mall GLA $226 $204 $260 $245 $262 $285 $259 $335 $348
Minimum Rent/Sales
ratio 8.6% 7.1% 8.3% - - - 6.8% 10.2% 8.1%
Total Occupancy
Cost/Sales ratio 12.2% 10.0% 12.4% - 11.2% - 10.2% 14.8% 11.7%
Mall Shop
Occupancy Level 88.7% 84.0% 85.0% 87.0% 92.9% - 86.2% 86.6% 93.3%
- - --------------------------------------------------------------------------------
Share Price
- - --------------------------------------------------------------------------------
IPO Date 10/27/93 8/9/93 6/30/94 4/8/93 3/9/94 1996 12/26/93 11/18/92 10/6/93
IPO Price $19.50 $17.25 $14.75 $22.00 $19.00 - $22.25 $11.00 $23.50
Current Price
(12/15/95) $21.63 $ 7.38 $13.00 $19.13 $19.75 $19.63 $25.13 $ 9.75 $21.75
52-Week High $22.00 $14.13 $15.13 $22.63 $21.88 $22.63 $26.00 $10.38 $22.50
52-Week Low $17.38 $ 6.50 $12.00 $18.13 $19.25 $17.50 $22.50 $ 8.88 $18.75
- - --------------------------------------------------------------------------------
Capitalization and Yields
- - --------------------------------------------------------------------------------
Outstanding
Shares*** 30.20 36.85 89.60 43.37 31.45 47.87 95.64 125.85 21.19
Market Cap.*** $653 $272 $1,165 $830 $621 $940 $2,403 $1,227 $461
Annual Dividend$1.59 $0.80 $1.26 $1.72 $1.68 $0.80 $1.97 $0.88 $1.94
Dividend Yield
(12/15/95) 7.35% 10.84% 9.69% 8.99% 8.51% 4.08% 7.84% 9.03% 8.92%
FFO 1995**** $1.85 $1.50 $1.53 $1.96 $1.92 $1.92 $2.28 $0.91 $2.17
FFO Yield
(12/15/95) 8.55% 20.33% 11.77% 10.25% 9.72% 9.78% 9.07% 9.33% 9.98%
- - --------------------------------------------------------------------------------
Source: Salomon Brothers and Realty Stock Review; Annual Reports
* Super Regional Centers (>=800,000 Sq. Ft)
** Numbers in thousands (000) includes mall only
*** Numbers in millions
**** Funds From Operations is defined as net income (loss) before depreciation,
amoritizatoin, other non-cash items, extrodinary items, gains or losses of
assets and before minority interests in the Operating Partnership.
CBL - CBL & Associates
CWN - Crown American
EJD - Edward Debartolo
GGP - General Growth
MAC - Macerich Company
ROUS - Rouse Company
SPG - Simon Property
TCO - Taubman Centers
URB - Urban Shopping
Shopping Center REITs
Shopping center REITs comprise the largest sector of the retail REIT
market accounting for 29 out of the total 47 securities. General
characteristics of eight of the largest shopping center REITs are
summarized on Table C. The public equity market capitalization of the eight
companies totaled $6.1 billion as of December 15, 1995. The two largest,
Kimco Realty Corp. and New Plan Realty Trust have a market capitalization
equal to approximately 34.5 percent of the group total.
While the regional mall and outlet center REIT markets struggled
through 1995, shopping center REITs showed a positive November 30, 1995
year-to-date return of 2.87%. Through 1995, transaction activity in the
national shopping center market has been moderate. Most of the action in
this market is in the power center segment. As an investment, power
centers appeal to investors and REITs because of the high current cash
returns and long-term leases. However, with their popularity, the potential
for overbuilding is high. Also creating skepticism within this market is the
stability of several large discount retailers such as Kmart, and other
discount department stores which typically anchor power centers. Shopping
center REITs which hold numerous properties where struggling retailers are
located are currently keeping close watch over these centers in the event
of these anchor tenants vacating their space.
Similar to the regional mall REITs, shopping center REITs have been
publicly traded for only a short period and do not have a defined track
record. While the REITs have been in existence for a relatively short
period, the growth requirements of the companies should place upward pressure
on values due to continued demand for new product.
Table C Shopping Center REIT analysis
Cushman & Wakefield, Inc.
REIT Portfolio DDR FRT GRT JPR KIM NPR VNO WRI
- - --------------------------------------------------------------------------------
Company Overview
- - --------------------------------------------------------------------------------
Tot. Properties 111 53 84 46 193 123 65 161
Tot. Retail Centers 104 53 84 40 193 102 56 141
Tot. Retail GLA* 23,600 11,200 12,300 6,895 26,001 14,500 9,501 13,293
Avg. Shop GLA/Cen.* 227 211 146 172 135 142 170 94
- - --------------------------------------------------------------------------------
Mall Operations
- - --------------------------------------------------------------------------------
Reporting year - - 1994 - 1994 - - 1994
Total Rental Income - - $71,101 -$125,272 - -$112,223
Average Rent/SF $6.04 - $5.78 - $4.82 - - $8.44
Total Oper. Expenses - - $45,746 - $80,563 - - $76.771
Oper. Expenses/SF - - $3.72 - $3.10 - - $5.78
Oper. Expenses Ratio - - 64.3% - 64.3% - - 68.4%
Total Occupancy Level 96.6% 95.1% 96.3% 94.0% 94.7% 95.4% 94.0% 92.0%
- - --------------------------------------------------------------------------------
Share Price
- - --------------------------------------------------------------------------------
IPO Date 1992 1993 1994 1994 1991 1973 1993 1985
IPO Price $19.50 $17.25 $14.75 $22.00 $19.00 - $22.25 -
Current Price
(12/15/95) $29.88 $23.38 $17.75 $20.63 $42.25 $21.63 $36.13 $36.13
52-Week High $32.00 $23.75 $22.38 $21.38 $42.25 $23.00 $38.13 $38.13
52-Week Low $26.13 $19.75 $16.63 $17.38 $35.00 $18.75 $32.75 $32.75
- - --------------------------------------------------------------------------------
Capitalization and Yields
- - --------------------------------------------------------------------------------
Outstanding Shares** 19.86 32.22 24.48 19.72 22.43 53.26 24.20 26.53
Market Cap.*** $ 567 $ 753 $ 435 $ 407 $ 948 $1,152 $ 872 $ 959
Annual Dividend $2.40 $1.64 $1.92 $1.68 $2.16 $1.39 $2.24 $2.40
Dividend Yield
(12/15/95) 8.03% 7.01% 10.82% 8.14% 5.11% 6.43% 6.20% 6.64%
FFO 1995**** $2.65 $1.78 $2.25 $1.83 $3.15 $1.44 $2.67 $2.80
FFO Yield
(12/15/95) 8.87% 7.61% 12.68% 8.87% 7.46% 6.66% 7.39% 7.75%
- - --------------------------------------------------------------------------------
Source: Salomon Brothers and Realty Stock Review; Annual Reports
* Numbers in thousands (000) includes mall only
** Numbers in millions
*** Funds From Operations is defined as net income (loss) before depreciation,
amoritizatoin, other non-cash items, extrodinary items, gains or losses of
assets and before minority interests in the Operating Partnership.
DDR - Development Diversified
FRT - Federal Realty Inv.
GRT - Glimcher Realty
JPR - JP Realty Inc.
KIM - Kimco Realty Corp.
NPR - New Plan Realty
VNO - Vornado Realty
WRI - Weingarten Realty
Outlook
A review of various data sources reveals the intensity of the development
community's efforts to serve a U.S. retail market that is still growing,
shifting and evolving. It is estimated 25- 30 power centers appear to be
capable of opening annually, generating more than 12 million square feet
of new space per year. That activity is fueled by the locational needs of
key power center tenants, 27 of which indicated in recent year-end reports
to shareholders an appetite for 900 new stores annually, an average of 30 new
stores per firm.
With a per capita GLA figure of 19 square feet, most analysts are in
agreement that the country is already over-stored. As such, new centers
will become feasible through the following demand generators:
- The gradual obsolescence of some existing retail locations
and retail facilities;
- The evolution of the locational needs and format preferences
of various anchor tenants; and
- Rising retail sales generated by increasing population and
household levels.
By the year 2000, total retail sales are projected to rise from $2.237
trillion in 1994 to almost $2.9 trillion; shopping center-inclined sales are
projected to rise by $361 billion, from $1.194 trillion in 1994 to nearly $1.6
trillion in the year 2000. Those increases reflect annual compound growth
rates of 4.1 percent and 4.5 percent, respectively, for the six-year period.
On balance, we conclude that the outlook for the retail industry is
one of cautious optimism. Because of the importance of consumer spending to
the economy, the retail industry is one of the most studied and analyzed
segments of the economy. One obvious benefactor of the aggressive expansion
and promotional pricing which has characterized the industry is the
consumer. There will continue to be an increasing focus on choosing the
right format and merchandising mix to differentiate the product from the
competition and meet the needs of the consumer. Quite obviously, many of the
nations' existing retail developments will find it difficult if not
impossible to compete. Tantamount to the success of these older centers must
be a proper merchandising or repositioning strategy that adequately
considers the feasibility of the capital intensive needs of such an
undertaking. Coincident with all of the change which will continue to
influence the industry is a general softening of investor bullishness. This
will lead to a realization that the collective interaction of the fundamentals
of risk and reward now require higher capitalization rates and long term
yield expectations in order to attract investment capital.
GRAPHIC SHOWING OPERATING EXPENSE BUDGET (1996)
GRAPHIC SHOWING TENANT SALES REPORT (1995)
GRAPHIC SHOWING PRO-JECT LEASE ABSTRACT REPORT
GRAPHIC SHOWING PRO-JECT PROLOGUE ASSUMPTIONS REPORT
GRAPHIC SHOWING PRO-JECT TENANT REGISTER REPORT
GRAPHIC SHOWING PRO-JECT LEASE EXPIRATION REPORT
GRAPHIC SHOWING ENDS FULL DATA REPORT FOR PRIMARY AND TOTAL TRADE AREA
GRAPHIC SHOWING REGIONAL MALL SALES (1991-1993)
GRAPHIC SHOWING CUSHMAN & WAKEFIELD INVESTOR SURVEY
QUALIFICATIONS OF RICHARD W. LATELLA
Professional Affiliations
Member, American Institute of Real Estate Appraisers
(MAI Designation #8346)
New York State Certified General Real Estate Appraiser #46000003892
Pennsylvania State Certified General Real Estate Appraiser #GA-001053-R
State of Maryland Certified General Real Estate Appraiser #01462
Minnesota Certified General Real Estate Appraiser #20026517
Commonwealth of Virginia Certified General Real Estate Appraiser #4001-003348
State of Michigan Certified General Real Estate Appraiser #1201005216
New Jersey Real Estate Salesperson (License #NS-130101-A)
Certified Tax Assessor - State of New Jersey
Affiliate Member - International Council of Shopping Centers, ICSC
Real Estate Experience
Senior Director, Retail Valuation Group, Cushman & Wakefield
Valuation Advisory Services. Cushman & Wakefield is a national
full service real estate organization and a Rockefeller Group
Company. While Mr. Latella's experience has been in appraising a
full array of property types, his principal focus is in the
appraisal and counseling for major retail properties and
specialty centers on a national basis. As Senior Director of
Cushman & Wakefield's Retail Group his responsibilities include
the coordination of the firm's national group of appraisers who
specialize in the appraisal of regional malls, department stores
and other major retail property types. He has personally
appraised and consulted on in excess of 200 regional malls and
specialty retail properties across the country.
Senior Appraiser, Valuation Counselors, Princeton, New Jersey,
specializing in the appraisal of commercial and industrial real
estate, condemnation analyses and feasibility studies for both
corporate and institutional clients from July 1980 to April 1983.
Supervisor, State of New Jersey, Division of Taxation, Local
Property and Public Utility Branch in Trenton, New Jersey, as
sisting and advising local municipal and property tax assessors
throughout the state from June 1977 to July 1980.
Associate, Warren W. Orpen & Associates, Trenton, New Jersey,
assisting in the preparation of appraisals of residential prop
erty and condemnation analyses from July 1975 to April 1977.
Formal Education
Trenton State College, Trenton, New Jersey
Bachelor of Science, Business Administration - 1977
As of the date of this report, Richard W. Latella, MAI, has
completed the requirements under the continuing education program
of the Appraisal Institute.
QUALIFICATIONS OF BRIAN J. BOOTH
General Experience
Brian J. Booth joined Cushman & Wakefield Valuation Advisory
Services in 1995. Cushman & Wakefield is a national full service
real estate organization.
Mr. Booth previously worked for two years at C. Spencer
Powell & Associates in Portland, Oregon, where he was an
associate appraiser. He worked on the analysis and valuation of
numerous properties including, office buildings, apartments,
industrials, retail centers, vacant land, and special purpose
properties.
Academic Education
Bachelor of Science (BS) Willamette University (1993)
Major: Business-Economics Salem, Oregon
Study Overseas (Spring 1992) London University
London, England
Appraisal Education
110 Appraisal Principles Appraisal Institute 1993
120 Appraisal Procedures Appraisal Institute 1994
310 Income Capitalization Appraisal Institute 1994
320 General Applications Appraisal Institute 1994
410 Standards of Professional Practice A Appraisal Institute 1993
420 Standards of Professional Practice B Appraisal Institute 1993
Professional Affiliation
Candidate MAI, Appraisal Institute
QUALIFICATIONS OF JAY F. BOOTH
General Experience
Jay F. Booth joined Cushman & Wakefield Valuation Advisory
Services in August 1993. As an associate appraiser, Mr. Booth is
currently working with Cushman & Wakefield's Retail Valuation
Group, specializing in regional shopping malls and all types of
retail product. Cushman & Wakefield, Inc. is a national full
service real estate organization.
Mr. Booth previously worked at Appraisal Group, Inc. in
Portland, Oregon where he was an associate appraiser. At AGI, he
assisted in the valuation of numerous property types, including
office buildings, apartments, industrials, retail centers, vacant
land, and special purpose properties.
Academic Education
Master of Science in Real Estate (MSRE) -- New York University (1995)
Major: Real Estate Valuation & Analysis New York, New York
Bachelor of Science (BS) -- Willamette University (1991)
Majors: Business-Economics, Art Salem, Oregon
Study Overseas (Fall 1988) -- Xiamen University, Xiamen, China;
Kookmin University, Seoul, South Korea;
Tokyo International, Tokyo, Japan
Appraisal Education
As of the date of this report, Jay F. Booth has successfully
completed all of the continuing education requirements of the
Appraisal Institute.
Professional Affiliation
Certified General Appraiser, State of New York No. 46000026796
Candidate MAI, Appraisal Institute No. M930181
YAC, Young Advisory Council, Appraisal Institute
PARTIAL CLIENT LIST
VALUATION ADVISORY SERVICES
CUSHMAN & WAKEFIELD, INC.
NEW YORK
PROFESSIONALS ARE JUDGED BY THE CLIENTS THEY SERVE
VALUATION ADVISORY SERVICES enjoys a long record of service in a
confidential capacity to nationally prominent institutional and
corporate clients, investors, government agencies and many of the
nations largest law firms. Following is a partial list of
clients served by members of VALUATION ADVISORY SERVICES - NEW
YORK OFFICE.
Aetna
Air Products and Chemicals, Inc.
Aldrich, Eastman & Waltch, Inc.
Allegheny-Ludlam Industries
AMB Institutional Realty Advisors
America First Company
American Bakeries Company
American Brands, Inc.
American District Telegraph Company
American Express
American Home Products Corporation
American Savings Bank
Apple Bank
Apple South
Archdiocese of New York
Associated Transport
Atlantic Bank of New York
AT&T
Avatar Holdings Inc.
Avon Products, Inc.
Bachner, Tally, Polevoy, Misher & Brinberg
Baer, Marks, & Upham
Balcor Inc.
BancAmerica
Banca Commerciale Italiana
Banco de Brasil, N.A.
Banco Santander Puerto Rico
Banque Paribas
Baker & Mackenzie
Bank of America
Bank of Baltimore
Bank of China
Bank of Montreal
Bank of New York
Bank of Nova Scotia
Bank of Seoul
Bank of Tokyo Trust Company
Bank Leumi Le-Israel
Bankers Life and Casualty Company
Bankers Trust Company
Banque Indosuez
Barclays Bank International, Ltd.
Baruch College
Battery Park City Authority
Battle, Fowler, Esqs.
Bayerische Landesbank
Bear Stearns
Berkshire
Bertlesman Property, Inc.
Betawest Properties
Bethlehem Steel Corporation
Bloomingdale Properties
Borden, Inc.
Bowery Savings Bank
Bowest Corporation
Brandt Organization
Brooklyn Hospital
BRT Realty Trust
Burke and Burke, Esqs.
Burmah-Castrol
Cadillac Fairview
Cadwalader, Wickersham & Taft
Caisse National DeCredit
Campeau Corporation
Campustar
Canadian Imperial Bank of Commerce
Canyon Ranch
Capital Bank
Capital Cities-ABC, Inc.
Care Incorporated
Carter, Ledyard & Milburn
Chase Manhattan Bank, N.A.
Chemical Bank Corporation
Chrysler Corporation
C. Itoh & Company
Citibank, NA
Citicorp Real Estate
City University of New York
Clayton, Williams & Sherwood
Coca Cola, Inc.
Cohen Brothers
College of Pharmaceutical Sciences
Collegiate Church Corporation
Columbia University
Commonwealth of Pennsylvania
Consolidated Asset Recovery Company
Consolidated Edison Company of New York, Inc.
Continental Realty Credit, Inc.
Copley Real Estate Advisors
Corning Glass Works
Coudert Brothers
Covenant House
Cozen and O'Connor
Credit Agricole
Credit Lyonnais
Credit Suisse
Crivello Properties
CrossLand Savings Bank
CSX
Dai-Ichi Kangyo Bank
Dai-Ichi Sempei Life Insurance
Daily News, Inc.
Daiwa Securities
Dart Group Corporation
David Beardon & Company
Davidoff & Malito, Esqs
Dean Witter Realty
Debevoise & Plimpton
DeMatteis Organization
Den Norske Bank
Deutsche Bank
DiLorenzo Organization
Dime Savings Bank
Dodge Trucks, Inc.
Dollar/Dry Dock Savings Bank
Donovan, Leisure, Newton & Irvine
Dreyer & Traub
Dun and Bradstreet, Inc.
Eastdil Realty Advisors
East New York Savings Bank
East River Savings Bank
East Rutherford Industrial Park
Eastman Kodak Company
Eaton Corporation
Eichner Properties, Inc.
Ellenburg Capital Corporation
Emigrant Savings Bank
Empire Mutual Insurance Company
Endowment Realty Investors
Enzo Biochem, Inc.
Equitable Life Assurance Society of America
Equitable Real Estate
European American Bank
F.S. Partners
Famolare, Inc.
Farwest Savings & Loan Association
Federal Asset Disposition Authority
Federal Deposit Insurance Company
Federal Express Corporation
Federated Department Stores, Inc.
Feldman Organization
Fidelity Bond & Mortgage Company
Findlandia Center
First Bank
First Boston
First Chicago
First National Bank of Chicago
First Nationwide Bank
First New York Bank for Business
First Tier Bank
First Winthrop
Fisher Brothers
Fleet Bank
Flying J, Inc.
Foley and Lardner, Esqs.
Ford Bacon and Davis, Inc.
Ford Foundation
Ford Motor Company
Forest City Enterprises
Forest City Ratner
Forum Group, Inc.
Franchise Finance Corporation of America
Fried, Frank, Harris, Shriver & Jacobson
Friendly's Ice Cream Corporation
Fruehauf Trailer Corporation
Fuji Bank
Fulbright & Jaworski
G.E. Capital Corporation
General Electric Credit Corporation
General Motors Corporation
Gerald D. Hines Organization
Gibson Dunn and Crutcher
Gilman Paper
Gladstone Equities
Glimcher Company
Glynwed, Ltd.
Goldman, Sachs & Co.
Greater New York Savings Bank
Greycoat Real Estate Corp.
Greyhound Lines Inc.
Grid Properties
GTE Realty
Gulf Coast Restaurants
Gulf Oil
HDC
HRO International
Hammerson Properties
Hanover Joint Ventures, Inc.
Hartz Mountain Industries
Hawaiian Trust Company, Ltd.
Hertz Corporation
Home Federal
Home Savings of America
HongKong & Shanghai Banking Corporation
Horn & Hardart
Huntington National Bank
Hypo Bank
IDC Corporation
Ideal Corporation
ING Corporation
Integon Insurance
International Business Machines Corporation
International Business Machines Pension Fund
International Telephone and Telegraph Corporation
Investors Diversified Services, Inc.
Iona College
Irish Intercontinental Bank
Irish Life Assurance
Israel Taub
Isetan of America, Inc.
J & W Seligman & Company, Inc.
JMB Realty
J. B. Brown and Sons
J. C. Penney Company, Inc.
J. P. Morgan
Jamaica Hospital
James Wolfenson & Company
Jerome Greene, Esq.
Jewish Board of Family & Children's Services
Jones Lang Wootton
K-Mart Corporation
Kelly, Drye and Warren, Esqs.
Kennedy Associates
Key Bank of New York
Kerr-McGee Corporation
Kidder Peabody Realty Corp.
Kitano Arms Corporation
Knickerbocker Realty
Koeppel & Koeppel
Kronish, Lieb, Weiner & Hellman
Krupp Realty
Kutak, Rock and Campbell, Esqs.
Ladenburg, Thalman & Co.
Lans, Feinberg and Cohen, Esqs.
Lands Division, Department of Justice
Lazard Freres
LeBoeuf, Lamb, Greene & MacRae
Lefrak Organization
Lehman Brothers
Lennar Partners
Lepercq Capital Corporation
Lexington Corporate Properties
Lexington Hotel Corporation
Lincoln Savings Bank
Lion Advisors
Lomas & Nettleton Investors
London & Leeds
Long Term Credit Bank of Japan, Ltd.
Lutheran Church of America
Lynton, PLC
Macluan Capital Corporation
Macy's
MacAndrews and Forbes
Mahony Troast Construction Company
Manhattan Capital Partners
Manhattan College
Manhattan Life Insurance
Manhattan Real Estate Company
Manufacturers Hanover Trust Company
Marine Midland Bank
Mason Tenders
Massachusetts Mutual Life Insurance Company
May Centers, Inc.
Mayer, Brown, Platt
McDonald's Corporation
McGinn, Smith and Company
McGrath Services Corporation
MCI Telecommunications
Mellon Bank
Memorial Sloan-Kettering Cancer Center
Mendik Company
Mercedes-Benz of North America
Meridian Bank
Meritor Savings Bank
Merrill Lynch Hubbard
Merchants Bank
Metropolis Group
Metropolitan Life Insurance Company
Metropolitan Petroleum Corporation
Meyers Brothers Parking System Inc.
Michigan National Corp.
Milbank, Tweed
Millennium Partners
Miller, Montgomery, Sogi and Brady, Esqs.
Mitsui Fudosan - New York Inc.
Mitsui Leasing, USA
Mitsubishi Bank
Mitsubishi Trust & Banking Corporation
Mobil Oil Corporation
Moody's Investors Service
Moran Towing Corporation
Morgan Guaranty
Morgan Hotel Group
Morse Shoe, Inc.
Moses & Singer
Mountain Manor Inn
Mudge Rose Guthrie Alexander & Ferdon, Esqs.
Mutual Benefit Life
Mutual Insurance Company of New York
National Audubon Society, Inc.
National Bank of Kuwait
National Can Company
National CSS
National Westminster Bank, Ltd.
Nelson Freightways
Nestle's Inc.
New York Bus Company
New York City Division of Real Property
New York City Economic Development Corporation
New York City Housing Development Authority
New York City School Construction Authority
New York Life Insurance Company
New York State Common Fund
New York State Employee Retirement System
New York State Parks Department
New York State Teachers
New York State Urban Development Corporation
New York Telephone Company
New York Urban Servicing Company
New York Waterfront
Niagara Asset Corporation
Nippon Credit Bank, Inc.
Nomura Securities
Norcross, Inc.
North Carolina Department of Insurance
NYNEX Properties Company
Olympia and York, Inc.
Orient Overseas Associates
Orix USA Corporation
Otis Elevator Company
Owens-Illinois Corporation
PaineWebber, Inc.
Pan American World Airways, Inc.
Paul, Weiss, Rifkind
Park Tower Associates
Parke-Davis and Company
Paul Weiss Rifkind, Esqs.
Penn Central Corporation
Penn Mutual Life Insurance Company
Pennsylvania Retirement Fund
Penthouse International
Pepsi-Cola Company
Peter Sharp & Company
Petro Stopping Center
Pfizer International, Inc.
Philip Morris Companies, Inc.
Philips International
Phoenix Home Life
Pittston Company
Polyclinic Medical School and Hospital
Port Authority of New York and New Jersey
Postel Investment Management
Prentiss Properties Realty Advisors
Procida Organization
Proskauer Rose Goetz and Mandelsohn, Esqs.
Provident Bank
Prudential Securities
Pyramid Company
Rabobank Nederland
Ratner Group
RCA Corporation
Real Estate Recovery
Realty Income Corporation
Remson Partners
Republic Venezuela Comptrollers Office
Revlon, Inc.
Rice University
Richard Ellis
Richards & O'Neil
Ritz Towers Hotel Corporation
River Bank America
Robert Bosch Corporation
Robinson Silverman Pearce Aron
Rockefeller Center, Inc.
Rockefeller Center Properties
Roman Catholic Diocese of Brooklyn
Roosevelt Hospital
Rosenman & Colin
Royal Bank of Scotland
RREEF
Rudin Management Co., Inc.
Saint Vincent's Medical Center of New York
Saks Fifth Avenue
Salomon Brothers Inc.
Salvation Army
Sanwa Bank
SaraKreek USA
Saxon Paper Corporation
Schroder Real Estate Associates
Schulman Realty Group
Schulte, Roth & Zabel
BDO Seidman
Seaman Furniture Company, Inc.
Security Pacific Bank
Semperit of America
Sentinel Realty Advisors
Service America Corp.
Shea & Gould, Esqs.
Shearman and Sterling, Esqs.
Shearson Lehman American Express
Shidler Group
Sidley & Austin
Silver Screen Management, Inc.
Silverstein Properties, Inc.
Simpson, Thacher and Bartlett, Esqs.
Skadden, Arps, Slate, Meagher & Flom
Smith Barney
Smith Corona Corporation
Sol Goldman
Solomon Equities
Sonnenblick-Goldman
Southtrust Bank of Alabama
Spitzer & Feldman, PC
Stahl Real Estate
Standard & Poors
State Teachers Retirement System of New York
State Teachers Retirement System of Ohio
Stauffer Chemical Corporation
Stephens College
Sterling Drug, Inc.
Stroheim and Roman, Inc.
Stroock and Stroock and Lavan, Esqs.
Sullivan and Cromwell, Esqs.
Sumitomo Life Realty
Sumitomo Mutual Life Insurance Company
Sumitomo Trust Bank
Sun Oil Company
Sutherland, Asbill & Brennan
Swiss Bank Corporation
Tenzer Greenblat, Esqs.
Textron Financial
Thatcher, Proffitt, Wood
The Shopco Group
Thomson Information/Publishing
Thurcon Properties, Ltd.
Tobishima Associates
Tokyo Trust & Banking Corporation
Transworld Equities
Travelers Realty, Inc.
Triangle Industries
TriNet Corporation
UBS Securities Inc.
UMB Bank & Trust Company
Unibank
Union Bank of Switzerland
Union Carbide Corporation
Union Chelsea National Bank
United Bank of Kuwait
United Fire Fighters of New York
United Parcel Service
United Refrigerated
United States District Court, Southern District of New York
United States Life Insurance
United States Postal Service
United States Trust Company
Upward Fund, Inc.
US Cable Corp.
Vanity Fair Corporation
Verex Assurance, Inc.
Victor Palmieri and Company, Inc.
Village Bank
Vornado Realty Trust
W.P. Carey & Company, Inc.
Wachtell, Lipton, Rosen & Katz, Esqs.
Waterfront New York Realty Corporation
Weil, Gotshal & Manges
Weiss, Peck & Greer
Wells Fargo & Co.
Westpac Banking Corporation
Western Electric Company
Western Union International
Westinghouse Electric Corporation
White & Case
Wilkie Farr and Gallagher, Esqs.
William Kaufman Organization
Windels, Marx, Davies & Ives
Winthrop Financial Associates
Winthrop Simston Putnam & Roberts
Witco Corporation
Wurlitzer Company
Yarmouth Group
