UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] 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
Attn: Andre Anderson
3 World Financial Center, New York,
New York 29th Floor 10285-2900
Address of principal executive offices Zip Code
Registrant's telephone number, including area code: (212) 526-3237
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
DEPOSITARY UNITS OF LIMITED PARTNERSHIP INTEREST
Title of Class
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 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. (x)
Aggregate market value of voting stock held by non-affiliates of the
Registrant: Not applicable
Documents Incorporated by Reference: See Exhibit Index in Part IV to this
Form 10-K.
PART I
Item 1. Business
(a) General Development of Business
Eastpoint Mall Limited Partnership (the "Partnership"), a Delaware limited
partnership, was formed on June 26, 1985. The affairs of the Partnership
are conducted by Eastern Avenue Inc. (the "General Partner," formerly
Shearson Lehman Eastern Avenue Inc.), a Delaware corporation and affiliate
of Lehman Brothers Inc. ("Lehman"). The Partnership was formed to acquire
a general partnership interest in Bellwether Properties, L.P., a New York
limited partnership, from Corporate Property Investors, the sole asset of
which is Eastpoint Mall (the "Mall") located in Baltimore County, Maryland.
Concurrent with the acquisition, Bellwether Properties, L.P. was
reconstituted under the name of Eastpoint Partners L.P. (the "Owner
Partnership"), and the Partnership became the managing general partner of
the Owner Partnership. The Owner Partnership consists of the Partnership
which holds a 90.9% interest in the Owner Partnership, the General Partner
which holds a .1% interest and SFN Limited Partnership ("SFN"), a Maryland
limited partnership which is an affiliate of The Shopco Company which holds
a 9% interest in the Mall (collectively the "Owner Partners"). Shopco
Management Corp. has been retained by the Owner Partnership as managing and
leasing agent for the Mall.
On November 22, 1985, the Partnership commenced investment operations with
the acceptance of subscriptions of 4,575 limited partnership units, the
maximum authorized by the limited partnership agreement ("Limited
Partnership Agreement"). Upon the admittance of the additional limited
partners, the initial limited partner withdrew from the Partnership.
On November 29, 1985, the Owner Partnership acquired the Mall by purchasing
all of the general partnership interests in Bellwether Properties, L.P.,
for a purchase price of $28,634,598.
In December 1989, the Partnership obtained first mortgage financing (the
"First Mortgage Note") in the maximum amount of $50,000,000 secured by the
Mall to: (1) repay the existing indebtedness of the Owner Partnership, (ii)
make certain capital improvements to the Mall, including the construction
of a Sears department store and the acquisition of the underlying real
estate, the creation of additional Mall shops in the area previously
occupied by Hutzler's, a former anchor tenant, and an overall renovation of
the Mall, and (iii) make a cash distribution to each limited partner on
February 1, 1990 of $2,500 for each $5,000 interest owned. The renovation
of the Mall and construction of the Sears store were completed during 1991.
The First Mortgage Note was scheduled to mature on December 28, 1994. In
December 1993, the Partnership obtained new first mortgage financing in the
amount of $51,000,000 from CBA Associates, Inc., an entity which placed the
new mortgage into a pool of mortgages to be held by a Real Estate Mortgage
Investment Conduit (the "REMIC Lender"). For the terms of the new
financing, see Note 5 to the Notes to the Consolidated Financial
Statements.
The Partnership intends to begin marketing the Mall for sale in 1997;
however, it is not certain whether appropriate offers will be received. At
such time as the Mall is sold and all obligations are fulfilled, the
Partnership will wind up its affairs and be dissolved. The exact timing of
these events is dependent on the success of the sale effort.
(b) Financial Information About Industry Segments
All of the Partnership's revenues, operating profit or loss and assets
relate solely to its interest as the general partner of the Owner
Partnership. All of the Owner Partnership's revenues, operating profit or
losses and assets relate solely to its ownership interest in and operation
of the Mall.
(c) Narrative Description of Business
The Partnership's sole business is acting as the managing general partner
of the Owner Partnership. The Owner Partnership's sole business is the
ownership and operation of the Mall. See Item 2 for a description of the
Mall and its operations. The Partnership's investment objectives are to:
(i) provide cash distributions from operations of the Mall;
(ii) achieve long-term appreciation in the value of the Mall; and
(iii) preserve and protect Partnership capital and the Owner
Partnership capital.
There is no guarantee that the Partnership's objectives will be achieved.
The Mall is managed on a day-to-day basis by Shopco Management Corp., a New
York corporation (the "Property Manager"). The Property Manager is
responsible for rent collection, leasing and day-to-day on-site management
of the Mall. The Owner Partnership has the right to terminate the Property
Manager, without cause, at any time during the term of the Property
Management and Leasing Agreement. The Property Manager receives 4.5% per
annum of all fixed rents, minimum rents, and percentage rents (as such
terms are defined in the respective leases) collected from operations of
the Mall for providing property management and leasing services. In the
event that the Property Manager ceases to act as management and leasing
agent of the Mall, SFN's limited partnership interest in the income,
profits, and cash distributions of the Owner Partnership will be reduced to
7% from 9%. For the years ended December 31, 1996, 1995, and 1994, the
management fee earned by the Property Manager amounted to $368,435,
$349,166 and $389,631, respectively. Please refer to Note 7 to the Notes
to the Consolidated Financial Statements for additional discussion
regarding the Partnership's management agreement with the Property Manager.
The Owner Partnership's business, as owner and operator of the Mall, is
seasonal since a portion of its revenue is derived from a percentage of the
retail sales of certain tenants at the Mall. Generally such sales are
higher in November and December during the holiday season.
Employees
The Partnership has no employees. The affairs of the Partnership are
conducted by the General Partner. See Item 11 and Item 13 for a discussion
of the management of the Partnership.
Item 2. Properties
Eastpoint Mall is an enclosed regional shopping center located on
approximately 67.1 acres in Baltimore County, Maryland, approximately one
mile east of the city limits of Baltimore. The Mall consists of a central
enclosed mall anchored by four major department stores - J.C. Penney, Inc.
("J.C. Penney"), Schottenstein Stores Corporation, doing business as Value
City ("Value City"), Sears, Roebuck, and Co. ("Sears") and Ames Department
Stores, Inc. ("Ames"). The retail space in the Mall is contained on one
level; J.C. Penney and Value City are multi-level and there are five
freestanding buildings. Office and storage areas are contained in the
lower level of existing mall space, and in the lower and upper floor levels
of the expansion mall space. Parking is provided for over 4,500 cars.
The Mall currently has gross leasable space totaling 864,993 square feet.
Of this leasable space, 637,582 is owned by the Owner Partnership and
227,411 square feet of gross leasable space area is owned by the tenants
who have leased portions of land pursuant to ground leases with the Owner
Partnership. Upon expiration of such ground leases, ownership of the
buildings thereon will revert to the Owner Partnership.
On December 28, 1989, the Partnership purchased 5.1 acres of land adjacent
to the Mall for a contract sales price of $640,125 on which a one-story,
79,000 square foot Sears department store and an 8,734 square foot
automotive center were constructed. The Sears department store and
automotive center, located adjacent to the new food court, opened in
October 1991. As described below, the Partnership owns the store and
leases it to Sears, which serves as a replacement anchor tenant for
Hutzler's, which vacated the Mall on January 22, 1990, after expiration of
its lease on July 31, 1989. The space previously occupied by Hutzler's was
converted into new mall shops, a food court and seating area, and office
space. The construction of the new space was completed in 1991, as was a
renovation program at the Mall which replaced skylights and floors and
refurbished Mall common areas.
On November 8, 1996, the Owner Partnership purchased for $975,000 the
leasehold interest in a vacant, free-standing, 17,340 square foot building
and the underlying land located adjacent to the J.C. Penney anchor tenant
at the Mall from J.C. Penney Company, Inc. The acquisition of the leasehold
interest in this parcel allows for expansion of the center or the addition
of parking by the Partnership or a subsequent owner.
The total building area of the Mall is allocated as shown in the table
below.
Percent of
Square Feet Total Area
Anchors:
J.C. Penney 151,629 17%
Value City 140,000 16
Sears 87,734 10
Ames 58,442 7
Specialty Retailers(1) 362,028 42
Atrium and Office Space 65,160 8
Total 864,993 100%
(1) Includes outparcel stores and outdoor tenants.
Anchor Tenants
J.C. Penney leases a parcel of land pursuant to a ground lease on which it
has constructed the largest of the Mall's four anchor stores containing an
aggregate of approximately 151,629 square feet of building area, or 17% of
the gross leasable building area of the Mall. On November 8, 1996, the
Owner Partnership purchased the leasehold interest in a vacant, free-
standing, 17,340 square foot building and the underlying land located
adjacent to the J.C. Penney anchor tenant from J.C. Penney Company, Inc.
Ownership of the anchor store, currently owned and occupied by J.C. Penney,
will revert to the Owner Partnership upon the expiration of the ground
lease. The initial term of the J.C. Penney ground lease expires on
August 31, 2001. Two 5-year renewal options, two 10-year renewal options,
and two 5-year renewal options are available on the same terms and
conditions. The minimum rent payable thereunder is $1,219 annually plus a
percentage rent of .5% of gross sales.
The ground lease with J.C. Penney provides that J.C. Penney does not have
to operate if (i) at least 250,000 square feet of the total retail space of
the Mall, including the space occupied by Value City, the space previously
occupied by Hutzler's and certain other space, is not being used for retail
use, or (ii) neither Schottenstein Stores Corporation (or any successor)
nor Hutzler's (or any successor) are operating retail department stores in
their premises. If at any time, J.C. Penney discontinues the use of its
anchor store as a retail department store and assigns its lease or sublets
the premises within a certain period of time, the Owner Partnership, as
landlord, has the right to purchase the lease at fair market value.
Value City, the second largest anchor store, leases approximately 140,000
square feet, or 16% of the gross leasable building area of the Mall, and is
located at the western end of the Mall. The initial term of the Value City
lease was scheduled to expire on November 30, 1999. On September 14, 1995,
the expiration date of the lease was extended until November 30, 2009. A
10-year renewal option is available on the same terms and conditions. Per
the terms of the September 14, 1995 amendment to the lease, the minimum
rent payable thereunder was increased from $220,000 to $585,000 per annum,
with increases based on the following increments in annual sales: 3 1/2%
of the first 4.2 million in sales; 3 1/4% of sales in excess of $4.2
million but not in excess of $7 million; 3% of sales in excess of $7
million but not exceeding $8.4 million, and 2 1/2% of sales in excess of
$8.4 million.
Ames (previously G.C. Murphy) leases a parcel of land pursuant to a ground
lease on which it has constructed a building containing approximately
58,442 square feet of building area, or 7% of the gross leasable building
area of the Mall. The initial term of the Ames ground lease expires on May
30, 2004. One 10-year renewal option is available on the same terms and
conditions. Ownership of the building now owned and occupied by Ames will
revert to the Owner Partnership upon the expiration of the ground lease.
The minimum rent payable under the Ames ground lease is $204,000 annually
with a percentage rent of .5% of gross sales above the breakpoint of
$4,800,000 until January 31, 1999. Commencing on February 1, 1999, minimum
rent payable will increase to $257,000 per annum. In the event that Ames
exercises its renewal option, the minimum rent payable is $257,000 per year
with a percentage rent of .5% of gross sales above the breakpoint of
$6,000,000. Ames is not required to operate if (i) less than 150,000
square feet in the Mall is used for retail use, or (ii) any two of Value
City, Hutzler's or J.C. Penney (or any successor) cease operations as an
anchor store in the Mall.
On April 26, 1990, Ames filed for bankruptcy protection under Chapter 11 of
the Federal Bankruptcy Code. By filing its bankruptcy petition, Ames was
in default under the deed of trust held by Consolidated Fidelity Life
Insurance Company ("Consolidated") and secured by the Ames parcel. In July
1994, the Partnership entered into a settlement agreement with Consolidated
regarding the Ames parcel. At December 31, 1996, total payments received
from Ames were $1,009,458 of which approximately $222,000, is payable to
Consolidated. Please refer to Item 3, Item 7 and Note 3 to the Notes to
the Consolidated Financial Statements for a description of the Ames
bankruptcy and the Release Agreement negotiated by the Partnership and
Consolidated.
Sears leases approximately 79,000 square feet of gross leasable area in a
new anchor store opened in October 1991, together with a freestanding
store, containing an aggregate of approximately 87,734 square feet of
building area or 10% of the gross leasable building area of the Mall. The
initial term of the lease expires on October 16, 2006. The tenant has the
right to extend the lease term for seven additional periods of five years
each under the same terms, by providing the landlord written notice no less
than twelve months prior to the end of the lease term. Rent is based on a
percentage of net sales, with the tenant paying a sum equal to 1.75% of net
sales in excess of $1 but less than $16,000,000 and a sum equal to 1.5% of
net sales that exceed $16,000,000.
The lease with Sears provides that Sears does not have to operate if (i)
less than 60% of the gross leasable area of the Mall (excluding anchor
stores) is not operating and (ii) at least two of the anchor stores are not
operating. If such events occurred, the landlord has twelve months in
which to remedy any condition which would enable Sears to terminate the
lease agreement.
Mall, Outparcel Tenants and Atrium Space
During 1996, 14 leases totaling 20,245 square feet of space were executed
with new and existing tenants. Due to the sluggish commercial real estate
market in eastern Baltimore County, the leasing of additional Atrium office
space is anticipated to be a lengthy and capital intensive process. Costs
associated with maintaining the space consist primarily of utility expenses
which are included in property operating expenses. These costs, as well as
costs associated with marketing the space for lease, are funded from the
Partnership's cash flow and cash reserves.
Staples leases an outparcel store with 36,000 square feet of building area
or 4.2% of the gross leasable building area of the Mall. The primary lease
term runs through the year 2004, plus two lease renewal options for five
years each. The fixed minimum rent during the primary term begins at $7.50
per square foot and escalates throughout the term of the lease reaching
$8.25 per square foot for years eleven through fifteen, subject to certain
cost-of-living adjustments.
During 1996, the retail industry, particularly apparel merchants and other
mall-based retail chains, continued to suffer from changes in shoppers'
buying patterns which have primarily benefited discount retailers and
superstores. The continuing difficulties in the retail industry are
evidenced by the increasing number of bankruptcy filings by many companies.
As of the date for which this report is filed, 4 tenants, or their parent
corporations, at the Mall have filed for protection under the U.S. Federal
Bankruptcy Code. These tenants currently occupy approximately 3% of the
Mall's leasable area (exclusive of anchor tenants), and at this point their
plans to remain at the Mall remain uncertain. Please refer to Item 7 for a
listing of Mall tenants which have filed for bankruptcy protection.
Competition
Eastpoint Mall is the only regional shopping center located within a 3 mile
radius (the primary geographical area from which the Mall derives its
repeat sales and regular customers). However, two shopping centers are
directly competitive with the Mall. Golden Ring Mall, located slightly
over three miles northeast of Eastpoint Mall, represents its principal
competition. Golden Ring Mall is a two-story center containing
approximately 737,000 square feet of gross leasable area. Golden Ring has
three anchor tenants, Hecht's, Caldor and Montgomery Ward, as well as
approximately 80 smaller mall stores. Golden Ring completed a cosmetic
renovation of both the interior and exterior of the center during 1992.
White Marsh Mall is located approximately six miles north of the Mall and
contains approximately 1,105,000 square feet of gross leasable space on two
levels. Anchor stores include Macy's, J.C. Penney and Sears. There is an
empty anchor space in the former site of Woodward & Lothrup. Ikea, a
furniture store, is located on an outparcel site at the mall. White Marsh
contains approximately 180 stores.
Temporary Tenants
A formal temporary tenant program was instituted in November 1992 in which
kiosks and vacant spaces are used as temporary retail locations. The
program generated revenues of $397,921 in 1996. The temporary tenant
program is managed by Shopco Management Corp., the Mall's property manager.
Item 3. Legal Proceedings
Land leased to Ames by the Owner Partnership, together with the building
constructed thereon by Ames, secured a deed of trust (the "Deed of Trust")
held by Consolidated. In 1990, Ames filed for bankruptcy protection under
Chapter 11 of the Federal Bankruptcy Code, thereby defaulting on the Deed
of Trust. On December 18, 1992, the Bankruptcy Court confirmed a Plan of
Reorganization for Ames (the "Plan") and the Plan was subsequently
consummated. Pursuant to the Plan, Ames assumed the lease of its store at
the Mall and continues its operations there.
In July 1994, the Partnership executed a Compromise and Mutual Release (the
"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 (the "Claim"), of which approximately $1,530,142 is
for amounts due under the Ames promissory note, and requiring Ames to make
a payment of $10,000 to the Owner Partnership. An Agreed Order approving
the settlement was entered by the Bankruptcy Court on May 1, 1996. Ames'
$10,000 payment to the Owner Partnership was received on June 4, 1996. On
August 7, 1996 and September 23, 1996, payments on the claim were received
by the Owner Partnership from Ames in the amounts of $887,520 and $111,938,
respectively. At December 31, 1996, the total payments received by the
Owner Partnership from Ames were $1,009,458, of which approximately
$222,000, is payable to Consolidated and is reflected in accounts payable
and accrued expenses on the Partnership's December 31, 1996 consolidated
balance sheet. It is uncertain at this time if there will be any
additional payments from Ames to the Owner Partnership.
On August 21, 1996, the Owner Partnership retired the Ames promissory note
secured by the Deed of Trust.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of the Unit Holders during the fourth
quarter of the year for which this report has been filed.
PART II
Item 5. Market for the Partnership's Limited Partnership Units and Related
Security Holder Matters
(a) Market Price Information
There is no established trading market for the Units of the Partnership.
The Partnership had 4,575 Units outstanding at December 31, 1996.
(b) Holders
There were 1,691 Limited Partners as of December 31, 1996.
(c) Distributions of Cash
Since inception, Limited Partners have received cumulative distributions of
$6,154.52 per Unit, including a $2,500 return of capital in 1990.
For the years ended December 31, 1996 and 1995, the Partnership paid
quarterly cash distributions of $62.50 per Unit per quarter. In addition
the Partnership paid special cash distributions of $218.50 per Unit on
June 7, 1995 and $546.25 per Unit on April 4, 1996. Both of these special
cash distributions were paid from excess cash reserves. The level, timing
and amount of future distributions, including special distributions, will
be reviewed at a minimum on a quarterly basis after an evaluation of the
Mall's performance and the Partnership's current and future cash needs. No
assurances can be made regarding the size or continuance of future
distributions.
Quarterly Cash Distributions Per Limited Partnership Unit
1996 (a) 1995 (a)
First Quarter $ 62.50 $ 62.50
Second Quarter 608.75 (b) 281.00 (c)
Third Quarter 62.50 62.50
Fourth Quarter 62.50 62.50
TOTAL $ 796.25 $ 468.50
(a) Distribution amounts are reflected in the period for which they are
declared. The record date is the last day of each month of the
respective quarter and the actual cash distributions are paid
approximately 45 days after the record date.
(b) Includes the $546.25 per Unit special cash distribution paid on
April 4, 1996.
(c) Includes the $218.50 per Unit special cash distribution paid on
June 7, 1995.
Item 6. Selected Financial Data
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related Notes
appearing elsewhere in this Form 10-K.
(in thousands except per Unit data) As of and for the years ended
December 31,
1996 1995 1994 1993 1992
Total Rental and
Percentage Rent
Income $ 8,327 $ 8,104 $ 7,907 $ 7,404 $ 6,424
Escalation Income 3,706 3,585 3,143 3,049 2,898
Interest Income 341 406 265 80 25
Miscellaneous Income 170 113 150 210 73
Total Income 12,543 12,209 11,465 10,743 9,420
Net Income(Loss) 1,944 1,934 915 (658) (372)
Net Income(Loss)
per Unit (a) 420.62 418.44 198.00 (142.30) (80.40)
Cash Distributions
per Unit (a)(b) 796.25(c) 468.50(d) 187.50 -- --
Total Assets 53,306 55,367 55,625 56,458 49,689
Long-term Obligations 51,000 51,000 51,000 51,000 44,650
(a) There are 4,575 Units outstanding.
(b) Distribution amounts are reflected in the period for which they are
declared. Actual cash distributions are paid subsequent to such
periods.
(c) Includes a $ 546.25 per Unit special distribution paid on April 4,
1996.
(d) Includes a $ 218.50 per Unit special distribution paid on June 7,
1995.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
At December 31, 1996, the Partnership had cash and cash equivalents of
$6,362,256, relatively unchanged in comparison to $6,254,501 at
December 31, 1995. Restricted cash, which represents a loan reserve
established under the terms of the Partnership's first mortgage loan,
decreased from $2,100,000 at December 31, 1995 to $1,000,000 at
December 31, 1996 due to the release to the Partnership of $1.1 million of
the proceeds of its first mortgage loan which was withheld pending
resolution of the 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 $535,313 at December 31, 1996
compared to $443,811 at December 31, 1995. The increase is primarily
attributable to fundings made to the real estate tax and insurance escrows
as specified under the terms of the Partnership's first mortgage loan
exceeding payments made for real estate taxes and insurance premiums.
Accounts receivable increased from $638,436 at December 31, 1995 to
$836,705 at December 31, 1996 primarily due to an increase in recoverable
common area maintenance expenses and rent from temporary tenants.
Accrued interest receivable increased from $224,567 at December 31, 1995 to
$346,091 at December 31, 1996 reflecting interest earned in 1996 on the
loan reserve which is reflected as restricted cash on the Partnership's
consolidated balance sheets at December 31, 1996 and 1995.
Note receivable decreased from $738,000 at December 31, 1995 to $0 at
December 31, 1996 reflecting receipt from the Ames Trustee of payments on
the Ames Bankruptcy Claim. Please refer to "Ames Parcel and Consolidated
Release Agreement" below.
The increase in accounts payable and accrued expenses is attributable to
the receipt from the Ames trustee of payment of that part of the Ames
Bankruptcy Claim which is payable to Consolidated. Please refer to "Ames
Parcel and Consolidated Release Agreement" below.
Accrued interest payable decreased from $340,425 at December 31, 1995 to $0
at December 31, 1996 due to the payment of debt service due in December
1996 prior to December 31, 1996. The debt service payment due on
December 31, 1995 was paid on January 1, 1996.
As of the filing date of this report, the following current tenants at the
Mall, or their parent corporations, have filed for protection under the
U.S. Bankruptcy Code:
Tenant Square Footage Leased
Marianne 3,750
Marianne Plus 3,000
Jeans West 2,400
Rave 2,000
As of December 31, 1996, these tenants occupied 11,150 square feet, or
approximately 3% 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.
The Partnership intends to begin marketing the Mall for sale in 1997;
however, it is not certain whether appropriate offers will be received. At
such time as the Mall is sold and all obligations are fulfilled, the
Partnership will wind up its affairs and be dissolved. The exact timing of
these events is dependent on the success of the sale effort.
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 the Plan pursuant to which Ames 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 (the "Release Agreement"). 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 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
approximately $1,530,142 is for amounts due under the Ames promissory note,
and requiring Ames to make a payment of $10,000 to the Owner Partnership.
An Agreed Order approving the settlement was entered by the Bankruptcy
Court on May 1, 1996. Ames' $10,000 payment to the Owner Partnership was
received on June 4, 1996. On August 7, 1996 and September 23, 1996,
additional payments were received from Ames in the amounts of $887,520 and
$111,938, respectively. At December 31, 1996, the total payments received
from Ames were $1,009,458, of which $222,081 is payable to Consolidated and
is reflected in accounts payable and accrued expenses on the Partnership's
balance sheet. It is uncertain at this time if there will be any
additional payments to the Owner Partnership.
The Partnership's mortgage lender withheld certain of the proceeds of the
first mortgage loan until the Partnership resolved the Consolidated
dispute. These funds, which totaled $1.1 million, were released to the
Partnership in December 1996 following the extinguishment of the first
mortgage secured by the Ames parcel.
Leasehold Purchase
On November 8, 1996, the Owner Partnership purchased for $975,000 the
leasehold interest in a vacant, free-standing building and the underlying
land located adjacent to the J.C. Penney anchor tenant at the Mall from
J.C. Penney Company, Inc. The acquisition of the leasehold interest in
this parcel allows for expansion of the center or the addition of parking.
Cash Distributions
A regular cash distribution for the fourth quarter of 1996, in the amount
of $62.50 per Unit, was paid on February 10, 1997. 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.
On February 16, 1996, based upon, among other things, the advice of legal
counsel, 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.
Results of Operations
1996 versus 1995
Net cash flow from operating activities totaled $3,596,613 in 1996,
relatively unchanged in comparison to $3,732,467 in 1995. For the year
ended December 31, 1996, the Partnership recognized net income of
$1,943,774, also relatively unchanged in comparison to $1,933,722 for the
year ended December 31, 1995.
Rental income increased from $6,894,097 for the year ended
December 31, 1995 to $7,306,819 for the year ended December 31, 1996
primarily due to higher base rent billings resulting from a lease amendment
with anchor tenant Value City, whereby Value City's base rent payments are
increased and percentage rent payments are decreased, and the addition of
new tenants during 1996.
Percentage rental income decreased from $1,209,752 for the year ended
December 31, 1995 to $1,019,783 for the year ended December 31, 1996
primarily due to the lease amendment with anchor tenant Value City
mentioned above.
Interest income decreased from $406,292 for the year ended
December 31, 1995 to $340,504 for the year ended December 31, 1996
primarily due to a decrease in cash balances maintained by the Partnership
as well as lower interest rates.
Property operating expenses increased from $3,160,271 at December 31, 1995
to $3,502,731 at December 31, 1996 primarily due to higher costs for snow
removal and roof repairs and to increased bad debt expense related to the
tenants that have filed for bankruptcy protection.
Total Mall tenant sales (exclusive of anchor tenants) were $74,747,000 for
the year ended December 31, 1996, improved from $70,794,000 for the year
ended December 31, 1995. Sales for tenants (exclusive of anchor tenants)
which operated at the Mall for each of the last two years were $66,048,000
and $66,171,000 for the years ended December 31, 1996 and 1995,
respectively. As of December 31, 1996, the Mall was 92.6% occupied,
excluding anchor tenants and office space, compared to 94.1% at December
31, 1995.
1995 versus 1994
Net cash flow from operating activities totaled $3,732,467 in 1995 compared
to $2,092,835 in 1994. The increase is primarily due to higher net income
and increases in accounts payable and amounts due to affiliates partially
offset by a decrease in accrued interest payable. Cash outflows from
investing activities totaled $757,229 in 1995 and $1,990,343 in 1994. The
decrease in cash outflows from investing activities for 1995 was due to the
payment made pursuant to the Release Agreement in 1994.
For the year ended December 31, 1995, the Partnership recognized net income
of $1,933,722 compared to $915,010 during 1994. The increase in net income
was primarily attributable to increases in rental, escalation and interest
income.
The Partnership generated total income for the year ended December 31, 1995
of $12,208,708 compared to $11,464,835 during 1994. Rental income
increased for the year ended December 31, 1995 compared to 1994 reflecting
lease renewals at higher rates and leases with new tenants. 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 year ended December 31, 1995
compared to 1994 mainly due to credits issued to tenants during 1994 for
1993 reimbursable expenses.
Interest income increased for the year ended December 31, 1995 compared to
1994 primarily due to an increase in cash reserves and in interest rates
earned on the Partnership's invested cash.
Total Mall tenant sales (exclusive of anchor tenants) were $70,794,000 for
the year ended December 31, 1995, improved from $63,766,000 for the year
ended December 31, 1994. Sales for tenants (exclusive of anchor tenants)
which operated at the Mall for each of the last two years were $66,171,000
and $59,691,000, respectively. As of December 31, 1995, the Mall was 94.1%
occupied, excluding anchor tenants and office space, compared to 94.2% at
December 31, 1994.
Property Appraisal
The appraised fair market value of the Mall at January 1, 1996 and 1997, as
determined by Cushman & Wakefield, Inc., an independent third party
appraisal firm, was $81,000,000. Limited Partners should note that
appraisals are only estimates of current value and actual values realizable
upon sale may be significantly different. A significant factor in
establishing an appraised value is the actual selling price for properties
which the appraiser believes are comparable. Because of the nature of the
Partnership's property and the limited market for such property, there can
be no assurance that the other properties reviewed by the appraiser are
comparable. Additionally, the low level of liquidity as a result of the
current restrictive capital environment has had the effect of limiting the
number of transactions in real estate markets and the availability of
financing to potential purchasers, which may have a negative impact on the
value of an asset. Further, the appraised value does not reflect the
actual costs which could be incurred in selling the property. As a result
of these factors and the illiquid nature of an investment in Units of the
Partnership, the variation between the appraised value of the Partnership's
property and the price at which Units of the Partnership could be sold is
likely to be significant. Fiduciaries of Limited Partners which are
subject to ERISA or other provisions of law requiring valuation of Units
should consider all relevant factors, including, but not limited to the net
asset value per Unit, in determining the fair market value of the
investment in the Partnership for such purposes.
Item 8. Financial Statements and Supplementary Data
See Item 14(a) for a listing of the Consolidated Financial Statements and
Supplementary data in this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The General Partner is an affiliate of Lehman and has offices at the same
location as the Partnership and the Owner Partnership at 3 World Financial
Center, 29th Floor, New York, NY, 10285-2900. All of the executive
officers and directors of the General Partner are also officers and
employees of Lehman.
On July 31, 1993, Shearson Lehman Brothers, Inc. ("Shearson") sold certain
of its domestic retail brokerage and asset management businesses to Smith
Barney, Harris Upham & Co. Incorporated ("Smith Barney"). Subsequent to
this sale, Shearson changed its name to Lehman Brothers Inc. The
transaction did not affect the ownership of the Partnership or the
Partnership's General Partner. However, the assets acquired by Smith
Barney included the name "Shearson." Consequently, the General Partner
changed its name to "Eastern Avenue Inc." to delete any references to
"Shearson."
Certain executive officers and directors of the General Partner are now
serving (or in the past have served) as executive officers or directors of
entities which act as general partners of a number of real estate limited
partnerships which have sought protection under the provisions of the
Federal Bankruptcy Code. The partnerships which have filed bankruptcy
petitions own real estate which has been adversely affected by the economic
conditions in the markets in which the real estate is located and,
consequently, the partnerships sought the protection of the bankruptcy laws
to protect the partnerships' assets from loss through foreclosure.
The executive officers and directors of the General Partner as of December
31, 1996 are as follows:
Name Age Office
Paul L. Abbott 51 Director, Chief Executive Officer,
Chief Operating Officer
Robert J. Hellman 42 President
Joan Berkowitz 37 Vice President
Elizabeth I. Rubin 30 Vice President, Chief Financial Officer
Paul L. Abbott is a Managing Director of Lehman Brothers. Mr. Abbott
joined Lehman Brothers in August 1988, and is responsible for investment
management of residential, commercial and retail real estate. Prior to
joining Lehman Brothers, Mr. Abbott was a real estate consultant and a
senior officer of a privately held company specializing in the syndication
of private real estate limited partnerships. From 1974 through 1983, Mr.
Abbott was an officer of two life insurance companies and a director of an
insurance agency subsidiary. Mr. Abbott received his formal education in
the undergraduate and graduate schools of Washington University in St.
Louis.
Robert J. Hellman is a Senior Vice President of Lehman Brothers and is
responsible for investment management of retail, commercial and residential
real estate. Since joining Lehman Brothers in 1983, Mr. Hellman has been
involved in a wide range of activities involving real estate and direct
investments including origination of new investment products,
restructurings, asset management and the sale of commercial, retail and
residential properties. Prior to joining Lehman Brothers, Mr. Hellman
worked in strategic planning for Mobil Oil Corporation and was an associate
with an international consulting firm. Mr. Hellman received a bachelor's
degree from Cornell University, a master's degree from Columbia University,
and a law degree from Fordham University.
Joan B. Berkowitz is a Vice President of Lehman Brothers, responsible for
investment management for retail, commercial and residential real estate
within the Diversified Asset Group. Ms. Berkowitz joined Lehman Brothers
in May 1986 as an accountant in the Realty Investment Group. From October
1984 to May 1986, she was an Assistant Controller to the Patrician Group.
From November 1983 to October 1984, she was employed by Diversified
Holdings Corporation. From September 1981 to November 1983, she was
employed by Deloitte Haskins & Sells. Ms. Berkowitz, a Certified Public
Accountant, received a B.S. degree from Syracuse University in 1981.
Elizabeth I. Rubin is a Vice President of Lehman Brothers in the
Diversified Asset Group. Ms. Rubin joined Lehman Brothers in April 1992.
Prior to joining Lehman Brothers, she was employed from September 1988 to
April 1992 by the accounting firm of Kenneth Leventhal and Co. Ms. Rubin
is a Certified Public Accountant and received a B.S. degree from the State
University of New York at Binghamton in 1988.
Item 11. Executive Compensation
The directors and executive officers of the General Partner do not receive
any salaries or other compensation from the Partnership. See Item 13 with
respect to a description of certain transactions between the General
Partner or its affiliates and the Registrant.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security ownership of certain beneficial owners
The Partnership knows of no person who beneficially owns more than 5% of
its Units.
(b) Security ownership of management
As of December 31, 1996, neither the General Partner, nor any executive
officer or director thereof, was the beneficial owner of any Units.
(c) Changes in control
There were no changes in control during the year ended December 31, 1996.
Item 13. Certain Relationships and Related Transactions
The Partnership has no directors or executive officers. Its affairs are
managed by the General Partner, which receives 1% of the distributions of
income, profits, cash distributions and losses of the 90.9% received from
the Owner Partnership each year.
The Limited Partnership Agreement specifies the allocation of operating
income, profits, losses and cash distributions. For a description of such
terms, please refer to Note 4 to the Notes to the Consolidated Financial
Statements of this report.
Affiliates of the General Partner have been responsible for certain
administrative functions of the Partnership. For amounts paid to such
affiliates, see Note 6 of the Notes to the Consolidated Financial
Statements.
CPR Realty Brokerage, Inc. ("CPR"), formerly Shearson Realty Brokerage,
Inc., was paid $510,000 in 1994 in conjunction with the Partnership's 1993
refinancing. CPR is an affiliate of the General Partner.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(i) Index to Consolidated Financial Statements
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets at
December 31, 1996 and 1995 F-2
Consolidated Statements of Operations for
the years ended December 31, 1996, 1995 and 1994 F-3
Consolidated Statements of Partners' Capital
(Deficit) for the years ended
December 31, 1996, 1995 and 1994 F-3
Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994 F-4
Notes to the Consolidated Financial Statements F-5
(a)(ii) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts F-11
Schedule III - Real Estate and Accumulated Depreciation F-12
(a)(iii) Exhibits
Subject to Rule 12b-32 under the Securities Exchange Act of 1934 on
incorporation by reference, listed below are the exhibits that are filed as
part of this report:
No. Title
3.1 Restated Agreement and Certificate of Limited Partnership of the
Partnership dated as of June 25, 1985 is hereby incorporated by
reference to Exhibit B to the Prospectus (the "Prospectus")
contained in Registration Statement No. 2-98786, as amended (the
"Registration Statement"), which Registration Statement was declared
effective on August 19, 1985.
3.2 Form of Restated Agreement and Certificate of the Partnership is
hereby incorporated reference to Exhibit B to the Prospectus.
3.3 Certificate of Limited Partnership of Bellwether Properties, L.P.
("Bellwether"), as amended, is hereby incorporated by reference to
the Registration Statement.
3.4 Form of Amendment to Certificate of Limited Partnership of Bellwether
is hereby incorporated by reference to the Registration Statement.
3.5 Form of Amended and Restated Agreement of Limited Partnership of the
Owner Partnership is hereby incorporated by reference to Exhibit C to the
Prospectus.
4.1 Form of certificate representing a limited partnership interest in
the Partnership is hereby incorporated by reference to the
Registration Statement.
10.1 Subscription Agreement and Signature Page is hereby incorporated by
reference to Exhibit D to the Prospectus.
10.2 Escrow Agreement between the Partnership, Shearson Lehman Brothers
Inc. ("Shearson") and Manufacturers Hanover Trust Company, dated as
of August 12, 1985, is hereby incorporated by reference to the
Registration Statement.
10.3 Form of Property Management and Leasing Agreement dated as of
November 29, 1985, between the Owner Partnership and Shopco
Management Corporation is hereby incorporated by reference to the
Registration Statement.
10.4 Capital Contribution Agreement dated as of August 7, 1985, between
Shearson Lehman Brothers Group Inc. and the General Partner is hereby
incorporated by reference to the Registration Statement.
10.5 Letter Agreement, dated as of June 6, 1985, amending the Contract of
Sale is hereby incorporated by reference to the Registration
Statement.
10.6 Indemnification Agreement between Shearson, Shearson Holdings and the
officers and directors of the General Partner is hereby incorporated
by reference to the Registration Statement.
10.7 Amended and Restated Deed of Trust and Security Agreement between
Eastpoint Partners, L.P. and CBA Associates, Inc. dated December 1,
1993, is hereby incorporated by reference to Exhibit 10.14 to the
Partnership's Annual Report on Form 10-K for the year ended December
31, 1993.
10.8 Compromise and Mutual Release Agreement dated as of July 14, 1994 by
and between Eastpoint Partners, L.P. and Southwestern Life Insurance
Company is hereby incorporated by reference to Exhibit 10.1 to the
Partnership's report on Form 10-Q for the period ended June 30, 1994
27 Financial Data Schedule.
99 Limited Appraisal of Real Property for Eastpoint Mall as of January 1,
1997, as prepared by Cushman & Wakefield, Inc.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 27, 1997
EASTPOINT MALL LIMITED PARTNERSHIP
BY: Eastern Avenue, Inc.
General Partner
BY: /s/ Paul L. Abbott
Name: Paul L. Abbott
Title: Director, Chief Executive Officer and
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
EASTERN AVENUE INC.
General Partner
Date: March 27, 1997
BY: /s/ Paul L. Abbott
Paul L. Abbott
Director,
Chief Executive Officer and
Chief Operating Officer
Date: March 27, 1997
BY: /s/ Robert J. Hellman
Robert J. Hellman
President
Date: March 27, 1997
BY: /s/ Joan Berkowitz
Joan Berkowitz
Vice President
Date: March 27, 1997
BY: /s/ Elizabeth Rubin
Elizabeth Rubin
Vice President & Chief Financial Officer
Independent Auditors' Report
The Partners
Eastpoint Mall Limited Partnership
We have audited the consolidated financial statements of Eastpoint Mall
Limited Partnership (a Delaware limited partnership) and consolidated
partnership as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedules as listed in the accompanying index. These
consolidated financial statements and financial statement schedules are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Eastpoint Mall Limited Partnership and consolidated partnership as of
December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the years in the three-year period ended
December 31, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
March 21, 1997
Consolidated Balance Sheets At December 31, At December 31,
1996 1995
Assets
Real estate, at cost (notes 2, 3 and 5):
Land $ 4,409,980 $ 4,166,230
Building 43,972,310 43,241,060
Improvements 7,286,406 7,050,087
55,668,696 54,457,377
Less accumulated depreciation
and amortization (13,529,644) (11,738,595)
42,139,052 42,718,782
Cash and cash equivalents 6,362,256 6,254,501
Restricted cash (note 5) 1,000,000 2,100,000
Cash-held in escrow (note 5) 535,313 443,811
Accounts receivable, net of allowance
of $125,805 in 1996 and $80,405 in 1995 836,705 638,436
Accrued interest receivable (note 5) 346,091 224,567
Deferred rent receivable 343,990 356,656
Note receivable (note 3) -- 738,000
Deferred charges, net of accumulated
amortization of $622,906 in 1996
and $423,597 in 1995 1,353,384 1,510,981
Prepaid expenses 389,559 381,278
Total Assets $ 53,306,350 $ 55,367,012
Liabilities, Minority Interest and
Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 417,511 $ 212,779
Mortgage loan payable (note 5) 51,000,000 51,000,000
Accrued interest payable -- 340,425
Due to affiliates (notes 6 and 7) -- 2,226
Security deposits payable 46,819 46,819
Deferred income 424,580 415,081
Distribution payable 288,826 288,826
Total Liabilities 52,177,736 52,306,156
Minority interest (541,161) (344,786)
Partners' Capital (Deficit) (note 4):
General Partner (97,569) (80,211)
Limited Partners (4,575 limited partnership
units authorized, issued and outstanding) 1,767,344 3,485,853
Total Partners' Capital 1,669,775 3,405,642
Total Liabilities, Minority Interest
and Partners' Capital $ 53,306,350 $ 55,367,012
Consolidated Statements of Operations
For the years ended December 31, 1996 1995 1994
Income
Rental income (note 3) $ 7,306,819 $ 6,894,097 $ 6,724,625
Percentage rental income 1,019,783 1,209,752 1,182,148
Escalation income (note 3) 3,706,381 3,585,193 3,143,108
Interest income 340,504 406,292 265,117
Miscellaneous income 169,512 113,374 149,837
Total Income 12,542,999 12,208,708 11,464,835
Expenses
Interest expense 4,059,600 4,071,472 4,090,017
Property operating expenses 3,502,731 3,160,271 3,305,981
Settlement costs (note 3) -- 78,000 371,500
Depreciation and amortization 2,032,858 2,001,526 1,904,981
Real estate taxes 596,769 576,674 563,423
General and administrative 210,244 186,504 207,040
Total Expenses 10,402,202 10,074,447 10,442,942
Income before minority interest 2,140,797 2,134,261 1,021,893
Minority interest (197,023) (200,539) (106,883)
Net Income $ 1,943,774 $ 1,933,722 $ 915,010
Net Income Allocated:
To the General Partner $ 19,438 $ 19,337 $ 9,150
To the Limited Partners 1,924,336 1,914,385 905,860
$ 1,943,774 $ 1,933,722 $ 915,010
Per limited partnership unit
(4,575 outstanding) $ 420.62 $ 418.44 $ 198.00
Consolidated Statements of Partners' Capital (Deficit)
For the years ended December 31, 1996, 1995 and 1994
General Limited
Partner Partners Total
Balance at December 31, 1993 $ (78,385) $ 3,666,812 $ 3,588,427
Net income 9,150 905,860 915,010
Distributions (8,664) (857,814) (866,478)
Balance at December 31, 1994 (77,899) 3,714,858 3,636,959
Net income 19,337 1,914,385 1,933,722
Distributions (21,649) (2,143,390) (2,165,039)
Balance at December 31, 1995 (80,211) 3,485,853 3,405,642
Net income 19,438 1,924,336 1,943,774
Distributions (36,796) (3,642,845) (3,679,641)
Balance at December 31, 1996 $ (97,569) $ 1,767,344 $ 1,669,775
Consolidated Statements of Cash Flows
For the years ended December 31, 1996 1995 1994
Cash Flows From Operating Activities:
Net income $ 1,943,774 $ 1,933,722 $ 915,010
Adjustments to reconcile net income
to net cash provided by operating
activities:
Minority interest 197,023 200,539 106,883
Depreciation and amortization 2,032,858 2,001,526 1,904,981
Settlement costs -- 78,000 371,500
Increase (decrease) in cash arising
from changes in operating assets
and liabilities:
Cash-held in escrow (91,502) (72,818) (75,070)
Accounts receivable (198,269) (88,894) (119,708)
Accrued interest receivable (121,524) (134,370) (90,197)
Deferred rent receivable 12,666 (98,755) (131,105)
Deferred charges (41,712) (38,256) (30,413)
Prepaid expenses (8,281) (37,762) (49,515)
Accounts payable and accrued expenses 204,732 3,245 (834,877)
Accrued interest payable (340,425) -- 340,425
Due to affiliates (2,226) 2,035 (237,716)
Security deposits payable -- (12,837) 9,788
Deferred income 9,499 (2,908) 12,849
Net cash provided by operating
activities 3,596,613 3,732,467 2,092,835
Cash Flows From Investing Activities:
Additions to real estate (1,253,819) (757,229) (802,843)
Proceeds from note receivable 738,000 -- --
Purchase of note receivable -- -- (1,187,500)
Net cash used for investing activities (515,819) (757,229) (1,990,343)
Cash Flows From Financing Activities:
Release of restricted cash 1,100,000 -- --
Deferred charges -- -- (530,552)
Distributions paid (3,679,641) (2,165,039) (577,652)
Distributions paid-minority interest (393,398) (216,745) (57,831)
Net cash used for financing activities (2,973,039) (2,381,784) (1,166,035)
Net increase (decrease) in cash and
cash equivalents 107,755 593,454 (1,063,543)
Cash and cash equivalents,
beginning of period 6,254,501 5,661,047 6,724,590
Cash and cash equivalents,
end of period $ 6,362,256 $ 6,254,501 $ 5,661,047
Supplemental Disclosure of
Cash Flow Information:
Cash paid during the
period for interest $ 4,400,025 $ 4,071,472 $ 3,749,592
Notes to the Consolidated Financial Statements
December 31, 1996, 1995 and 1994
1. Organization
Eastpoint Mall Limited Partnership (the "Partnership") was formed as a limited
partnership on June 26, 1985 under the laws of the State of Delaware. The
Partnership is the managing general partner of Eastpoint Partners L.P. (the
"Owner Partnership") a New York limited partnership, which owns Eastpoint Mall
(the "Mall").
The general partner of the Partnership is Eastern Avenue Inc., (the "General
Partner"), formerly Shearson Lehman Eastern Avenue Inc. (see below), an
affiliate of Lehman Brothers Inc., formerly Shearson Lehman Brothers, Inc.
On July 31, 1993, Shearson Lehman Brothers, Inc. ("Shearson") sold certain of
its domestic retail brokerage and asset management businesses to Smith Barney,
Harris Upham & Co. Incorporated ("Smith Barney"). Subsequent to the sale,
Shearson changed its name to Lehman Brothers, Inc. ("Lehman Brothers"). The
transaction did not affect the ownership of the General Partner. However, the
assets acquired by Smith Barney included the name "Shearson." Consequently,
effective January 13, 1994, Shearson Lehman Eastern Avenue Inc., the General
Partner, changed its name to Eastern Avenue Inc.
The Partnership commenced investment operations on November 22, 1985, with the
acceptance of subscriptions for 4,575 limited partnership units, the maximum
authorized by the limited partnership agreement ("Limited Partnership
Agreement"). Upon the admittance of the additional limited partners, the
initial limited partner withdrew from the Partnership.
On February 16, 1996, based upon, among other things, the advice of legal
counsel, 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.
2. Summary of Significant Accounting Policies
Basis of Accounting
The consolidated financial statements of the Partnership have been prepared on
the accrual basis of accounting and include the accounts of the Partnership and
Eastpoint Partners L.P. All significant intercompany accounts and transactions
have been eliminated.
Real Estate
Real estate investments, which consist of land, building and improvements, are
recorded at cost less accumulated depreciation and amortization. Cost includes
the initial purchase price of the property plus closing costs, acquisition and
legal fees and capital improvements, including capitalized interest.
Depreciation of the building is computed using the straight-line method based
on an estimated useful life of 40 years. Depreciation of improvements is
computed using the straight-line method over estimated useful lives of 7 to 12
years.
Accounting for Impairment
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121"),
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. FAS 121 also addresses the accounting for long- lived assets
that are expected to be disposed of. The Partnership adopted FAS 121 in the
fourth quarter of 1995.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("FAS 107"), requires that the Partnership
disclose the estimated fair values of its financial instruments. Fair values
generally represent estimates of amounts at which a financial instrument could
be exchanged between willing parties in a current transaction other than in
forced liquidation.
Fair value estimates are subjective and are dependent on a number of
significant assumptions based on management's judgment regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. In addition, FAS 107 allows
a wide range of valuation techniques, therefore, comparisons between entities,
however similar, may be difficult.
Deferred Charges
Deferred charges are amortized using the straight-line method over the
following periods:
Period
Fee for negotiating the acquisition of the
ownership of the Mall 12 to 40 years
Financing fees 10 years
Fees paid in connection with the acquisition of the property have been included
in the purchase price of the property. Accordingly, such fees have been
allocated to the basis of the land, building and improvements and are being
depreciated over the estimated useful lives of the depreciable assets. Leasing
commissions are amortized using the straight-line method over 7 years which
approximates the average life of the leases.
Offering Costs
Offering costs are non-amortizable and have been deducted from partners'
capital.
Transfer of Units and Distributions
Net income or loss from operations is allocated to registered holders ("Unit
Holder"). Upon the transfer of a unit, net income (loss) from operations
attributable to such unit generally is allocated between the transferor and the
transferee based on the number of days during the year of transfer that each is
deemed to have owned the unit. The Unit Holder of record on the first day of
the calendar month is deemed to have transferred their interest on the first
day of such month.
Distributions of operating cash flow, as defined in the Partnership Agreement,
is payable on a quarterly basis to registered Unit Holders on record dates
established by the Partnership, which generally fall 45 days after quarter end.
Income Taxes
No provision is made for income taxes since such liability is the liability of
the individual partners.
Net Income Per Limited Partnership Unit
Net income per limited partnership unit is calculated based upon the number of
limited partnership units outstanding during the year.
Rental Income and Deferred Rent
The Partnership rents its property to tenants under operating leases with
various terms. Deferred rent receivable consists of rental income which is
recognized on the straight-line basis over the lease terms, but will not be
received until later periods as a result of scheduled rent increases.
Cash and Cash Equivalents
Cash and cash equivalents consist of money market investment accounts which
invest in short-term highly liquid investments with maturities of three months
or less from the date of issuance. The carrying amount approximates fair value
because of the short maturity of those investments.
Concentration of Credit Risk
Financial instruments which potentially subject the Partnership to a
concentration of credit risk principally consist of cash and cash equivalents
in excess of the financial institutions' insurance limits. The Partnership
invests available cash with high credit quality financial institutions.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified in order to conform to the
current year's presentation.
3. Real Estate
The Owner Partnership's real estate which was purchased on November 29, 1985,
consists of a central enclosed mall plus five free standing buildings and is
located on approximately 67.1 acres in Baltimore County, Maryland. The Mall
consists of a central enclosed mall anchored by four major department stores -
J.C. Penney, Inc. ("J.C. Penney"), Schottenstein Stores Corporation, doing
business as Value City ("Value City"), Sears, Roebuck, and Co. ("Sears") and
Ames Department Stores, Inc. (two of which are subject to ground leases),
improvements and land. The retail space in the Mall is contained on one level;
J.C. Penney and Value City are multi-level. Office and storage areas are
contained in the basement level and on the second floor levels of the Mall.
Parking is provided for over 4,500 cars.
The Mall currently has gross leasable space totaling 864,993 square feet. Of
this leasable space, 637,582 is owned by the Owner Partnership and 227,411
square feet of the gross leasable space is owned by the tenants who have leased
portions of land pursuant to ground leases with the Owner Partnership. Upon
expiration of such ground leases, ownership of the buildings thereon will
revert to the Owner Partnership.
J.C. Penney leases a parcel of land pursuant to a ground lease on which it
constructed the largest of the Mall's anchor stores containing approximately
151,629 square feet of the gross leasable area. The initial term of the J.C.
Penney ground lease expires on August 31, 2001.
Value City leases approximately 140,000 square feet of the gross leasable area
of the Mall. The initial term of the lease was scheduled to expire on November
30, 1999 but has been extended until November 30, 2009.
Sears leases approximately 87,734 square feet of the gross leasable area of the
Mall. The initial term of the lease expires on October 16, 2006.
Ames leases a parcel of land pursuant to a ground lease on which it has
constructed a building containing approximately 58,442 square feet of the gross
leasable area. The initial term of the Ames ground lease expires on May 30,
2004.
On November 8, 1996, the Owner Partnership purchased for $975,000 the leasehold
interest in a vacant, free-standing building and the underlying land located
adjacent to the J.C. Penney anchor tenant store at the Mall from J.C. Penney
Company, Inc.
The following is a schedule of the remaining minimum lease payments as called
for under the lease agreements:
Year Amount
1997 $ 6,397,641
1998 5,912,917
1999 5,551,453
2000 5,044,574
2001 4,285,557
Thereafter 12,252,077
$ 39,444,219
In addition to the minimum lease amounts, the leases provide for percentage
rents, and escalation charges to tenants for common area maintenance and real
estate taxes. For the years ended December 31, 1996, 1995 and 1994, temporary
tenant income amounted to $397,921, $302,815 and $296,938, respectively, and
are included in rental income.
For the year ended December 31, 1995, one tenant accounted for approximately
10% of the Partnership's rental and percentage rental income. No single tenant
accounted for 10% or more of such income for the years ended December 31, 1996
and 1994.
On April 26, 1990, Ames Department Stores, Inc. ("Ames") filed for bankruptcy
protection under Chapter 11 of the Federal Bankruptcy Code. Land leased to
Ames by the Owner Partnership together with the building constructed thereon by
Ames secured a first priority deed of trust held by Consolidated Fidelity Life
Insurance Company ("Consolidated") as successor to Southwestern Life Insurance
Company. By filing its bankruptcy petition, Ames was in default under the
Consolidated priority deed of trust. On December 18, 1992, the Bankruptcy
Court confirmed a Plan of Reorganization for Ames (the "Plan") and the Plan was
subsequently consummated. Pursuant to the Plan, Ames assumed the lease of its
store at the Mall and continues its operations there.
On December 28, 1992, the Partnership received a Notice of Default from
Consolidated. The Partnership and Consolidated negotiated a Settlement
Agreement (the "Settlement Agreement") whereby, upon approval by the Bankruptcy
Court and consummation of certain further agreements reached between
Consolidated and Ames, the Partnership would make a payment of $812,500 to
Consolidated in complete satisfaction of all claims Consolidated may have
against the Ames parcel and the Partnership. As part of the Settlement
Agreement, Consolidated withdrew its Notice of Default. The Settlement
Agreement was effective through December 31, 1993.
The Settlement Agreement expired on December 31, 1993, as Bankruptcy Court
approval of the outstanding claims between Consolidated and Ames had not then
been obtained. Since Consolidated and Ames (and Ames' trustee in bankruptcy)
had not resolved all claims among them, there still existed defaults under the
Consolidated deed of trust and therefore, Consolidated had the right to
foreclose on the Ames parcel. On January 7, 1994, Consolidated delivered
another notice of default to the Partnership.
The delivery to the Partnership by Consolidated of the new Notice of Default
constituted a technical default under the new first mortgage loan of the
Partnership with the REMIC Lender (note 5). However, the REMIC Lender was aware
of the Consolidated claim at the time the new first mortgage loan was closed,
and the REMIC Lender held certain proceeds of the new first mortgage loan in
escrow until such time as the Partnership resolved the Consolidated dispute and
provided a release of Consolidated's outstanding deed of trust on the Ames
parcel.
In July 1994, the Partnership executed a Compromise and Mutual Release (the
"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 (the "Claim"), of which approximately $1,530,142 is for
amounts due under the Ames promissory note, and requiring Ames to make a
payment of $10,000 to the Owner Partnership. An Agreed Order approving the
settlement was entered by the Bankruptcy Court on May 1, 1996. Ames' $10,000
payment to the Owner Partnership was received on June 4, 1996. On August 7,
1996, and September 23, 1996, payments on the Claim were received by the Owner
Partnership from Ames in the amounts of $887,520 and $111,938, respectively. At
December 31, 1996, the total payments received from Ames were $1,009,458, of
which approximately $222,000, is payable to Consolidated and is reflected in
accounts payable and accrued expenses on the Partnership's Consolidated Balance
Sheet. It is uncertain at this time if there will be any additional payments
made to the Owner Partnership.
On August 21, 1996, the Owner Partnership retired the Ames promissory note
secured by the Deed of Trust.
The following is a schedule of the remaining minimum lease payments as called
for under the ground lease agreements:
Year Amount
1997 $ 205,500
1998 205,500
1999 254,083
2000 258,500
2001 258,500
Thereafter 621,083
$ 1,803,166
The appraised fair market value of Eastpoint Mall at January 1, 1997 and 1996,
as determined by an independent third party appraisal firm, was $81,000,000.
4. Partnership Agreement
The Partnership has a 90.9% interest in the operating income, profits and cash
distributions, and a 99% interest in the operating losses of the Owner
Partnership. The limited partnership agreement provides that all operating
income, losses, profits, and cash distributions are allocated 1% to the General
Partner and 99% to the Limited Partners. The proceeds of sale and interim
capital transactions will be distributed 100% to the Partnership (100% to the
limited partners) until the Limited Partners have received distributions equal
to a return of their original capital contribution plus a 10% cumulative return
on capital ("Preferred Return"). Thereafter, any remaining proceeds will be
allocated 86% to the Partnership (1% to the General Partner and 99% to the
Limited Partners). As of December 31, 1996, the Limited Partners have not
received distributions in excess of their Preferred Return and original capital
contributions.
With respect to the Owner Partnership, the General Partner has a .1% interest
and SFN Limited Partnership has a 9% interest in the income, profits, and cash
distributions of the Mall. Losses from operations shall be allocated .1% to
the General Partner, and .9% to the SFN Limited Partnership. Upon sale or
interim capital transaction, the General Partner will receive 5% and SFN
Limited Partnership will receive 9% after the limited partners of the
Partnership receive their original capital contribution plus their 10%
cumulative return.
5. Mortgage Loan Payable
In December 1993, the Partnership obtained new first mortgage financing from
CBA Conduit, Inc., an entity which placed the new mortgage into a pool of other
mortgages to be held by a Real Estate Mortgage Investment Conduit (the "REMIC
Lender"). The total amount of the new first mortgage is $51,000,000 which
requires monthly interest payments at a rate of 8.01% per annum for the first
five years and, thereafter, at a rate equal to 2.8% above the current yield on
five-year Treasury Notes. The mortgage loan matures on December 22, 2003, at
which time the entire outstanding principal balance is due. After repayment of
the Partnership's former first mortgage loan from Kemper Investors Life
Insurance Company and the establishment of certain loan reserves and payment of
expenses, approximately $3,000,000 of the proceeds were available to the
Partnership for tenant improvements, leasing commissions, capital improvements
and costs attributable to leasing and re-leasing. Escrow accounts were also
established for the collection of real estate taxes and various insurance
expenses. They are currently presented on the consolidated balance sheets as
cash-held in escrow.
Certain proceeds of the new first mortgage loan were placed into a restricted
cash account to be funded to the Partnership at such time as the Partnership
obtains a release of the first mortgage outstanding to Consolidated Fidelity
Life Insurance Company on the parcel of real estate currently occupied by Ames.
On December 16, 1996, $1,100,000 was released to the Partnership following the
completion of certain administrative procedures required by the first mortgage
lender.
Additionally, $1,000,000 of the loan proceeds has been placed into the
restricted cash account which constitutes additional collateral for the new
first mortgage and can be used by the Partnership for leasing expenses and
capital improvements. The loan is secured by a first mortgage and an
assignment of leases on Eastpoint Mall. Accrued interest receivable at
December 31, 1996 and 1995 represents interest income on the restricted cash
balance.
Based on the borrowing rates currently available to the Partnership for
mortgage loans with similar terms and average maturities, the fair value of
long-term debt approximates its carrying value as of the balance sheet date.
6. Transactions with Related Parties
CPR Realty Brokerage, Inc. ("CPR, Inc.") formerly Shearson Realty Brokerage,
Inc. was paid $510,000 in 1994 in conjunction with the Partnership's
refinancing.
The General Partner was reimbursed $99,007 during 1994 from the Partnership and
$138,900 from the Owner Partnership, for professional fees paid at inception of
the Partnership.
Under the terms of the Partnership Agreement, the General Partner and its
affiliates are entitled to be reimbursed for out-of- pocket expenses. For the
years ended December 31, 1996, 1995 and 1994, out-of-pocket expenses were
$5,048, $5,064, and $2,740, respectively. At December 31, 1996 and 1995, $0
and $2,226, respectively, remained unpaid.
Cash and Cash Equivalents
Certain cash and cash equivalents were on deposit with an affiliate of the
General Partner during a portion of 1996 and all of 1995. As of December 31,
1996, no cash and cash equivalents were on deposit with an affiliate of the
General Partner or the Partnership.
7. Management Agreement
On November 29, 1985, the Partnership entered into an agreement with Shopco
Management Corporation, an affiliate of SFN Limited Partnership, for the
management of the property. The agreement, which expired on December 31, 1990,
provided for an annual fee equal to 3.0% of the gross rents collected from the
Mall, as defined, payable monthly. The Partnership and Shopco Management
Corporation agreed to the terms of the new management agreement effective
January 1, 1991 through December 31, 1993, which included an increase in the
annual fee to 4.5% of gross rents collected from the Mall. The new management
agreement which expired on December 31, 1993 is automatically renewed for
successive periods of one year. The management agreement has been renewed
through December 31, 1997. For the years ended December 31, 1996, 1995 and
1994, management fee expense amounted to $368,435, $349,166 and $389,631,
respectively.
8. Distributions to Limited Partners
In 1996, 1995 and 1994, distributions to Limited Partners totaled $3,642,845,
($796.25 per limited partnership unit), $2,143,390, ($468.50 per limited
partnership unit), and $857,814 ($187.50 per limited partnership unit),
respectively.
9. Reconciliation of Consolidated Financial Statement Net Income and Partners'
Capital to Federal Income Tax Basis Net Income and Partners' Capital (Deficit)
Reconciliations of consolidated financial statement net income and partners'
capital to federal income tax basis net income and partners' capital (deficit)
at December 31, follow:
1996 1995 1994
Financial statement net income $ 1,943,774 $ 1,933,722 $ 915,010
Tax basis recognition of deferred
charges over financial statement
recognition of deferred charges (37,875) (37,875) (46,334)
Tax basis recognition of deferred income
over (under) financial statement
recognition of deferred income 2,821 (115,321) (119,650)
Tax basis depreciation over financial
statement depreciation (472,137) (456,095) (522,536)
Financial statement basis recognition
of Settlement cost over
(under) tax basis (44,883) 70,902 337,695
Federal income tax basis
net income $ 1,391,700 $ 1,395,333 $ 564,185
1996 1995 1994
Financial statement basis
partners' capital $ 1,669,775 $ 3,405,642 $ 3,636,959
Current year financial
statement net income over
federal income tax basis
net income (552,074) (538,389) (350,825)
Cumulative federal income tax
basis net income (loss) over
cumulative financial statement
net income (loss) (3,472,588) (2,934,199) (2,583,374)
Federal income tax basis partners'
capital (deficit) $ (2,354,887) $ (66,946) $ 702,760
Because many types of transactions are susceptible to varying interpretations
under Federal and State income tax laws and regulations, the amounts reported
above may be subject to change at a later date upon final determination by the
respective taxing authorities.
Schedule II Valuation and Qualifying Accounts
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions Period
Allowance for doubtful accounts:
Year ended December 31, 1994: $ 308,828 $ 129,193 $ 143,962 $ 294,059
Year ended December 31, 1995: 294,059 19,852 233,506 80,405
Year ended December 31, 1996: $ 80,405 $ 146,652 $ 101,252 $ 125,805
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1996
Eastpoint
Description: Shopping Center Total
Location Baltimore County, MD na
Construction date 1956-1981 na
Acquisition date 11-29-85 na
Life on which depreciation
in latest income statements
is computed Building - 40 years na
Improvements - 7-12 years na
Encumbrances $ 51,000,000 $ 51,000,000
Initial cost to Partnership: (A)
Land $ 3,497,465 $ 3,497,465
Building and
improvements $ 26,254,002 $ 26,254,002
Costs capitalized
subsequent to acquisition:
Land, building
and improvements $ 25,917,229 $ 25,917,229
Gross amount at which
carried at close of period: (B)
Land $ 4,409,980 $ 4,409,980
Building and
improvements 51,258,716 51,258,716
$ 55,668,696 $ 55,668,696
Accumulated depreciation $ 13,529,644 $ 13,529,644
(A) The initial cost of the Partnership represents the original purchase price
of the property.
(B) For Federal income tax purposes, the cost basis for the land, building and
improvements at December 31, 1996 is $51,772,419.
A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended December 31, 1996, 1995, and 1994 follows:
1996 1995 1994
Real estate investments:
Beginning of year $ 54,457,377 $ 53,761,925 $ 52,996,871
Additions 1,253,819 757,229 802,843
Dispositions (42,500) (61,777) (37,789)
End of year $ 55,668,696 $ 54,457,377 $ 53,761,925
Accumulated depreciation:
Beginning of year $ 11,738,595 $ 9,997,420 $ 8,335,792
Depreciation expense 1,833,549 1,802,952 1,699,417
Dispositions (42,500) (61,777) (37,789)
End of year $ 13,529,644 $ 11,738,595 $ 9,997,420
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Dec-31-1996
<CASH> 6,362,256
<SECURITIES> 000
<RECEIVABLES> 1,652,591
<ALLOWANCES> 125,805
<INVENTORY> 000
<CURRENT-ASSETS> 000
<PP&E> 55,668,696
<DEPRECIATION> 13,529,644
<TOTAL-ASSETS> 53,306,350
<CURRENT-LIABILITIES> 1,177,736
<BONDS> 51,000,000
<COMMON> 000
000
000
<OTHER-SE> 1,669,775
<TOTAL-LIABILITY-AND-EQUITY> 53,306,350
<SALES> 000
<TOTAL-REVENUES> 12,542,999
<CGS> 000
<TOTAL-COSTS> 4,099,500
<OTHER-EXPENSES> 2,243,102
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 4,059,600
<INCOME-PRETAX> 000
<INCOME-TAX> 000
<INCOME-CONTINUING> 000
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> 1,943,774
<EPS-PRIMARY> 420.62
<EPS-DILUTED> 420.62
</TABLE>
COMPLETE APPRAISAL OF REAL PROPERTY
Eastpoint Mall
Eastern Avenue and North Point Boulevard
Baltimore, Baltimore County, Maryland
IN A SUMMARY REPORT
As of January 1, 1997
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, New York 10019
March 14, 1997
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
Eastpoint Mall Limited Partnership:
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 has been 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, MAI. 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 appraiser's 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, 1996. 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, 1997, 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, MAI
Retail Valuation Group
/s/ Richard W. Latella
Richard W. Latella, MAI
Senior Director
Retail Valuation Group
Maryland Certified General
Real Estate Appraiser License No. 10462
JFB:RWL:emf
C&W File No. 97-9011
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, 1997
Date of Inspection: January 25, 1997; January 26,
1997
Ownership: Eastpoint Mall Limited
Partnership
Land Area: 67.121+/- Acres
Zoning: BM-CT Business Major -
Town Center Core
Highest and Best Use
As 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
Sears (1) 87,734+/- SF
J.C. Penney (2) 168,969+/- SF
Total Anchor Stores 455,145+/- SF
Enclosed Mall 241,146+/- SF
Atrium Office Space 55,435+/- SF
Outdoor Tenants (3) 110,587+/- SF
Total GLA 862,313+/- SF
(1) Includes T.B.A.
(2) Ground lease.
(3) Includes free-standing and exterior stores.
Condition: Good
Operating Data and Forecasts
Current Occupancy: 72% (Based on mall shop GLA, mall
offices, atrium office space,
and outdoor tenants. Includes
tenants leaving in 1997).
Forecasted Stabilized
Occupancy: 94.0%
Forecasted Date of
Stabilized Occupancy: December 2000
Operating Expenses
Owner's Budget (1997): $3,722,847 ($15.44/SF Mall Shops)
C&W's Forecast (1997): $3,542,049 ($14.69/SF Mall Shops)
Value Indicators
Sales Comparison Approach: $80,000,000 to $83000,000
Income Approach
Direct Capitalization: $83,000,000
Discounted Cash Flow: $80,300,000
Investment Assumptions
Income Growth Rates
Retail Rent Growth: Flat - 1997
+2.0% - 1998
+2.5% - 1999
+3.0% - 2000-2006
Office Rents: Flat - 1998-2000
+2.0% - 2001-2006
Expense Growth Rate: +3.5% - 1997-2005
Sales Growth Rate: Flat - 1997
+2.0% - 1998
+3.0% - 1999-2006
Tenant Improvements-New
Atrium Office
Tenants: $20.00/SF
Mall Tenants: $ 8.00/SF
Tenant Improvements-
Renewing
Atrium Tenants: $ 4.00/SF
Mall Tenants: $ 2.00/SF
Vacancy between Tenants
Mall Space: 6 months
Office Space: 6 months
Renewal Probability
Mall Space: 70%
Office Space: 50%
Going-In Capitalization
Rate: 9.50% - 10.00%
Terminal Capitalization
Rate: 9.50% - 10.00%
Cost of Sale at
Reversion: 2.00%
Discount Rate: 12.00% - 12.50%
Value Conclusion: $81,000,000
Resulting Indicators
CY 1997 NOI: $8,006,372
Going-In Overall Rate: 9.88%
Price per Square Foot
of Owned GLA: $116.83 (based on 694,274 SF)
Price per Square Foot
of Mall Shop GLA: $335.90 (based on 241,146 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
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 4
Definitions of Value, Interest Appraised, and Other
Pertinent Terms 4
Legal Description 5
REGIONAL ANALYSIS 6
NEIGHBORHOOD ANALYSIS 15
RETAIL MARKET ANALYSIS 16
THE SUBJECT PROPERTY 26
HIGHEST AND BEST USE 28
VALUATION PROCESS 29
SALES COMPARISON APPROACH 30
INCOME APPROACH 50
RECONCILIATION AND FINAL VALUE ESTIMATE 86
ASSUMPTIONS AND LIMITING CONDITIONS 88
CERTIFICATION OF APPRAISAL 90
ADDENDA 91
PHOTOGRAPHS OF SUBJECT PROPERTY
(Four photographs of Property from varoius directions)
Main entrance to Eastpoint Mall.
Back side of mall; food court entrance and Sears.
Value City store.
JC Penney 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 862,313+/- 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 appraisal is to provide a market value
estimate of the leased fee estate in the subject property as of
January 1, 1997. Our analysis reflects conditions prevailing as
of that date. Our last appraisal was completed as of January 1,
1996 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 recentsales 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 25, 1997 Jay F. Booth inspected the subject
property and its environs. Richard W. Latella, MAI inspected the
property on January 26, 1997. Our date of value is January 1,
1997.
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 showing the location of the mall)
REGIONAL ANALYSIS
Baltimore Metropolitan Area
The subject property is located in the City of Westminster,
Carroll County, in the northeast quadrant of 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, 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 or 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 outlying counties. The City of Baltimore demonstrated
an overall 11.9 percent decline in population in the 1980-1995
period, equivalent to a 0.84 percent compound annual decrease.
The MSA as a whole, however, had a modest 12.5 percent increase
in population growth between 1980 and 1995.
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 CACI, the Baltimore MSA is
anticipated to increase its population base by 4.5 percent to
2,587,057 through 2000. 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 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, creating
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 * 1996 *
% of % of % of % of
Nos. Total Nos. Total Nos. Total Nos. Total
Construction 37.5 6.0 73.5 6.3 130.3 10.9 130.4 10.9
Manufacturing 199.0 31.6 126.9 10.9 103.9 8.7 102.1 8.6
Util./Transp/Post 55.4 8.8 56.3 4.9 55.8 4.7 54.8 4.6
Retail/Wholesale 126.7 20.1 274.9 23.7 264.2 22.1 265.1 22.2
Finance/Insurance 32.8 5.2 75.8 6.5 70.7 5.9 68.6 5.8
Service 82.8 13.2 333.6 28.7 357.4 30.0 362.5 30.4
Government 94.8 15.1 219.4 18.9 211.0 17.7 209.2 17.5
Total 629,000 100.0 1,160,400 100.0 1,193,300 100.0 1,192,700 100.0
* Data as of June of each year
Source: U.S. Department of Labor, Bureau of Labor Statistics
Over the period 1990-1996, the metropolitan area added only
32,300 jobs, an increase of 2.8 percent or 0.50 percent per
annum. Compared to gains in other comparably sized metropolitan
areas, this growth could be characterized as below average. Over
the past year (1995 - 1996), total employment actually declined
by 600 jobs. The City of Baltimore lost 2,500 jobs during this
period.
According to WEFA, a recognized economic consulting firm,
Metropolitan Baltimore has been faring worse than the state as a
whole. 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. 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. During the past year, the greatest employment
gains were realized in the Service section, with 5,100 net new
jobs, or an increase of 1.4 percent. Other job gains were
realized in Construction (+ 100) and Retail and Wholesale Trade
(+ 900). Manufacturing lost 1,800 jobs, transportation was down
by 1,000, FIRE declined by 2,100 jobs, and Government shed 1,800
jobs, during the year.
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, a trend that does not appear to be changing.
In fact, the Baltimore manufacturing sector has surrendered
24,800 jobs since 1990. While the rate of decline is expected to
slow, the erosion of manufacturing jobs from the local economy is
expected to continue.
Transportation, another important industry to Baltimore's
economy, is not in decline, but 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 reality 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 June 1996, the unemployment rate for Baltimore was 5.9
percent versus 5.5 percent for U.S. The unemployment rate
improved slightly over the previous year's rate of 6.2 percent
(June 1995).
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 types 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 & Hospital 21,000
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 System 4,500
Blue Cross & Blue Shield of Maryland 4,500
University of Maryland at Baltimore 4,500
Source: Baltimore Business Journal Book 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.
Along with its world renowned medical institutions, John Hopkins
is 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 Uiversity* $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
private sector groups involved in biotechnology research. As
mentioned, the state ranks third in the nation in the percentage
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.
The following bullet points outline some of the significant
economci occurrences in the Baltimore metropolitan area.
- The area's two major utilities (Baltimore Gas & Electric and
Potomac Electric Power Company) plan a merger effective in
early 1997 which could eliminate 1,200 area jobs.
- New developments at Fort Meade military base include a $30
million Defense Information School with a student population of
4,000 (1997 completion) and plans for a $44 million EPA laboratory
and office building (1998 completion).
- Relocation of the Robert Gallo Institute for Human Virology to the
University of Maryland Biotechnology Institute in downtown Baltimore.
The Institute employs 300 professionals.
- Construction of a $98 million Comprehensive Cancer Center on the
John Hopkins Hospital campus (1998 opening).
- Expansion of T. Rowe Price with the addition of 33 acres near
their Owings Mills complex and construction of the first two of
five total buildings (1997 completion).
- Construction of a new $190 million football stadium to house the
Baltimore Ravins (formerly Cleveland Browns) with completion
scheduled for Fall 1998.
- Completion of the $151 million expansion of the Baltimore
Convention Center from 425,000 square feet to 1.2 million square feet.
- New Inner Harbor developments include the $160 million Christopher
Columbus Center for Marine Research and Exploration (1997 scheduled
opening), the 80,000 square foot Port Discovery children's museum,
and plans for a 160,000 square foot entertainment complex on the
former Six Flags property.
- Expansion of the Baltimore-Washington Airport adding a $110 million
International terminal.
- Extension of light rail service to Penn Station with connections to
Amtrak and MARC trains; the new international terminal at the
Baltimore-Washington Airport, with connections to downtown Baltimore;
and to Hunt Valley.
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 better understanding 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 - 1996, the Baltimore
MSA had a median household Effective Buying Income (EBI) of
$36,955, ranking it as the 43rd highest metropolitan area in the
country. Among components, the median household EBI varied from
a low of $24,980 in the City of Baltimore, to a high of $52,244
in Howard County. Anne Arundel had the second highest household
EBI ($43,201), followed by Carroll County ($40,925), and Harford
($39,232).
Effective Buying Income
Baltimore MSA
(000's) Median
Total EBI Household
EBI
BALTIMORE MSA $39,957,665 $36,955
Anne Arundel $ 8,045,372 $43,201
Baltimore County $12,921,988 $38,677
Baltimore City $ 8,308,138 $24,980
Carroll $ 2,188,549 $40,925
Harford $ 3,188,794 $39,232
Howard $ 4,708,582 $52,244
Queen Anne's $ 602,242 $37,361
Source: Sales & Marketing Management, 1996 Survey of
Buying Power
An additional measure of the area's economic vitality can be
found in income level distribution. Approximately 32.2 percent
of all households have effective buying income in excess of
$50,000. This ranges from a high of 53.3 percent in Howard
County to a low of 18.1 percent in the City of Baltimore,
mirroring median household EBI.
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 money in the retail marketplace.
The Baltimore MSA ranks 19th in retail sales, 17th in effective
buying income and 18th in buying power. These statistics place
the Baltimore MSA in the top 5.0 percent in the country.
Retail Sales
Retail sales in the Baltimore Metropolitan Area are currently
estimated to exceed $21.7 billion annually. As previously
stated, Baltimore ranked 19th nationally in total retail sales
for 1995, the last year for which statistics are currently
available. Retail sales in the metropolitan area have increased
at a compound annual rate of 4.28 percent since 1989; 5.64
percent per year since 1992.
Retail Sales
Baltimore Metropolitan Area
(In Thousands)
Metropolitan
Year Baltimore % Change
1989 $16,905,854c ---
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%
1995 $21,744,811 +4.94%
Compound Annual
Change +4.28%
Source: Sales and Marketing Management 1990-1995
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
arterials are accessible from Interstate 695, Baltimore's five
lane beltway. The following chart illustrates Baltimore's
proximity to the east coast and midwest markets.
Highway Distance from Baltimore
Boston 392 miles
Chicago 668 miles
New York 196 miles
Philadelphia 96 miles
Pittsburgh 218 miles
Richmond 143 miles
Washington, D.C. 37 miles
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 throughout 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 International Airport (BWI) is
located in the southerly portion of the Baltimore region 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 32.0 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 warehousing 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.
Real Estate Market Trends
Office vacancy rates throughout the metropolitan area
declined to 15.0 percent as of the second quarter 1996, the
lowest overall rate since mid-1988. The downtown submarket
continued to show the highest availability (21.3 percent), while
the suburban sector showed an overall vacancy of only 11.0
percent. Some new development, both build-to-suit and
speculative, is occurring in the suburban west and south sectors.
The industrial market showed signs of slowing during the
first half of 1996, with net negative absorption after two years
of strong leasing activity and positive absorption. The overall
metro vacancy rate was reported at 15.0 percent. Much of the
increase in availability was attributed to Merry-Go-Round
vacating their 800,000 square foot facility after following into
bankruptcy. New speculative development continued to occur in
spite of the decline in occupancy.
In the retail property sector, caution is the operative word.
According to KLNB Commercial Real Estate Services as reported in
the Real Estate Index, national retailers such as Best Buy,
Michaels Stores, and Best Products have cut back the number of
stores they plan to open in the area. Other retailers have
pulled away from the market altogether. Target (Dayton Hudson)
is an exception with plans to add seven stores in the Baltimore-
Washington D.C. area. Power Centers dominate new construction.
Overall vacancy in good quality grocery/drug anchored
neighborhood centers was reported at below 3.0 percent.
Overall, the real estate markets are generally showing signs
of strengthening, although the industrial sector most recently
experienced a decline in leasing activity compared to previous
years. The greatest improvements were realized in the office
sector. The retail market is considered to be relatively stable,
with limited new development anticipated during the near term.
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 some of 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 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 a 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 though lending criteria remains
somewhat 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
have depressed housing activity and multi-family housing permits
were down by 26.9 percent through mid-1996. Nonetheless, the
1996 median home price increased 5.1 percent over 1995 to
$114,600. Non-residential construction is providing some support
to the overall construction sector due to the work on several
large projects. Non-residential permit values were up 85.0
percent in 1995 from 1994 levels.
On balance, the Baltimore region benefits from a relatively
diversified economic base which should protect the region from
the effects of wide swings in the economy. Over the long-term,
the region's strategic location along the eastern seaboard and
its reputation as a major business center should further enhance
the area's 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 19th 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 map of area surrounding mall)
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.
Recent Trends
Wal-Mart is reportedly trying to open a store approximately
1.0 mile east of the subject on the site of an existing flea
market. It has reportedly been approved, although local resident
opposition has been strong. The store will likely open in 1998
and will help attract additional shoppers to the area.
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.
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.
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.
(Graphic showing population density of mall's trade area)
(Graphic showing Average Household Income demographics of
mall's 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
Year County Baltimore MSA Maryland
1985 $5,402,509 $13,681,848 $28,863,392
1990 $6,971,038 $17,489,333 $36,836,986
1993 $7,872,419 $19,610,884 $40,363,984
1994 $7,974,328 $20,720,649 $44,183,971
1995 $8,516,777 $21,744,811 $45,643,984
CAGR:85-95 +4.66% +4.74% +4.69%
CAGR:90-95 +4.09% +4.45% +4.38%
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
4.09 percent since 1990, slightly lower than the Baltimore MSA
and State of Maryland as a whole.
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.
Non-Anchor Sales
Sales reported for mall shops and outside tenants 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 and exterior GLA.
Subject Mall Shop Sales
Total Applica Sales
Year Sales % ble 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%
1996 $75,400 +7.20% 327,605 $230.16 +7.00%
CAGR:89-96 -- +6.02% -- -- +3.48%
CAGR:92-96 -- +5.45% -- -- +6.52%
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 6.02 percent per year since 1989. In this regard, sales
increased from approximately $50.1 million in 1989 to $75.4
million in 1996. Abstracting a unit rate for each year based
upon total reporting GLA, sales in 1995 reportedly increased to
$230.16 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. For 1996, mature
store sales were relatively unchanged, declining to $312.10 per
square foot from $312.70 in 1995. Property totals for
comparative store sales increased from $261.60 in 1995 to $263.20
in 1996. Comparable mall shop sales, excluding food court
tenants, reached about $255 per foot in 1996.
Department Store Sales
Department store sales at the subject property reportedly
reached $75.6 million in 1996, reflecting a 3.5 percent increase
over 1995 figures. The indicated overall sales average per
square foot is $166. 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 $15,281 $18,671
1996 $29,806 $ 10,227 $15,432 $20,146
CAGR:89-96 +6.86% +1.82% +0.57% --
CAGR:92-96 +2.98% +3.51% +2.24% +13.17%
As can be seen, department store sales have grown at a
compound annual rate of about 5.16 percent per year since 1992.
Sears has shown the strongest overall growth at 13.17 percent,
while JC Penney has had growth of 2.24 percent per annum. JC
Penney is on ground lease terms and not part of owned GLA.
We would note that JC Penney has more or less saturated the
Baltimore market over the past several years, adding some 20
stores in conjunction with the purchase of a majority of the
Woodward & Lothrop stores. This has reportedly had some impact
at the subject store, restricting sales growth.
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 Golden 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 80.0 percent, with average
mall shop sales of $221 per square foot in 1995, up from about
$213 per square foot in 1993. For 1996, sales reportedly dropped
to a range of $200 to $210 per square foot. Over 20.0 percent of
tenants at the property are reported to be entertainment
oriented. Four theaters were added to the mall in 1994 and crime
continues to be a problem for this center. Big box users have
expressed recent interest in areas around the property.
The White Marsh Mall, approximately 6+/- miles to the north, is
the subjects other competitive center, competing for portions of
Eastpoints 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 Hechts (120,000 square feet), JC Penney (132,000
square feet), Macys (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.
It is rumored that ownership may convert this store into mall
shop 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.
This area is also experiencing interest from big box users.
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.
As noted, Wal-Mart will apparently be developing a store about
1.0 mile east of the subject on the site of an existing flea
market. While being competitive with Ames and Value City, we
believe Wal-Mart will attract additional traffic to the area,
improving the draw of shoppers.
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 nations 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 areas retail sales.
- The subjects trade area has declined slightly in population,
primarily as a result of the outmigration of residents from
Baltimore City into more suburban areas.
- Competition exists most directly with the Golden Ring Mall.
Golden Ring, together with the subject, have similar merchandising
themes targeted to the middle income residents that form the
basis for the trade area. The subject's expansion, renovation
and remerchandising has been timely and continues 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 subjects
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 subjects region continues to be positive, with below
average prospects for growth.
THE SUBJECT PROPERTY
Property Description
Eastpoint Mall contains a total GLA of 862,313+/- square feet.
Of this total, the enclosed mall consists of 296,581+/- 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
three to four 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 continues to try to bring in a so-
called fifth anchor on the former Firestone outpad. Service
Merchandise was a proposed deal here and would occupy a 50,00+/-
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 $630,000 for real estate taxes in calendar year
1997, higher than the $598,600 in 1996. 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; and
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 Capitalization 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 (REITs). 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.
However, overbuilding in the retail industry has resulted in the
highest GLA per capita ever (19 square feet per person). As a
consequence, institutional investors are more selective than ever
with their underwriting criteria. Many investors are even
shunning further retail investment at this time, content that
their portfolios have a sufficient weighting in this segment.
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 overwhelming consensus that Class A
property would trade in the 7.0 to 8.0 percent capitalization
rate range, with rates below 7.5 percent likely limited to the
top 15 to 20 malls with sales at least $350 per square foot.
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 9.5 to 14.0 percent range. Pessimism
about the long term viability of many of these lower quality
malls has been fueled by the recent turmoil in the retail
industry.
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. The typical range for
total occupancy cost-to-sales ratios falls between 10.0 and 15.0
percent. With operating expenses growing faster than sales in
many malls, this issue has become even more important. As a
general rule of thumb, malls with sales under $250 per square
foot generally support ratios of 10.0 to 12.0 percent; $250 to
$300 per square foot support 12.0 to 13.5 percent; and over $300
per square foot support 13.5 to 15.0 percent. 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 for some higher margin
tenants. 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 for new
competition. 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
(four are ideal), 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. Entertainment - Entertainment has become a critical element at
larger centers as it is designed to increase customer traffic and
extend customer staying time. This loosely defined term covers
a myriad of concepts available ranging from mini-amusement
parks, to multiplex theater and restaurant themes, to interactive
virtual reality applications. The capacity of regional/ super-regional
centers to provide a balanced entertainment experience well serve to
distinguish these properties from less distinctive formats such as
power and smaller outlet centers.
5. Dense Marketplace - Several of the institutional investors favor
markets of 300,000 to 500,000 people 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.
6. Income Levels - Household incomes of $50,000+ which tends to be
limited in many cases to top 50 MSA locations. Real growth with
spreads of 200 to 300 basis points over inflation are ideal.
7. Good Access - Interstate access with good visibility and a location
within or proximate to the growth path of the community.
8. 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.
9. 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.
10. 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.
11. 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. Most of the stores have since been
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. The trend of further consolidation and vulnerability
of the regional chains continued throughout 1996.
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.
Cushman & Wakefield has extensively tracked regional mall
transaction activity for several years. In this analysis we
discuss sale trends since 1991. Summary data sheets for the more
recent period (1995 to 1996) are displayed on the Following
Pages. Summary information for prior years (1991 to 1994) are
maintained in our files. 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 $686 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 $686 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
1995 Mall Sales Chart
1996 Mall Sales Chart
1996 Mall Sales Chart (page 2)
- The fourteen sales included for 1991 show a mean 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 19
mall transactions for 1995. With the exception of possibly
Natick Mall and 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.
In 1995, it is shown to be $88.6 million which is even skewed
upward by Natick and Smith Haven Malls which had a combined price
of $486.0 million. The average price per square foot of total
GLA sold is calculated to be $193 per square foot. The range in
values of mall GLA sold are $93 to $686 with an average of $285
per square foot. The upper end of the range is formed by Queens
Center with mall shop sales of nearly $700 per square foot.
Characteristics of these lesser quality malls would be higher
initial capitalization rates. The range for these transactions
is 7.25 to 11.10 percent with a mean of 9.13 percent. Most
market participants indicated that continued turmoil in the
retail industry will force cap rates to move higher.
- 1996 has been the most active year in
recent times in terms of transactions. REIT's have far and away
been the most active buyers. We believe this increase in
activity is a result of a combination of dynamics. The liquidity
of REIT's as well as the availability of capital has made
acquisitions much easier. In addition, sellers have become much
more realistic in there pricing, recognizing that the long term
viability of a regional mall requires large infusions of capital.
The 26 transactions we have tracked range in size from
approximately $22.2 million to $266.0 million. The malls sold
also run the gamut of quality ranging from several secondary
properties in small markets to such higher profile properties as
Old Orchard Shopping Center in Chicago and South Park Mall in
Charlotte. Sale prices per SF of mall shop GLA range from $126
to $534 with a mean of $242. REIT's primary focus on initial
return with their underwriting centered on in place income. As
such, capitalization rates ranged from 7.0 percent to 12.0
percent with a mean of 9.35 percent.
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.
Chart A, following, shows this relationship along with other
selected indices.
CHART A *
Selected Average Indices
Transaction Price/SF Price/SF Range Sales Capitali-
Year Range ** of Mall Shop Multi- zation
of Total GLA/Mean ple Rates
GLA/Mean
1991 $156 - $556 $203 - $556 1.17 6.44%
$282 $357
1992 $136 - $511 $226 - $511 1.07 7.31%
$259 $320
1993 $ 73 - $471 $173 - $647 1.15 7.92%
$242 $363
1994 $ 83 - $378 $129 - $502 0.96 8.37%
$197 $288
1995 $ 53 - $686 $ 93 - $686 0.96 9.13%
$193 $284
1996 $ 58 - $534 $126 - $534 0.84 9.35%
$190 $242
* Includes all transactions for particular year
** Based on total GLA acquired
The chart above shows that the annual average price per
square foot of total GLA acquired has ranged from $190 to $282
per square foot. A declining trend has been in evidence as cap
rates have risen. 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.
The price per square foot of mall shop GLA has declined from a
high of $357 per square foot in 1991 to $242 per square foot in
1996. In order to gain a better perspective into this measure,
we can isolate only those sales which involved a transfer of the
mall shop GLA. Chart B, following, makes this distinction. We
have displayed only the more recent transactions (1995-1996).
CHART B
Regional Mall Sales Involving
Mall Shop Space Only
1995 1996
Sale Unit NOI Sale Unit NOI
No. Rate Per No. Rate Per
SF SF
95-1 $686 $66.58 96-6 $126 $15.12
95-3 $342 $26.68 96-8 $144 $14.84
95-4 $259 $22.42 96-9 $281 $25.12
95-7 $237 $17.21 96-10 $433 $30.34
96-16 $145 $11.27
96-17 $270 $29.74
96-18 $534 $40.03
96-21 $508 $35.57
96-23 $342 $29.11
96-24 $225 $17.32
96-25 $239 $17.44
Mean $381 $33.22 $295 $24.17
From the above we see that the mean unit rate for sales
involving mall shop GLA only has ranged from approximately $126
to $686 per square foot with yearly averages of $295 and $381 per
square foot for the most recent two year period. We recognized
that these averages may be skewed somewhat by the size of the
sample, particularly in 1995.
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 $143 per square
foot in 1995, and only $113 per square foot in 1996. Chart C,
following, depicts this data.
CHART C
Regional Mall Sales Involving
Mall Shops and Anchor GLA
Sale Unit NOI Sale Unit NOI
No. Rate Per No. Rate Per
SF SF
95-2 $410 $32.95 96-1 $278 $22.54
95-5 $272 $21.05 96-2 $130 $13.62
95-6 $ 91 $ 8.64 96-3 $129 $13.57
95-8 $105 $ 9.43 96-4 $108 $10.70
95-9 $122 $11.60 96-5 $122 $11.06
95-10 $ 95 $ 8.80 96-7 $ 58 $ 6.58
95-11 $ 53 $ 5.89 96-11 $ 73 $ 8.02
95-12 $ 79 $ 8.42 96-12 $102 $10.21
95-13 $ 72 $ 7.16 96-13 $117 $10.96
95-14 $ 96 $ 9.14 96-14 $ 77 $7.78
95-15 $212 $17.63 96-15 $ 92 $9.52
95-16 $ 56 $ 5.34 96-19 $ 91 $8.40
95-17 $ 59 $ 5.87 96-20 $ 66 $6.81
95-18 $143 $11.11 96-22 $170 $12.75
95-19 $287 $22.24 96-26 $ 75 $8.01
Mean $143 $12.35 Mean $113 $10.70
* Sale included peripheral GLA
Analysis of Sales
Within Charts B and C, we have presented a summary of several
transactions 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.
Application to Subject Property
Because the subject is theoretically selling both mall shop
GLA and owned department stores, we will look at the recent sales
summarized in Chart C more closely. As a basis for comparison,
we will analyze the subject based upon projected net operating
income. First year NOI has been projected to be $11.55 per
square foot (CY 1997), based upon 693,344 square feet of owned
GLA. Derivation of the subject's projected net operating income
is presented in the Income Capitalization Approach section of
this report as calculated by the Pro-Ject model. With projected
NOI of $11.55 per square foot, the subject falls toward the low
end of the range exhibited by most of 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 at the high-end 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 $11.55 81.1%
1992 $16.01 $11.55 72.1%
1993 $15.51 $11.55 74.5%
1994 $15.62 $11.55 73.9%
1995 $12.35 $11.55 93.5%
1996 $10.70 $11.55 107.4%
* Data for years 1991 through 1994 are
retained in our files.
With first year NOI forecasted at approximately 72.0 to 107.0
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 more
recent sales data (1995/96). 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 Income
Sale Price/SF + NOI/SF Multiplier
No.
95-6 $ 91 $8.64 10.53
95-8 $ 105 $9.43 11.13
95-10 $ 95 $8.80 10.80
95-14 $ 96 $9.14 10.50
96-11 $ 73 $8.02 9.10
96-14 $ 77 $7.78 9.90
96-15 $ 92 $9.52 9.66
96-19 $ 91 $8.40 10.83
96-26 $ 75 $8.01 9.36
Mean $ 88 $8.64 10.20
Valuation of the subject property utilizing the net income
multipliers (NIMs) from the comparable properties accounts for
the disparity of the net operating incomes ($NOIs) per square
foot between the comparables and the subject. Within this
technique, each of the adjusted NIMs 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 Capitalization
Approach section of this report.
Adjusted Unit Rate Summary
Net Income Indicated
Sale NOI/SF X Price = $/SF
No. Multiplier
95-6 $11.55 10.53 $122
95-8 $11.55 11.13 $129
95-10 $11.55 10.80 $125
95-14 $11.55 10.50 $121
96-11 $11.55 9.10 $105
96-14 $11.55 9.90 $114
96-15 $11.55 9.66 $112
96-19 $11.55 10.83 $125
96-26 $11.55 9.36 $108
Mean $11.55 10.20 $118
From the process above, we see that the indicated net income
multipliers range from 9.10 to 11.13 with a mean of 10.20. The
adjusted unit rates range from $105 to $129 per square foot of
owned GLA with a mean of $118 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.
The subject, although considered the dominant property for
its trade area, has less than average growth potential in terms
of its net income/cash flow. There is also some near term rent
roll risk with a number of leases expiring.
As such, we would be inclined to be at the lower end of the
adjusted range for the comparables. Considering the
characteristics of the subject relative to the above, we believe
that a unit rate range of $114 to $120 per square foot is
appropriate. Applying this unit rate range to 693,344 square
feet of owned GLA results in a value of approximately $79.0
million to $83.0 million for the subject as shown below.
693,344 SF 693,344 SF
x $114 x $120
--------------- ---------------
$79,000,000 $83,000,000
Rounded Value Estimate - Market Sales Unit Rate Comparison
$79,000,000 to $83,000,000
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 1.00 as
a benchmark, and will look to keep it within a range of 0.75 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. Therefore, the analysis shown below
is limited to those sales which involved mall shop GLA only.
Sales Multiple Summary
Sale Going-In Sales
No. OAR Multiple
95- 1 9.71% 1.00
95- 3 7.80% 1.01
95- 4 8.66% 0.99
95- 7 7.25% 0.82
96- 6 12.00% 0.33
96- 8 10.31% 0.67
96- 9 8.95% 0.85
96-10 7.00% 1.08
96-16 7.75% 0.53
96-17 11.00% 0.71
96-18 7.50% 1.17
96-21 7.00% 1.27
96-23 8.50% 1.14
96-24 7.70% 0.87
96-25 7.30% 0.96
Mean 8.56% 0.89
The mall sales involving solely mall shop GLA for the years
1995/1996 show sales multiples that range from 0.33 to 1.27 with
a mean of about 0.89. As 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 sales performance in 1997, the subject
should produce sales of about $260 per square foot for all
comparable store tenants, including food court.
In the case of the subject, the overall capitalization rate
being utilized for this analysis is considered to be in the mid-
range of the mean exhibited by the comparable sales. As such, we
would be inclined to utilize a multiple near the mean indicated
by the sales which is applied to just the mall shop space. In
addition, the subject has a below average sales and income growth
potential. Applying a ratio of say, 0.70 to 0.75 percent to the
forecasted sales of $260 per square foot, the following range in
value is indicated:
Unit Sales Volume (Mall Shops) $260 $260
Sales Multiple x 0.70 x 0.75
---------- ----------
Adjusted Unit Rate $182.00 $195.00
Mall Shop GLA x 343,458 x 343,458
---------- ----------
Value Indication $62,500,000 $67,000,000
The analysis shows an adjusted value range of approximately
$62.5 to $67.0 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 and other major tenants are forecasted to
contribute approximately $1.5 million in revenues in 1997
($790,500 in base rent obligations and $711,764 in overage rent).
If we were to capitalize this revenue separately at an 10.5
percent rate, the resultant effect on value is approximately
$14.3 million.
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 sales occurred with
credit worthy national tenants in place.
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 a rate toward the middle 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 $179,900 in minimum rent in 1997. Utilizing a
capitalization rate of 12.0 percent, an allocated value of
$1,500,000 can be placed on the offices.
Therefore, adding the anchor and office income's implied
contribution to value of $14.3 and $1.5 million, respectively,
the resultant range is shown to be approximately $78.3 to $82.8
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 $78,300,000 to $82,800,000
Value Conclusion
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 fairly typical anchor alignment and good
representation of national tenants. The subject's trade area has
limited growth and does not appeal to the broad segment of the
investor marketplace.
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 Square Feet: 693,344+/ SF
Price Per SF of Salable Area: $114 to $120
Indicated Value Range: $79,000,000 to $83,000,000
Sales Multiple Analysis
Indicated Value Range $78,300,000 to $82,800,000
The parameters above show a value range of approximately
$78.3 to $83.0 million for the subject property. 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 for the subject within the more defined
range of $80.0 to $83.0 million for the subject as of January 1,
1997.
Market Value As Is - Sales Comparison Approach
Rounded to $80,000,000 to $83,000,000
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, 1997. 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, it is projected
that the subject property will generate approximately $11,935,400
in potential gross revenues, equivalent to $17.21 per square foot
of total appraised (owned) GLA of 693,344 square feet. These
forecasted revenues may be allocated to the following components:
Revenue Summary
Initial Year of Investment - 1997
Revenue Amount Unit Income
Component Rate * Ratio
Minimum Rent $ 7,018,996 $10.12 58.8%
Overage Rent $ 959,884 $ 1.38 8.0%
Expense
Recoveries $ 3,387,020 $ 4.89 28.4%
Miscellaneous
Income $ 569,500 $ 0.82 4.8%
Total $ 11,935,400 $17.21 100.0%
* Reflects total owned GLA of 693,344 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 $4,970,005, or $21.34 per square foot. Minimum rent may be
allocated to the following components:
Minimum Rent Allocation
Interior Mall Shops
1997 Applicable Unit Rate
Revenue GLA * (SF)
Mall Shops $4,441,586 224,780 SF $19.76
Kiosks $ 158,333 1,645 SF $96.25
Food Court $ 370,086 6,446 SF $57.41
Total $4,970,005 232,871 SF $21.34
* 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.
New Tenant Activity
New tenants to the mall and/or proposed leases can be
summarized in the following bullet points:
- Great Cookie will be moving into an in-line suite,
occupying 510 square feet on a 10-year term beginning
at $39.22 per square foot.
- Small's Formalwear leased 1,050 square feet in October
1996 at an initial rental rate of $20.00 per square foot.
- Ritz Camera will reportedly be leasing 1,200 square feet
in mid-year 1997 at an initial rent of $16.67 per square foot.
- Claire's Boutique will be occupying Suite 7750 (1,500 square
feet) at $23.00 per square foot. The rent steps to $29.67
in year six.
- Bath & Body Works will reportedly lease 2,500 square feet at
an initial rental rate of $15.00 per square foot.
- Hair Cuttery will lease 1,275 square feet at $23.53 in July 1997,
increasing to $25.10 in 2000 and $26.67 in 2004.
- 5-7-9 is currently negotiating a deal for 2,252 square feet.
This lease should begin in January 1998 at an initial rent of
$18.00 per square foot.
- Footquarters opened a 4,130 square foot store in October 1996.
The beginning rental rate of $17.00 steps to $19.00 in 1999 and
$20.00 in 2003.
- Champs Sporting Goods is reportedly interested in the former
Provident Bank space. The proposed lease starts at $15.00 per
square foot, escalating to $17.50 in 2000 and $20.00 in 2004.
- Provident Savings is moving into 4,700 square feet (Suites 7859/61)
in April 1997.
Tenant Renewals
The following tenants have or will reportedly be renewing
their leases at the subject property:
- C.J. Watch Repair - General Nutrition
- Super Cuts - S&N Katz
- Kay Bee Toys - Kinney Shoes
- Payless - B. Fine
- Children's Place - Moun Wok
- Going Places - Dr. Schlossberg
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.
- Brass Hen - Pro Image
- Arby's - Kids Mart
- Provident (Relocating) - Great Cookie (Relocating)
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.
As shown, 41 leases reflect an overall average rent of $18.42
per square foot. The highest rent is attained from Group 1
(Tenants < 750 SF) with an average of $44.00 per square foot.
The averages generally decline by size category to $10.66 for
Group 7 (Tenants > 10,000 SF). It is noted that Catherines,
Baltimore Gas, and Golden Corral are not interior mall tenants.
The lease terms shown average approximately 10.3 years. Over
the lease term, the average rent is shown to increase by 15.4
percent.
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.
Occupancy Cost Analysis Chart
(Occupancy cost analysis for selected cities)
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 1996 reportedly reached
$255 per square foot for all tenants exclusive of the food court.
In light of the mall's performance, we are forecasting sales to
remain flat in 1997.
After considering all of the above, we have developed a
weighted average rental rate of approximately $19.00 per square
foot based upon a relative weighting of tenant spaces by size.
We have tested this average rent against total occupancy costs in
order to test the reasonableness of this average rent (see
following section). Since occupancy costs are projected to be at
the high end for a mall of the subject's calibre, we feel that
base rent should not exceed a 7.0 to 7.5 percent ratio to sales.
Based upon this ratio, the following presents a range in rents
for the subject.
Base Rent-to-Sales Implied Rent from
Ratio $255/SF
7.00 $17.85/SF
7.25 $18.50/SF
7.50 $19.10/SF
7.75 $19.80/SF
Our average rent conclusion of $19.00 per square foot 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 $19.00 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 - 1997
Tenant Cost Estimated Expenses/SF
Economic Base Rent $ 19.00
(Weighted Average)
Occupancy Costs (A)
Common Area Maintenance (1) $ 11.48
Real Estate Taxes (2) $ 1.68
Other Expenses (3) $ 1.35
Total Tenant Costs $ 33.51
Projected Average Sales (1997) $ 255.00
Rent to Sales Ratio 7.45%
Cost of Occupancy Ratio 13.14%
(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 13.1 percent of
projected average 1997 retail sales which we feel is moderately
high but manageable.
Food Court
The food court has not seen many recent leases and has shown
signs of some tenants paying high occupancy costs. In total, ten
food court tenants occupy an average of 645 square feet. The
average rent is currently $52.44 per square foot, with average
sales of $548. Delicious recently re-opened under a new operator
at a rental rate of $43.40 per square foot, while Moun Wok has
signed an early renewal beginning in 1998 at $83.64 per square
foot. Due to increased competition and occupancy costs, we have
ascribed a rental rate of $45.00 per square foot for food court
tenants. Food court tenants pay additional recoveries for common
seating charges.
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 $2.00 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 three year period
through December 2000. We have identified 29,249 square feet of
vacant in-line space, net of newly executed leases and pending
deals which have good likelihood of coming to fruition. This
figure includes tenants who will be vacating over the next year
and is equivalent to 12.5 percent of mall shop GLA. In total,
vacancy at the subject is approximately 77,530 square feet,
including outdoor tenants and office space. Office space is
projected to be absorbed through December 2000, although 32,075
square feet of atrium office space is never projected to be
leased.
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 2,437 square feet per quarter. We have
assumed that the space will all lease at 1997 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)
1997 86.57%
1998 88.09%
1999 93.52%
2000 99.26%
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 opened 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 about $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 three year period through December 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 1997, outdoor tenants are
forecasted to generate nearly $1,078,591 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 $790,500 in calendar year 1997. 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 $1.74 per square foot of department store area or
11.3 percent of total minimum rent in 1997. The following
schedule summarizes anchor rent obligations.
Eastpoint Mall
Schedule Anchor Tenant Revenues
Tenant Demised Area (SF) Expiration with Options Annual Rent Unit Rate
JC Penney 168,969 8/2001 ** $ 1,500 $0.01
Ames 58,442 5/2004 $204,000 $3.49
Hochschilds 140,000 11/2009 $585,000 $4.18
Sears 87,734 8/2041 -- --
Total 455,145 $790,500 $1.74
* 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. 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 *
1997 Flat
1998 +2.0%
1999 +2.5%
Thereafter +3.0%
* 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 Flat yrs. One step Yes Yes Yes
Artium
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 1997), it is
projected that the subject property will produce approximately
$7,018,996 in minimum rental income. This estimate of base
rental income is equivalent to $10.12per square foot of total
owned GLA. Alternatively, minimum rental income accounts for
58.8 percent of all potential gross revenues. Further analysis
shows that over the holding period (CY 1997-2006), minimum rent
advances at an average compound annual rate of 2.4 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 varying trends 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.
Thus, in the initial full year of the investment holding
period, overage revenues are estimated to amount to $959,884 (net
of any recaptures) equivalent to $1.38 per square foot of total
GLA and 8.0 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. After considering our
analysis, combined with the potential for increased competition
in the subject market, we have forecasted the following sales
growth rates:
Sales Growth Rate Forecast
Period Annual
Growth Rate
1997 Flat
1998 2.0%
Thereafter 3.0%
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.
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 $3,387,020 in reimbursements for
these operating and $569,500 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
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 Expense Actual hard cost for year exclusive
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 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 3.5 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 5.5
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 5.5 percent factor as the mall leases
up based upon the following schedule.
1997 4.0%
1998 4.5%
1999 5.0%
Thereafter 5.5%
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 5.6 percent (2000) of total potential gross revenues to a
high of 17.4 percent (1997). On average, the total allowance for
vacancy and credit loss over the 10 year projection period
averages 9.9 percent of these revenues.
Total Rent Loss Forecast *
Year Credit Physical Total Loss
Loss Vacancy Provision
1997 4.00% 13.43% 17.43%
1998 4.50% 11.91% 16.41%
1999 5.00% 6.48% 11.48%
2000 5.50% 0.07% 5.57%
2001 5.50% 1.52% 7.02%
2002 5.50% 1.54% 7.04%
2003 5.50% 1.26% 6.76%
2004 5.50% 1.48% 6.98%
2005 5.50% 3.01% 8.51%
2006 5.50% 5.81% 11.31%
Avg. 5.20% 4.65% 9.85%
* Includes phased global vacancy provision for
unseen vacancy and credit loss as well as
weighted downtime provision of lease turnover.
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 1997,
effective gross revenues ("Total Income" line on cash flow) are
forecasted to amount to approximately $11,548,421, equivalent to
$16.66 per square foot of total owned GLA.
Effective Gross Revenue Summary Initial Year of Investment - 1997
Aggregate Unit Income
Sum Rate Ratio
Potential Gross Income $11,935,400 $17.21 100.0%
Less: Vacancy and
Credit Loss ($386,979) ($ 0.56) 3.3%
Effective Gross Income $11,548,421 $16.66 96.7%
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 1997 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.
Expense Growth Rates
Expense growth rates are generally forecasted to be more
consistent with inflationary trends than necessarily with
competitive market forces. 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 $1,907,993
1997 Budget $1,926,911
The 1997 CAM budget is shown to be $1,926,911. An
allocation of this budget by line item provided in the
Addenda. We have utilized an expense of $1,925,000 for
1996 which is equivalent to $7.98 per square foot of mall
shop area (241,146 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.
Real Estate Taxes - The projected taxes to be incurred in
1997 are equal to $630,000, up from $598,600 in 1996. 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.
Food Court CAM (Common Seating) - The cost of maintaining
the food court is budgeted at $192,250, down from
$199,276 in 1995. 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 $29.82 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 1997, we reflect general and
administrative expenses of $160,000.
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 $81,000 in
1997. 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 $105,000.
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 $359,049. 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 $2.00 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
$3.80 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 $4.00 per square foot for new tenants and
$2.00 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 $2.60 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 $300,000 in 1997, and $100,000
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 $0.15 per square foot of owned GLA during
the first year ($104,002), 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 $8.0 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 $7.4 million.
Operating Summary
Initial Year of Investment - 1997
Aggregate Unit Rate* Operating
Sum Ratio
Effective Gross Income $11,548,421 $16.66 100.0%
Operating Expenses $ 3,542,049 $ 5.11 30.7%
Net Operating Income $ 8,006,372 $11.55 69.3%
Other Expenses $ 655,102 $ 0.95 5.7%
Cash Flow $ 7,351,270 $10.60 63.6%
* Based on total owned GLA of 693,344 square feet.
Our cash flow model has forecasted the following compound
annual growth rates over the ten year holding period 1997-2006.
Net Operating Income: 2.5%
Cash Flow: 2.9%
Growth rates are shown to be 2.5 and 2.9 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 an 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
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.
For retail properties, the trend has been for rising
capitalization rates. We feel that much of this has to do with
the quality of product that has been selling. Sellers of better
performing dominant Class A malls have been unwilling to waver on
their pricing. Many of the malls sold over the past 18-24 months
are found in less desirable, second or third tier locations, or
rep-resent turnaround situations with properties that are poised
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 Point
Change
1988 5.00% - 8.00% 6.19% -
1989 4.57% - 7.26% 6.22% + 3
1990 5.06% - 9.11% 6.29% + 7
1991 5.60% - 7.82% 6.44% + 15
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 7.25% -11.10% 9.13% + 76
1996 7.00% -12.00% 9.35% + 22
Basis Point Change
1988-1996 316 Basis Points
1992-1996 204 Basis Points
The data shows that the average capitalization rate has shown
a rising trend each year. Between 1988 and 1996, the average
capitalization rate has risen 316 basis points. Since 1992, the
rise has been 204 basis points. This change is a reflection of
both rising interest rates and increasing first year returns
demanded by investors in light of several fundamental changes
which have occurred in the retail sector. The 22 basis point
change in the mean between 1995 and 1996 may be an indication
that rates are approaching stabilization.
As noted, 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 Autumn 1996 survey reveals that
going-in cap rates for Class A regional shopping centers range
between 7.00 and 9.50 percent, with a low average of 7.90 percent
and high average of 8.20 percent, respectively; a spread of 30
basis points. Generally, the change in average capitalization
rates over the Winter 1995 survey shows that the low average
decreased by 50 basis points, while the upper average remained
the same. Terminal, or going-out rates are now averaging 8.20
and 8.60 percent, indicating a spread between 30 to 40 basis
points over the going-in rates. For Class B properties, the
average low and high going-in rates are 9.30 and 9.60 percent,
respectively, with terminal rates of 9.60 and 10.00 percent.
Cushman & Wakefield Valuation Advisory Services
National Investor Survey - Regional Malls (%)
Investment Winter 1995 Spring 1996 Autumn 1996
Parameters Low High Low High Low High
OAR/Going-In 7.0-8.0 7.5-9.0 7.5-9.0 7.5-9.5 7.0-9.0 7.5-9.5
7.47 8.25 8.0 8.2 7.9 8.2
OAR/Terminal 7.0-9.0 8.0-10.0 7.0-9.5 7.8-11.0 7.0-9/5 7.8-11.0
8.17 8.83 8.3 8.7 8.2 8.6
IRR 10.0-11.5 10.5-12.0 10.0-15.0 11.0-15.0 10.0-15.0 11.0-15.0
10.72 11.33 11.5 11.8 11.4 11.8
Cushman & Wakefield now surveys respondents on their criteria
for both Class B and "Value Added" malls (see Addenda for
complete survey results). As expected, going-in capitalization
and yield rates range from 100 to 300 basis points above rates
for Class A assets. Our current survey also shows that investors
have become more cautious in their underwriting, positioning
"retail" lower on their investment rating scales in terms of
preferred investments.
The Fourth Quarter 1996 Peter F. Korpacz survey concurs with
these findings, citing that regional malls are near the bottom of
investor preferences. As such, they foresee some opportunities
for select investing. Pricing is lower then it has been in
years. With expense growth surpassing sales increases in many
markets, occupancy cost issues have also become of greater
concern. Even in some malls where sales approach the lofty level
of $350+/- per square foot, it is not uncommon for occupancy costs
to limit the opportunity to grow rents. Thus, with limited
upside growth in net income, cap rates are generally well above
8.0 percent. Even at this level, cap rates are lower than other
property types. One attraction for malls is that pricing is
based upon the expectation of lower rents while most other
property types are analyzed with higher rents.
NATIONAL REGIONAL MALL MARKET
FOURTH QUARTER 1996
CURRENT LAST
KEY INDICATORS QUARTER QUARTER YEAR AGO
Free & Clear Equity IRR
RANGE 10.00%-14.00% 10.00%-14.00% 10.00%-14.00%
AVERAGE 11.69% 11.56% 11.55%
CHANGE (Basis Points) - +13 +14
Free & Clear Going-In
Cap Rate
RANGE 6.25%-11.00% 6.25%-11.00% 6.25%-11.00%
AVERAGE 8.57% 8.33% 7.86%
CHANGE (Basis Points) - +24 +71
Residual Cap Rate
RANGE 7.50%-11.00% 7.00%-11.00% 7.00%-11.00%
AVERAGE 8.76% 8.71% 8.45%
CHANGE (Basis Points) - +5 +31
Source: Peter Korpacz Associates,Inc. - Real Estate Investor Survey
Fourth Quarter -1996
As can be seen from the above, the average IRR has increased
by 14 basis point to 11.69 percent from one year ago. It is
noted that this measure has been relatively stable over the past
12 months. The quarter's average initial free and clear equity
cap rate rose 71 basis points to 8.57 percent from a year
earlier, while the residual cap rate increased 31 basis points to
8.76 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 1997 in view of the
wave of retail chains whose troublesome earnings are forcing
major restructures or even liquidations. 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 15 to 20+/- malls in the country.
Excellent demographics with high sales
($400+/-/SF) and good upside.
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. Sales tend to be in
the $300 to $350 per square foot range.
8.5% to 11.0% 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.
11.0% to 14.0% 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 9.50 and 10.00 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, the Cushman & Wakefield survey
shows a 30-40 basis point differential, while Korpacz reports 19
basis points.
Therefore, to the range of stabilized overall capitalization
rates, we have considering adding 25 basis points to arrive at a
projected terminal capitalization rate. We would note, however,
that income growth projections are relatively modest and that
very little upside is projected for the office portion of
Eastpoint. As such, we have looked toward a terminal cap rate
between 9.50 and 10.00 percent as being reasonable for the
subject. 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 9.75
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 $107.3 million based on 2007 net
income of approximately $10.46 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 and
Net Income 2007 Gross Sale Price Misc. Expenses at 2.0% Net Proceeds
$10,464,350 $107,326,667 $2,146,533 $105,180,133
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 Autumn
1996 survey, investors in regional malls are currently looking at
broad rates of return between 10.00 and 15.00 percent, down
slightly from our last two surveys. The average low IRR for
Class A malls is 11.40 percent, while the average high is 11.80
percent. The indicated low and high averages for Class B
properties are 13.40 and 13.90 percent, respectively. Peter F.
Korpacz reports an average internal rate of return of 11.69
percent for the Fourth Quarter 1996, up 14 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 Bond Yields (%) March 6, 1997
Reserve Bank Discount Rate 5.00%
Prime Rate (Monthly Average) 8.25%
6-Month Treasury Bills 5.18%
U.S. 10-Year Notes 6.56%
U.S. 30-Year Bonds 6.82%
Telephone Bonds 7.86%
Municipal Bonds 5.79%
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 six
month treasury bill at 5.18 percent. A more risky investment,
such as telephone bonds, would currently yield a much higher rate
of 7.86 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 6.56 percent, while 30-year bonds are
at 6.82 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 $350 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.
We would also note that much of the risks associated with
discounted cash flow projections are accounted for in the
selection of market rents, growth rates, turnover probability,
and global 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, 2006), 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 property have been
presented. To reiterate, the formulation of these cash flows
incorporate the following general assumptions in our computer
model:
SUMMARY OF CRITICAL ASSUMPTIONS FOR DISCOUNTED CASH FLOW
SUBJECT PROPERTY EASTPOINT MALL
SQUARE FOOTAGE RECONCILIATION
TOTAL GROSS LEASABLE AREA 862,313 SF
ANCHOR TENANT GLA 455,145 SF
OWNED GLA 693,344 SF
MALL SHOP GLA 241,146 SF
MARKET RENT/SALES CONCLUSIONS
MARKET RENT ESTIMATES (1997)
AVERAGE MALL SHOP RENT $19.00/SF
AVERAGE FOOD COURT RENT $45.00/SF
RENTAL BASIS NNN
MARKET RENTAL GROWTH RATE 2.0%-1999; 3.0%
THEREAFTER
CREDIT RISK LOSS (NON-ANCHOR SPACE) 5.5% (STABILIZED)
VACANCY & TYPICAL LEASE TERM
AVERAGE LEASE TERM 10 YEARS
RENEWAL PROBABILITY 70%
WEIGHTED AVERAGE DOWNTIME 3 MONTHS
STABILIZED OCCUPANCY 94.0%
ABSORPTION PERIOD 36 MONTHS
OPERATING EXPENSE DATA
LEASING COMMISSIONS
NEW TENANTS $4.00/SF
RENEWAL TENANTS $2.00/SF
TENANT IMPROVEMENT ALLOWANCE
RAW SUITES $25.00/SF
NEW TENANT $ 8.00/SF
RENEWAL TENANT $ 2.00/SF
EXPENSE GROWTH RATE 3.5%/YR
TAX GROWTH RATE 3.5%/YR
MANAGEMENT FEE (MINIMUM AND % RENT) 4.5%
CAPITAL RESERVES (PSF OF OWNED GLA) $0.15/SF
RATES OF RETURN AS IS
CASH FLOW START DATE 1/1/97
DISCOUNT RATE 12.00-12.50%
GOING-IN CAPITALIZATION RATE 9.50-10.00%
TERMINAL CAPITALIZATION RATE 9.50-10.00%
REVERSIONARY SALES COSTS 2.00%
HOLDING PERIOD 10 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 Facing Page.
Through such a sensitivity analysis, it can be seen that the
present value of the subject property varies from approximately
$78.3 to $82.5 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 9.75
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 $80.3 million for the subject property as of January 1,
1997. The indices of investment generated through this indicated
value conclusion are shown on the Facing Page.
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.
We believe that an investor in the subject would place
substantial weight on this methodology, giving little weight
toward lease-up projections and placing heavy emphasis on initial
return. In view of our total analysis, we would anticipate that
at the subject would trade at an overall rate of approximately
9.50 to 10.00 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 $8,006,372
results in a value of approximately $80,100,000 to $84,300,000.
From this range we would be inclined to conclude at a value of
$83,000,000 by direct capitalization which is indicative of an
overall rate of 9.65 percent.
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 $80,000,000-$83,000,000
Income Approach
Discounted Cash Flow $80,300,000
Direct Capitalization $83,000,000
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, 1997, 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, MAI inspected the property.
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 and Jay F. Booth have completed the requirements of
the continuing education program of the Appraisal Institute.
/s/Jay F. Booth /s/Richard W. Latella
Jay F. Booth, MAI Richard W. Latella, MAI
Retail Valuation Group Senior Director
Retail Valuation Group
Maryland Certified General
Real Estate Appraiser License No. 10462
ADDENDA
NATIONAL RETAIL OVERVIEW (not included)
OPERATING EXPENSE BUDGET - 1997 (not included)
TENANT SALES REPORT - 1996 (not included)
PRO-JECT LEASE ABSTRACT REPORT (not included)
PRO-JECT PROLOGUE ASSUMPTIONS REPORT (not included)
PRO-JECT TENANT REGISTER REPORT (not included)
PRO-JECT LEASE EXPIRATION REPORT (not included)
ENDS FULL DATA REPORT FOR PRIMARY AND TOTAL TRADE AREA (not included)
CUSHMAN & WAKEFIELD INVESTOR SURVEY (not included)
APPRAISERS' QUALIFICATIONS
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 300 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,
assisting 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
property 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 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
Member, Appraisal Institute (MAI No. 11142)
Certified General Appraiser, State of New York No. 46000026796
YAC, Young Advisory Council, Appraisal Institute
