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 (fee required)
For the fiscal year ended December 31, 1994
[ ] Transition Report Pursuant to Section 13 or 159(d) of the Securities
Exchange Act of 1934 (fee required)
For the Transition period from to
Commission file number: 1-9331
MIDWEST REAL ESTATE SHOPPING CENTER L.P.
(formerly Equitable Real Estate Shopping Centers, L.P.)
Exact name of Registrant as specified in its charter
Delaware 13-3384643
State or other jurisdiction of incorporationI.R.S. Employer Identification No.
3 World Financial Center, 29th Floor, New York, NY 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:
NEW YORK STOCK EXCHANGE
Name of each exchange on which registered
10,700,000 UNITS OF LIMITED PARTNERSHIP SECURITIES
Title of Class
Securities registered pursuant to Section 12(g) of the Act: None
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: Agreement of Limited Partnership,
dated December 1, 1986, incorporated by reference to Exhibit A to the prospectus
contained in the Registration Statement No. 33-9937. Proxy Statement used in
connection with solicitation of Unitholders on June 7, 1994 (the "Proxy
Statement"). With the exception of the pages of the Proxy Statement specifically
incorporated by reference herein, the Proxy Statement is not deemed to be filed
as part of this Form 10-K.
PART I
Item 1. Business
(a) General Development of Business
Midwest Real Estate Shopping Center L.P. (formerly Equitable Real Estate
Shopping Centers, L.P.), a Delaware limited partnership (the "Partnership"),
was formed on October 28, 1986. Midwest Centers Inc. (formerly Shearson ESC/GP
Inc.), a Delaware corporation, is the general partner of the Partnership (the
"General Partner"). Midwest Centers Depositary Inc. (the "Assignor Limited
Partner", formerly Shearson ESC Corp.) is the sole limited partner of the
Partnership. The General Partner and the Assignor Limited Partner are
affiliates of Lehman Brothers Holdings, Inc.
On December 30, 1986, the Partnership completed an offering of $107,000,000 of
limited partnership securities ("Units," the holders of which are referred to
herein as "Unitholders") representing assignments of limited partnership
interests from the Assignor Limited Partner. The net proceeds of the offering
after payment of syndication and organizational costs aggregated $97,925,000.
The Partnership was formed to acquire from The Equitable Life Assurance Society
of the United States ("Equitable") two regional shopping malls which Equitable
had owned since 1978: Brookdale Center, located in Brooklyn Center (Hennepin
County), Minnesota ("Brookdale"), and Northland Center, located in Southfield
(Oakland County), Michigan ("Northland") (together the "Properties"). On
December 30, 1986 the Partnership acquired the fee interest in the land and
improvements constituting the Properties for a total purchase price of
$130,025,000 ($49,000,000 for Brookdale and $81,025,000 for Northland).
Two mortgage notes from Equitable were issued on December 30, 1986 in the
initial principal amounts of $15,175,000 (the "Brookdale Note") and $25,675,000
(the "Northland Note"). The Partnership had deferred payment of principal and
interest on the Northland Note until its scheduled maturity on June 30, 1995.
In connection with the impending maturity of the Northland Note, the
Partnership executed a contract with Equitable on March 28, 1994 for the sale
of Northland at the price of $6,600,000 in excess of the balance of the
Northland Note (the "Northland Sales Contract"). On July 22, 1994, the sale
was completed and the Northland Note paid. The effective date of the sale of
Northland was January 1, 1994 and any positive cash flow generated by Northland
Center from January 1, 1994 to the closing belonged to Equitable. The
Partnership is also deferring payment of principal and interest on the
Brookdale Note until its maturity date on June 30, 1995. In connection with
the impending maturity of the Brookdale Note the General Partner is currently
attempting to dispose of Brookdale Center and dissolve the Partnership in an
orderly manner. See Item 7 for the terms of the sale of Northland and a
discussion of the impending maturity of the Brookdale Note.
The Unitholders were solicited on June 7, 1994 in connection with the sale of
Northland. This solicitation informed the Unitholders that the sale of
Northland would be the first step in the disposition of the assets of the
company with a view to the orderly dissolution and liquidation of the
Partnership. Information involving the plan to dispose of all the assets of
the Partnership with a view to its liquidation is contained under the caption
"The Plan to Liquidate" in the Partnership's definitive proxy statement filed
on May 27, 1994 pursuant to Regulation 14A and is incorporated herein by
reference.
On December 31, 1986 the Partnership entered into an agreement with Equitable
Real Estate Investment Management, Inc. ("EREIM"), an indirect wholly-owned
subsidiary of Equitable, to retain EREIM as asset manager (the "Asset Manager")
to the Partnership. Consultation with the Asset Manager by the General Partner
was required to effect a sale of all or substantially all of either property or
to refinance either of the Notes. The Asset Manager has waived its right of
first offer with respect to any proposed sale of either property by the
Partnership. In association with the sale of Northland and intention to
dispose of Brookdale, the asset management agreement with EREIM for both malls
was terminated effective December 31, 1993, thereby releasing the Partnership
from its obligation to pay EREIM an asset management fee of $1,060,000 per
year.
On June 25, 1991, the Partnership obtained a $3 million second mortgage loan
from Equitable (the "Second Mortgage") secured by a second mortgage lien on
Northland Center. The proceeds were used to fund food court construction costs
and remerchandising costs at Northland. The Second Mortgage was repaid in June
1993, prior to its June 25, 1993 maturity date, from Partnership cash reserves.
On November 21, 1994, the Partnership changed its name from Equitable Real
Estate Shopping Centers, L.P. to Midwest Real Estate Shopping Center L.P. The
name change was in conjunction with the termination of the former asset
management agreement with EREIM, pursuant to which the Partnership agreed to
cease using the words "Equitable" and "Equitable Real Estate" in its name.
(b) Financial Information About Industry Segments
The Partnership's sole business is the ownership and operation of its remaining
property, Brookdale Center. All of the Partnership's revenues, operating
profit or loss and assets relate solely to such industry segment.
(c) Narrative Description of Business
The Registrant's principal business is to own and operate its remaining
property. The Partnership's principal objectives are to:
(1) provide quarterly cash distributions, substantially all of
which should not be subject to Federal income tax due to Partnership
tax deductions for cost recovery on the Properties and accrued but
unpaid interest on the Notes; and
(2) achieve long-term appreciation in the value of the Properties
to produce distributions to Unitholders on sale. Please refer to Item 5
for a description of the Partnership's policy concerning distributions.
There is no assurance that any of these objectives will be achieved.
Competition
See Item 2 for a description of the competition in the primary trade area of
the Partnership's remaining property.
Employees
The Partnership has no employees. The affairs of the Partnership are conducted
by the General Partner, and the remaining property is managed on a day-to-day
basis by General Growth Management Inc. (the "Property Manager"). Please see
Note 9 to the Financial Statements in Item 8, and Item 13.
Item 2. Properties
The Partnership's remaining property, Brookdale Center, is a regional shopping
mall located in Brooklyn Center (Hennepin County), Minnesota, approximately
five miles northwest of the central business district of Minneapolis.
Brookdale consists of a mall anchored by five major department stores -
Sears, Roebuck and Co. ("Sears"), J.C. Penney, Inc. ("J.C. Penney"),
Dayton-Hudson Corporation, doing business as Dayton's ("Dayton's"), Mervyn's,
a California corporation doing business as Mervyn's ("Mervyn's"), which
acquired Carson Pixie Scott & Co., doing business as Carson's ("Carson's") on
March 6, 1995, and Kohl's Department Stores, Inc., doing business as Kohl's
("Kohl's") in a freestanding building, all located on a site of approximately
81 acres. Brookdale contains approximately 985,000 gross leasable square
feet, of which approximately 785,000 square feet is owned or leased by the
anchor tenants and not by the Partnership. Brookdale has parking for
approximately 5,000 automobiles. During 1988, a freestanding Kohl's
department store consisting of approximately 75,000 square feet was completed
on the east end of the mall site. Kohl's commenced operations on August 1,
1988 as projected. Brookdale was constructed in 1962, underwent major
expansion in 1966, and was refurbished in 1970 and again in 1983.
The total building area of Brookdale is allocated as shown in the table below.
Square Feet Square Feet Total
Leased to Owned by Square
Tenants Anchors(1) Feet
Anchor Stores:
Mervyn's (2) - 144,546 144,546
Dayton's - 195,368 195,368
J.C. Penney - 140,320 140,320
Kohl's - 75,000 75,000
Sears - 180,669 180,669
Outparcel Stores (3) - 48,858 48,858
Enclosed Mall Tenants(4) 200,146 - 200,146
200,146 784,761 984,907
Common Area - - 119,113
Total 200,146 784,761 1,104,020
(1) Includes square footage leased by anchors from independent third parties.
(2) On March 2, 1995, Carson's ceased operations at Brookdale Center. On
March 6, 1995, Mervyn's, a California Corporation, took possession of the
space. See description of anchor tenants.
(3) The four outparcel stores at Brookdale are owned by the tenants and consist
primarily of automotive accessory stores.
(4) Storage area of 3,104 square feet is included in the mall stores' square
footage.
Anchor Tenants
Sears, which owns its own buildings and land, pays its own real estate taxes
and utilities. Sears has an operating agreement and a purchase agreement that
require it to operate a Sears store in its main building until May 1997. Sears
is required to pay a proportionate share of the costs incurred by Brookdale in
maintaining the common areas, which is in proportion to the Sears building area
to the aggregate of all building area in Brookdale. Sears may not sublease its
space except to carry on portions of its business through licensees, lessees,
concessionaires or corporations in which a majority of the voting stock is
owned by Sears. The operating agreement and purchase agreement and all rights
and obligations thereunder, including Sears' obligation to pay common area
expenses, expire in May 1997.
J.C. Penney leases its building and the land on which its building is
constructed from a third party which leases the land from the Partnership until
July 27, 2015; however, it has the option to terminate the lease on either July
27, 1995 or July 27, 2005. J.C. Penney pays its own real estate taxes and
utilities. J.C. Penney is required to operate a J.C. Penney-type department
store until July 27, 1995; however J.C. Penney may sublet the entire premise or
assign the lease to any corporation which may take over the business of J.C.
Penney in Minnesota as a result of an assignment or merger. J.C. Penney is
also subject to an operating agreement that requires it to pay a portion of the
common area expenses, including real estate taxes and assessments of the common
area, in proportion to 75% of the gross building area in its store to the total
gross building area. J.C. Penney has not informed the Partnership of any
intention to leave the Mall.
An affiliate of Carson's owns the 144,546 square foot store and underlying land
and leased from the Partnership an additional 15,952 square feet of space at
the mall entrance to Carson's store. Under the terms of an agreement with the
Partnership in 1993, following the bankruptcy of Carson's parent company, P.A.
Bergner ("Bergner"), (i) Carson's lease expiration was accelerated to May
31,1994, (ii) Carson's operating agreement with respect to its store was
extended to 2003, (iii) the Partnership agreed to reconfigure the mall entrance
to Carson's store, and (iv) Carson's paid the Partnership $1,250,000,
representing the amount budgeted for the reconfiguration of Carson's mall
entrance and lease space following the accelerated termination of Carson's
lease.
Mervyn's, a California corporation, has entered into an agreement which was
finalized on March 6, 1995, pursuant to which Mervyn's agreed to purchase all
of the outstanding shares of stock of a wholly-owned subsidiary of CPS
Department Stores, Inc., a Delaware corporation ("Carson's"), thereby acquiring
the Carson's store in the Mall. Carson's ceased operations at the store on
March 2 1995, and Mervyn's took possession of this space on March 6, 1995.
Mervyn's has commenced remodeling the store and is scheduled to reopen and
operate a store at the Carson's site under the trade name Mervyn's. Although
Mervyn's has not yet announced an opening date, it intends to begin operating
the Brookdale store during the third quarter of 1995.
Dayton's land and building are owned by Dayton Development Company ("DDC"), an
affiliate of Dayton's which leases Dayton's land and building to Dayton's.
DDC's lease to Dayton's runs through July 31, 1996. DDC and Dayton's are
subject to an operating agreement that generally requires Dayton's to operate a
Dayton's store in the Dayton's building until July 31, 1996. DDC pays its own
real estate taxes and for the water, gas and electricity used by Dayton's. In
addition, DDC also pays a proportionate share of the costs incurred by
Brookdale in supplying climate conditioning services to the entire shopping
center, plus a $2,442.10 monthly standby charge. DDC is also required to pay a
proportionate share of the costs incurred by Brookdale in maintaining the
common areas. DDC has the right to approve any purchaser of the Brookdale
Center, and if such approval is not granted and the purchaser subsequently
defaults in its common area maintenance obligations, DDC shall have the right
to take over common area maintenance. The Dayton's operating agreement
terminates on July 31, 1996, except that it shall continue t hereafter so long
as Brookdale is a shopping center and Dayton's shall continue to operate a
Dayton's department store therein.
Kohl's owns its building and leases land from the Partnership. Kohl's lease
runs for a period of 22 years through January 31, 2010 with two five-year
renewals. The minimum rent is $175,000 per year with percentage rent of 1.5%
of all net sales in excess of $64,000,000 per year. The leases are net ground
leases with the tenant responsible for all costs such as real estate taxes and
utilities. Kohl's pays a fixed common area maintenance charge. Kohl's did not
renew its operating agreement which expired on August 1, 1993, but has not
informed the Partnership of any intention to leave the Mall.
Mall and Outparcel Tenants
As of December 31, 1994, Brookdale had 200,146
square feet of gross leasable area (excluding anchor stores and outparcel
stores), of which 42,328 square feet (representing kiosks and mall stores
totalling 39,224 square feet and 3,104 square feet of storage area) were
vacant. During 1994, 11 leases totalling 27,918 square feet terminated and
space totalling 16,708 square feet was leased. 3 leases totalling 1,363 square
feet were signed with existing tenants and 8 leases totalling 15,345 square
feet were signed with new tenants. In summary, leasing for 1994 resulted in an
additional 11,210 square feet available for lease.
Historical Occupancy
The following table shows the historical occupancy percentage at Brookdale at
December 31 of the indicated years.
1994 1993 1992 1991 1990
Including Anchor Stores 94.0% 96.0% 99.0% 99.4% 99.9%
Excluding Anchor Stores 79.0% 85.0% 95.0% 98.0% 99.5%
Competition
The Minneapolis-St. Paul metropolitan area contains 17 regional shopping
centers containing a total of 14 million square feet of retail space.
Brookdale, which is located in a northern suburb of Minneapolis, competes
directly with three shopping centers - Northtown Mall, Rosedale Center and
Ridgedale Center. Brookdale also competes for customers with a variety of
local shops and merchants.
Northtown Mall is a smaller regional center located five miles north of
Brookdale and is anchored by Carson's, Montgomery Ward and Kohl's. Northtown
Mall contains gross leasable area of approximately 800,000 square feet.
Rosedale Center, which is owned by an affiliate of Equitable, is a two-level,
enclosed mall located ten miles southeast of Brookdale and is anchored by
Dayton's, Carson's, J.C. Penney and Montgomery Ward. This center contains a
gross leasable area of 1,400,000 square feet and underwent an expansion in
1991, including a new 250,000 square foot Dayton's store. Ridgedale Center is
located eight miles southeast of Brookdale and is anchored by Sears, J.C.
Penney, Dayton's and Carson's. Ridgedale contains gross leasable area of
1,035,000 square feet. All three centers compete against Brookdale for
customers with a variety of local shops and national retailers.
On August 11, 1992, a super-regional center, Mall of America, opened in
Bloomington, approximately 8.25 miles from downtown Minneapolis and
approximately 14.25 miles southeast of Brookdale. The 4.2 million square foot
center is anchored by Nordstrom's, Bloomingdale's, Sears and R.H. Macy & Co.,
Inc., among others, and includes an amusement park. Although occupancy has
declined over the past few years, the General Partner attributes this decline
to general competition from other shopping centers, of which the Mall of
America is only a part. While Mall of America does not appear to have had a
direct impact on leasing initiatives at Brookdale at this time, it has had an
impact on consumer traffic at Brookdale. The General Partner is less certain
concerning the long-term impact, if any, on sales at Brookdale since Mall of
America is located outside Brookdale's primary trade area. <PAGE>
Item 3. Legal Proceedings
On January 17, 1995, the Partnership announced that an action had been filed in
the United States District Court for the Southern District of New York on
behalf of all persons who owned Limited Partnership Units of the Partnership on
June 7, 1994. The action was brought against the Partnership, the General
Partner, officers and directors of the General Partner and other defendants
with respect to the sale of Northland. The General Partner believes that the
Plaintiff's allegations are without merit, and intends to defend the lawsuit
vigorously. The complaint alleges, among other things, that the solicitation
statement used by the Partnership to solicit limited partner consents to the
sale of Northland contained material misrepresentations and omissions and that
the General Partner, assisted by the other defendants, breached its fiduciary
duties to the plaintiffs in connection with the Northland sale. Plaintiffs
seek, among other things, compensatory damages and to have their action
certified as a class action under Federal Rules of Civil Procedure.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Unitholders at a meeting or
otherwise during the three months ended December 31, 1994.
PART II
Item 5. Market for the Registrant's Limited Partnership Units and Related
Security Holder Matters
The Units are listed on the New York Stock Exchange and trade under the symbol
"EQM". The high and low sales price of the Units on the New York Stock
Exchange as reported on the consolidated transaction reporting system, during
the periods January 1, 1993 to December 31, 1993 and January 1, 1994 to
December 31, 1994 were as follows:
High Low
1993
First Quarter $ 2 5/8 $ 1 3/4
Second Quarter 2 5/8 2 1/8
Third Quarter 2 1/2 2
Fourth Quarter 2 1/2 2 1/8
1994
First Quarter $ 2 3/8 $ 2
Second Quarter 2 1/8 1 1/8
Third Quarter 1 3/4 11/16
Fourth Quarter 7/8 1/2
(b) Distribution of Operating Cash Flow
The Partnership's policy is to distribute to the Unitholders their allocable
portion of Operating Cash Flow (as defined below) in respect of each fiscal
year in substantially equal quarterly installments based on estimated Operating
Cash Flow for the current year.
Distributions of Operating Cash Flow are paid on a quarterly basis to
registered holders of Units on record dates established by the Partnership,
which generally will be the last day of each quarter. If a Unitholder
transfers a Unit prior to a record date for a quarterly distribution of
Operating Cash Flow, the transferor Unitholder may be subject to tax on part or
all of the Net Income from operations, if any, for such quarter (since Net
Income from operations is allocated on a monthly basis, rather than quarterly),
but will not be entitled to receive any portion of the Operating Cash Flow to
be distributed with respect to such quarter.
The amount of Operating Cash Flow available for distribution is determined by
the General Partner after taking into account the cash requirements of the
Partnership, including operating expenses and reserves for future commitments
and contingencies.
For the specific terms of the distribution of operating cash flow, reference is
made to pages 84 and 85 in the Partnership Agreement which is incorporated
herein by reference.
Quarterly Cash Distributions Per Limited Partnership Unit
Distribution amounts are reflected in the period for which they are declared.
The record date is the last day of the respective quarter and the actual cash
distributions are paid approximately 45 days after the record date.
1994 1993
First Quarter $ .07 $ .125
Second Quarter .07 .125
Third Quarter .935* .125
Fourth Quarter .07 .125
TOTAL $ 1.145 $ .50
* This amount includes the Partnership's third quarter cash distribution of
$.07 per Unit as well as a special cash distribution of $.865 per Unit paid on
August 31, 1994, to unitholders of record as of August 12, 1994. This
distribution represented the net proceeds from the sale of Northland Center and
included a disbursement of $4,484,000 from the Partnership's cash reserves.
See Item 7 for a discussion of the sale of Northland Center.
A portion of the Partnership's cash flow is currently being reserved to fund
leasing programs and capital improvements at Brookdale and in anticipation of
the potential costs associated with a refinancing of the mortgage loan or sale
of Brookdale (See Item 7). The Partnership reduced its distribution for the
first quarter of 1994 to $.07 from the previous level of $.125 per quarter in
anticipation of the sale of Northland to Equitable, which sale was completed on
July 22, 1994, with an effective date of December 31, 1993.
As of December 31, 1994, there were 6,663 Unit Holders.
(c) Distribution of Net Proceeds of Capital Transactions:
The Net Proceeds of an Interim Capital Transaction, which would include the
sale of either or both Malls, are distributable to the Unitholders and the
General Partner in the manner described in the Partnership Agreement which is
incorporated herein by reference. See also Note 4 to the Consolidated
Financial Statements.
Related Security Holder Matters
The Partnership is a "publicly traded partnership" for purposes of Federal
income taxation. The Revenue Act of 1987 (the "Act") changed the Federal
income tax treatment of "publicly traded partnerships." Under the Act, the
Partnership could be taxed as a corporation for Federal income tax purposes
beginning in 1998 if the Partnership does not satisfy an income test under the
Act. While the Partnership currently expects to meet this income test, it is
unclear whether the Partnership will always meet the income requirements for an
exception to the rule treating a publicly traded partnership as a corporation.
Publicly traded partnerships are subject to a modified version of the passive
loss rules if they are not taxed as corporations. Under the modified rules
applicable to publicly traded partnerships, the passive loss rules are applied
separately for the items attributable to each publicly traded partnership.
Any Tax-Exempt Entity acquiring Units after December 17, 1987 (including any
acquired pursuant to a reinvestment plan) realizes unrelated business income
("UBI"), with respect to such Units for periods during which the Partnership is
a "publicly traded partnership", and such UBI may cause the Tax-Exempt Entity
to incur a federal income tax liability. It should be noted that the
Partnership agreement stated that "An investment in the Units is not suitable
for Tax-Exempt Entities, including Individual Retirement Accounts ("IRA's") and
Keogh and other retirement plans, because such investment would give rise to
unrelated business taxable income."
Item 6. Selected Financial Data.
(dollars in thousands except per interest data)
For the years ended December 31,
1994 1993 1992 1991 1990
Total Income $12,695 $ 30,312 $ 31,404 $ 30,383 $ 29,482
Net Income (Loss) (7,567)(2) (18,377)(1) (7,834)(1) 389 1,759
Net Income (Loss) per
Limited Partnership
Unit (10,700,000
outstanding) (.79) (1.70)(1) (.73)(1) .04 .16
Real Estate 35,072 100,264 118,416 127,101 125,396
Mortgage Notes Payable 33,652 82,011 77,245 70,215 60,849
Total Assets 42,302 113,448 131,082 136,879 132,004
(1) Includes write-downs in carrying value of the Northland property in
1992 and 1993. See Item 7.
(2) Includes gain on sale of Northland and write-down of Brookdale. See
Item 7.
The above selected financial data should be read in conjunction with the
financial statements and notes thereto contained in Item 8.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
At December 31, 1994, the Partnership had cash totalling $6,693,502 compared to
$10,668,441 at December 31, 1993. The $3,974,939 decrease is primarily the
result of the August 31, 1994 cash distribution (discussed below), a portion of
which was funded from the Partnership's cash reserve.
The General Partner is currently attempting to dispose of the Partnership's
remaining property and dissolve the Partnership in an orderly manner. The
Partnership has engaged Lehman Brothers, an affiliate of the General Partner,
to advise and assist the Partnership in the possible sale of Brookdale Center.
The Partnership executed a contract with Equitable for the sale of Northland
Center for the price of $6,600,000 in excess of the balance of the first
mortgage loan. The effective date of the sale of Northland was January 1, 1994
and any positive cash flow that was generated by Northland Center from January
1, 1994 to the closing on July 22, 1994 belonged to Equitable. In addition,
the contract provided for the release of the Partnership's obligations under
the first mortgage on Northland and the modification of the terms of the first
mortgage on Brookdale. The first mortgage on Brookdale has been modified to
permit prepayment in full, with a modified defeasance fee equal to 75% of the
amount by which the sales price of Brookdale exceeds $45,000,000. In
connection with the sale, the Partnership retained an independent advisor to
render an opinion as to the fairness of the Northland transaction. The advisor
concluded that the sale was fair, from a financial point of view, to the
limited partners. On July 22, 1994, the sale and proposed modification of the
Partnership Agreement was approved by a majority in interest of the
Partnership's limited partners, and the sale of Northland was consummated. The
Partnership's net proceeds from the Northland Center sale, after closing
adjustments, expenses related to the sale, and the satisfaction of the
mortgage, were $5,625,304. The transaction resulted in a gain on sale of
$4,610,550. On August 31, 1994, a special cash distribution of $.865 per unit
was paid for unitholders of record on August 12, 1994. The special
distribution, which exceeded the net proceeds from the Northland Center sale,
included a disbursement of $4,484,000 from the Partnership's cash reserves.
Additionally, the Asset Management Agreement with EREIM for Northland Center
and Brookdale Center was terminated effective December 31, 1993, thereby
releasing the Partnership from its obligation to pay EREIM an asset management
fee of $1,060,000 per year.
There is no guarantee that the Partnership will be able to sell Brookdale prior
to the June 1995 maturity of the mortgage loan. If the sale of Brookdale
appears unlikely at or prior to this date, the Partnership will attempt to
extend the maturity of the mortgage loan, or secure replacement financing from
the current lender. The Partnership's ability to refinance its mortgage in
whole or in part or, as an alternative, to find a purchaser for the Mall, may
be adversely impacted by economic and competitive conditions pertaining to the
Mall, the limited availability of financing for real estate projects, and
adverse real estate market conditions in general.
A portion of the Partnership's cash flow is currently being reserved to fund
leasing costs, necessary capital improvements and potential costs associated
with a potential sale of Brookdale. Cash distributions are determined on a
quarterly basis, and were reduced to $.07 per unit beginning with the first
quarter 1994 distribution in recognition of the likelihood of the Northland
sale. In view of a disposition of Brookdale, to the extent possible, capital
expenditures, other than leasing-related expenditures, will be kept to a
minimum with only those items addressed which require immediate attention due
to code requirements, safety concerns or lease and other contractual
obligations.
Accounts receivable, net of allowance, decreased from $514,505 at December 31,
1993 to $272,327 at December 31, 1994 primarily due to a decrease in
Brookdale's tenant receivables and the sale of Northland. This also resulted
in a decrease in the allowance for receivables from $1,251,805 at December 31,
1993 to $95,229 at December 31, 1994.
Prepaid assets decreased from $1,676,333 at December 31, 1993 to $142,679 at
December 31, 1994 due to the reimbursement of Northland Center's real estate
taxes prepaid at December 31, 1993 for the first and second quarter of 1994.
At December 31, 1994, accounts payable and accrued expenses totalled
$1,170,453, a decrease of $999,783 from December 31, 1993, primarily due to the
sale of Northland Center.
On August 23, 1991, P.A. Bergner, the parent company of Carson's, filed for
protection under Chapter 11 of the Federal Bankruptcy code. In conjunction
with its Third Amended Joint Plan of Reorganization under bankruptcy, Bergner
elected to terminate the store's lease of 15,952 square feet on May 31, 1994,
to extend the store's operating covenant to 2003 and to pay the Partnership a
lease termination and settlement fee of $1,250,000. Bergner also agreed to
cure pre-petition defaults amounting to $328,250 for real estate taxes and
common area maintenance. Following termination of the lease, the Partnership
reconfigured the area occupied by Carson's into tenant space and constructed a
new entrance to the Carson's store. Such reconfiguration was funded by
Partnership cash reserves, in addition to the $1,250,000 received by the
Partnership in December 1993. Accordingly, deferred income decreased
$1,250,000 from December 31, 1993 to $0 at December 31, 1994 as a result of the
recognition of income upon termination of the lease in May 1994.
Mortgage notes payable decreased from $82,011,121 at December 31, 1993 to
$33,652,305 at December 31, 1994 due to the sale of Northland Center which
resulted in the payoff of the $54,504,713 mortgage secured by that property.
Brookdale tenant Herman's Sporting Goods which filed for Chapter 11 of the
Bankruptcy Code paid the Partnership $200,000 in 1994 to be released from its
lease obligations. The loss of Herman's, which occupied 12,000 square feet,
did not have a material effect on the Partnership's operating results.
Brookdale anchor tenant Kohl's did not renew its operating agreement which
expired August 1, 1993, but has not informed the Partnership of any intention
to leave the mall. Kohl's owns its building, and its ground lease does not
expire until January 31, 2010. If Kohl's were to leave the mall, this would
likely result in a decline in mall traffic and cash flow, and would likely have
a material adverse effect on future mall store leasing efforts.
Results of Operations
1994 versus 1993
Cash provided by operating activities totalled $4,483,503 for the year ended
December 31,1994, compared with $12,701,730 for the year ended December 31,
1993. The reduced cash flow is primarily due to the assignment of positive
cash flow from Northland to Equitable, pursuant to the terms of the sale
contract which provided for all operating income of Northland commencing
January 1, 1994 to be paid to Equitable upon closing of the sale. The
Partnership recognized a net loss of $7,567,268 for the year ended December 31,
1994 compared to a net loss of $18,376,967 for 1993. The decrease in net loss
is due to the fact that the write-down of Brookdale to its estimated value in
1994 was less than the write-down in value of the Northland in 1993, as well as
the sale of Northland which resulted in a gain of $4,610,550 in 1994.
The carrying value of Brookdale was reduced during the fourth quarter of 1994,
based upon management's assessment of the estimated fair market value of the
property. The determination of the estimated fair market value of the property
was based upon the most recent appraisal of the property , which is conducted
annually, and the impending maturity of the first mortgage note.
Rental income totalled $4,895,956 in 1994, as compared to $12,622,285 in 1993.
The decrease reflects the absence of Northland activity as well as lower
average occupancy at Brookdale in 1994. Escalation income decreased
$11,262,664 from 1993 to $5,964,157 in 1994. Escalation income represents
billings to tenants for their proportionate share of common area maintenance,
insurance and real estate tax expenses, HVAC and other miscellaneous expenses.
The decrease in escalation income is primarily due to the absence of Northland
activity. Miscellaneous income increased $1,303,568 from 1993, primarily due
to the recognition of the $1,250,000 termination and restructuring fee paid by
Carson's in connection with its lease settlement and the receipt of $200,000 in
connection with the Herman's lease buyout at Brookdale.
Total expenses decreased $23,815,857 from $48,688,493 in 1993 to $24,872,636 in
1994 primarily due to the write-down of Brookdale to its estimated value being
less than the write-down of Northland in 1993, and due to the absence of
Northland activity resulting from the sale of Northland in 1994. Property
operating expenses decreased due primarily to the absence of Northland activity
and a decrease in bad debt expense at Brookdale Center resulting from the
collection of past due Carson's receivables. This was slightly offset by an
increase in CAM and promotion expenses at Brookdale Center. Real estate tax
expense decreased due to the absence of Northland activity offset by an
increase at Brookdale due to an increased assessed value of the Mall. Interest
expense totaled $6,145,897 compared with $7,857,584 in 1993. The decrease is
due to the payment of the Northland zero coupon note upon closing of the
Northland sale on July 22, 1994. General and administrative expenses decreased
in 1994, primarily due to the termination of the EREIM asset management
agreement as of December 31, 1993 (see Liquidity and Capital Resources above).
Sales for tenants (exclusive of anchor tenants) who operated at the Brookdale
Mall for each of the last two years were approximately $38,545,800 and
$38,288,000 for the years ending December 31, 1994 and 1993, respectively. As
of December 31, 1994, Brookdale was 79% occupied (exclusive of anchor and
outparcel stores) as compared to 85% on December 31, 1993. The decline in
occupancy is largely attributable to the reconfiguration of approximately
40,000 square feet of previously leased space, which was recently renovated.
These renovations were completed in November 1994 and a portion of the space
has been re-leased as of year-end 1994.
1993 versus 1992
Cash provided by operating activities totalled $12,701,730 for the year ended
December 31, 1993 compared to $10,156,099 for 1992. The increase is primarily
due to the receipt of the $1.25 million Carson's lease termination settlement
discussed above, the decrease in accounts receivable resulting from lower
recoveries of common area maintenance and utility expenses, and to the change
in the income and expense categories discussed below.
The Partnership incurred a net loss of $18,376,967 for the year ended December
31, 1993 compared to $7,834,360 for 1992. The increase in net loss is due to
the additional reduction of Northland's carrying value in 1993 by $16,163,153
to its estimated fair market value at December 31, 1993 as well as the decrease
in escalation income and increased real estate taxes and interest expense.
The carrying value of the Northland property was reduced during the fourth
quarter of 1992 and 1993, based upon management's assessment of the estimated
fair market value of the property. Such assessment in 1992 was based upon the
appraised value of the property, which was conducted as of December 31, 1992,
and in consideration of national market trends for real estate and the
continuing depressed economic conditions in the metropolitan Detroit area. The
determination of the estimated fair market value of the property at interim
dates during 1993 was based upon the most recent appraisal of the property,
which is conducted annually. The General Partner also considered the minimal
change in occupancy during 1993 when considering factors that might have
contributed to a further decline in value. The reduction in carrying value
during the fourth quarter of 1993 was based upon the terms of the proposed sale
of the property, which were not finalized until the first quarter of 1994, (see
"Liquidity and Capital Resources" above), pursuant to which the partnership
would incur a loss on disposal of approximately $16.1 million.
Rental income totalled $12,622,285 in 1993, largely unchanged from $12,607,071
in 1992. Escalation income decreased $775,748 from 1992 to $17,226,821 in
1993, primarily due to concessions made to certain tenants and lower recovery
levels. Escalation income represents billings to tenants for their
proportionate share of common area maintenance, insurance and real estate tax
expenses. Interest income decreased $46,655 from 1992 to $257,776 in 1993.
The decrease reflects lower interest rates earned on Partnership cash balances.
Miscellaneous income totalled $204,644 in 1993, compared with $489,685 in 1992,
down $285,041 due primarily to a 1992 lease buyout by Lens Crafters, a tenant
at Northland, totaling $325,000.
Total expenses increased $9,775,377 from $38,913,116 in 1992 to $48,688,493 in
1993, primarily due to the additional reduction of Northland's carrying value
in 1993. Property operating expenses totaled $13,025,506, down 2% from 1992.
The decrease in operating expenses is primarily due to a decrease in
reimbursable expenses at Northland. Interest expense totaled $7,857,584
compared with $7,245,703 in 1992. The increase is due to the compounding of
interest on the zero coupon notes. Real estate taxes increased to $5,705,170
in 1993, up 6% from 1992, due to an increase in taxes at Brookdale. The 5%
increase in depreciation and amortization expense from 1992 to 1993 is due to
the ongoing tenant additions at the properties. Professional fees increased
from $183,491 in 1992 to $229,616 in 1993, reflecting higher legal fees
incurred in 1993 as a result of sale negotiations.
Brookdale: Sales for tenants (exclusive of anchor tenants) who operated at the
Mall for each of the last two years were approximately $37,066,000, and
$38,507,000. As of December 31, 1993, Brookdale was 85% occupied (exclusive of
anchor and outparcel stores) as compared to 95% on December 31, 1992. The
General Partner attributes the decrease in sales at Brookdale primarily to the
decrease in occupancy at the center, reflecting a remerchandising strategy at
the Mall, financial difficulties experienced by certain tenants which have led
to store closings, increased competition from recently renovated centers and
the newly constructed Mall of America, as well as generally sluggish economic
conditions.
Northland: Sales for tenants (exclusive of anchor tenants) who operated at the
Mall for each of the last two years were approximately $80,092,000, and
$76,201,000. As of December 31, 1993, Northland was 71% occupied (exclusive of
anchor tenants and secondary space) compared to 73% on December 31, 1992.
Inflation
Inflation generally does not affect either the business of the Partnership
relative to its industry segments. Most increases in operating expenses
incurred by the Malls are passed through to its tenants under the terms of
their leases. Alternatively, inflation may also cause an increase in sales
revenue reported by the tenants at the Malls, which serves to increase the
Partnership's revenues, since a portion of its rental income is derived from
percentage rents paid by certain tenants.
Property Appraisal
The Partnership Agreement and the Notes require the Partnership to retain an
independent appraisal firm to appraise the Properties each year. The
Partnership is generally required to provide an appraisal of the properties to
the Unit Holders within 90 days after the end of the Partnership's fiscal year.
Cushman & Wakefield, Inc., an independent appraisal firm retained by the
Partnership to appraise the Properties in 1994, has appraised Brookdale at
$35,072,000 as of December 31, 1994.
It should be noted that appraisals are only estimates of current value and
actual values realizable upon a 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 properties and the limited market for such
properties, 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 would be incurred in selling the property, including brokerage fees
and prepayment penalties.
Item 8. Financial Statements and Supplementary Data.
See Item 14a for a listing of the Financial Statements and Supplementary data
filed 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 Registrants
The Partnership has no officers or directors. The General Partner manages and
controls substantially all of the Partnership's affairs and has general
responsibility and ultimate authority in all matters affecting the
Partnership's business. Certain officers and directors of the General Partner
are now serving (or in the past have served) as officers and 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 that real estate is located and, consequently, the
partnerships sought protection of the bankruptcy laws to protect the
partnerships' assets from loss through foreclosure.
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 Partners.
However, the assets acquired by Smith Barney included the name "Shearson."
Consequently, the general partner changed its name to Midwest Centers Inc. to
delete any references to "Shearson."
The directors and executive officers of the General Partner are as follows:
Name Age Office
Paul L. Abbott 49 Director, President and Chairman of
the Board
Stevan N. Bach 55 Director
Kathleen Carey 41 Director
Raymond C. Mikulich 41 Director
Robert J. Hellman 40 Vice President, Director and Chief
Financial Officer
Joan B. Berkowitz 35 Vice President
Elizabeth Rubin 28 Vice President
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.
Stevan N. Bach is Executive Vice President of Bach, Thoreen, McDermott Inc., a
real estate valuation and consulting firm based in Houston, Texas. Mr. Bach
has over 25 years of experience in the real estate business. From December
1980 through July 1984, Mr. Bach was a Senior Vice President, National Director
and General Manager of the Southwestern Region for Landauer Associates, Inc.
From December 1975 through December 1980, Mr. Bach was the Vice President and
Manager of Coldwell Banker Appraisal Services. Mr. Bach is a graduate of the
University of Southern California.
Kathleen B. Carey is an attorney specializing in commercial real estate. She
is a graduate of the State University of New York at Albany and St. John's
University Law School. In 1987, she joined the Connecticut law firm of
Cummings & Lockwood and served as a partner in the firm from 1989 until
mid-1994. She is admitted to practice in New York and Connecticut, and worked
with firms in both states before joining Cummings & Lockwood. She resigned
from that firm in 1994 and now resides in California. Ms. Carey's practice has
involved all facets of acquisitions, sales and financing of commercial
properties, including multifamily housing, office buildings and shopping
centers. She has represented developers and lenders in numerous transactions
involving properties located throughout the United States.
Raymond C. Mikulich is a Managing Director of Lehman, and since January 1988,
has been head of the Real Estate Investment Banking Group. Prior to joining
Lehman Brothers Kuhn Loeb in 1982, Mr. Mikulich was a Vice President with
LaSalle National Bank, Chicago, in the Real Estate Advisory Group, where he was
responsible for the acquisition of equity interests in commercial real estate.
Over his fifteen years in the real estate business, Mr. Mikulich has arranged
acquisitions and dispositions on behalf of both individuals and institutional
investors. Mr. Mikulich holds a BA degree from Knox College and a JD degree
from Kent College of Law.
Robert J. Hellman is a Senior Vice President of Lehman Brothers and is
responsible for investment management of retail and commercial 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 asset
management 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 Rubin is an Assistant 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 Officers of the General Partner do not receive any salaries
or other compensation from the Partnership, except that Mr. Bach receives
$12,000 per year for serving as Director of the General Partner. Prior to
September 1, 1993 he received $10,000, and $2,400 for attendance in person at
any meeting of the Board of Directors of the General Partner or of the Audit
Committee. During 1994, Mr. Bach was paid $21,600 in director fees. In
addition, Donald R. Waugh Jr. , who served as Director of the General Partner
until his death in 1995, received $19,200 for services rendered in 1994.
The General Partner is entitled to receive 1% of Operating Cash Flow
distributed in any fiscal year and to varying percentages of the Net Proceeds
of capital transactions. See pages 84 and 85 of the Partnership Agreement for
a description of such arrangements which description is incorporated by
reference thereto.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners - To the knowledge of the
Partnership, no person owns more than 5% of the outstanding Units as of
December 31, 1994.
(b) Security Ownership of Management - Various employees of Lehman Brothers
that perform services on behalf of the General Partner own no units of the
Partnership as of December 31, 1994.
(c) Changes in Control - None
Item 13. Certain Relationships and Related Transactions
The General Partner, an affiliate of Lehman Brothers, is entitled to receive a
portion of Operating Cash Flow and Net Proceeds from Capital Transactions (see
Item 5). During 1994, the General Partner received $123,752 as its share of
Operating Cash Flow for 1994.
During 1993, the Partnership engaged Lehman Brothers, an affiliate of the
General Partner, in conjunction with the possible sales of Brookdale and
Northland. Pursuant to such agreement, Lehman Brothers is entitled to a fee
equal to 0.875% of the gross proceeds of a transaction, as defined in the
Letter Agreement (incorporated by reference to Exhibit 10.13). Pursuant to
this agreement, the Partnership paid Lehman Brothers $508,774 in 1994 for
advisory services related to the sale of Northland Center.
An affiliate of Lehman Brothers and the General Partner is the general partner
of Hotel Properties, L.P., a public limited partnership which owns four
Marriott hotels. Equitable holds first mortgages in the aggregate amount of
approximately $80,000,000 on such properties, and EREIM performs asset
management services for that partnership which are similar to the asset
management services which it performed for the Partnership. An affiliate of
Lehman Brothers and the General Partner is the General Partner of Capital
Growth Mortgage Investors, L.P., a public limited partnership which specializes
in mortgages. Equitable holds a first mortgage on a property in the aggregate
amount of approximately $43,000,000 for which Capital Growth holds a second
mortgage in the aggregate amount of approximately $37,000,000.
Affiliates of the General Partner are or have been responsible for certain
administrative functions of the Partnership. For amounts paid to such
affiliates, see Note 7 of the Notes to Financial Statements.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2).
MIDWEST REAL ESTATE SHOPPING CENTER LIMITED PARTNERSHIP
(a Delaware limited partnership)
Index to Financial Statements
Page
Number
Independent Auditors' Report F-1
Balance Sheets At December 31, 1994 and 1993 F-2
Statements of Partners' Capital (Deficit)
For the years ended December 31, 1994, 1993 and 1992 F-2
Statements of Operations
For the years ended December 31, 1994, 1993 and 1992 F-3
Statements of Cash Flows
For the years ended December 31, 1994, 1993 and 1992 F-4
Notes to Financial Statements F-5
Schedule II - Valuation and Qualifying Accounts F-10
Schedule III - Real Estate and Accumulated Depreciation F-11
(b) Reports on Form 8-K in the fourth quarter of 1994:
On November 21, 1994, the Partnership filed a current report on Form 8-K
reporting the change in the Partnership's name from Equitable Real Estate
Shopping Centers, L.P. to Midwest Real Estate Shopping Center L.P. See Item 1
for a discussion of the name change.
(c) Exhibits.
Subject to Rule 12b-32 of the Securities Act of 1934 regarding incorporation by
reference, listed below are the exhibits which are filed as part of this
report:
3.* Registrant's Agreement of Limited Partnership, dated December 1, 1986, is
hereby incorporated by reference to Exhibit A to the Prospectus contained in
Registration Statement No. 33-9937, which Registration Statement (the
"Registration Statement") was declared effective by the SEC on December 23,
1986.
4.1*The form of Certificate of Limited Partnership Interest is hereby
incorporated by reference to Exhibit 4.1 to the Registration Statement.
4.2*The form of Unit Certificate is hereby incorporated by reference to Exhibit
4.2 to the Registration Statement.
10.1*The form of Property Management Agreement between Registrant and Center
Management Venture is hereby incorporated by reference to Exhibit 2 to the
Registration Statement.
10.2*The form of Transfer Agent Agreement is hereby incorporated by reference
to Exhibit 10.7 to the Registration Statement.
10.3*The form of Promissory Note (Brookdale) is hereby incorporated by
reference to Exhibit 10.8.1 to the Registration Statement.
10.4*The form of Promissory Note (Northland) is hereby incorporated by
reference to Exhibit 10.8.2 to the Registration Statement.
10.5*The form of Mortgage is hereby incorporated by reference to Exhibit 10.9
to the Registration Statement.
10.6*The form of Assignments of Leases and Rents is hereby incorporated by
reference to Exhibit 10.10 to the Registration Statement.
10.7*The Indemnification Agreement is hereby incorporated by reference to
Exhibit 10.11 to the Registration Statement.
10.8*The Agreement of Indemnification is hereby incorporated by reference to
Exhibit 10.11 to the Registration Statement.
10.9*The Second Mortgage Loan Agreement from Equitable to the Partnership dated
June 25, 1991 is hereby incorporated by reference to Exhibit 10.13 to the
Registrant's Form 10-K for the year ended December 31, 1991.
10.10*Letter of Intent to Purchase Northland Center by Equitable Life Assurance
Society of the United States is hereby incorporated by reference to Exhibit A
to the Partnership's Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 19, 1994.
10.11*The Engagement Letter between the Partnership and Lehman Brothers
securing Lehman Brothers services as exclusive financial advisor with respect
to the sale of Northland Center and Brookdale Center, dated October 25, 1993 is
hereby incorporated by reference to Exhibit 10.13 to the Partnership's Annual
Report on Form 10-K for the year ended December 31, 1993.
10.12*Termination and Release Agreement between the Partnership and Equitable
Real Estate Investment Management, Inc. dated March 28, 1994 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.
10.13Summary of Real Property for Brookdale Center as of January 1, 1995, as
prepared by Cushman & Wakefield, Inc.
* Previously filed
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 30, 1995
MIDWEST REAL ESTATE SHOPPING CENTER L.P.
BY: Midwest Centers Inc.
General Partner
BY: /s/ Paul L. Abbott
Director, President and Chairman of the Board
BY: /s/ Robert J. Hellman
Director, Vice President
and Chief Financial 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.
MIDWEST CENTERS INC.
General Partner
Date: March 30, 1995
BY: /s/ Paul L. Abbott
Director, Chairman of the Board and President
Date: March 30, 1995
BY:/s/ Raymond Mikulich
Director
Date: March 30, 1995
BY:/s/ Stevan N. Bach
Director
Date: March 30, 1995
BY: /s/ Robert J. Hellman
Director, Vice President and Chief Financial Officer
Date: March 30, 1995
BY: /s/ Joan B. Berkowitz
Vice President
Date: March 30, 1995
BY: /s/ Elizabeth Rubin
Vice President
INDEPENDENT AUDITORS' REPORT
The Partners Midwest Real Estate Shopping Center L.P.
We have audited the financial statements of Midwest Real Estate Shopping Center
L.P. (a Delaware limited partnership) as listed in the accompanying index. In
connection with our audits of the financial statements, we also have audited
the financial statement schedules as listed in the accompanying index. These
financial statements and financial statement schedules are the responsibility
of the Partnership's management. Our responsibility is to express an opinion
on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of Midwest Real Estate Shopping
Center L.P. at December 31, 1994 and 1993, and the results of its operations
and its cash flows for each of the years in the three-year period ended
December 31, 1994, in conformity with generally accepted accounting principles.
Also in our opinion, the related financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
The accompanying financial statements and financial statement schedules have
been prepared assuming that the Partnership will continue as a going concern.
As discussed in Note 5 to the financial statements , the Partnership's mortgage
note payable, secured by its remaining property, matures June 30, 1995. The
Partnership does not currently have an agreement with the mortgage lender to
either extend the maturity of the debt or to refinance the obligation, nor does
the Partnership have replacement financing from another lender. Market
conditions may prevent the Partnership from obtaining sufficient proceeds from
a sale or refinancing to satisfy the mortgage obligation. These conditions
raise substantial doubt about the Partnership' ability to continue as a going
concern. The financial statements and financial statement schedules do not
include any adjustments that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 14, 1995
Balance Sheets
December 31, 1994 and 1993
Assets 1994 1993
Property held for disposition
(notes 3, 5 and 6) $ 35,072,000 $ 100,264,096
Cash 6,693,502 10,668,441
Accounts receivable, net of allowance
of $95,229 in 1994 and $1,251,805 in 1993 272,327 514,505
Due from affiliates, net (note 7) 88,278 124,345
Deferred charges, net of accumulated
amortization of $246,676 in 1994 and
$1,573,469 in 1993 33,324 199,954
Prepaid assets 142,679 1,676,333
Total Assets $ 42,302,110 $ 113,447,674
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 1,170,453 $ 2,170,236
Deferred income (note 2) - 1,250,000
Mortgage notes payable (note 5) 33,652,305 82,011,121
Distribution payable (note 10) 756,565 1,351,010
Total Liabilities 35,579,323 86,782,367
Partners' Capital (deficit) (note 4):
General Partner 19,065 (719,854)
Limited Partners (10,700,000 securities
outstanding) 6,703,722 27,385,161
Total Partners' Capital 6,722,787 26,665,307
Total Liabilities and Partners' Capital $ 42,302,110 $ 113,447,674
Statements of Partners' Capital (Deficit)
For the years ended December 31, 1994, 1993 and 1992
Limited General
Partners Partner Total
Balance at December 31, 1991 $ 64,037,624 $ (352,910) $ 63,684,714
Net loss (7,759,266) (75,094) (7,834,360)
Distributions (note 10) (5,350,000) (54,040) (5,404,040)
Balance at December 31, 1992 50,928,358 (482,044) 50,446,314
Net loss (18,193,197) (183,770) (18,376,967)
Distributions (note 10) (5,350,000) (54,040) (5,404,040)
Balance at December 31, 1993 27,385,161 (719,854) 26,665,307
Net loss (8,429,939) 862,671 (7,567,268)
Distributions (note 10) (12,251,500) (123,752) (12,375,252)
Balance at December 31, 1994 $ 6,703,722 $ 19,065 $ 6,722,787
See accompanying notes to the financial statements.
Statements of Operations
For the years ended December 31, 1994, 1993 and 1992
Income 1994 1993 1992
Rental income $ 4,895,956 $ 12,622,285 $ 12,607,071
Escalation income 5,964,157 17,226,821 18,002,569
Interest income 326,493 257,776 304,431
Miscellaneous income (note 2) 1,508,212 204,644 489,685
Total Income 12,694,818 30,311,526 31,403,756
Expenses
Property operating expenses 2,657,042 13,025,506 13,254,011
Loss on write-down of real
estate (note 3) 9,068,553 16,163,153 7,256,151
Real estate taxes 3,528,943 5,705,170 5,386,056
Interest expense 6,145,897 7,857,584 7,245,703
Depreciation and amortization 2,677,432 3,854,330 3,674,346
General and administrative 311,639 1,289,480 1,342,731
Management fee (note 9) 230,565 563,654 570,627
Professional fees 252,565 229,616 183,491
Total Expenses 24,872,636 48,688,493 38,913,116
Loss from Operations (12,177,818) (18,376,967) (7,509,360)
Gain (Loss) on sale of property
(note 3) 4,610,550 - (325,000)
Net Loss $(7,567,268) $(18,376,967) $ (7,834,360)
Net Loss Allocated:
To the General Partner $ 862,671 $ (183,770) $ (75,094)
To the Limited Partners (8,429,939) (18,193,197) (7,759,266)
$(7,567,268) $(18,376,967) $ (7,834,360)
Per Limited Partnership Security
(10,700,000 securities outstanding) $ (.79) $ (1.70) $ (.73)
See accompanying notes to the financial statements.
Statements of Cash Flows
For the years ended December 31, 1994, 1993 and 1992
Cash Flows from Operating Activities: 1994 1993 1992
Net loss $ (7,567,268) $ (18,376,967) $ (7,834,360)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and amortization 2,677,432 3,854,330 3,674,346
Loss on write-down of real estate 9,068,553 16,163,153 7,256,151
Increase in interest on mortgage
notes payable 6,145,897 7,766,104 7,030,506
(Gain) Loss on sale of sale of
property (4,610,550) - 325,000
Increase (decrease) in cash arising
from changes in operating assets
and liabilities:
Accounts receivable 242,178 1,434,809 (821,306)
Due from affiliates, net 36,067 (41,723) 27,879
Prepaid assets 1,533,654 (96,338) 17,634
Accounts payable and
accrued expenses (1,792,460) 748,362 483,331
Deferred income (1,250,000) 1,250,000 -
Accrued interest - note
payable - - (3,082)
Net cash provided by operating
activities 4,483,503 12,701,730 10,156,099
Cash Flows from Investing Activities:
Net proceeds from sale of property 5,625,304 - 650,000
Additions to real estate (1,114,049) (2,322,045) (3,137,121)
Construction escrow - 84,425 557,082
Net cash provided by (used for)
investing activities 4,511,255 (2,237,620) (1,930,039)
Cash Flows from Financing Activities:
Payoff of note payable - (3,000,000) -
Construction escrow - 486,280 -
Distributions paid (12,969,697) (5,417,550) (5,390,530)
Net cash used for financing activities (12,969,697) (7,931,270) (5,390,530)
Net increase (decrease) in cash (3,974,939) 2,532,840 2,835,530
Cash at beginning of period 10,668,441 8,135,601 5,300,071
Cash at end of period $ 6,693,502 $ 10,668,441 $ 8,135,601
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period
for interest $ - $ 91,480 $ 218,279
Supplemental Disclosure of Noncash
Investing Activities:
Closing costs of $370,000 and capital expenditures of $422,677 were funded
through accounts payable in 1994. Capitalized construction costs of $605,175
were funded through accounts payable in 1992.
Supplemental Disclosure of Noncash
Financing Activities:
In connection with the sale of Northland Center, Equitable released the
Partnership from the related $54,504,713 mortgage obligation.
See accompanying notes to the financial statements.
Notes to Financial Statements
December 31, 1994 and 1993
1. Organization
Midwest Real Estate Shopping Center L.P., formerly Equitable Real Estate
Shopping Center L.P. (the "Partnership") was formed as a limited partnership on
October 28, 1986, under the laws of the State of Delaware. The Partnership was
formed to acquire two regional shopping malls.
In conjuction with the termination of the former asset management agreement
with Equitable Real Estate Investment Management, Inc. (Note 8), the
Partnership was required to cease using "Equitable" and "Equitable Real Estate"
in its name. Consequently, effective November 21, 1994, the Partnership
changed its name to Midwest Real Estate Shopping Center, L.P.
The general partner of the Partnership is Midwest Centers Inc., (the "General
Partner") formerly Shearson ESC/GP Inc. (see below), an affiliate of Lehman
Brothers Inc., formerly Shearson Lehman Brothers Inc.
The initial capital was $1,000, representing a capital contribution by the
General Partner. The Partnership commenced investment operations on December
30, 1986, with the acceptance of subscriptions for 10,700,000 limited
partnership securities, the maximum authorized by the agreement of limited
partnership (the "Partnership Agreement").
On July 31, 1993, Shearson Lehman Brothers Inc. 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 November
12, 1993, the general partner changed its name to Midwest Centers Inc. to
delete any references to "Shearson".
The General Partner believes it is in the best interests of the Partnership and
the Unitholders for the Partnership to dispose of its assets and dissolve and
liquidate the Partnership in an orderly manner. During 1993, the Partnership
engaged Lehman Brothers, an affiliate of the General Partner, to assist in this
effort with respect to the sale of the Properties. On March 28, 1994, the
Partnership executed a contract with Equitable for the sale of Northland Center
subject to agreement by the parties to certain additional documentation. On
July 22, 1994, the Partnership closed the sale of Northland.
2. Summary of Significant Accounting Policies
Basis of Accounting - The financial statements of the Partnership have been
prepared on the accrual basis of accounting.
Real Estate Investments -- Real estate investments, which consist of buildings,
land and personal property, are recorded at the lower of amortized cost or
estimated fair market value in 1994 and 1993. Prior to 1993, the Brookdale
Center real estate investment was recorded at cost less accumulated
depreciation. As further discussed in Note 3, it was determined that the
decline in appraised value of Northland Center as of December 31, 1992 and the
decline in the appraised value of Brookdale Center as of December 31, 1994, the
decline in national real estate market trends and continuing decreases in
occupancy were not abating and the carrying values should be reduced to their
appraised value. Depreciation of the buildings is computed using the
straight-line method over an estimated useful life of 40 years. Depreciation
of personal property is computed under the straight-line method over an
estimated useful life of 12 years. Amortization of tenant leasehold
improvements is computed under the straight-line method over the lease term.
Deferred Charges -- The following fees and charges are amortized on a
straight-line basis over the following periods:
Period
Fee for negotiating the mortgage notes 8.5 years
Fee for placement of mortgage notes 8.5 years
Offering Costs -- Offering costs are nonamortizable and have been deducted
from partners' capital.
Transfer of Units and Distributions -- Upon the transfer of a unit, net income
and net loss from operations attributable to such unit generally will be
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
unitholder of record on the last day of a calendar month will be deemed to have
owned the unit for the entire month. Distributions of operating cash flow, as
defined in the Partnership Agreement, will be paid on a quarterly basis to
registered holders of units on record dates established by the Partnership,
which generally will be the last day of each quarter.
Income Taxes -- No provision is made for income taxes since such liability is
the liability of the individual partners.
Deferred Income -- In 1993, deferred income represents a termination fee paid
by a tenant to terminate a lease. This amount was recognized in 1994 upon the
termination of the lease.
Net Income Per Limited Partnership Unit -- Net income per limited partnership
unit is based upon the limited partnership interests outstanding at year-end
and the net income allocated to the limited partners.
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.
3. Real Estate
The Partnership's real estate, which was purchased on December 30, 1986 from
the Equitable Life Assurance Society of the United States ("Equitable"),
originally consisted of two regional shopping malls known as Brookdale Center,
located in Brooklyn Center, Hennepin County, Minnesota ("Brookdale"); and
Northland Center, located in Southfield, Oakland County, Michigan
("Northland"), collectively, the "Properties."
On March 20, 1992, the Partnership sold The Telephone Employees Credit Union
building and a parcel of land in Southfield, Michigan for an adjusted selling
price of $650,000. The building and land had an adjusted book value of
$975,000, resulting in a loss on the sale in the amount of $325,000. Pursuant
to the Partnership Agreement, 100% of the loss was allocated to the Limited
Partners.
On July 22, 1994, the Partnership executed an agreement with Equitable for the
sale of Northland Center for the price of $6,600,000 in excess of the balance
of the first mortgage loan. The carrying value was reduced by $16,163,153 to
its estimated fair market value at December 31, 1993, which reflected the terms
of the sale. The price was determined as if the sale had closed on December
31, 1993 and any positive cash flow generated by Northland Center from January
1, 1994 to the closing belonged to Equitable. The Partnership received net
proceeds of $5,625,304. The transaction resulted in a gain on sale of
$4,610,550. Pursuant to the Partnership agreement (Note 4), the gain was
allocated $984,449 to the general partner and $3,626,101 to the limited
partners.
During 1992 the Partnership wrote down the net book value of Northland by
$7,256,151. In 1992 several national credit tenants vacated their space or
indicated their intention to do so. Previously, the General Partner had
anticipated that increasing occupancy and rental income, resulting from the
leasing strategy, would create a recovery in value within the anticipated
holding period of the property.
During 1994, the Partnership wrote down the net book value of Brookdale by
$9,068,553 to its estimated fair market value. The determination of the
estimated fair market value of the property was based upon the most recent
appraisal of the property, which is conducted annually, and the impending
maturity of the mortgage note.
The following is a schedule of the minimum lease payments for Brookdale as
called for under the lease agreements:
Year ending
December 31, Brookdale
1995 $ 4,100,757
1996 3,883,320
1997 3,662,209
1998 3,367,189
1999 3,166,697
Later years 11,092,052
$29,272,224
In addition to the minimum lease amounts, the leases provide for escalation
charges to tenants for common area maintenance, real estate taxes and
percentage rents. For the years ended December 31, 1994, 1993 and 1992,
percentage rents amounted to $295,440, $855,488, and $1,082,025 respectively,
which amounts are included in rental income.
4. Partnership Agreement
Pursuant to the terms of the Partnership Agreement, profits and losses from
operations shall be allocated 99% to the unitholders and 1% to the General
Partner. Distributions of net cash flow from operations, as defined in the
Partnership Agreement, shall be made in the following amounts and order of
priority: (i) first, 99% to the unitholders and 1% to the General Partner,
until the unitholders receive an amount equal to a cumulative annual return of
11%, compounded quarterly, on their Adjusted Capital Contributions; and (ii)
second, 99% to the unitholders and 1% to the General Partner.
With respect to capital transactions, income and losses will be allocated to
the General Partner and the unitholders in the same proportions as net proceeds
from capital transactions are distributed, except to the extent necessary to
reflect prior capital account adjustments. Distributions of net proceeds from
capital transactions shall be distributed as follows: (i) first, 99% to the
unitholders and 1% to the General Partner, until the unitholders have received,
from aggregate distributions of operating cash flow and net proceeds from
capital transactions, an amount equal to a cumulative annual return of 11%
compounded quarterly on their adjusted capital contributions; (ii) second, 99%
to unitholders and 1% to the General Partner, until the unitholders have
received, from aggregate distributions of operating cash flow and net proceeds
from capital transactions, less distributions constituting the cumulative
priority return, as defined in the Partnership Agreement, an amount equal to
their adjusted capital contributions; and (iii) third, 88.24% to the
unitholders and 11.76% to the General Partner.
5. Mortgage Notes Payable
Financing for the purchase of the Properties was provided by two nonrecourse
mortgage notes from Equitable in the initial principal amounts of $15,175,000
(the "Brookdale Note") and $25,675,000 (the "Northland Note"). Upon the sale of
the Northland Center on July 22, 1994, Equitable released and discharged the
Partnership from the Northland Note and all interest accrued on the principal
as specified in the mortgage note agreement. The Brookdale Note has an
interest rate of 10.2% per annum, compounded semiannually. The Partnership has
the right to defer, and intends to defer, payment of principal and interest on
the Brookdale Note until June 30, 1995, its maturity, at which point the note
will have an accreted value of $35,368,572. The note provides that the
Partnership must maintain at all times a "Loan-to-Value Ratio" of not greater
than 90%. Loan-to-Value Ratio is defined generally as the then outstanding
accreted amount of the Brookdale Note divided by the most recent appraised
value of the property, as updated on an annual basis. The Note is secured by a
first mortgage on Brookdale Mall and an assignment of rents and leases.
6. Note Payable
On June 25, 1991, the Partnership obtained a $3,000,000 loan from Equitable
Life Assurance Society of the U.S. The note bore interest at 1% above prime and
was secured by a second mortgage lien on Northland Center. Monthly payments of
interest only were required. On June 6, 1993, the Partnership repaid the note
payable from cash reserves.
7. Transactions with Related Parties
The General Partner or its affiliates earned fees and compensation in
connection with the syndication, acquisition and administrative services
rendered to the Partnership of $11,342,000 and incurred unreimbursed costs on
behalf of the Partnership of $570,352. The aggregate amount of the
aforementioned fees and compensation earned and unreimbursed costs was composed
of $7,490,000 included in offering costs and $4,422,352 included in deferred
charges. During 1993, the Partnership engaged Lehman Brothers, an affiliate of
the General Partner, in conjunction with exploring the possible sales of
Brookdale and Northland. Pursuant to such agreement, Lehman Brothers is
entitled to a fee equal to .875% of the gross proceeds of a transaction, as
defined in the Letter Agreement. Pursuant to this agreement, Lehman Brothers
received $508,774, in 1994, from the Partnership for advisory services related
to the sale of Northland Center. As of December 31, 1994 and 1993, $88,278 and
$124,345, respectively, is the net amount due from affiliates. For the years
ended December 31, 1994, 1993 and 1992, $665,155, $151,243, and $144,864,
respectively, was earned by affiliates.
Cash Certain cash accounts reflected on the Partnership's balance sheet at
December 31, 1994 were on deposit with an affiliate of the General Partner.
Cash reflected on the Partnership's balance sheet at December 31, 1993 was on
deposit with an unaffiliated party.
8. Asset Management Agreement
On December 31, 1986, the Partnership entered into an agreement with Equitable
Real Estate Investment Management, Inc. ("EREIM") for the management of the
Properties. The agreement provided for an annual fee equal to $1,060,000 per
annum (included in operating expenses) through December 30, 2001. Effective
December 31, 1993, the Asset Management Agreement with EREIM was terminated.
9. Management Agreement
The Partnership has entered into a management agreement with a local manager
for the day-to-day operations of the Properties. The local manager is to
receive a monthly fee of 4.45% (increased from 4% commencing February 1, 1989)
of the net rents as defined in the management agreement. The agreement expired
January 31, 1989 and was extended for two years. The Properties were managed
pursuant to the terms of the agreement during 1994, 1993 and 1992. However, the
Partnership and the manager have not yet finalized the terms of an agreement
extension.
10. Distribution to Limited Partners
Distributions to limited partners for 1994, 1993 and 1992 were $12,251,500
($1.15 per limited partnership security), $5,350,000 ($.50 per limited
partnership security), and $5,350,000 ($.50 per limited partnership security),
respectively. Cash distributions declared payable to limited partners at
December 31, 1994 and 1993 were $749,000 ($.07 per limited partnership
security) and $1,337,500 ($.125 per limited partnership security),
respectively.
11. Reconciliation of Financial Statement Net Loss and Partners' Capital to
Federal Income Tax Basis Net Loss and Partners' Capital
1994 1993 1992
Financial statement net loss $ (7,567,268) $ (18,376,967)$ (7,834,360)
Tax basis depreciation over financial
statement depreciation (169,715) (2,565,258) (2,570,288)
Tax basis rental income over (under)
financial statement rental income (2,187,492) 1,899,207 (92,637)
Tax basis loss on sale of property over
financial statement gain on sale
of property (12,630,880) - -
Financial statement loss on write-down of
real estate over tax basis loss on
write-down of real estate 9,068,553 16,163,153 7,256,151
Other (194,409) (31,791) 145,771
Federal income tax basis net loss $(13,681,211) $ (2,911,656) $(3,095,363)
Financial statement partners' capital $ 6,722,787 $ 26,665,307 $50,446,314
Current year financial statement net
loss over (under) federal income tax
basis net loss (6,113,943) 15,465,311 4,738,997
Cumulative financial statement net
income (loss) over (under) federal
income tax basis net loss 5,628,343 (9,836,968) (14,575,965)
Federal income tax basis partners'
capital $ 6,237,187 $ 32,293,650 $ 40,609,346
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
taxing authorities.
12. Litigation
On January 17, 1995, the Partnership announced that an action was filed in the
United States District Court for the Southern District of New York on behalf of
all persons who owned Limited Partnership Units of the Partnership on June 7,
1994. The action was brought against the Partnership, its General Partner,
officers and directors of the General Partner and other defendants with respect
to the recent sale by the Partnership of Northland Center. The General Partner
believes that Plaintiff's allegations are without merit, and will defend the
lawsuit vigorously. The complaint alleges, among other things, that the
solicitation statement used by the Partnership to solicit limited partner
consents to the July 1994 sale of Northland contained material
misrepresentations and omissions and that the General Partner, assisted by the
other defendants, breached its fiduciary duties to the plaintiffs in connection
with the Northland Sale. Plaintiffs seek, among other things, compensatory
damages and to have their action certified as a class action under the Federal
Rules of Civil Procedure.
MIDWEST REAL ESTATE SHOPPING CENTER L.P.
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, 1992 $ 725,057 $ 577,372 $ 149,883 $ 1,152,546
Year ended
December 31, 1993 1,152,546 544,951 445,692 1,251,805
Year ended
December 31, 1994 1,251,805 (184,872) 971,704 95,229
MIDWEST REAL ESTATE SHOPPING CENTER, L.P. Schedule III
Real Estate and Accumulated Depreciation
December 31, 1994
Cost Capitalized
Initial Cost Subsequent
to Partnership (A) To Acquisition
Land,
Buildings and Buildings and Write-down
Description Encumbrances Land Improvements Improvements Adjustment (C)
- ----------- ------------ ----- ------------- ------------- -------------
Brookdale
Shopping
Center,
Hennepin
County, MN $33,652,305 $5,413,594 $42,816,568 $5,520,624 $18,678,786
$33,652,305 $5,413,594 $42,816,568 $5,520,624 $18,678,786
MIDWEST REAL ESTATE SHOPPING CENTER, L.P.
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1994
(continued)
Gross Amount at Which Carried at Close of Period (B)
Buildings and Accumulated
Description Land Improvements Total Depreciation
- ----------- ------ -------------- --------- ------------
Brookdale
Shopping
Center,
Hennepin
County, MN $3,662,530 $31,409,470 $35,072,000 $--
$3,662,530 $31,409,470 $35,072,000 $--
MIDWEST REAL ESTATE SHOPPING CENTER, L.P.
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1994
(continued)
Life on which
Depreciation
in Latest
Date of Date Income Statements
Description Construction Acquired is Computed
- ------------- ------------ ---------- -----------------
Brookdale
Shopping
Center,
Hennepin
County, MN 1962 12/86 Building 40 years
Imprvmnts 12 years
(A) The initial costs of the Partnership represents the original purchase
price of the properties, including amounts incurred subsequent to the
acquisition which were contemplated. The initial costs included the purchase
paid by the Partnership and acquisition fees and expenses.
(B) The aggregate costs of real estate at December 31, 1994 and 1993 for
Federal income tax purposes is $53,602,750 and $145,499,286, respectively.
(C) During 1994, the Partnership recognized a write-down in the book value of
the Brookdale Center of $9,068,553. The net book value adjusted for the
write-down, becomes the new carrying value for the property.
A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended December 31, 1994, 1993 and 1992:
Real Estate investments: 1994 1993 1992
Beginning of year $ 108,498,993 $ 125,363,943 $141,636,880
Additions 1,536,726 1,716,870 3,054,764
Write-down (18,678,786) (18,581,820) (18,227,701)
Dispositions (56,284,933) - (1,100,000)
End of year $ 35,072,000 $ 108,498,993 $125,363,943
Accumulated Depreciation:
Beginning of year $ 8,234,897 $ 6,948,395 $ 14,535,617
Depreciation expense 2,510,802 3,705,169 3,509,328
Write-down (9,610,233) (2,418,667) (10,971,550)
Dispositions (1,135,466) - (125,000)
End of year $ -- $ 8,234,897 $ 6,948,395
EXHIBIT 10.12
LIMITED APPRAISAL OF REAL PROPERTY
Brookdale Center
N/E/C of Routes 100 and 152
Brooklyn Center
Hennepin County, Minnesota
IN A SUMMARY REPORT
As of January 1, 1995
Prepared For:
Equitable Real Estate Shopping Centers L.P.
3 World Financial Center, 29th Floor
New York, New York 10013
Prepared By:
Cushman & Wakefield, Inc.
Valuation Advisory Services
51 West 52nd Street
New York, New York 10019
February 10, 1995
Equitable Real Estate Shopping Centers L.P.
3 World Financial Center, 29th Floor
New York, New York 10013
Re: Limited Appraisal of Real Property
Brookdale Center
N/E/C of Routes 100 and 152
Brooklyn Center
Hennepin County, Minnesota
Gentlemen:
In fulfillment of our agreement as outlined in the Letter of Engagement,
Cushman & Wakefield, Inc. is pleased to transmit our 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.
At the time of our inspection, we were advised that Dayton Hudson announced
plans to acquire eight Twin Cities Carson Pirie Scott stores including the
store at Brookdale Mall. The sale is expected to close by March 1995 at which
time Dayton's will convert the store to a Mervyn's. Our valuation assumes that
this conversion will occur in an orderly fashion with minimal or no downtime
between the transformation.
This report was prepared for Equitable Real Estate Shopping Center L.P.
("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 Richard W.
Latella, MAI. Jay F. Booth provided significant assistance in the preparation
of the report and the cash flows contained herein.
This is a limited appraisal prepared in accordance with the Departure
Provision 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. By mutual agreement, this limited
appraisal contains something less than the work required by the specific
guidelines of the Uniform Standards of Professional Appraisal Practice. In
this case, the Cost Approach, which might have been appropriate to this
appraisal, has not been developed. We have relied upon the Sales Comparison
and Income Approaches as being particularly relevant to the appraisal of this
property. Furthermore, we are providing this report as an update to our last
analysis which was prepared as of January 1, 1994. 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, 1995,
was:
THIRTY FIVE MILLION DOLLARS $35,000,000
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.
Richard W. Latella, MAI Senior Director Retail Valuation Group
Jay F. Booth Valuation Advisory Services
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
Property Name: Brookdale Center
Location: N/E/C of Routes 100 and 152
Brooklyn Center
Hennepin County, Minnesota
Assessor's Parcel Numbers: A complete listing of the various parcel
numbers is contained in the Real Property Taxes and Assessments section of this
report.
Interest Appraised: Leased Fee Estate
Date of Value: January 1, 1995
Date of Inspection: January 19, 1995
Ownership: Equitable Real Estate Shopping Center, L.P.
Land Area:
Owned by Partnership: 58.02 Acres
Owned by Anchors: 30.00 Acres
Total: 88.02 Acres
Zoning: C2, Commercial District
Highest and Best Use
If Vacant: Retail use built to its maximum feasible FAR
As Improved: Continued retail use as a super-regional
shopping center.
Improvements
Type: Single story super-regional mall with two-level
department stores.
Year Built
Original Construction 1962
3rd Dept. Store (Dayton's)
and Mall Shop Expansion 1966
4th Dept. Store
(Carson Pirie Scott) 1967
Retenanting & Refurbishing 1970
Retenanting & Refurbishing 1983
Kohl's 1988
Carson Throat Take Back 1994
Type of Construction: Steel frame and masonry exterior
facility.
GLA Summary *
Owned GLA
Mall Shops 196,395 SF
Kiosks 5,166 SF
Total Owned Mall GLA 201,561 SF
Non-Owned Anchor Store
Space
Sears 180,669 SF
Dayton's 195,368 SF
Carson Pirie
Scott ** 140,336 SF
JC Penney *** 140,320 SF
Kohl's *** 75,000 SF
Total Anchor Area 731,709 SF
Anchor Owned TBA Stores 48,958 SF
Total Non-Owned Space 780,667 SF
Total Occupancy Area 982,228 SF
* Primary space only (excludes secondary storage space).
** To be converted to Mervyn's.
*** The land under the JC Penney and Kohl's is owned by
the partnership and leased to anchors.
Operating Data and Forecasts
Current Vacant Space 41,681 square feet
Current Occupancy Level 79.3% based on mall GLA (inclusive of
pre-committed tenants); 95.8% overall.
Forecasted Stabilized
Occupancy (Mall Shops): 94% (exclusive of downtime provisions)
Forecasted Date of
Stabilized Occupancy: January 1, 1998
Operating Expenses
1995: $5,867,582
($29.11/SF of owned GLA of 201,561 SF)
Value Indicators
Cost Approach: N/A
Sales Comparison
Approach: $33,900,000 to $36,400,000
Income Approach
Direct
Capitalization: $37,000,000
Discounted Cash
Flow: $34,000,000
Investment Assumptions
Rental Growth Rate: 1995-1996 Flat
1997 +1.0%
1998 +2.0%
1999 +3.0%
2000-2004 +3.5%
Expense Growth Rate
(General): 1995-2004 +4.0%
Tax Growth Rate: 1995-2004 +5.0%
Sales Growth Rate: 1995 - 1.5%
1996 +0.0%
1997 +2.0%
1998 +3.0%
1999-2004 +3.5%
Other Income 1995-2004 +3.0%
Tenant Improvements-
New Tenant: $10.00/SF
Tenant Improvements-
Renewing Tenants: $ 1.00/SF
Vacancy between
Tenants: 6 months
Renewal Probability: 70%
Terminal Overall Rate: 9.75%
Cost of Sale at
Reversion: 2%
Discount Rate: 12.75%
Value Conclusion: $35,000,000
Exposure Time Implicit in Value
Conclusion: Not more than 12 months
Resulting Indicators
Going-In Overall Rate: 11.43%
Price Per Square Foot
of Owned (Mall Shop)
GLA: $173.64
Special Risk Factors
1. At the time of our inspection, we were advised that Dayton Hudson
announced plans to acquire eight Twin Cities Carson Pirie Scott stores
including the store at Brookdale Mall. The sale is expected to close
by March 1995 at which time Dayton's will convert the store to a
Mervyn's. Our valuation assumes that this conversion will occur in an
orderly fashion with minimal or no downtime between the transformation.
Special Assumptions
1. Throughout this analysis we have relied on information provided by
ownership and management which we assume to be accurate. We have been
provided with summary information only for new leases in the form of a
rent roll or lease abstracts. We have not been provided with actual
lease documents. Negotiations are currently underway with additional
mall tenants that will enhance the mall's overall appeal and
merchandising strategy. In addition, we are advised that a few
existing tenants will be leaving the mall as a result of parent company
bankruptcies and remerchandising efforts. 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 General
Growth Management. Such leases are identified within the body of this
report.
3. Dayton Hudson's operating covenant expires in 1996. Management has
been negotiating with Dayton's to extend the agreement. We have made a
financial contingency in our cash flow assumptions as compensation to
Dayton's to induce them to extend the agreement. Should Dayton's
vacate the mall, it would have a severe impact on the property.
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
applied 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. 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.
We understand that, for an existing structure like the subject, compliance can
be accomplished in stages as all or portions of the building are periodically
renovated. The maximum required cost associated with compliance-related
changes is 20 percent of total renovation cost. A prudent owner would likely
include compliance-related charges in periodic future common area and tenant
area retrofit. We consider this in our future projections of capital
expenditures and retrofit allowance costs to the landlord.
At this time, most buyers do not appear to be reflecting future ADA compliance
costs for existing structures in their overall rate or price per square foot
decisions. This is recent legislation and many market participants are not yet
fully aware of its consequences. We believe that over the next one to two
years, it will become more of a value consideration. It is important to
realize that ADA is a Civil Rights law, not a building code. Its intent is to
allow disabled persons to participate fully in society and not intended to
cause undue hardship for tenants or building owners.
5. We note that the asbestos has been identified in the property and
ownership has initiated a program of removal as will be discussed in
further detail herein.
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.
PHOTOGRAPHS
(10 photographs of exterior and interior views of Brookdale Center Mall)
TABLE OF CONTENTS
Page
INTRODUCTION
Identification of Property 1
Property Ownership and Recent History 1-2
Purpose and Function of the Appraisal 2
Extent of the Appraisal Process 2-3
Departure from Specific Guidelines 3
Date of Value and Property Inspection 3
Property Rights Appraised 3
Definitions of Value, Interest Appraised,
and Other Pertinent Terms 4-5
Legal Description 5
REGIONAL ANALYSIS 6-14
NEIGHBORHOOD ANALYSIS 15-16
RETAIL MARKET ANALYSIS 17-41
THE SUBJECT PROPERTY 42-43
REAL PROPERTY TAXES AND ASSESSMENTS 44
ZONING 45
HIGHEST AND BEST USE 46
VALUATION PROCESS 47
SALES COMPARISON APPROACH 48-70
INCOME APPROACH 71-124
RECONCILIATION AND FINAL VALUE ESTIMATE 125-127
ASSUMPTIONS AND LIMITING CONDITIONS 128-130
CERTIFICATION OF APPRAISAL 131
ADDENDA
OPERATING EXPENSE BUDGET AND FORECASTS
TENANT SALES REPORT
PRO-JECT LEASE ABSTRACT REPORT
PRO-JECT PROLOGUE ASSUMPTIONS REPORT
PRO-JECT TENANT REGISTER REPORT
PRO-JECT LEASE EXPIRATION REPORT
ENDS FULL DATA REPORT
MALL LEASING PLAN
CUSHMAN & WAKEFIELD INVESTOR SURVEY
APPRAISERS' QUALIFICATIONS
PARTIAL CLIENT LIST
INTRODUCTION
Identification of Property
Brookdale Center is a single level super-regional shopping mall located
in the northwest quadrant of the Minneapolis MSA. It contains 982,228
square feet and is anchored by five department stores. Brookdale was
originally constructed in 1962 and included Sears and JC Penney with
Dayton's being added in 1966. In 1967, Donaldson's (now Carson Pirie
Scott) was constructed as Brookdale became the nation's first enclosed
four anchor mall. As discussed, this store is expected to be converted
to a Mervyn's over the next few months. The fifth anchor was added as
an outparcel in 1988. Main Street department stores (a division of
Federated) built a 75,000 square foot free-standing unit on leased
land. Later that year, Federated sold its Main Street division to
Kohl's who continues to operate the store today.
Brookdale Center is located immediately east of the intersection of
County Road 10 and Brooklyn Boulevard (Route 152), adjacent to State
Highway 100 and approximately five miles northwest of the Minneapolis
Central Business District. The area surrounding Brookdale is
characterized by intensive retail development, making Brookdale a
strong retail draw in the northwest quadrant of the MSA.
Brookdale's market continues to experience growth with the three
fastest growing suburbs in the Twin Cities in its target market (Coon
Rapids, Maple Grove, and Plymouth). The center's dated appearance has
made it increasingly difficult to compete with its three principle
competitors, namely Ridgedale, Rosedale, and Northtown, all of which
have undergone major renovations and/or expansions. Brookdale is
currently about 95.8 percent occupied with continuing plans for
remerchandising and remodeling efforts.
Property Ownership and Recent History
Fee title to the subject is held by Equitable Real Estate Shopping
Centers, L.P. The partnership has owned the mall since acquiring it from the
Equitable Life Insurance Company in October, 1986.
Property Ownership and Recent History (cont'd.)
Carson's, Sears and Dayton's all own their own buildings and pads. JC Penney
and Kohl's are both ground tenants. JC Penney's ground lease is for a 50 year
term that expires on January 31, 2015. They pay a base rent of $20,930 per
year. Kohl's operates under a lease which expires January 31, 2010. They pay
a base rent of $175,000 per year. Both of the ground tenants also have
percentage rent clauses. The operating covenant for Dayton's expires in 1996,
while Carson's and Sears run until 1999. We have been advised that Dayton
Hudson has acquired the Carson Pirie Scott store. It will be converted to a
Mervyn's store sometime during the spring of 1995.
Purpose and Function of the Appraisal
The purpose of this limited appraisal report is to estimate the market value of
the leased fee estate in the property, as of January 1, 1995. Our analysis
reflects conditions prevailing as of that date. Our last appraisal was
completed on January 1, 1994 and we have focused on changes to the property and
market conditions since that time. The function of this appraisal is to
provide an independent valuation analysis to our client, which will be used to
monitor 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 with Linda Smith, the mall
manager.
Interviewed representatives of the property management company,
General Growth Management.
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 expense and a budget
forecast for 1995 including the budget for planned capital expenditures
and repairs.
Extent of the Appraisal Process (cont'd.)
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 a detailed discounted cash flow analysis for the purpose of
discounting a forecasted net income stream to a present value.
Conducted market inquiries into recent sales of similar regional
malls to ascertain sales price 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.
Departure from Specific Guidelines
This is a limited appraisal prepared in accordance with the Departure Provision
of the Uniform Standards of Professional Appraisal Practice of the Appraisal
Foundation. In this case, the Cost Approach, which might have been appropriate
to this appraisal, has not been developed. Furthermore, the report primarily
addresses changes to the property and its environs over the past year and does
not provide a detailed discussion of these items.
By definition, a limited appraisal is considered to be less reliable than a
complete appraisal in that it does not contain all of the data and analysis
normally found in a complete appraisal.
Date of Value and Property Inspection
On January 19, 1995 Richard W. Latella, MAI inspected the subject property and
its environs. Jay F. Booth did not inspect the property but provided
significant assistance in the preparation of the report and the cash flows.
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 best interests;
3. A reasonable time is allowed for exposure in the open market;
4. Payment is made in terms of cash in United States 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 values
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.
Definitions of pertinent terms taken from the Dictionary of Real Estate
Appraisal, Third Edition (1993), published by the Appraisal Institute,
are as follows:
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 the appraisal.
Definitions of other terms taken from various other sources are as
follows:
Market Value As Is on Appraisal Date
Value of the property appraised in the condition observed upon
inspection and as it physically and legally exists without hypothetical
conditions, assumptions, or qualifications on the effective date of
appraisal.
Legal Description
A legal description is retained in our files.
(Map identifying major areas of development activity in Minneapolis/Saint Paul
area)
REGIONAL ANALYSIS
Introduction
The regional analysis section evaluates general demographic and economic trends
in the property's county to determine the outlook for the overall market and
industries based upon comparison of projected population and employment trends
with actual historical data.
The subject property is located in Brooklyn Center within the metropolitan area
of Minneapolis, Minnesota. It is approximately 5 miles north of the
Minneapolis Central Business District.
Geographic Boundaries
Minnesota lies near the geographic center of North America and is the
northern-most state in the continental United States. Minneapolis and St.
Paul, the state's capital, comprise the nucleus of the seven-county Twin Cities
metropolitan area. The Twin Cities metropolitan area extends east to the
Wisconsin border and includes the following seven counties: Hennepin, Ramsey,
Dakota, Anoka, Scott, Washington, and Carver. The Twin Cities are one of the
primary financial, commercial, and industrial centers for the Upper Midwest and
have one of the finest educational and instructional systems in the country.
Transportation
Minneapolis is advantageously located in southeast Minnesota at the head of
the Mississippi River and within close proximity to major interstate routes,
shipping passages and railroad service. Minneapolis is strategically located
to serve a large midwest market with Omaha located 378 miles to the south,
Chicago 410 miles southeast; Milwaukee 337 miles southeast and Kansas City 443
miles south. The Greater Minneapolis-St. Paul area's location and wide variety
of transportation options has enabled it to be an important transportation hub
of the midwest.
The Minneapolis-St. Paul metropolitan area is accessible by several major
expressways and interstate highways. Interstate 94 and Interstate 35 are the
two primary interstate highways serving the metropolitan area. Interstate 94
travels east-west from the Wisconsin border, through the downtown area and
continues west towards St. Cloud. Interstate 35 runs west and north-south
providing access from Duluth to Fairbult. In addition, the three belt-line
freeways, Interstate 494, Interstate 694 and Interstate 394 facilitate travel
in and around the first and second ring suburbs. Interstate 35 East runs
north-south providing transportation from Burnsville to Duluth. Minnesota has
127,500 miles of street and highway, ranking it fifth in the nation in miles of
roadways.
Within the metropolitan area, commuter transportation is facilitated by the
Metropolitan Transit Commission (MTC), a public agency which owns and operates
the second largest bus system in the United States. The MTC annually serves
over 70 million passengers in Minneapolis, St. Paul, and the surrounding
suburbs. Five additional private operators provide bus route service to the
metropolitan area.
Due to its strategic location at the head of the Mississippi River, the Twin
Cities are the home of six barge lines and are served by over 72 barge
carriers. The ports of Minneapolis and St. Paul handle more than eleven
million tons of waterborne commodities for domestic and foreign markets each
year. The Twin Cities comprise the nation's seventh largest wholesale
distribution center and the third largest trucking distribution center, with
over 150 first class carriers.
The Minneapolis-St. Paul metropolitan area is served by six railroad companies,
with the three dominant lines being Burlington Northern, Inc., Chicago and
Northwestern Transportation Company, and Soo Line Railroad (CP Rail System).
The six truck line railroads have over 5,400 miles of rail trackage. Railroads
within the area provide service which is integrated with the national U.S.
railway system, as well as the Canadian national railway system. Passenger
service is provided by Amtrak.
The Minneapolis-St. Paul International Airport is the major airline gateway for
the Twin Cities and the Upper Midwest.
Population
The Twin Cities Metropolitan Area, located in the southeastern quadrant of
Minnesota, is home to over half of the state's population. For perspective,
the Twin Cities Metropolitan Area, as defined by Sales & Marketing Management,
includes eleven counties in Minnesota and two counties in Wisconsin.
The regional planning organization, the Metropolitan Council, has prepared
population estimates and projections for the area. The historical and
projected population growth trends for the seven primary counties in the Twin
Cities metropolitan area are summarized in the following table.
Twin Cities Metropolitan Area
Population Statistics - 1980 Through 2000
_________________________________________
Average Average
Estimated Annual % Projected Annual %
County 1980 1993 Change 1980-93 2000 Change 1990-2000
_____________________________________________________________________________
Hennepin 941,411 1,051,426 0.9% 1,109,820 0.8%
Minneapolis 370,951 367,924 -0.1% 370,500 0.1%
Suburban 570,460 683,502 1.5% 739,320 1.2%
Anoka 195,998 261,814 2.6% 285,190 1.3%
Carver 37,046 52,758 3.3% 62,920 2.8%
Dakota 194,279 298,678 4.1% 346,130 2.3%
Ramsey 459,784 491,306 0.5% 504,110 0.4%
Scott 43,784 64,242 3.6% 77,410 2.9%
Washington 113,571 163,500 3.4% 180,180 1.5%
______________________________________________________________________________
Total 1,985,873 2,383,725 1.5% 2,565,760 1.1%
Source: U.S. Census and estimates of the Metropolitan Council
______________________________________________________________
The population of the metropolitan area increased by a simple average
annual rate of 1.5 percent between 1980 and 1993. Dakota, Scott and
Carver Counties, which geographically comprise the southern half of the
metropolitan area, continue to lead the other counties in rate of
population growth through 1993. Population rate of growth in these
counties will continue to lead the metro area through the year 2000.
Currently, the population of the Twin Cities MSA comprises nearly 60
percent of the total for the State of Minnesota.
According to the Metropolitan Council, the metropolitan area is the
12th fastest growing metro area in terms of population among the
largest 25 in the United States. However this rate of growth is
expected to decrease slightly between 1993 and the year 2000, when
population in the metropolitan area is projected to reach 2,566,000.
As shown on the following table, the population in the area is also
moving from the city toward the suburbs, as has been common among the
nation's metropolitan areas.
TABLE B
Population Census and Forecast
Twin Cities Metropolitan Area
(as a percentage of the total population)
-----------------------------------------
County 1980 1993* 2000* 2010*
- -----------------------------------------------------------------------------
Hennepin: 47% 45% 43% 42%
Minneapolis 19% 15% 14% 13%
Suburban 29% 29% 29% 29%
Anoka 10% 11% 11% 11%
Carver 2% 2% 2% 3%
Dakota 10% 13% 13% 14%
Ramsey 23% 21% 20% 19%
Scott 2% 3% 3% 3%
Washington 6% 7% 7% 8%
_____________________________________________________________________________
* Estimated
Source: U.S. Census and Metropolitan Council
_____________________________________________________________________________
The preceding table shows a gradual shift of population outward from
the city toward the suburbs. The trend is projected to continue,
although at a more moderate rate. The collar counties of Anoka,
Carver, Dakota, Scott and Washington increased their share of the
regional population from 30 percent in 1980 to 36 percent in 1993.
Their share of the population is expected to increase to 39 percent by
the year 2010. Dakota County is expected to increase its share of
population.
The population shift from the city to suburban areas, is common among
most major cities located throughout the Great Lakes and Northeastern
regions, and is expected to continue for the foreseeable future.
Economic Base The Twin Cities economy, like most major metropolitan
areas, began as a manufacturing center. However, today the Twin
Cities' economic base is less dependant on the manufacturing sector,
and is distributed among many industry groups. Table C summarizes the
diversity of employment for the eleven county Twin Cities metropolitan
area as of 1993.
TABLE C
Nonagricultural Wage And Salary Employment
Eleven County Area: 1993 Annual Averages
__________________________________________
Industry Group Employment Percent Of Total
____________________________________________________________
Manufacturing 258,700 18.1%
Construction 46,400 3.2%
TCU* 76,300 5.3%
Trade 339,600 23.8%
FIRE 104,400 7.3%
Services 408,200 28.6%
Government 194,700 13.6%
____________________________________________________________________
Total 1,428,300 100.0%
____________________________________________________________________
* Transportation, Communications & Utilities
Source: WEFA
____________________________________________________________________
Manufacturing employment in the Twin Cities has experienced a decline,
reducing its share of the market from 23 percent in 1980 to 18 percent
in 1993. The greatest improvements were predictably in the services
and trade industries which, combined, employed 52.4 percent of the
labor market in 1993.
Manufacturing had been the Twin Cities' major employer up to the early
1980's, when employment in the trade and service industries matched
that of manufacturing, and subsequently surpassed it. The Twin Cities'
service industries produced substantial growth in employment from 1980
to 1993. Employment growth during this time period generated 169,250
new service jobs. The most recent addition to the Twin Cities service
sector is the 4.2 million square foot Mall of America located in
Bloomington, Minnesota.<PAGE>
This $625 million retail/entertainment complex
has created 11,000 new permanent jobs and has substantially boosted the
tourism and service industries. According to reports published in the
Twin Cities Star Tribune, 35.0 to 40.0 million visits were made to the
Mall of America during its first year of operation. During the
forecast period from 1993 to 2000, the service industry in the Twin
Cities is expected to continue to lead other employment sectors.
The financial service sector is one of the growth prospects in
Minneapolis. After suffering financial difficulties during the early
1980's, Norwest Corporation, for example, one of the region's largest
banking companies, has broadened and strengthened its portfolio.
Norwest is now one of the strongest banking corporations in the
Midwest, continuing to expand through the purchase of regional banks.
With over 1,300 technology intensive firms, this metropolitan area has
one of the largest concentrations of high technology businesses in the
nation. It is the nation's largest producer of main frame computers
and related equipment. Despite the prominence of this sector, high
tech industries in Minnesota, in general, have suffered in recent
years.
The computer has not been solely responsible for job losses in the
manufacturing industries, defense related manufacturing has also had an
effect on the local economy. While Minnesota's expenditures have
historically ranked high for defense related manufacturing, and
research and development, governmental cuts have had an impact on this
area of the local economy.
In the Twin Cities area, health services are projected to add nearly
2,000 jobs annually through 1996, while companies that provide services
to other businesses will add another 3,000 new jobs each year to the
local employment base. The Twin Cities will remain a center for
professional sports, the arts and other forms of recreation and
cultural activities, providing new jobs in these fields. A number of
native american tribal casinos have been constructed in both the
metropolitan area and statewide since 1989. Employment in this part of
the entertainment industry has expanded rapidly since 1989, and is
expected to be a continued source of new employment opportunities in
the foreseeable future.
Seventeen Fortune 500 industrial firms are headquartered in the
metropolitan area in 1994. Some of the nation's largest service firms
and private firms are also located in Minneapolis/St. Paul. The
presence of these firms is generally indicative of the strength of the
local support network and outlook for the business client.
Unemployment
The region's unemployment rate, according to the Metropolitan Council,
has historically outperformed the state and national rates. As of
September, 1994, the region's unemployment rate was 3.3 percent, well
below the U.S. average rate of 5.6 percent. The selected average
annual unemployment rates for the seven-county metropolitan area are
summarized below in Table D.
TABLE D
Selected Average Annual Unemployment Rate
Seven County Twin Cities Metropolitan Area
___________________________________________
Year TCMA U.S.
____________________________________________________________
1982 4.2% 6.4%
1986 3.4% 7.2%
1988 4.1% 8.1%
1989 4.1% 5.4%
1990 4.0% 5.5%
1991 4.4% 6.7%
1992 4.4% 7.4%
1993 4.2% 6.8%
Sept. 1994 3.3% 5.6%
____________________________________________________________
Source: Minnesota Dept. of Economic Security
____________________________________________________________
Income
Greater Minneapolis-St. Paul's residents are slightly more affluent
than those of the Minnesota. The MSA's 1993 median household Effective
Buying Income (EBI) of $41,594 ranked 29th among the nation's largest
316 metropolitan statistical areas, according to Sales and Marketing
Management's 1994 Survey of Buying Power. The median EBI for the top
316 MSAs in 1993 was $37,358. For the State of Minnesota, the
comparable number was $35,731.
The distribution of incomes over the last four years in the
Minneapolis-St. Paul metropolitan area is illustrated on the following
page.
Minneapolis-St. Paul MSA Median Household Income
1989-1992
________________________________________________
Year $10,000 to $19,999 $20,000 to $34,999 $35,000 to $46,999 $50,000 and Over
______________________________________________________________________________
1989 17.1% 25.5% 21.3% 24.3%
1990 16.4% 24.6% 21.4% 26.5%
1991 13.4% 24.2% 23.1% 31.0%
1992 12.7% 22.7% 22.5% 34.2%
1993 12.0% 20.9% 21.8% 37.9%
______________________________________________________________________________
Source: Sales and Marketing Management's Survey of Buying Power, 1990-1994
______________________________________________________________________________
As can be seen from the chart above, the number of households with an
EBI over $50,000 per year has increased since 1989 while the number of
households with EBIs between $10,000 and $20,000 has decreased during
the same time period. This growth trend is forecasted to continue.
According to Equifax National Decision Systems (ENDS), the MSA is
decidedly more affluent than the state as a whole as is shown below.
All data is through 1994.
_____________________________________________________________________________
Minneapolis MSA State of Minnesota
_____________________________________________________________________________
Average Household Income $53,276 $45,260
Median Household Income $42,647 $35,095
Per Capita Income $20,835 $17,799
_____________________________________________________________________________
Culture and Education
Minnesota has developed excellent primary and secondary educational
systems which rank among the nation's highest in percent of graduating
high school seniors. Minnesota also has consistently been in the top
ten states in percent of population with college degrees. There are
twenty-five colleges and universities in the Twin Cities Metropolitan
Area, including the University of Minnesota with about 45,000 full time
students. About 39 percent of the Minnesota tax dollar is spent on
educational support.
Cultural facilities include several dozen theaters, the famous Tyrone
Guthrie Theater, a science museum, two art museums, the well known
Minnesota Symphony Orchestra and the Ordway Music Theater.
Conclusion
The Minneapolis-St. Paul metropolitan area remains a vital place of
business. The outlook for the Minneapolis-St. Paul metropolitan area
is generally positive. While population has increased over the past
decade, the projection figures reflect additional gains over the next
five years at reasonably good levels. In addition, continued gains in
median household income and a diversified economy support the relative
stability of the area. Disposal personal income has grown by 4.9
annually since 1985 which has been in excess of the inflation rate.
Overall, employment levels have been improving and the area enjoys a
low cost of living. The diversified employment base has enabled the
greater Minneapolis-St. Paul area to remain competitive on a national
level.
As we foresee a modest short term economic growth condition, it is our
opinion that the long-term prospect for net appreciation in commercial
and residential real estate values remains good. Minneapolis-St. Paul
should be able to sustain and continue growth in the future while
remaining desirable to the major industries and maintaining a strong
labor force.
NEIGHBORHOOD ANALYSIS
Brookdale Center is located immediately east of the intersection of
County Road 10 and Brooklyn Boulevard (Route 152), adjacent to State
Highway 100, and about five miles northwest of the Minneapolis Central
Business District. There is intensive retail development along County
Road 10, Brooklyn Boulevard, Xerxes Avenue, and Shingle Creek Parkway,
which are the major streets in this area. The surrounding neighborhood
is predominantly single-family residential in character. The primary
growth period of this area occurred prior to 1970. On balance,
Brooklyn Center is a mature, relatively attractive community. While
many of its residents are employed in downtown Minneapolis and its
environs, Brooklyn Center is an employment center in its own right.
Brookdale Center is bounded by State Highway 100 to the southeast, a
four-lane, limited access thoroughfare with interchanges at County Road
10 and Brooklyn Boulevard. Beyond State Highway 100, there lies a
residential area. Directly north of the subject, across County Road
10, are commercial properties including bank branch offices, a
seven-story multi-tenant office building, and automobile dealerships.
Directly west, across Xerxes Avenue, are several community and
neighborhood centers including Brookdale Square, Brookview Plaza and
Brookdale Court. There are also numerous free-standing "big box"
retailers in the neighborhood. New construction includes Circuit City
which took over the former Childrens Place and Office Depot which
opened in December 1994.
Access to Brooklyn Center is excellent. It is adjacent to Highway 100,
a limited access freeway with interchanges at Brooklyn Boulevard and
Route 10. Highway 100 connects with Interstate 94/694 one mile
northeast, a major east/west route. Brooklyn Boulevard is a major
four-lane thoroughfare located only one-fourth mile west of Brooklyn
Center. Xerxes Avenue is a four-lane street that serves as a perimeter
roadway for the mall as well as providing secondary access for the
commercial properties along the east side of Brooklyn Boulevard. Route
10 (also known as Bass Lake Road and 57th Avenue) is a four-lane,
east/west thoroughfare. There are two access driveways each from
Xerxes Avenue and Route 10; those on Xerxes are stop sign-controlled;
those on Route 10 are traffic-signal controlled.<PAGE>
We are advised
that negative press as of late citing changing demographics,
deterioration of the immediate area and safety issues has impacted
consumers' perception of the subject and its environs. Nonetheless,
our observations indicate that there has been some new construction and
investment in the market. We are advised that residential values have
been relatively stable. Our demographic survey shows that the primary
market area for the subject is expected to see moderate population,
household and income growth. As such, we remain cautiously optimistic
about the outlook for the immediate area.
RETAIL MARKET ANALYSIS
National Retail Overview
Regional and super-regional shopping centers constitute the major form
of retail activity in the United States today. It is estimated that
consumer spending accounts for about two-thirds of all economic
activity in the United States. As such, retail sales patterns have
become an important indicator of the country's economic health.
During the period 1980 through 1993, total retail sales in the United
States increased at a compound annual rate of 5.74 percent. Data for
the period 1990 through 1993 shows that sales growth has slowed to an
annual average of 4.75 percent. November 1994 sales (advance estimate)
are up nearly 7 percent over November 1993. This information is
summarized below.
Total U.S. Retail Sales *
_________________________
Year Amount (Billions)
______________________________________________
1980 $ 793,300
1985 $1,072,400
1990 $1,425,200
1991 $1,447,000
1992 $1,564,356
1993 $1,638,202
______________________________________________
Compound Annual Growth + 5.74%
1980-1993
CAG: 1990 - 1993 + 4.75%
November 1993 $ 137,825
November 1994 ** $ 147,409
(+6.95%)
________________________________________________________________
* Excludes Automotive Group
** Advance Estimate
________________________________________________________________
Source: Monthly Retail Trade Reports Business Division, Bureau of the Census,
U.S. Department of Commerce.
____________________________________________________________________________
Economic Trends
The early part of the 1990s was a time of economic stagnation and
uncertainty in the country. The gradual recovery, which began as the
nation crept out of the last recession, continues to gain strength.
But as the recovery period reaches into its third year, speculation
regarding the nation's economic future remains. Global economic
troubles continue to impact the country's slow economic growth trends.
Post recessionary trends offer important insight to this analysis,
particularly consumer behavior. In 1992, after an erratic year for
retail sales, the nation's leading chains reported stunningly strong
sales in December, their best holiday season since 1988. Although the
first half of the year had seen little growth in sales, year end 1992
retail sales (exclusive of automobile sales) were up by 4.5 percent
over 1991. Clearly, the importance of the Christmas selling season is
underscored by the fact that some retailers generate up to 60.0 percent
of sales and profits during the last quarter of the year.
The first half of 1993 was characterized by consumers demonstrating a
willingness to spend more money in retail stores, but more often in
department stores than in apparel shops. Retail sales climbed 5.6
percent in June 1993 as recorded by a Salomon Brothers monthly index
that measures sales of 22 major retailers at stores open at least one
year. In June 1992, this same-store growth index was up 3.8 percent.
By and large, leading department stores showed greater gains than
apparel chains. The figures suggested the possibility of a stronger
second half of the year. Some analysts predicted that sales would
pick-up as the overall economy improved, causing buyers to spend more,
particularly in anticipation of higher taxes in 1994. For the year,
total retail sales (exclusive of automobiles) were up by 4.72 percent
in 1993.
Americans' personal incomes and spending increased in 1993 at rates
that economists saw as harbingers of a healthy expansion for 1994.
Some of the lowest interest rates in two decades spurred new home
construction which resulted in increased demand for such household
goods as appliances and furniture. The housing market accounts for a
significant portion of the gross domestic product. The Commerce
Department reported that earnings rose 4.7 percent in 1993, helped by a
0.6 percent increase in December. The yearly figure was nearly double
the 2.7 percent rise in inflation. Consumer spending rose 6.1 percent,
the biggest increase since a 6.8 percent gain in 1990. As suggested,
consumer spending represents two-thirds of the nation's economic
activity.
Year end 1994 results show that while the holiday season may have been
disappointing to certain merchants, especially apparel retailers, who
were forced to cut prices and profits, total consumer spending rose by
5.7 percent from 1993 when it rose 5.8 percent. Although this was the
smallest rise since 1991 when it rose 3.8 percent, it was still a
respectable finish. Much of this optimism is being fueled by low
unemployment and bolstered consumer confidence. During 1994
approximately 3.5 million jobs were created. One very significant
bright spot in the economy is automobile sales which are running near
record levels.
According to the Commerce Department, per capita income rose 3.2
percent to $20,781 nationwide in 1993. This was down from 4.9 percent
growth in 1992 but above the 2.8 percent growth in 1991. Income growth
varied dramatically from no growth in North Dakota to 6.3 percent in
Montana which was largely fuelled by a housing boom which boosted
lumber prices. Connecticut continued to enjoy the highest per capita
income at $27,957, while Mississippi ($14,708) was the lowest.
Fresh signs of persistent economic vigor were in evidence through
September 1994 as the government published upbeat reports on housing
and employment. The Departments of Commerce and Housing and Urban
Development reported that sales of new single-family homes climbed 9.7
percent in August over the previous year. While the increase was
spread across all four regions, it was strongest in the northeast. The
median new home price was $134,000, up from $125,000 in July.
First time claims for unemployment benefits fell by 11,000 to 310,000
at the end of September. This fits a pattern of recent improvement in
the employment rates. However, inflation fears persist due to an
economy which may be growing too quickly. In reaction, the bond
markets have skidded with long term treasuries pushing 8.0 percent for
the first time in two and one half years as investors have become wary
of higher inflation.
Personal income jumped by .8 percent in December 1994 after a 1 percent
dip in November and registered the biggest gain in four years for all
of 1994. The increase in income was more than enough to offset the
rise in spending as the personal savings rate increased. The savings
rate, a figure watched widely by economists that shows savings as a
percentage of disposable income, rose to 4.8 percent in December 1994
from 4.3 percent in November.
The report on the gross domestic product (GDP) showed that output for
goods and services expanded at an annual rate of 4.5 percent in the
fourth quarter of 1994. Overall, the economy gained 4 percent in 1994,
the strongest rate in ten years when it was 6.2 percent in 1984. The
data also implies that vigorous growth may continue, and possibly
accelerate, before higher interest rates take their toll on the economy
in 1995. Most economists predict a slowdown with annual growth in the
3.0 to 3.5 percent range. In a separate government report, American
industry was operating at 84.6 percent of capacity in October, the
highest rate since 1989. A utilization rate above 85 percent or so is
considered to be in danger of accelerating inflation.
Retail Sales
In their recent publication, The Scope of the Shopping Center Industry
in the United States - 1994, The International Council of Shopping
Centers reports that overall retail conditions continued to improve for
the third consecutive year in 1993. Total shopping center sales
increased 5.5 percent to $830.2 billion in 1993, up from $787.2 billion
in 1992. The comparable 1992 increase was 5.3 percent. Retail sales
in shopping centers (excluding automotive and gasoline service station
sales) now account for about 55.0 percent of total retail sales in the
United States.
Total retail sales per square foot have shown positive increases over
the past three years, rising by 4.8 percent from approximately $165 per
square foot in 1990, to $173 per square foot in 1993. It is noted that
the increase in productivity has slightly exceeded the increase in
inventory which bodes well for the industry in general. This data is
summarized on the following table.
Selected Shopping Center Statistics
1990-1993
___________________________________
% Compound
Change Annual
1990 1991 1992 1993 1990-93 Growth
_____________________________________________________________________________
Retail Sales
in Shopping
Centers * $727.7 $747.8 $787.2 $830.2 14.1% 4.49%
Total
Leasable
Area ** 4.4 4.6 4.7 4.8 9.1% 2.94%
Unit Rate $165 $163.0 $167.0 $173.0 4.8% 1.59%
_____________________________________________________________________________
* Billions of Dollars
** Billions of Square Feet
_____________________________________________________________________________
Source: International Council of Shopping Centers. The Scope of the Shopping
Center Industry in the United States - 1994.
As a whole, 1993 was a good year for most of the nation's major retailers.
Sales for the month of December were up for most, however, the increase ranged
dramatically from 1.1 percent at Kmart to 13.3 percent at Sears for stores open
at least a year. It is noted that the Sears turnaround after years of slippage
was unpredicted by most forecasters. Unfortunately, for most full service
retailers, margins had been impacted by aggressive price cutting and promotions
as consumers have become more value conscious. For the year, however, 1994 has
offered mixed results. Data through the first quarter of 1994 had shown that
sales in March surged in comparison to the setback in January which was
attributed to poor weather. Many of the nation's largest retailers have
reported double-digit sales gains, lead by Sears (16.8 percent) and Wal-Mart
(15.0 percent). Salomon Brothers said its retail index rose 11.1 percent in
March, the biggest one month jump since 1991. By comparison, the
1993 index rose 3.7 percent. Data through the first half of 1994 shows that
sales have continued their improving trend; however, sales through the third
quarter slowed below most retailers' expectations. The Salomon Brothers index
showed that retail sales in September grew 3.9 percent from the month a year
earlier. The comparable September 1993 figure was 5.6 percent. While
September is traditionally a slow month, most retailers blamed the slow results
on weather. With December results recently in, most retailers posted same
store gains of between 2 and 6 percent. Sears was the exception with an
increase of 7.9 percent. The Goldman Sachs Retail Composite Comparable Store
Sales Index, a weighted average of monthly same store sales of 52 national
retail companies rose 4.5 percent in December. The weakest sales have been in
womens' apparel with the strongest sales reported for items such as jewelry and
hard goods. Most department store companies reported moderate increases in
same store sales, though largely as a result of aggressive markdowns. Thus,
profits are expected to be negatively affected for many companies.
Provided on the following chart is a summary of overall and same store sales
for selected national merchants for December 1994, the most recent month
available.
Same Store Sales for the Month of December, 1994
________________________________________________
% Change From Previous Year
___________________________
Name of Retailer Overall Same Store Basis
___________________________________________________________
Wal-Mart +21.6% + 6.8%
Kmart + 1.6% + 3.0%
Sears, Roebuck & Co. + 8.0% + 7.9%
J.C. Penney + 5.3% + 5.4%
Dayton Hudson Corp. + 9.6% + 3.7%
May Department Stores + 8.3% + 5.5%
Federated Dept. Stores N/A + 2.2%
The Limited Inc. + 5.6% - 4.0%
Gap Inc. +12.0% + 0.0%
Dillard's + 7.7% + 5.0%
___________________________________________________________
Source: New York Times, January 6, 1995
___________________________________________________________
Some analysts point to the fact that consumer confidence has resulted
in increases in personal debt which may be troublesome in the long run.
Consumer loans by banks rose 14.4 percent in the twelve months that
ended on September 30th. Credit card billings have jumped 25 percent
in the last twelve months. But data gathered by the Federal Reserve on
monthly payments suggest that debt payments are not taking as big a
bite out of income as in the late 1980s, largely because of the record
refinancings at lower interest rates in recent years and the efforts by
many Americans to repay debts. The ratio of payments to income now
stands around 15.9 percent, roughly what it was in the mid-1980s, and
considerably below the 17.9 percent of 1989.
Department Store Chains
The continued strengthening of some of the major department store
chains, including Sears, Federated/Macy's, May and Dayton Hudson, is in
direct contrast to the dire predictions made by analysts about the
demise of the traditional department store industry. This has
undoubtedly been brought about by the heightened level of merger and
acquisition activity in the 1980s which produced a burdensome debt
structure among many of these entities. When coupled with reduced
sales and cash flow brought on by the recession, department stores were
unable to meet their debt service requirements. Following a round of
bankruptcies and restructurings, the industry has responded with
aggressive cost cutting measures and a focused merchandising program
that is decidedly more responsive to consumer buying patterns. The
importance of department stores to mall properties is tantamount to a
successful project since the department store is still the principal
attraction that brings patrons to the
Industry Trends
Since 1990, total U.S. shopping center GLA has increased by 400 million
square feet, a 9.1 percent increase or 2.9 percent growth per annum.
This change has outpaced annual population growth. In 1990 the total
per capita GLA was 17.7 square feet. By 1993, this figure advanced to
18.5 square feet per person. According to the National Research
Bureau, there were a total of 39,633 shopping centers in the United
States in 1993, an increase of 1.7 percent from 38,966 shopping centers
in 1992.
The total leasable area of U.S. Shopping Centers increased by 2.1
percent in 1993 to 4.77 billion square feet. As would be expected,
construction of new centers has dropped from a high of 91.8 million
square feet (979 centers with a contract value of $5.9 billion) in
1990, to 42.8 million square feet in 1993. According to F.W. Dodge,
the construction information division of McGraw-Hill, 451 new shopping
centers were started in 1993. These new projects generated $2.7
billion in construction contract awards and supported 43,700 jobs in
the construction trade and related industries. This is nearly half of
the construction employment level of 95,360 for new shopping center
development in 1990. It is estimated that 10.044 million people are
now employed in shopping centers, equal to about one of every nine
non-farm workers in the country. This is up 2.2 percent over 1992.
On balance, 1993 was a period of transition for the retail industry.
Major retailers achieved varying degrees of success in meeting the
demands of increasingly value conscious shoppers. Since the onset of
the national economic recession in mid-1990, the retail market has been
characterized by intense price competition and continued pressure on
profit margins. Many national and regional retail chains have
consolidated operations, closed underperforming stores, and/or scaled
back on expansion plans due to the uncertain spending patterns of
consumers. The consolidations and mergers have produced a more limited
number of retail operators, which have responded to changing spending
patterns by aggressively repositioning themselves within this evolving
market. Much of the current retail construction activity involves the
conversion of existing older retail centers into power center formats,
either by retenanting or through expansion. An additional area of
growth in the retail sector is in the "supercenter" category, which
consists of the combined grocery and department stores being developed
by such companies as Wal-Mart and Kmart. These formats require
approximately 150,000 to 180,000 square feet in order to carry the
depth of merchandise necessary for such economies of scale and market
penetration.
Market Shifts
During the 1980s, the department store and specialty apparel store
industries competed in a tug of war for the consumer's dollar.
Specialty stores emerged largely victorious as department store sales
steadily declined as a percentage of total GAFO sales during the
decade, slipping from 47.0 percent in 1979 to 44.0 percent in 1989.
During this period, many anchor tenants teetered from high debt levels
incurred during speculative takeovers and leveraged buyouts of the
1980s. However, bankruptcies and restructuring forced major chains to
refocus on their customer and shed unproductive stores and product
lines. As a result, department store sales as a percentage of GAFO
sales rebounded sharply in the early 1990s. In fact, by year-end 1993,
department store share of GAFO sales had climbed back above 46.0
percent, its highest level since 1979.
Despite the proliferation of non-store retailers (catalog shopping)
during the 1980s, general merchandise, apparel, furniture and other
store (GAFO) sales, generally considered to be a proxy for mall store
sales, actually increased steadily during the decade. As a percentage
of total retail sales (excluding automobiles), GAFO sales rose to
approximately 35.0 percent by year-end 1993 from 29.0 percent in 1980.
During the period 1985 to 1991, regional mall market share of total
shopping center expenditures declined from 30.0 to 24.0 percent
according to a recent study by Salomon Brothers. This is attributed to
the faster pace of new construction related to neighborhood, community,
and power centers nationally. The most notable increase in market
share has come from growth in community centers which are typically
anchored by discounters such as Wal-Mart, Target, and Kmart as shown on
the following table.
Market Share of Shopping Centers
by Property Type
____________________________________
Type 1985 1991
____________________________________________
Neighborhood Centers 38.0% 37.0%
Community Centers 31.0% 37.0%
Regional Malls 30.2% 24.0%
Power Centers .8% 2.0%
____________________________________________
Source: National Research Bureau, International Council of Shopping Centers,
Salomon Brothers
This repositioning of retail product has been a direct response to
changing consumer preferences. Both regional and super-regional
shopping center completions have declined by approximately 66.0 percent
from their 1989 peaks, implying that positive net absorption should
result as the economy improves.
Outlook
Many analysts remain bullish with respect to the department store
industry which appears well prepared to take a competitive stance against the
major discounters and "category killers" in the second half of the decade.
Sears and JC Penney have undergone major restructurings and have seen
comparable store sales growth of 7.9 and 5.4 percent, respectively. The May
Company has focused on consolidating operations in order to strengthen its
buying power and lower expenses. They also expect to embark on an aggressive
expansion program that will expand 55 existing stores and add approximately 100
new stores by 1998. Dillard's is often cited as an efficient operator and they
continue to expand into new markets with both new store construction and
selective acquisitions. Macy's recent merger with Federated has received wide
acclaim as the two have formed one of the nation's largest department store
companies with over 300 units and annual sales of over $13.0 billion.
Nonetheless,competition among retailers of all types will remain intense. The
consumer stands to benefit from this price competition assuming real increases
in purchasing power can be maintained.
The WEFA Group, an economic consulting company, projects that potential
growth of the economy will slow moderately over the long-term. This
will have a direct influence on consumption (consumer expenditures) and
overall inflation rates (CPI).
The outlook for inflation faces a great deal of uncertainty in the long
run. Inflation has decelerated over the past year due primarily to
slow rises in crude material prices which, in turn, have been reflected
in slower rises in producer prices for finished goods. Inflation (as
measured by the CPI-Urban) has increased at an annual average rate of
3.7 percent since 1982. This is in stark contrast to the average
performance of 8.4 percent per year between 1971 and 1981. The Bureau
of Labor Statistics has reported that consumer prices rose by only 2.7
percent in 1994, the fourth consecutive year in which inflation was
under 3 percent. Apart from the volatile food and energy sectors, the
core inflation rate was only 2.6 percent in 1994, the lowest rate since
1965. The WEFA Group projects that inflation rates will stabilize at
an annual rate near 3.5 percent in the long term.
Consumption expenditures are primarily predicated on the growth of real
permanent income, demographic influences, and changes in relative prices in the
long term. Changes in these key variables explain much of the consumer
spending patterns of the 1970s and mid-1980s, a period during which baby
boomers were reaching the asset acquisition stages of their lives; purchasing
automobiles and other consumer and household durables. Increases in real
disposable income supported this spending spurt with an average annual increase
of 2.9 percent per year over the past twenty years. Real consumption
expenditures increased at an average annual rate of 3.1 percent during the
1970s and by an average of 4.0 percent from 1983 to 1988. WEFA projects that
consumption expenditure growth will slow to 2.0 percent per year by 2003 as a
result of slower population growth and aging. WEFA further forecasts that
personal consumption expenditures on services will expand by a higher annual
rate of about 2.3 percent in the long term.
It is projected that the share of personal consumption expenditures
relative to GDP will decline over the next decade. Consumer spending
as a share of GDP peaked in 1986 at 67.4 percent after averaging about
63.0 percent over much of the post-war period. WEFA estimates that
consumption's share of aggregate output will decline to 64.5 percent by
2003 and 62.7 percent by 2018.
Potential GDP is a measure of the economy's ability to produce goods
and services. This potential provides an indication of the expansion
of output, real incomes, real expenditures, and the general standard of
living of the population. WEFA estimates that real U.S. GDP will grow
at an average annual rate of 2.7 percent through 2000 as the output gap
is reduced between real GDP and potential GDP. After 2000, annual real
GDP growth will decline, tapering to 2.3 percent per annum by 2003 and
2.1 percent by 2010.
Trade Area Analysis
Overview
A retail center's trade area contains people who are likely to
patronize that particular retail center. These customers are drawn by
a given class of goods and services from a particular tenant mix. A
center's fundamental drawing power comes from the strength of the
anchor tenants as well as the 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 while enjoying the comfort and convenience of an
integrated shopping environment.
In order to define and analyze the market potential for the Brookdale
Center, it is important to first establish the 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.
The subject's potential trade area partially overlaps with other retail
facilities along major retail thoroughfares. The subject's potential
trade area partially overlaps with its principal competitors, Rosedale,
Ridgedale, and Northtown. The subject's capture rate of area
expenditure potential is also influenced to a lesser extent by other
regional and super-regional centers in the Minneapolis MSA such as Mall
of America.
Finally, there are several large strip centers anchored by discount
department and specialty stores in the market. While some cross-shopping does
occur, these stores act more as a draw to the area, creating an image for the
area as a prime destination shopping district and generating more retail
traffic than would exist in their absence. Nonetheless, we do recognize and
mention these centers to the extent that they provide a complete understanding
of the area's retail structure. 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 center
itself. Generally, between 55 and 65 percent of a center's sales are generated
within its primary trade area. The secondary trade area generally refers to
more outlying areas which provide less frequent customers to the center.
Residents within the secondary trade area would be more likely to shop closer
to home due to time and travel constraints. Typically, an additional 20 to 25
percent of a center's sales will be generated from within the secondary area.
The tertiary or peripheral trade area refers to more distant areas from which
occasional customers to the mall 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 and 15 percent of a center's sales are derived
from customers residing outside the trade area. This potential is commonly
referred to as inflow.
In areas that are benefitted by an excellent interstate highway system
such as the Minneapolis MSA, the percentage of sales generated by
inflow patrons can often run upwards to 25 percent or higher.
Once the trade area is defined, the area's demographics and economic
profile can be analyzed. This will provide key insight into the area's
dynamics as it relates to the subject. The sources of economic and
demographic data for the trade are analysis are as follows: Equifax
Marketing Decision Systems (ENDS), Sales and Marketing Management's
Survey of Buying Power 1985-1994, The Urban Land Institute's Dollars
and Cents of Shopping Centers (1993), CACI, The Sourcebook of County
Demographics, and The Census of Retail Trade - 1992. We have also been
provided with a specific retail study of the mall's trade area and
remerchandising recommendations by General Growth Research, which has
relied upon shopper surveys and department store receipts in
determining the extent of the mall's draw.
Before the trade area can be defined, it is necessary that we
thoroughly review the retail market and the competitive structure of
the general marketplace, with consideration given as to the subject's
position. Existing Competition By virtue of its location, Brookdale
Center has historically served the near - northwest suburbs of
Minneapolis. The growth of development has been, and continues to be
in a northwesterly direction emanating from the Central Business
District.
The expansion of the suburban malls to the north, northwest and west
have been in direct response to the nature of population migration
patterns. The subject's principal competitors are seen in the
Northtown Mall at Highway 10 and University Avenue; the Ridgedale
Shopping Center at Highway 12 and Plymouth Road in Minnetonka and
Rosedale Shopping Center at Highway 36 and Fairview in Roseville.
These three centers have been identified through customer surveys as
well as management personnel as being the most directly competitive.
Ridgedale was cited in the 1994 Customer Intercept Study as being
Brookdale's strongest competitor. The study shows they capture 27
percent of Brookdale's customers and 8 percent of their dollars.
Table 1, shown below, identifies the various regional centers found
within the general area that compete most directly with the subject.
Table 1
Principal Competitive Regional Shopping Centers
_______________________________________________
Distance
Developer/ Year GLA from
Property Owner Location Built (sq.ft.) Anchors Subject
________________________________________________________________________
Northtown Mall Angeles Blaine,MN 1972 800,000 Carson 8-10 mi. N,
Hwy.10 & Univ. Corp. Pirie +- 15 min.
Ave. Scott,
Kohl's,
Mont Ward.,
Woolworth
____________________________________________________________________________
Ridgedale
Shopping Center
Hwy. 12 &
Plymouth Road Ridgedale Minnetonka, 1975 1,042,100 Carson 10 miles SW
Joint MN Pirie +- 15 min.
Venture Scott,
Dayton's,
J.C. Penney,
Sears
____________________________________________________________________________
Rosedale Shopping
Center
Hwy. 36 &
Fairview Equitable Real Roseville, 1969 1,400,000 Carson 10 miles E,
Estate MN Pirie +- 15 min.
Investment Scott,
Managers Dayton's,
J.C. Penney,
Mont. Ward
____________________________________________________________________________
The chart above summarizes the subject's three principal competitors.
In addition to the above, we should discuss the threat of new
competition. Both Rouse and Homart have announced potential sites in
Maple Grove for a regional center within 7 to 10 miles from Brookdale
Center. Homart's parcel is part of a 2,000 acre master plan
development at the northwest quadrant of Interstate 94 and Route 169.
The Rouse parcel is a 100 acre site at the intersection of Interstate
94 and the planned highway 610. This site is owned by the Osseo Area
school district and is adjacent from two existing schools. Obviously,
either one of these sites would have to overcome a number of hurdles in
order to proceed.
Speculation has it that a number of department stores could serve as
anchors including JC Penney, Sears, Montgomery Ward, Macy's, Nordstrom
and Dayton's. Should Dayton's decide to locate at the Homart site, it
would likely close the Brookdale store due to the distance (7 miles)
from the center.
At this early juncture, it is difficult to assess the impact of either
project. Should one be approved, it will likely be three to five years
before it comes on line. It is clear, however, that the subject will
need to be renovated at some point in order to maintain its current
market position.
Trade Area Definition
Brookdale is located in Brooklyn Center in the central portion of the
Minneapolis MSA approximately 5 miles northwest of the Minneapolis
Central Business District. This location makes it one of the more
accessible retail locations within the Minneapolis MSA. The advantage
of interstate proximity has the effect of expanding the mall's trade
area by virtue of reducing travel time for residents in more distant
locations.
As discussed in the previous section, the location and accessibility of
competing centers also has direct bearing on the formation and make-up
of a mall's trade area. Principal competition is seen in Northtown,
Ridgedale Center and Rosedale Center. The renovation of the latter
center has strongly positioned it in its market and has drawn a larger
percentage of the subject's shoppers over the past year. Ridgedale is
most closely aligned with the subject from a merchandising standpoint
and Northtown has probably slipped in its competitive standing over the
past year.
The downtown Central Business District is probably less of a factor
than it was, although it has been, and will always continue to be, more
of a force in serving the downtown Central Business District's
workforce. The Mall of America, to some extent, impacts Brookdale
Center by drawing certain weekend shoppers away from the subject.
While we expect that there will continue to be some shakeout at the
subject, particularly as tenants close marginally profitable stores and
consolidate, we feel that the long term outlook is positive for the
subject. Most of its patrons come to the mall for its convenience, as
evidenced by the size and depth of its primary market. The convenience
factor was cited in the 1994 Intercept Study as being important to the
typical shopper. We don't expect that significant changes will occur
in terms of the shopping patterns of these groups. Finally, we believe
that it is important to note that key community centers and
free-standing "category killers" represent a strong force in the
market's competitive environment. However, their primary stores
(groceries, drugs, home improvement and discounters) are different from
those which comprise Brookdale Center. Certainly there is a place for
both in most retail environments, including the Shingle Creek Road and
general Brookdale Center area. Collectively, they balance out the
retail infill and act as a traffic generator that increases the area's
status as a destination retail hub.
To summarize, the foundation of our analysis in the delineation of
trade area of Brookdale Center may be summarized as follows:
1. Highway accessibility including area traffic patterns,
geographical constraints and nodes of residential development.
2. The position and nature of the area retail structure including
the location of destination retail centers and the strength and
composition of the retail infill.
3. The size, anchor tenancy and merchandising composition of the
mall tenants, both as existing and as proposed.
Ownership has provided us with a survey by General Growth Research
which has identified shopping patterns based upon origin by zip codes.
We have analyzed this data and find it to be reasonable based upon our
examination of the area's retail structure. The report cites that the
primary trade area contains 80 percent of the mall's shoppers.
The zip codes and corresponding communities that form the basis for
this analysis are provided on the following page. Throughout the text,
we will discuss the components of the trade area (primary and
secondary) along with their individual characteristics. Often we will
refer to the total trade area by the collective term "trade area".
In essence, the total trade area encompasses the following communities:
Brookdale Center
________________
Primary Secondary
__________________________________________________________
Zip Code Community Zip Code Community
55429 * Minneapolis 55449 Minneapolis
55443 * Minneapolis 55418 Minneapolis
55430 * Minneapolis 55448 Minneapolis
55369 Osseo 55434 Minneapolis
55428 * Minneapolis 55413 Minneapolis
55412 * Minneapolis
55422 Minneapolis
55444 * Minneapolis
55411 Minneapolis
55445 Minneapolis
55316 Champlin
55442 Minneapolis
55311 Minneapolis
55374 * Rogers
55432 Minneapolis
55303 Minneapolis
55433 Minneapolis
55427 Minneapolis
55330 Elk River
55421 Minneapolis
55441 Minneapolis
55327 Dayton
__________________________________________________________
* Most effective markets
Source: General Growth Research
__________________________________________________________
Population
Once the market area has been established, the focus of our analysis
centers on the trade area's population. ENDS provides historic,
current and forecasted population estimates for the total trade area.
Patterns of development density and migration are reflected in the
current levels of population estimates. The report provided on the
facing page utilizes the statistics on the basis of the total trade
area (primary and secondary) citing the communities as segregated by
zip code which are identified in the Addenda. In the Addenda, we have
provided detailed profiles of both the primary and secondary
components.
Population statistics for the trade area are summarized below:
Brookdale Center
Population Growth and Forecasts
_______________________________________________________________________
Compound Compound
Trade Area Growth Rate Growth Rate
Component 1980 1990 1994 1999 1980 - 1994 1994 - 1999
1994 - 1999
_______________________________________________________________________
Primary 391,799 451,242 475,735 503,660 +1.40% +1.15%
Secondary 85,596 101,855 108,899 117,294 +1.73% +1.50%
Total 477,395 553,097 584,634 620,954 +1.46% +1.21%
_______________________________________________________________________
Source: Equifax National Decision Systems
_______________________________________________________________________
Between 1980 and 1994, ENDS reports that the population within the
total trade area increased by 107,239 residents to 584,634 reflecting a
22.5 percent increase or 1.46 percent per annum. Through 1999, the
trade area is expected to continue to increase to 620,954 residents
which is equal to an additional 6.2 percent increase or 1.21 percent
per annum.
Further analysis shows that the primary trade area contains a range of
relatively slow growth immediately around the mall as well as
communities to the south and southeast, to areas of moderate and high
growth in the north and west. Population patterns show these specific
areas which ownership should aggressively target in its promotion of
the mall. Both historical and projected population growth in both
components of the trade area coincide with past and projected growth
for the MSA of 1.45 percent and 1.25 percent per annum for the
respective periods of 1980 through 1994 and 1994 through 1999.
Provided on the following page is a graphic representation of the
population change forecasted for the trade area. Note that communities
forecasted to have the most significant growth are found to the north
and west.
Households
A household consists of all the people occupying a single housing unit.
While individual members of a household purchase goods and services,
these purchases actually reflect household needs and decisions. Thus,
the household is a critical unit to be considered when reviewing market
data and forming conclusions about the trade area as it impacts the
retail center.
National trends indicate that the number of households are increasing
at a faster rate than the growth of the population. Several noticeable
changes in the way households are being formed have caused the
acceleration in this growth, specifically:
The population in general is living longer on average. This
results in an increase of single and two person households.
The divorce rate increased dramatically during the 1980s, again
resulting in an increase in single person households.
Many individuals have postponed marriage, thus also resulting
in more single person households.
Brookdale Center
Household Data and Forecasts
____________________________
Compound Compound
Growth Rate Growth Rate
Component 1980 1990 1994 1999 1980 - 1994 1994-1999
_____________________________________________________________________
Primary 134,974 164,817 176,425 189,563 +1.93% +1.45%
_____________________________________________________________________
Secondary 30,703 38,264 41,639 45,211 +2.20% +1.66%
_____________________________________________________________________
Total 165,677 203,081 218,064 234,774 +1.98% +1.49%
_____________________________________________________________________
Source: Equifax National Decision Systems
_____________________________________________________________________
Map showing Brookdale Center's total trade area and specifying
population growth within area
According to ENDS, the total trade area gained 52,387 households
between 1980 and 1994, an increase of 31.6 percent or 1.98 per annum.
Between 1994 and 1999 the area is expected to grow, but at a slower
pace of 1.49 percent per year. We see that the secondary area is
growing faster than the primary market area. Consistent with the
national trend, the trade area is experiencing household growth at
rates in excess of population changes primarily due to the factors
mentioned above. Correspondingly, a greater number of smaller
households with fewer children generally indicates more disposable
income. In 1980, there were 2.88 persons per household in the total
trade area and by 1994, it is estimated to have decreased to 26870.
Trade Area Income
One of the most significant statistics for retailers is the trade
area's income potential. Income levels, either on a per capita, per
family, or household basis, indicate the economic level of the
residents of the market area and form an important component of this
total analysis. More directly, average household income, when combined
with the number of households, is a major determinant of an area's
retail sales potential. The trade area income figures support the
profile of a broad-based middle income market. According to ENDS,
average household income within the primary trade area is approximately
$51,072.
A comparison to the Minneapolis MSA is shown below:
Average Household Income Comparison
___________________________________
Primary Total Minneapolis
Area Area MSA
__________________________________________________________
Average Household
Income $51,072 $50,167 $53,276
__________________________________________________________
Median Household
Income $42,959 $42,544 $42,647
__________________________________________________________
Per Capita Income $19,186 $18,937 $20,835
__________________________________________________________
Source: Equifax Marketing Decision Systems
__________________________________________________________
The subject's trade area is shown to be slightly less affluent than the
MSA as a whole. However, areas directly to the west and the northwest
of the subject are shown to be affluent suburbs of the MSA. Provided
on the following page is a graphic presentation of the average
household income distribution throughout the trade area. As can be
seen, the subject is adjacent to some of the higher income areas.
Map showing Brookdale Center's total trade area and average household
income
Retail Sales
Another significant statistic for retailers is the total retail sales
expended in a given area. According to Sales and Marketing Management,
retail sales in the Minneapolis MSA have grown at a compound annual
rate of 5.2 percent between 1985 and 1993. This was greater than the
State of Minnesota's composite growth over the same period of 4.8
percent.
Retail Sales
____________
_____________________________________________________________________
State of Minnesota/St. Paul Hennepin County
Year Minnesota MSA
_____________________________________________________________________
1985 $27,241,195 $16,187,101 $ 8,255,326
_____________________________________________________________________
1986 $28,044,113 $16,837,510 $ 8,689,408
_____________________________________________________________________
1987 $28,903,224 $17,640,652 $ 9,184,604
_____________________________________________________________________
1988 $31,320,221 $19,092,209 $ 9,739,271
_____________________________________________________________________
1989 $32,208,001 $19,998,198 $ 9,784,828
_____________________________________________________________________
1990 $33,314,988 $20,446,928 $10,005,141
_____________________________________________________________________
1991 $35,159,987 $21,358,004 $10,349,106
_____________________________________________________________________
1992 $35,685,984 $21,919,344 $10,332,167
_____________________________________________________________________
1993 $39,582,998 $24,336,416 $11,555,647
_____________________________________________________________________
Compound
Annual
Growth
1985-93 +4.8% +5.2% +4.3%
_______________________________________________________________________
Source: Sales & Marketing Management Survey of Buying Power (1986-1994)
_______________________________________________________________________
As can be seen, retail sales in Hennepin County have grown at rates
below the MSA and State with a compound annual change of 4.3 percent
since 1985.
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 and potential that is most germane to our analysis.
Management has provided us with historical sales for the subject. The
sales trends for the specialty stores in the mall are shown in the
following table.
Brookdale Center
Retail Sales Trends
Specialty Stores
___________________
Comparison
Year Sales (Millions) Reporting GLA * Unit Rate (SF) Change *
___________________________________________________________________
1986 $44.1 171,600 $257.00 -
1987 $46.1 177,240 $260.10 + 1.2%
1988 $49.1 184,400 $266.30 + 2.4%
1989 $54.3 191,200 $284.00 + 6.6%
1990 $55.1 193,130 $285.30 + .5%
1991 $53.1 187,900 $282.60 - .9%
1992 $50.3 190,260 $280.04 - .9%
1993 $41.7 152,340 $273.73 - 2.2%
1994 $38.03 143,028 $265.91 - 2.9%
___________________________________________________________________
Compound Annual
Change 1986-93 -1.83%
___________________________________________________________________
* Change reported is for unit rate performance.
___________________________________________________________________
Source: General Growth Company
___________________________________________________________________
The data above shows that 1994 mall shop sales have continued to fall
since 1990. Year-to-date (December 1994) sales for tenants open for
the past thirteen months were $38,032,000, equivalent to $265.91 per
square foot. This was down nearly 8.8 percent in terms of aggregate
dollars and 2.9 percent on a reporting unit rate basis. The decline
was largely contributed to the renovation that was in process within
the Carson Throat area as well as a change in consumer perception of
the mall related to safety issues and loitering teenagers. Management
is actually forecasting a decline of approximately 1.5 percent in
1995. The Urban Land Institute's Dollars and Cents of Shopping
Centers (1993) reports sales per square foot of mall tenants in
super-regional shopping centers both by age and location. Nationally,
the total survey shows average mall shop sales ranging from $132.49 to
$303.16 per square foot with an overall average of $205.90. On a
regional basis, this range is $128.94 to $281.75 with an average at
$189.34 per square foot. For super-regional centers over 20 years old,
the average is equal to $188.39 with an upper decile figure of $282.77.
As can be seen, comparable sales at the subject property are closer to
the upper decile of the statistics reported.
Department Store Sales
The Urban Land Institute also tracks sales for owned and non-owned
department stores. ULI reports that median sales per square foot for
non-owned department stores (national chains) is $186 with the top 10
percent hitting the $315 mark. Owned stores report a median of $128
per square foot with the top 10 percent at $217.
General Growth reports that overall department store sales at Brookdale
Center for 1993 were approximately $141,100,000 (store by store
comparisons for all department stores were not available at this
writing). This suggests a .31 percent increase over $140,665,300 in
1992. On a per square foot basis, the department store average was
$191.74 per square foot in 1993 and $191.15 in 1992.
We have been provided with 1994 sales information for Kohl's and JC
Penney. Linda Smith, the mall manager, has estimated the sales for the
remaining majors.
1994 Anchor Store Sales
_______________________
Change
Store Area (SF) Sales Unit Rate from 1993
_____________________________________________________________________
JC Penney 140,320 $ 28,073,400 $200.07 -3.10%
_____________________________________________________________________
Kohl's 75,000 $ 17,355,300 $231.40 +9.60%
_____________________________________________________________________
Dayton's 195,368 $ 45,000,000 * $230.33 Flat
_____________________________________________________________________
Sears 180,669 $ 35,200,000 * $194.83 +.57%
_____________________________________________________________________
Carson
Pirie
Scott 140,336 $ 16,700,000 * $119.00 +1.18%
____________________________________________________________________
Total 731,709 $142,328,700 $194.52 + .87%
___________________________________________________________________
* Approximate amount - non-reporting store
___________________________________________________________________
Sales for the department stores were mixed in 1994. JC Penney's sales
down 3.1 percent to $28,073,400 or approximately $200 per square foot.
Kohl's saw the most dramatic increase with a sales jump of nearly 10
percent. At $231 per square foot, they were the most productive store
last year on a unit rate basis.
General Growth Management has supplied estimates only for Dayton's,
Sears, and Carson's. At $45.0 million, Dayton's is clearly the highest
grossing anchor at the mall. Sales in 1994 were estimated to be flat.
Sears and Carson's saw modest increases of .57 percent and 1.18
percent, respectively. Overall, the department store sales were
estimated at $142,328,700, up .87 percent over 1993.
Summary
Within the shopping center industry, a trend toward specialization has
evolved so as to maximize sales per square foot by deliberately meeting
customer preferences rather than being all things to all people. This
market segmentation is implemented through the merchandising of the
anchor stores and the tenant mix of the mall stores. The subject
property reflects this trend toward market segmentation. A review of
the existing as well as the proposed tenant mix shows that it has
clearly positioned itself at the broad middle of the market.
The anchor mix appears to be correctly positioned to represent the
population. Dayton's is by far the area's dominant store. It is found
in the majority of the successful malls throughout the Minneapolis MSA
which is its headquarters and hub. Dayton's draws the highest
percentage of shopper traffic (45 percent) followed by JC Penney (31
percent), Carson Pirie Scott (24 percent) and Sears (22 percent).
There is some speculation and concern about the conversion of the
Carson Pirie Scott store to Mervyn's. Dayton's has made a major
financial commitment to bring the chain to the Twin Cities area. The
newer Mervyn's concepts are attractive stores and the merchandise will
offer price points that are consistent with the profile of the trade
area. Evidence of this is seen in the success of Kohl's which will be
most competitive with Mervyn's. <PAGE>
Conclusion We have analyzed the retail
trade history and profile of the Minneapolis MSA and in order to make
reasonable assumptions as to the continued performance of the subject's
trade area.
A metropolitan and locational overview was presented which highlighted
important points about the study area and demographic and economic data
specific to the trade area were presented. The trade area profile
discussed encompassed a zip code based analysis that was established
based upon a thorough study of the competitive retail structure.
Marketing information relating to these sectors was presented and
analyzed in order to determine patterns of change and growth as it
impacts Brookdale Center. Next we discussed the subject's retail sales
history along with its forecasted performance over the near term. The
given data is useful in giving quantitative dimensions of the total
trade area, while our comments serve to provide qualitative insight
into this market. A compilation of this data provides the basis for
our projections and forecasts particular to the subject property. The
following summarizes our key conclusions.
The subject is benefitted by its location in one of the
Country's largest metropolitan areas. Within this component of
the MSA, the subject is the dominant destination retail center
for a primary trade area of nearly 475,000. It is also well
positioned to serve the population base which is expected to
see continued increases.
The MSA has excellent inter and intra-regional accessibility.
The subject is benefitted by excellent regional accessibility
being located approximately one mile from Interstate 94/694.
The subject offers a cohesive merchandising mix with a modest
allocation of regional and national tenants. These merchants
have the benefit of stronger advertising budgets and are more
familiar to shoppers which typically results in higher sales
levels. Furthermore, the existing anchor mix has been proven
to work in the Minneapolis marketplace by virtue of their
duplication found in many area malls.
Brookdale is attracting an older, middle to lower income
shopper. These customers reflect national trends of making
fewer shopping trips and spending less time at the mall per
trip.
While the basic demographics appear to be healthy, the
subject's physical plant is somewhat dated and in need of
upgrading. There also exists a level of uncertainty with
respect to the long term effect of the two proposed malls in
Maple Grove and the expansions/renovations at other area malls.
To the extent that Brookdale continues its efforts of
remerchandising and renovation, we expect that it will remain
one of the area's competitive centers.
Our analysis concludes that the existing and proposed merchandising mix
of the mall shops, its good MSA location, and the popularity of the
anchor department stores will all combine to maintain Brookdale
Center's position as the dominant retail center in its principal trade
area. Quite obviously, the prospect of new competition is of concern.
Efforts need to be made to get Dayton's to extend its operating
covenant. In addition, Sears and Carson's (Mervyn's) operating
agreements expire in 1999 so efforts to extend them should begin
shortly.
THE SUBJECT PROPERTY
The Brookdale Center Mall contains a gross occupancy area of 982,228
square feet including five anchor tenants. Anchor tenants comprise a
total of 731,709 square feet. All own their own buildings while two
(JC Penney and Kohl's) lease the land.
Since our previous report, the major changes in the mall have involved
the taking back of the former Carson's Throat area and the redemising
of the space into in-line GLA. At the time of our inspection, three
tenants (Hoff Jewelers, Regis Hair Stylist, and Champs had leased space
in this section of the mall. The total cost of redevelopment of this
space was reported to be approximately $1.0 million exclusive of monies
to be funded for tenant improvement allowances. Other changes center
around new tenant lease transactions, existing lease renewals, and
tenants who have been terminated. As a result, some remodelling and
renovation of tenant stores has occurred. Further discussion of these
activities is included in the Income Approach of this report.
During 1995 additional changes are planned for the mall. Probably the
most dramatic will be the conversion of Carson's to Mervyn's, a
division of Dayton Hudson. Dayton's acquired eight of the Minneapolis
area Carson Pirie Scott stores and is planning on converting seven to
the Mervyn's format.
At the time of our inspection Sears was in the process of renovating
their storefront entranceway along the main concourse.
Brookdale continues its efforts to upgrade the mall and improve its
appearance. During 1995 a number of capital projects are proposed but
as of this writing, none are approved. Some of the larger projects are
summarized in the following table.
Capital Items
_____________
Category Description Budget
_______________________________________________________
RMUs 5 Retail Merchandising $75,000
Units - Arcade
_______________________________________________________
ACM Abatement Tenants Turning Over $50,000
_______________________________________________________
Roof Replacement - Final Phase $231,000
(section u, v, w, x, y, z)
(includes infra-red scan)
________________________________________________________
Parking Lot Replacement/Sealcoat Phase I $175,000
(includes Zimmer Consultant Report)
________________________________________________________
Parking Lot Lot Lighting Upgrade $600,000
________________________________________________________
Parking Lot Lot Signs $45,000
________________________________________________________
Amenities Common Areas (inside & out) $75,000
________________________________________________________
Structure Remove Baffles/Paint Ceiling $105,000
_______________________________________________________
Energy Interior Lighting Retrofit $85,000
Conservation
_______________________________________________________
Structure Bump Backs - Vacant Spaces $25,000
_______________________________________________________
Total Capital Items $1,466,000
_______________________________________________________
We would also note that structurally and mechanically the improvements
appear to be in average condition. However, this type of analysis is
beyond our expertise and is best made by a professional engineer.
REAL PROPERTY TAXES AND ASSESSMENTS
The subject property is assessed by Hennepin County for the 1994
calendar year. The assessed values and tax liabilities for the
property are shown below.
Tax Schedule
____________
1994 1994
Assessed Tax
Parcel No. Description Value Liabilities
________________________________________________________________
02-118-21-32-0008 Main Mall $53,403,300 $3,325,105
________________________________________________________________
02-118-21-31-0055 Main Mall
Parking $ 2,549,500 $ 152,780
________________________________________________________________
02-118-21-23-0021 Main Mall
Parking $ 2,900 $ 180
________________________________________________________________
02-118-21-31-0056 Kohl's
(land only) N/A $ 165,023
________________________________________________________________
02-118-21-32-0009 JC Penney
(land only) N/A $ 45,894
________________________________________________________________
02-118-21-32-0010 JC Penney
(land only) N/A $ 9,028
_______________________________________________________________
Total $3,698,010
_______________________________________________________________
Taxes in 1994 were reported to be approximately 6 percent higher than
1993. Of the $3,698,010 in tax liability in 1994, the majority or
approximately $3.5 million is allocated to the mall, JC Penney and
Dayton's. Carson's had been contributing to taxes however a change in
their agreement last year reduced their obligation to zero.
We are advised by management that negotiations with taxing authorities
should result in a 17 percent reduction in tax liability for 1995.
They have budgeted $3,071,700 for the coming calendar year. In view of
the property's declining financial condition and the fact that tenants
are not able to support tax obligations in excess of $15.00 per square
foot, we believe that it is a reasonable assumption that tax relief
will be granted. Thus, we have reflected the budgeted amount of
$3,071,700 in our first year expense projection.
ZONING
The subject site is zoned C2, Commercial District by the City of
Brooklyn Center. According to the ordinance, this district is designed
to provide for a large concentration of comparison shopping, office,
and service needs for persons residing in a densely settled suburban
area. This district will allow for an intense use of land to service
regional needs and will be located adjacent to high volume major
thoroughfares.
We are not experts in the interpretation of complex zoning ordinances
but the property appears to be a generally conforming use based on our
review of public information. The determination of compliance is
beyond the scope of a real estate appraisal. However, the City of
Brooklyn Center has permitted the construction of the subject to its
present configuration.
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 American Institute of Real Estate
Appraisers, 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 our original report. In both cases, the highest
and best use must meet the aforementioned criteria. 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 FAR is the
highest and best use of the mall site as 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. 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.
Methodology
The Sales Comparison Approach allows the appraiser to estimate the
value of real estate 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, 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) Reduce the sales price to a common unit of comparison, such as
price per square foot of gross leasable area that is to be
sold;
(4) Make appropriate adjustments between the comparable properties
and the property appraised;
(5) Identify sales which include favorable financing and calculate
the cash equivalent price;
(6) Interpret the adjusted sales data and draw a logical value
conclusion.
The most widely-used and 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 an analysis of the sale. An analysis of the inherent
sales multiple also lends additional support to this overall
methodology.
Market Overview
The typical purchaser of properties of the subject's caliber includes both
foreign and domestic insurance companies, large retail developers, pension
funds, and real estate investment trusts (REIT's). The large capital
requirements necessary to participate in this market and the expertise demanded
to successfully operate an investment of this type, both limit the number of
active participants and, at the same time, expand the geographic boundaries of
the marketplace to include the international arena. Due to the relatively
small number of market participants and the moderate amount of quality product
available in the current marketplace, strong demand exists for the nation's
quality retail developments.
In recent years, interest in selling Class A properties had been
tempered by illiquidity in financing purchases because of persisting
post recessionary worries, lack of lending by banks that had been or
continue to have financial troubles, and a general lack of interest in
real estate as a prime investment vehicle. All of these factors have
operated to raise yield and capitalization rates for those few players
currently in the marketplace for Class A properties. Class B shopping
centers have been more seriously impacted according to buyers and
sellers, making few transactions probable as the product is withheld
from the marketplace, or if offered, tends to be unrealistically priced
based upon current economic conditions.
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. 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 are now serious impediments to
new retail developments.
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 super-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. Real Estate Investment Trust Market to date, the impact of
REITs on the regional mall investment market is not yet clear since the
majority of Initial Property Offerings (IPOs) involving regional malls
did not enter the market until the latter part of 1993 and early 1994.
It is noted, however, that REITs have dominated the investment market
for apartment properties and are expected to play a major role in
retail properties as well. While many of the country's best quality
malls have recently been offered in the public market, this heavily
capitalized marketplace has provided sellers with an attractive
alternative to the more traditional market for regional malls. The
pricing of REITs and the elimination of a significant portion of the
supply of quality regional malls could continue to favorably impact
sellers of this property type. During the past year, a number of
institutional investors have either become more aggressive in terms of
acceptable returns, or have been eliminated from this component of the
matter.
There are currently more than 230 REITs in the United States, about
77.0 percent (178) which are publicly traded. The advantages provided
by REITs, in comparison to more traditional real estate investment
opportunities, include the diversification of property types and
location, increased liquidity due to shares being traded on major
exchanges, and the exemption from corporate taxes when 95.0 percent of
taxable income is distributed.
There are essentially three kinds of REITs which can either be
"open-ended", or Finite-life (FREITs) which have specified liquidation
dates, typically ranging from eight to fifteen years.
Equity REITs center around the ownership of properties where
ownership interests (shareholders) receive the benefit of
returns from the operating income as well as the anticipated
appreciation of property value. Equity REITs typically provide
lower yields than other types of REITs, although this lower
yield is theoretically offset by property appreciation.
Mortgage REITs invest in real estate through loans. The return
to shareholders is related to the interest rate for mortgages
placed by the REIT.
Hybrid REITs combine the investment strategies of both the
equity and mortgage REITs in order to diversify risk.
During 1993, Hybrid REITs yielded an average of 7.28 percent as
compared with Equity REITs at 6.30 percent and Mortgage REITs at 10.44
percent. The chart on the facing page summarizes the historic annual
yield rates and overall return performance of REITs for the past ten
years.
Equity REITs clearly dominate the publicly traded marketplace, with an
80.0 percent share of the total market in terms of total capital. As
of November 1993, total market capital amounted to $30.026 billion,
nearly a 15.0 percent increase over the August 1993 figure of $26.185
billion. Capital invested in equity REITs has increased dramatically
as well. In 1992, five equity REITs raised $726.0 million in capital,
while in 1993, forty three equity REITs raised $8.616 billion in
capital.
The significant increase in equity REIT capital investment exhibited
during the past two years has continued during the first portion of
1994, with ten new equity REIT offerings through the first eight weeks,
and $1,520.4 million in total capital being raised. An additional ten
REIT IPOs are currently in Registration with the SEC as of February
1994.
The annual yields for all REITs have declined during the past four
years, to an average annualized yield of 6.94 percent overall for
1993. The average annualized returns for the most recent two-year
period are below the levels of the past ten years. The influx of
capital into REITs has provided property owners with a significant
alternative marketplace of investment capital and resulted in a
considerably more liquid market for real estate. A number of
"non-traditional" REIT buyers, such as utility funds and equity/income
funds, established a major presence in the market during 1993, and
there is strong evidence that public pension plans (including CalPers)
have committed or will soon commit significant capital to REIT
investment.
Although the REIT market is volatile and has historically experienced
rapid increases and declines in pricing and returns, the lower yields
and substantial price appreciation during the past year has placed
upward pressure on values and pricing for more traditional (non-REIT)
real estate transactions. The lower yields acceptable for equity
REITs incorporates the marketplace's perception that real estate is in
a recovery mode, which is expected to result in continued price
appreciation to offset the lower initial yields. While the market and
property specific due diligence used by the underwriters of the REIT
offerings does not necessarily mirror the more thorough process used by
more traditional institutional investors in real estate, the existence
of this marketplace could continue to drive property values upward for
the near term, particularly if inflation increases noticeably.
Regional Mall REITs
The accompanying exhibit "Analysis of Regional Mall REITs" summarizes
the basic characteristics of seven REITs and one publicly traded real
estate operating company (Rouse Company) comprised exclusively or
predominately of regional mall properties. Excluding the Rouse Company
(ROUS), the IPOs have all been completed since November 1992. The
Taubman (TCO) REIT IPO in November 1992 represented the first equity
REIT specializing in the ownership, management, and development of
enclosed regional mall shopping centers. Prior to the Taubman
offering, the public market for regional malls was limited to the Rouse
Company public offering. Six additional IPO's of equity REITs,
primarily involving enclosed regional shopping malls, have been
completed during the period November 1992 through December 1993. The
public equity market capitalization of the six REIT's (excluding Rouse
and DeBartolo) totalled $3.3 billion as of February 1994, and, combined
with restricted operating partnership units, totalled $6.9 billion.
Including equity, debt, and partnership units, the total capitalization
of these six REITs represented approximately $14 billion according to
Solomon Brothers. The combined leasable area owned and operated by the
six REITs represents approximately 10.0 percent of the total regional
mall inventory in the United States. Including the Rouse Company
portfolio and the April 1994 IPO by DeBartolo Realty Corporation
(involving 51 additional regional malls with a combined leasable area
of approximately 44.5 million square feet), the eight public offerings
included on the summary have a total of 260 regional or super regional
malls with a combined leasable area of approximately 200 million square
feet. This figure represents more than 14.0 percent of the total
national supply of this product type. A number of other REITs (not
included on summary) that are not exclusively or predominately
comprised of regional malls also include numerous additional regional
and super regional mall product within the larger offering. The eight
companies summarized on the exhibit are among the largest and best
capitalized domestic real estate equity securities, and are
considerably more liquid than more traditional real estate related
investments. Excluding the Rouse Company, however, these companies
have been publicly traded for only a short period, and there is not an
established track record. Regional mall REITs experienced a "price
correction" during November and December of 1993 (as did most equity
REITs), but the market rallied during the first quarter of 1994. The
current (end of first quarter 1994) investment market concerns
regarding inflation have created a better environment for some equity
REITs, which theoretically will benefit from inflation and
corresponding property value increases. The DeBartolo Company IPO
during April 1994 (originally planned for year-end 1993) was well
received by the marketplace and was perceived by many investors as a
"hedge" against inflation concerns. The impact of this alternative
market for regional malls on the traditional investment for this type
of asset is not yet clear. As noted previously, the multi-family
REITs, which are more established in the public markets than the mall
REITs, have had a significant impact on the investment market for
quality apartment product. The effective removal of a large percentage
of the total supply of regional mall product nationally from the
non-public investment sector should alter the supply and demand balance
in favor of current mall ownerships, effectively stabilizing or
increasing values for malls that satisfy REIT criteria. The following
analysis of comparable regional mall transactions suggests that the
investment market for this type of asset has stabilized during the past
year, following a downward trend in investment criteria during 1991 and
1992. The component of this stabilized trend attributable to the recent
REIT formations is not quantifiable, but the emergence of this
alternative marketplace logically should have a positive impact on
regional mall values for the near term.
Investment Criteria
Investment criteria for mall properties range widely. A more complete
discussion of investment indices can be found in the "Income Approach"
section of this report. This discussion details our use of
capitalization and yield rates for the subject property in relation to
the sales presented herein as well as an overview of current investors'
criteria.
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.
Equitable Real Estate Investment Management, Inc. reports in their
Emerging Trends in Real Estate - 1995 that their respondents give
retail investments reasonably good marks for 1995. It is estimated
that the bottom of the market for retail occurred in 1993. During
1994, value changes for regional malls and power centers is estimated
to be 1.4 and 3.5 percent, respectively. Other retail property should
see a rise of 1.7 percent in 1994. Forecasts for 1995 show regional
malls leading the other retail categories with a 2.8 percent increase.
Power centers and other retailers are expected to have increases of 2.6
and 2.2 percent, respectively. Long term prospects (1995-2005) for
regional malls fare the best for all retail properties which is
expected to outstrip total inflation (4.0 percent) with a 43 percent
gain.
The bid/deal spread has narrowed due to a pick up in transactions. On
average, the bid/ask spread for retail property is 60 to 70 basis
points, implying a pricing gap of 5 to 10 percent.
Capitalization Rate Bid/Ask Characteristics (%)
_______________________________________________
Type Bid Ask Bid/Ask Spread Deal
________________________________________________________________
Regional Mall 8.1 7.3 .8 7.5
Power Center 9.3 8.7 .6 8.8
Other 9.7 9.1 .6 9.3
________________________________________________________________
Prospects for regional malls and smaller retail investments are
tempered by the choppy environment featuring increased store
competition and continued shakeout. Population increases are expected
to be concentrated in lower income households, not the middle to upper
income groups. Through the balance of the 1990s, retail sales are
expected to outpace inflation on an annual basis of only 2 percent.
Thus, with a maturing retail market, store growth and mall investment
gains will come at the expense of competition.
Emerging Trends sees a 15 to 20 percent reduction in the number of
malls nationwide before the end of the decade. The report goes on to
cite that after having been written off, department stores are emerging
from the shake-out period as powerful as ever. Many of the nations
largest chains are reporting impressive profit levels, part of which
has come about from their ability to halt the double digit sales growth
of the national discount chains. Mall department stores are
aggressively reacting to power and outlet centers to protect their
market share. Department stores are frequently meeting discounters on
price.
Despite the competitive turmoil, Emerging Trends, interviewees remain
moderately positive about retail investments.
The RUSSELL-NCREIF Property Index represents data collected from the
Voting Members of the National Council of Real Estate Investment
Fiduciaries. As shown in the following table, data through the third
quarter of 1994 shows that the retail index posted a positive 1.67
percent increase in total return. This performance exceeded the
general index total return of 1.49 percent. Despite the decline in the
aggregate or general market index returns, retail has shown an
improvement in total return of 54 basis points, a moderate-to-low
improvement in income returns of 7 basis points and an appreciation
gain of 48 basis points. Retail properties ranked third out of the
five property types in the index, up from fifth place in the previous
quarter.
Retail Property Returns
Russell - NCREIF Index
Third Quarter 1994 (%)
______________________
Period Income Appreciation Total Change in CPI
3rd Qtr. 1994 1.94 - .26 1.67 .94
2nd Qtr. 1993 1.87 - .74 1.13 .50
One Year 7.82 -2.11 5.59 2.86
Three Years 7.36 -5.90 1.13 2.81
Five Years 6.98 -4.20 2.56 3.59
_____________________________________________________________________
Ten Years 7.08 .33 7.42 3.57
______________________________________________________________________
Source: Real Estate Performance Report (3rd Quarter 1994) National
Council of Real Estate Investment Fiduciaries and Frank Russell
Company
It is noted that the positive total return has been partially affected
by the capital return component which continues to be negative for the
last five years. Finally, it is important to point out that retail has
outperformed the overall index over the past fifteen years as well as
every other property type surveyed. Compared to the CPI, it has
performed particularly well.
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 a bankruptcy involving two department store divisions that
dominate the Philadelphia and Washington D.C. markets. 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. However, their cost cutting was
deep and painful as it involved closure to nearly 100 stores.
Federated Department Stores has also been acclaimed as a text book
example on how to successfully emerge from bankruptcy. They have
recently merged with Macy's to form one of the nation's largest
department store companies with sales in excess of $13.0 billion
dollars.
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.
Property Sales
The 46 sales (1991-94) presented in this analysis show a wide variety
of prices on a per unit basis, ranging from $95 per square foot up to
$556 per square foot of total GLA purchased. Alternatively, the
overall capitalization rates that can be extracted from each
transaction range from 5.60 percent to 10.29 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.
Data through 1994 shows 7 confirmed transactions with an average unit
rate of $182 per square foot. We do recognize that the survey is
skewed by the size of the sample and the quality of the product which
transferred, which is viewed, on average, as being inferior to many of
the properties which sold during 1991-1993. As of this writing, we
have been unable to confirm several other transactions which we feel
will serve to change the averages cited herein.
The fourteen sales included for 1991 show an average price per square
foot sold of $264 and a mean of $282. On the basis of mall shop GLA
sold, these sales present an average price of $358 per square foot and
a mean of $357. 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 weighted average of $239 and a
mean of $259 per square foot. For mall shop area sold, the 1992 sales
suggest a mean price of $320 per square foot. 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 again range from
10.75 to around 12.00 percent with a mean of 11.56 percent.
For 1993, a total of fourteen transactions have been tracked. These
sales show an overall weighted average sale price of $250 per square
foot based upon total GLA sold and $394 per square foot based solely
upon mall GLA sold. The respective means equate to $265 and $383 per
square foot for total GLA and mall shop GLA sold, respectively.
Capitalization rates continued to rise in 1993, showing a range between
7.00 and 9.00 percent. The overall mean has been calculated to be 7.65
percent. For sales reporting estimated terminal cap rates, the mean is
equal to 7.78 percent. Yield rates for 1993 sales range from 10.75 to
12.50 percent with a mean of 11.49 percent for those sales reporting
IRR expectancies. On balance, the year was notable for the number of
dominant Class A malls which transferred. Some of the more prominent
deals include:
Sale 93-1, The Galleria at Ft. Lauderdale, was purchased in December of
1993 by a pension fund advisor for an institutional investor. The
property achieved an OAR of 7.47 percent and is considered to be a
strong mall with good growth potential.
Sale 93-2 involved the Kenwood Towne Centre, Cincinnati's high end
fashion mall anchored by Lazarus, McAlpin's and Parisian. Sales were
forecasted in excess of $400 per square foot in 1994.
Sale 93-4 was a year end deal in which Homart sold their 50 percent
interest in the Arden Fair Mall in Sacramento, California. This is
considered to be one of Homart's best malls, having recently undergone
a major renovation and expansion. Arden Fair is Sacramento's dominant
mall, achieving a 7.00 percent cap at sale.
Sale 93-5 involved the Fiesta Mall, a dominant mall in the Phoenix
area. The mall was acquired by L&B Group for an undisclosed investment
fund. The high unit price per square foot and low capitalization rate
are indicative of the Fiesta Mall's strong market appeal.
Sale 93-6 is the Coronado Center, the dominant super-regional mall in
Albuquerque, New Mexico. The property reported average mall shop sales
of $250 per square foot at sale and achieved a reported OAR of 7.30
percent.
Sale 93-7 was the purchase of the remaining interest (29.5 percent) in
a strong super-regional mall in suburban Portland, Oregon. A pension
fund purchased this interest at a reported cap rate of 7.75 percent,
reflective of the minority position of the buyer.
Sale 93-8 The Garden State Plaza sold in July 1993 at an implied OAR of
7.40 percent. This is one of the truly dominant regional malls in the
country which sold to a Dutch pension fund. The implied 100 percent
purchase price was nearly twice the size of the next largest deal.
Sale 93-10 is the Carolina Place in Charlotte, North Carolina which
sold in June 1993 at an overall rate of 7.11 percent. This is a high
profile property which sold to a New York State pension fund after 15
months of negotiations.
Sale 93-12 was sold by DeBartolo to the same Dutch pension fund
purchasing the Garden State Plaza. The Florida Mall sold in March of
1993 at a cap rate of 7.48 percent. With mall shop sales of $447 per
square foot, this was one of DeBartolo's best producing malls. During
1994 many of the closed transactions have involved second and third
tier malls with investment characteristics substantially below the
subject property. 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. Another
significant deal involved Strafford Square, a six anchor mall in the
Chicago area which sold for a 7.5 percent cap rate.
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. For those centers selling just mall shop
GLA, prices range from approximately $203 to $556 per square foot of
salable area. In 1991, the mean for these transactions was $337 per
square foot. In 1992, the mean for the three sales was $381 per square
foot. In 1993, the sale of the mall shop space only shows a mean of
$351 per square foot. In 1994, the mean fell to $189 per square foot.
The following table depicts this data.
CHART A
Regional Mall Sales
Involving Mall Shop Space Only
______________________________
1991 1992 1993 1994
_________________________________________________________________________
Unit NOI Unit NOI Unit NOI Unit NOI
Sale# Rate per SF Sale# Rate per SF Sale# Rate per SF Sale# Rate per SF
_________________________________________________________________________
91- 1 $257 $15.93 92- 2 $348 $25.27 93- 1* $355 $23.42 94-5 $136 $14.00
_________________________________________________________________________
91- 2 $232 $17.65 92- 9 $511 $33.96 93- 4 $471 $32.95 94-7 $241 $18.16
_________________________________________________________________________
91- 5 $203 $15.89 92-11 $283 $19.79 93- 5 $396 $28.88
_________________________________________________________________________
91-6 $399 $24.23 93- 7 $265 $20.55
_________________________________________________________________________
91- 7 $395 $24.28 93-14 $268 $19.18
_________________________________________________________________________
91-8 $320 $19.51
_________________________________________________________________________
91-10 $556 $32.22
_________________________________________________________________________
Mean $337 $21.39 Mean $381 $26.34 Mean $351 $25.00 $189 $16.08
_________________________________________________________________________
* Sale included peripheral GLA.
_________________________________________________________________________
1991 1992 1993 1994
Alternately, where anchor store GLA has been included in the sale, the unit
rate is shown to range widely from $108 to $385 per square foot of salable
area, indicating a mean of $227 per square foot in 1991, $213 per square
foot in 1992, $221 per square foot in 1993, and $181 per square foot in
1994. The chart following depicts this data.
Chart B
Regional Mall Sales
Involving Mall Shops and Anchor GLA
_________________________________________________________________________
Unit NOI Unit NOI Unit NOI Unit NOI
Sale# Rate per SF Sale# Rate per SF Sale# Rate per SF Sale# Rate per SF
_________________________________________________________________________
91- 3 $156 $11.30 92- 1 $258 $20.24 93- 2* $225 $17.15 94-1 $112 $ 9.89
_________________________________________________________________________
91- 4 $228 $16.50 92- 3 $197 $14.17 93- 3 $135 $11.14 94-2 $166 $13.86
_________________________________________________________________________
91- 9 $193 $12.33 92- 4 $385 $29.43 93- 6 $224 $16.39 94-3 $ 95 $ 8.57
_________________________________________________________________________
91-11 $234 $13.36 92-5 $182 $14.22 93- 8 $279 $20.66 94-4 $155 $13.92
_________________________________________________________________________
91-12 $287 $17.83 92-6 $203 $16.19 93- 9* $289 $24.64 94-6 $378 $27.99
_________________________________________________________________________
91-13 $242 $13.56 92-7 $181 $13.60 93-10 $194 $13.77
_________________________________________________________________________
91-14 $248 $14.87 92-8 $136 $ 8.18 93-11 $108 $ 9.75
_________________________________________________________________________
92-10 $161 $12.07 93-12 $322 $24.10
_________________________________________________________________________
93-13 $214 $16.57
_________________________________________________________________________
Mean $227 $14.25 Mean $213 $16.01 Mean $221 $17.13 $181 $14.85
_________________________________________________________________________
* Sale included peripheral GLA.
_________________________________________________________________________
Analysis of Sales
We have presented a summary of recent transactions (1991-1994)
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 extremely 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 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. It is noted that, when viewed in
terms of unit sales productivity (sales per square foot of mall shop
GLA), the subject would rank near the mid point of the range exhibited
which implicitly lends insight into this analysis.
Because the subject is theoretically selling only mall shop GLA and
owned department stores, we will look at the recent sales involving
both types in Chart A more closely. As a basis for comparison, the
subject has a calendar year 1995 NOI of $21.84 per square foot, based
upon 201,561 square feet of owned GLA. The derivation of the
subject's projected first year (CY 1995) net operating income is
presented in the "Income Approach" section of this report. With NOI of
$21.84 per square foot, the subject falls at the mid-point of the range
exhibited by the comparable sales. These sales display an NOI range of
$16.08 to $26.34 per square foot over the past four years. The mean
NOI for the specific transactions in 1991 was $21.39 per square foot.
In 1992 we track the mean to be $26.34 per square foot. The 1993
transactions show a mean net income of $25.00 per square foot and in
1994 it was $16.08 per square foot of total GLA sold.
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 above the range indicated by the comparables would be
applicable to the subject. As articulated, the mean sale price for
these comparable sales ranges between $181 and $227 per square foot of
GLA sold. 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 Year Mean NOI (A) Subject Forecast (B) Subject Ratio
_____________________________________________________________________
1991 $21.39 $21.84 102%
_____________________________________________________________________
1992 $26.34 $21.84 83%
_____________________________________________________________________
1993 $25.00 $21.84 87%
_____________________________________________________________________
1994 $16.08 $21.84 136%
____________________________________________________________________
With first year NOI forecasted at approximately 83 to 136 percent of
the mean of these sales in each year, the unit price for the subject
property would 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. 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
We have included only the more recent sales data (1993/1994).
NOI AS A FUNCTION OF $/SF
_________________________
Sale Number NOI/SF Sales Price/SF
_____________________________________________
93- 1 $23.42 $355
93- 4 $32.95 $471
93- 5 $28.88 $396
93- 7 $20.55 $265
93-14 $19.18 $268
94- 5 $14.00 $136
94- 7 $18.16 $241
_____________________________________________
The range of net income multipliers and going-in capitalization rates
exhibited by the various regional mall sales are summarized on the
following table.
Net Income Multiplier
_____________________
Going-In Net Income
Sale Capitalization Rate Multiplier
_______________________________________________
93- 1 7.47% 15.2
93- 4 7.00% 14.3
93- 5 7.29% 13.7
93- 7 7.75% 12.9
93-14 7.16% 14.0
94- 5 10.29% 9.7
94- 7 7.53% 13.3
______________________________________________
Valuation of the subject property utilizing the net income multipliers
(NIM) from the comparable properties accounts for the disparity of the
net operating incomes ($NOI's) per square foot between the comparables
and the subject. Within this technique, each of the adjusted NIM's are
multiplied by the $NOI per square foot of the subject, which produces
an adjusted value indication for the subject. The net operating income
per square foot for the subject property is calculated as the first
year of the holding period, as detailed in the Income Approach section
of this report.
Adjusted Unit Rate Summary
__________________________
Sale Net Income Subject Indicated
No. Multiplier NOI $/SF Price $/SF
____________________________________________________
93- 1 15.2 $21.84 $332
93- 4 14.3 $21.84 $312
93- 5 13.7 $21.84 $299
93- 7 12.9 $21.84 $282
93-14 14.0 $21.84 $306
94- 5 9.7 $21.84 $212
94- 7 13.3 $21.84 $290
_______________________________________________
Overall
Average 13.3 $290
_______________________________________________
From the process above, we see that the indicated net income
multipliers range from 9.7 to 15.2 with a mean of 13.3. The adjusted
unit rates range from $212 to $332 per square foot of owned GLA.
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.
We see that while the subject's net income ranks at the mid-point of
the sale transactions. Furthermore, we recognize that most of these
transactions involved dominant, Class A malls with good income growth
potential. On balance, we would characterize the subject as less
desirable than these sales which would warrant a unit rate at the low
end of the range. Considering the characteristics of the subject
relative to the above, we believe that a unit rate range of $225 to
$235 per square foot is appropriate. Applying this unit rate range to
the 201,561 square feet of owned GLA results in a value of
approximately $45,350,000 to $47,350,000 for the subject as shown
below.
201,561 SF 201,561 SF
x $225 x $235
$45,351,225 $47,366,835
Estimated Value - Market Sales Unit Rate Comparison
$45,350,000 to $47,350,000
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. On the basis of mall shop GLA sold, the transactions for this
category show unit rates ranging from $136 to nearly $556 per square
foot. A myriad of factors influence this rate, perhaps none of which
is more important than the sales performance of the mall shop tenants.
Accordingly, the abstraction of a sales multiple from each transaction
lends additional perspective to this analysis.
The sales multiple measure is often used as a relative indicator of the
reasonableness of the acquisition price. As a rule of thumb, investors
will look at a sales multiple of 1.0 as a benchmark, and will look to
keep it within a range of .75 to 1.25 times mall shop sales performance
unless there are compelling reasons why a particular property should
deviate.
The sales multiple is defined as the sales price per square foot of
mall GLA divided by average mall shop sales per square foot. As this
reasonableness test is predicated upon the economics of the mall shops,
technically, any income (and hence value) attributed to anchors that
are acquired with the mall as tenants should be segregated from the
transaction. As an income (or sales) multiple has an inverse
relationship with a capitalization rate, it is consistent that, if a
relatively low capitalization rate is selected for a property, it
follows that a correspondingly above-average sales (or income) multiple
be applied. In most instances we are not privy to the anchor's
contributions to net income. As such, the sales multiples reported may
be slightly distorted to the extent that the imputed value of the
anchor's contribution to the purchase price has not been segregated.
Sales Multiple Summary
______________________
Sale No. Multiple
________________________
93- 1 .92
93- 4 1.16
93- 5 1.16
93- 7 .88
93-14 1.09
94- 5 .72
94- 7 .93
______________________
Mean .98
______________________
The fourteen sales that are being compared to the subject show sales
multiples that range from .72 to 1.16 with a mean of about .98. As is
evidenced, the more productive malls with higher sales volumes on a per
square foot basis tend to have higher sales multiples. Furthermore,
the higher multiples tend to be in evidence where an anchor(s) is
included in the sale.
Based upon forecasted 1994 performance, together with our assumption
that sales will decline by 1.5 percent, the subject is projected to
produce comparable sales equal to approximately $262 per square foot in
1995 for all tenants.
In the case of the subject, the overall capitalization rate being
utilized for this analysis is considered to be slightly above the mean
exhibited by the comparable sales. As such, we would be inclined to
utilize a multiple below the mean indicated by the sales. As such, we
will utilize a lower sales multiple to apply to just the mall shop
space. Applying a ratio of, say, .80 to .85 to the forecasted sales of
$262 per square foot, the following range in value would be indicated.
Unit Sales Volume (Mall Shops) $ 262 $ 262
Sales Multiple x .80 x .85
Adjusted Unit Rate $ 210 $ 223
Mall Shops GLA x 201,561 x 201,561
Value Indication $42,328,000 $44,948,000
The analysis shows an adjusted value range of approximately $42.3 to
$44.9 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. 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
anchor tenants (JC Penney and Kohl's) contribute approximately $359,900
in revenues in 1995. These revenues comprise ground rent obligations
and percentage rent. If we were to capitalize this revenue separately
at a 10 percent rate, the resultant effect on value is approximately
$3.6 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 8.9
and 10.9 percent with a mean of approximately 9.6 percent. All of the
sales occurred with credit worthy national tenants in place. The
buildings ranged from 86,479 to 170,000 square feet and were located in
high volume destination retail areas.
Trends indicate that investors have shown a shift in preference to
initial return and, as will be discussed in a subsequent section,
overall capitalization rates have been showing increases over the past
several years. Moreover, when the acquisition of a shopping mall
includes anchor department stores, investors will typically segregate
income attributable to the anchors and analyze these revenues with
higher capitalization rates than those revenues produced by the mall
shops. Therefore, based upon the preceding discussion, it is our
opinion that overall capitalization rates for department stores are
reasonably reflected by a range of 9.5 to 10.5 percent.
Therefore, adding the anchor income's implied contribution to value of
$3.6 million, the resultant range is shown to be approximately $45.9 to
$48.5 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 $46,000,000 to $48,500,000
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 does best fit the
profile of an older mall that is merchandised well to meet the needs of
its trade area. We do note that the subject's upside potential appears
good as the lease-up of the vacant space and the repositioning of
tenants continues. Much of the vacancy is attributed to the space
taken back in the Carson's Throat strategy. As will be seen in the
Income Approach, NOI in the first full year of investment, 1995 is
almost 8.0 percent below 1996 levels. Furthermore, NOI is projected to
increase by an additional 5.0 percent in 1997. As such, we see good
near term upside potential in the mall.
We recognize that an investor would view the subject's position as
being vulnerable to new competition. The subject is located in an area
that has declined somewhat in recent years in terms of its
demographics. While its principal trade area cites continued
population, household and income growth, the positive changes are
occurring in the more outlying communities where new competition is
proposed. Furthermore, the physical condition of the mall is nearing
the stage when some significant capital expenditures are needed to
maintain its market share at the minimum. Finally, Dayton's operating
covenant expires in 1996 and there will likely be some expenditure on
ownership's part in order to induce them to stay.
After considering all of the available market data in conjunction with
the characteristics of the subject property, the indices of investment
that generated our value ranges are as follows:
Unit Price Per Square Foot
Salable SF: 201,561
Price Per SF of
Salable Area: $225 to $235
Indicated Value
Range: $45,350,000 to $47,350,000
Sales Multiple Analysis
Indicated Value
Range $46,000,000 to $48,500,000
The parameters above show a range of approximately $45.3 to $48.5
million for the subject.
Based on our total analysis relative to the strengths and weaknesses of
each methodology, it would appear that the Sales Comparison Approach
indicates a market value within the more defined range of $45,500,000
to $48,000,000 for Brookdale Center.
However, as is discussed in further detail in the Income Approach, we
have forecasted that a significant amount of capital expenditures are
necessary. Furthermore, as the lease-up is forecasted to continue over
the next two years, a prospective buyer would incur tenant improvement
allowances. Finally, we have also accounted for costs with respect to
extending Dayton's operating covenant and a mall-wide renovation in
1997. It is our opinion that a prudent buyer would take these expenses
into consideration when viewing the property in its full context. We
have calculated the present value of these expenditures to be
approximately $11.62 million. By deducting this expense from the
estimates above, a range in value between $33,900,000 and $36,400,000
is indicated for the subject property by the Sales Comparison Approach,
as of January 1, 1995.
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, the 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
of 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 on the capitalization of the next year's projected net
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 forecasted to achieve stabilization within a relatively
short time frame. Thus, the direct capitalization method will provide
additional support in the 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 to 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 Brookdale Center, we have
utilized a 10 year holding period for the investment with the cash flow
analysis commencing on January 1, 1995. Although an asset such as the
subject has a much longer useful life, an 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
remerchandising, 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 to 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 judgement 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 Brookdale Center as a long term
investment opportunity for a competent owner/developer. An analytical
real estate computer model that simulates the behavioral aspects of the
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 the tenant space; projection of future
revenues annually based upon the existing and pending leases,
probable renewals at market rentals, and expected vacancy
experience;
2) An estimate of 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;
5) A derivation of the most probable net operating income and
pre-tax cash flow (net operating income) less reserves, tenant
improvements, and any extraordinary expenses (such as asbestos
removal)
to be generated by the property by subtracting all property
expenses
from the effective gross income;
6) Estimation of a reversionary sales price based upon a
capitalization of the net operating income (before reserves,
tenant
improvements and leasing commissions or other capital items).
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; a minimum rent determined by lease
agreement, an additional overage rent based upon a percentage of retail sales,
a 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 the investors in the real estate, while the passing of certain
expenses onto the tenants serves to maintain this return in an era of
continually rising costs of operation. The 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
important source of revenue in the complete operation of the subject
property. In the initial year of the investment, 1995, it is projected
that the subject property will generate approximately $10,495,686 in
potential gross revenues, equivalent to $52.07 per square foot of total
appraised (owned) GLA of 201,561 square feet. Mall GLA as used herein
refers to the total of in-line shops area and kiosks as reconfigured
with the Carson's Throat area having been taken back. These forecasted
revenues are allocated to the following components:
Brookdale Center
Revenue Summary
Initial Year of Investment - 1995
______________________________________________________________________
Revenue Component Amount Unit Rate * Income Ratio
______________________________________________________________________
Minimum Rent $ 4,291,997 ** $21.29 40.9%
______________________________________________________________________
Overage Rent $ 277,790 *** $ 1.38 2.6%
______________________________________________________________________
Expense Recoveries $ 5,515,899 $27.37 52.6%
______________________________________________________________________
Miscell. Income $ 410,000 $ 2.03 3.9%
______________________________________________________________________
Total $10,495,686 $52.07 100.0%
______________________________________________________________________
* Reflects total owned GLA of 201,561 SF as reconfigured
** Net of free rent
*** Net of recaptures
______________________________________________________________________
Minimum Rental Income
The 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 rates 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 General Growth
management and leasing personnel and analyzed 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. The 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 ground rent obligations of JC Penney and Kohl's; mall tenant
revenues consisting of all in-line mall shops. As a sub-category of
in-line shop rents, we have segregated 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.
Interior Mall Shops
Rent from all interior mall tenants comprise the majority of minimum
rent. Aggregate rent from the mall shops in the calendar year 1995 is
shown to be $4,096,067. Minimum rent may be allocated to the following
components:
Brookdale Center
Minimum Rent Allocation
Interior Mall Shops
_______________________
1995 Revenue Applicable GLA * Unit Rate (SF)
_____________________________________________________________________
Mall Shops $3,776,590 196,395 SF $19.23
_____________________________________________________________________
Kiosks $ 319,477 5,166 SF $61.84
_____________________________________________________________________
Total $4,096,067 201,561 SF $20.32
_____________________________________________________________________
* Represents leasable area as opposed to actual leased or occupied
area exclusive of non-owned space.
_____________________________________________________________________
Our analysis of market rent levels for the 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.
Typically, we would view the rent attainment levels in the existing
mall as being representative of the total property. However, the
center is characterized by many older leases, some of which date back
over 10 years. In addition, because of the reconfiguration of the
Sears court in 1993 through 1994, management had pursued a leasing
strategy that has kept certain leases on short terms that will enable
them to selectively terminate a tenant, relocate or expand others and
generally allow for greater flexibility to accommodate the needs of
more desirable tenants.
Leasing activity 1994 was characterized by a number of extensive
changes throughout the mall, most notable of which was the completion
of the Carson's Throat area. This was completed at a cost of
approximately $1 million and was available for tenant leasing during
the year. Provided below is a summary of some of the new leasing
activity for 1994 throughout the mall.
Hoff Jewelers took Space 179 which is located at the corner of
the Carson's Throat area and the main concourse. The tenant
took a total of 1,322 square feet for ten years, at an initial
rent of $60.00 per square foot for the first four years,
$65.00 per square foot for the next three and then $70.00 per
square foot thereafter.
Regis Hair Stylist took Space 168 which is in the former
Carson's Throat area. The space contains 1,103 square feet.
The tenant took it for ten years with a rent of $29.00 per
square foot for years one through five and $31.00 per square
foot for years six through 10.
Champs took space 183, a prime suite of 5,134 square feet on
the center concourse. The lease commenced in November, 1994
for approximately ten years at a flat rent of $18.00 per
square foot. The tenant received a tenant improvement
allowance of $128,750, equivalent to approximately $25.00 per
square foot which will be funded in 1995.
Auntie Anne's took Space 3513, is a permanent kiosk containing
294 square feet, for approximately nine years. The $85.00 per
square foot rent is equivalent to $25,000 per annum.
Estes Hallmark, in Space 205, extended their lease for an
additional five years at $33.00 per square foot. They also
have one five-year option at $35.00 per square foot.
Express Teller in Space 3514 and Marquett Bank in Space 3515,
both of which are automatic teller machine leases were
extended for three years; the first one at $12,000 per annum
and the latter for $13,000 per annum.
Food Express a kiosk in Space 3505 exercised their option to
renew for four years at $32,500 per annum.
Foot Locker currently in Space 145, which consists of 2,038
square feet, will expand into part of Space 140, formerly
occupied by Bachmans. Foot Locker would take a total of 3,697
square feet; it would be a lease commencing on or about June
1995 and would run for approximately ten years at a flat rent
of $40.00 per square foot. This would, as proposed, be an "as
is" deal with the tenant responsible for any costs of
construction.
Golden Razor Suite 100 has extended their lease until the year
2001. They have 1,324 square feet and the lease will be for
$30.00 per square foot for the first three years, stepping-up
to $32.00 per square foot for the balance of the term.
The Limited took Suite 165, 7,870 square feet for fifteen
years in January 1994. The initial rent starts at $16.00 per
square foot for five years, stepping to $18.00 per square foot
for five years and then $20.00 per square foot for the final
five years.
Original Cookie took Suite 120 containing 1,059 square feet
for approximately ten years at a rent of $32.10 per square
foot.
Tilt took Suite 275, which contains 3,423 square feet. The
lease commenced in August 1994 and expires in January 2005 at
a flat rent of $18.00 per square foot.
Sbarro took Suite 245 containing 1,801 square feet. The lease
commenced November 1994 and expires January 2005. It has a
flat rent of $28.00 per square foot over the term with the
first twelve months abated.
Hair by Stewarts took Suite 130 containing 1,209 square feet.
The nine year/two month lease commenced in November 1994. The
initial rent of $29.00 per square foot steps to $33.00 and
then $37.00 per square foot over the term.
Wilsons Suede and Leather exercised their option to renew.
They renewed the lease for ten years at a flat rent of $29.00
per square foot. This was an increase from $27.50 per square
foot.
Gordon Jewelers exercised their option to renew for five years
increasing the rent from $40.00 to $45.00 per square foot.
Naturalizer exercised their option to renew for eight years at
$24.00 per square foot.
Proex Portrait exercised their option to renew for five years
in Suite 385. The rent increased from $30.00 to $50.00 per
square foot.
Piercing Pagoda will lease a new 250 square foot kiosk for
four years at $30,000 per annum.
On the facing page we have summarized and allocated the recent leasing
(in-line shops only) to the respective size categories which seem
reasonable size breaks for analysis purposes. These leases include new
deals and tenant renewals within the mall. Since the bulk of the
recent leasing has been by smaller tenants (under 3,500 square feet),
we have broadened the scope to include several larger transactions.
The 38 leases show weighted averages ranging from $16.91 to $50.00 per
square foot. As can be seen, the weighted average lease rate is $23.69
per square foot.
Brookdale Center
Recent Leasing Activity
In-Line Shops Only
Allocated by Size
_______________________
Category No. of Leases Weighted Average
__________________________________________________________________________
Category 1: Less Than 750 SF 2 $50.00
__________________________________________________________________________
Category 2: 751 - 1,200 SF 8 $39.78
__________________________________________________________________________
Category 3: 1,201 - 2,000 SF 9 $33.55
__________________________________________________________________________
Category 4: 2,001 - 3,500 SF 10 $21.37
__________________________________________________________________________
Category 5: 3,501 - 5,000 SF 3 $26.83
__________________________________________________________________________
Category 6: 5,001 - 10,000 SF 6 $16.91
__________________________________________________________________________
First Year Rent Total Average 38 $23.69
_________________________________________________________________________
Our experience has generally shown that there is typically an inverse
relationship between size and rent. That is to say that the larger
suites will typically command a lower rent per square foot. The
previous chart tends to loosely confirm this observation.
Category 1 (less than 750 SF) shows an average rent of $50.00 per
square foot. The average then declines to $16.91 per square foot for
Category 6 (5,001 - 10,000 SF). The only anomaly appears to be
Category 5 (3,501 - 5,000 SF) wherein the lease rate of $26.83 per
square foot exceeds Category 4. This is due to the small sample size
(three leases) which are skewed by the Foot Locker deal.
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 8 to 12 percent range in the initial
year of the lease with 8 percent to 10 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 12 and 15 percent. As a general rule, where sales exceed $250
to $275 per square foot, 15 percent would be a reasonable cost of
occupancy. Experience and research show that most tenants will resist
total occupancy costs that exceed 16 to 18 percent of sales. However,
ratios of upwards to 20 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.
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 pages. On
average, these ratio comparisons provide a realistic check against
projected market rental rate assumptions.
Occupancy Cost Analysis Chart
From this analysis we see that the ratio of base rent to sales ranges from 6.9
to 10.3 percent, while the total occupancy cost ratios vary from 9.5 to 20.5
percent when all recoverable expenses are included. The surveyed mean for the
eighteen malls analyzed is 8.7 percent and 14.2 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 by the International Council of Shopping
Centers and Dollars & Cents of Shopping Centers (1993) by the Urban
Land Institute. The most recent publications indicate base rent to
sales ratios of approximately 8 percent and total occupancy cost ratios
of 11.5 and 12.1 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 subjects' sales potential. Comparable mall sales in
calendar year 1994 are projected to be $266 per square foot, based on
tenants in place and reporting sales for the past thirteen months.
Sales are projected to decline slightly (1.5 percent) in 1995 to $262
per square foot. Most of the decline is attributed to the renovation
of the Carson's Throat area. Also during 1995, Carson's will be
converted to Mervyn's so there will likely be some disruption in normal
shopping patterns.
In the previous discussions, the overall attained rent was shown to be
$23.69 per square foot on average. After considering all of the above,
we have developed a weighted average rental rate of approximately
$21.00 per square foot based upon a relative weighting of a tenant
space by size. We have tested this average rent against total
occupancy cost. Since total 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 an 8.0 percent ratio (to sales) on average.
Furthermore, this average of approximately $21.00 per square foot is
believed to be reasonable in light of the average rent attained by the
recent leasing activity which has slightly exceeded this level.
The average rent is a weighted average rent for all in-line mall
tenants only. This average market rent has been allocated to space as
shown on the following chart.
Brookdale Center
In-Line Market Rent Assumption - 1995
_____________________________________
Initial
Rent Range/ Applicable % of Weighted
Suite Size Average Rate GLA Total Average
________________________________________________________________
Under 750 SF $30.00-$50.00 1,345 SF .68% $ 0.27
$40.00
________________________________________________________________
751 - 1,200 SF $25.00-$35.00 16,368 SF 8.33% $ 2.50
$30.00
________________________________________________________________
1,201 - 2,000 SF $25.00-$30.00 39,055 SF 19.89% $5.47
$27.50
________________________________________________________________
2,001 - 3,500 SF $20.00-$25.00 48,655 SF 24.77% $5.57
$22.50
________________________________________________________________
3,501 - 5,000 SF $16.00-$20.00 33,844 SF 17.23% $3.10
$18.00
________________________________________________________________
5,001 - 15,000 SF $12.00-$18.00 57,128 SF 29.09% $4.36
$15.00
________________________________________________________________
TOTAL 196,395 SF 100.00% $21.28
________________________________________________________________
Occupancy Cost - Test of Reasonableness
Our weighted average rent of $21.00 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.
Brookdale Center
Total Occupancy Cost Analysis - 1995
____________________________________
Economic Base Rent Estimated Expenses/SF
$ 21.00 (Weighted Average)
_____________________________________________________________
Occupancy Costs (A)
Common Area Maintenance (1) $ 4.91
_____________________________________________________________
Real Estate Taxes (2) $ 15.60
_____________________________________________________________
Other Expenses (3) $ 2.00
_____________________________________________________________
Total Tenant Costs $ 43.51
_____________________________________________________________
Projected Average Sales (1995) $262.00
_____________________________________________________________
Rent to Sales Ratio 8.02%
_____________________________________________________________
Cost of Occupancy Ratio 16.60%
_____________________________________________________________
(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) of 163,480 square
feet. Generally, the standard lease clause provides for a 15 percent
administrative factor less certain exclusions. 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).
(3) Other expenses include tenant contributions for marketing fund, water
and sewer, and other miscellaneous items.
Total costs, on average, are shown to be 16.6 percent of projected
average 1995 retail sales which we feel is high. This is due primarily
to the fact that real estate taxes at Brookdale Center are projected to
be $15.60. We are not troubled, however, by the high average since
these costs which are occupancy sensitive should decline as some of the
vacancy is absorbed. As cited earlier, much of the vacancy has to do
with the large amount of in-line GLA which was taken back with the
Carson's Throat strategy. For instance, the average occupied GLA is
projected to increase from 163,480 square feet in 1995 to 190,453
square feet in 1997. As the remerchandising continues, we would expect
that sales have a good chance to increase to levels in excess of our
growth rate assumption. Finally, we should not lose sight of the fact
that recent leasing levels in the mall have shown higher levels on
average.
It is emphasized that these rent categories provided a rough
approximation of market rent levels for a particular suite. This
methodology is given more credence when projecting rent levels for
vacant space where a potential tenant is unknown and their sales
performance is difficult to forecast. Also guiding our analysis were
the tenants location in the mall, (i.e. side court vs. center court)
its merchandise category and sales history. This is of particular
importance with the subject since its older layout with multiple side
courts results in rents which would tend to fall below the average.
Since most of the newer leasing activity has involved suites along the
center concourse or higher visibility areas, we would be inclined to
consider lower rents for certain side court locations. Therefore, in
many cases our assumed market rent would deviate from the range
indicated above in many instances.
Kiosks
We have also segregated permanent kiosks within our analysis since they
typically pay a much higher unit rent.
There are currently a total of 14 permanent kiosks, including two bank
ATM machines. Among the remaining 12, a range in size from 220 square
feet to 842 square feet are shown. Some of the more recent leases can
be summarized as follows:
Kiosk Rentals
_____________
Annual Unit Rate
Suite # Tenant Size (SF) Term Rent (SF)
______________________________________________________________________
3513 Auntie Anne's 294 11/94 - 1/05 $25,000 $ 85.02
3511 Coopers Watchworks 228 3/91 - 1/96 $26,000 $114.04
3507 Things Remembered 325 10/92 - 1/02 $33,000 $101.54
3512 The Eye Guys 220 3/91 - 1/96 $25,000 $113.64
3510 Baskin Robbins 378 2/90 - 1/95 $25,742 $ 68.10
3501 Piercing Pagoda 250 5/95 - 4/99 $30,000 $120.00
_____________________________________________________________________
We have compared the subject's revenue attainment levels with a
sampling of some recent data regarding permanent kiosks rentals in
other malls. This data is found on the following page.
Permanent Kiosks Recent Lease Transactions
__________________________________________
Tenant/ Annual
Property/Location Lease Date Area Rent/Term Unit Rate
______________________________________________________________________
Freehold Raceway Piercing Pagoda 204 SF $35,000 (1-5) $171.57
Mall, Freehold, NJ (3/93)
______________________________________________________________________
Aviation Mall The Mountain 202 SF $25,000(+-3%/yr) $123.76
Queenbury, NY (1/94)
Sunsations 158 SF $23,000 (1-5) $145.57
(5/93)
______________________________________________________________________
Oakdale Mall Cooper Watch 162 SF $32,000 (1-5) $197.53
Johnson City, NY (10/93)
Things Remembered 162 SF $37,500 (1-5) $231.48
(7/93)
______________________________________________________________________
Laurel Center Golden Valley 150 SF $25,000 (1-2) $166.67
Laurel, MD (12/93)
Royal Jewelry 396 SF $37,000 (1-5) $ 93.43
(8/93)
______________________________________________________________________
Eastpoint Mall Century 21 (5/94) 150 SF $37,500 (1-5) $250.00
Baltimore, MD
Plumb Gold (8/93) 150 SF $25,000 (1-3) $166.67
______________________________________________________________________
Brookdale Center Auntie Anne's (8/94) 395 SF $25,000 (1-10) $63.29
Minneapolis, MN
Glamour Shots (8/93) 200 SF $12,000 (1-3) $60.00
______________________________________________________________________
Meriden Square Great American 196 SF $15,000 (1-10) $76.53
Meriden, CT Cookie (4/94)
Sterling Accents 160 SF $25,000 (1-2) $156.25
(3/94) $27,000 (3-5) $168.75
______________________________________________________________________
Greece Ridge Ctr. Piercing Pagoda 196 SF $24,000 (1-5) $122.45
$122.45 (4/94)
Greece, NY
Coopers Watch (2/92) 192 SF $25,000 (1-3) $130.21
$27,000 (4-5) $140.63
_____________________________________________________________________
Galleria @ White Quintex Mobile (11/93) 163 SF $36,000 (1) $220.85
Plains $37,000 (2) $226.89
White Plains, NY
_____________________________________________________________________
Laguna Hills Mall Cutlery World (5/94) 150 SF $36,000 (1-5) $240.00
Laguna Hills, CA $41,400 (6-10)$276.00
Sunglass Hut (11/93) 250 SF $36,000 (1-5) $144.00
$41,400 (6-10)$165.00
_____________________________________________________________________
Salmon Run Mall Sunsations (5/93) 158 SF $23,000 (1-3) $145.57
Watertown, NY $26,800 (4-5) $164.56
Coopers Watch (5/92) 158 SF $22,000 (1-5) $139.24
_______________________________________________________________________
Aroostook Centre Sunglass Hut (11/93) $24,000 (1-10)$166.67
Presque Isle, ME
______________________________________________________________________
It is difficult to ascribe a unit rate ($ per square foot) to the
kiosks at Brookdale since they vary so much in size. In the aggregate,
we see that permanent kiosks command $25,000 to $33,000. The most
recent lease is with Piercing Pagoda at $30,000 per annum. In this
analysis we have forecasted a market rent of $27,500 for kiosks under
400 square feet and $30,000 for those in excess of $400 per square
foot. Bank machines are ascribed a market rent of $12,000 per annum.
Our analysis assumes five (5) year terms with a 10 percent increase in
rent after the third lease year. It is noted that it is not uncommon
for some kiosk tenants to pay mall charges, as they do at Brookdale.
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. The only reported free rent was with Sbarro which got
one year free year for its new leased space. 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. As will
be explained in a subsequent section of this appraisal, we have
made allowances of $15.00 per square foot to new (currently vacant)
and $10.00 per square foot for future turnover space. We have also
ascribed a rate of $1.00 per square foot to rollover space.
Furthermore, we have used an allowance of $25.00 per square foot for
any "raw" space presently located in the former Carson's Throat
area. This assumption offers further support for the attainment of
the rent levels previously cited.
Absorption
Finally, our analysis concludes that the current vacant retail space
will be absorbed over a three year period through January 1998. We
have identified 41,681 square feet of vacant space, net of newly
executed leases, pending deals which have good likelihood of coming to
fruition. This is equivalent to 20.7 percent of mall GLA and 4.2
percent overall.
Of this total, 25,311 square feet or 61 percent of the vacant space is
space comprising the former Carson's Throat area which was taken back
and reconstructed in order to accommodate mall shop space during 1994.
During the past year, three leases for 7,559 square feet were signed in
the throat area: Champs (5,134 square feet); Regis Hair Stylists
(1,103 square feet); and Hoff Jewelers (1,322 square feet).
During 1994, tenants which vacated totaled 8,452 square feet. This
included the following tenants.
Tenant Suite Area (SF)
____________________________________
Bachmans 140 1,129
(net of Foot Locker expansion)
____________________________________
Durling 395 2,712
Optical
____________________________________
Glamour Shots 3,517 200
____________________________________
Jarman's 255 1,276
____________________________________
Pizza Pasta 248 1,343
____________________________________
Subway 285 996
____________________________________
Trade Secret 330 796
____________________________________
Total 8,452
____________________________________
Also during 1994 Carson's stopped paying rent on the 15,952 square feet
it was leasing in the Throat area. This rent amounted to $295,100, or
$18.50 per square foot. Some of these revenues have been recovered
through the new leasing cited above.
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 3,473 square feet per quarter. We have conservatively assumed that
the space will all lease at the 1995 base date market rent estimate as
previously referenced.
The following chart tracks occupancy through 1998, the first full year
of stabilized occupancy.
Annual Average Occupancy (Mall GLA)
___________________________________
1995 81.1%
1996 86.6%
1997 94.4%
1998 99.2%
___________________________________
Anchor Tenants
The final category of minimum rent is derived by the contractual ground
lease obligations among the two anchor tenants. In 1995, these
revenues total $195,930. The following schedule details the major
tenant rent obligations.
Schedule of Anchor Tenant Revenues
__________________________________
Demised Lease Expiration Annual Rent
Tenant Area with Options
______________________________________________________
JC Penney 140,320 SF * 12/2015 $ 20,930
______________________________________________________
Kohl's 75,000 SF * 1/2010 $175,000
______________________________________________________
Total 215,320 SF - $195,930
______________________________________________________
* Represents building area and not necessarily the pad
area subject to ground lease.
______________________________________________________
Rent Growth Rates
Market rent will, over the life of a prescribed holding period, quite
obviously follow an erratic pattern. According to surveys by both
Cushman & Wakefield's Appraisal Division and Peter Korpacz and
Associates, major investors active in the acquisition of regional malls
are using growth rates of 0 percent to 6 percent in their analysis,
with 3 percent to 5 percent being most prevalent on a stabilized basis.
It is not unusual in the current environment to see investors
structuring no growth or even negative growth in the short term.
The Minneapolis metropolitan area in general has been negatively
impacted by the recession. Sales at many retail establishments have
been down for the past few years. The impact of Mall of America will
likely continue to be felt as some shakeout will inevitably continue.
Sales at Brookdale have been down as a result of the renovation to the
Carson's Throat area as well as the general economy around the mall and
heightened competition from its primary competitors. 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 *
____________________________________________________
1995-1996 0.0%
____________________________________________________
1997 +1.0%
____________________________________________________
1998 +2.0%
____________________________________________________
1999 +3.0%
____________________________________________________
2000-2004 +3.5%
____________________________________________________
* Indicated growth rate over the previous year's rent
_____________________________________________________
Releasing Assumption
The typical lease term for new in-line retail leases in centers such as
the subject generally ranges from five to twelve years. Market
practice dictates that it is not uncommon to get rent bumps throughout
the lease terms either in the form of fixed dollar amounts or a
percentage increase based upon changes in some index, usually the
Consumer Price Index (CPI). Often the CPI clause will carry a minimum
(4 percent) annual increase and be capped at a higher maximum (6 to 7
percent) 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
percent probability that an existing tenant will renew their lease
while the remaining 30 percent will vacate their space at this time.
While the 30 percent may be slightly high by some historic measures, we
think that it is a prudent assumption. 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. The subject's recent leasing activity attests to
this observation. Our global market assumptions for non-anchor tenants
may be summarized as shown on the following page.
Brookdale Center
Renewal Assumptions
___________________________________________________________________
Tenant
Tenant Type Lease Term Rent Steps Free Rent Alterations
___________________________________________________________________
In-Line Mall Shops 10 yrs. 10% in lease No Yes
year 4 and 8
___________________________________________________________________
Kiosks 5 yrs. 10% increase No No
in 4th year
___________________________________________________________________
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 ten year period. 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 been successful 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, the 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 1995), it is projected
that the subject property will produce approximately $4,291,997 in
minimum rental income. This estimate of base rental income is
equivalent to $21.29 per square foot of total owned GLA.
Alternatively, minimum rental income accounts for 40.9 percent of all
potential gross revenues. Further analysis shows that over the holding
period (CY 1995-2004), minimum rent advances at an average compound
annual rate of 3.7 percent. This increase is a synthesis of the mall's
lease-up, fixed rental increases as well as market rents from rollover
or turnover of space.<PAGE>
Overage Rent In addition to the minimum base
rent, many of the tenants of 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 an equal number do have stipulated breakpoints. The average
overage percentage for small space retail tenants is in a range of 5 to
6 percent with food court and kiosk tenants generally at 7 to 10
percent. Anchor tenants typically have the lowest percentage clause
with ranges of 1.5 to 3 percent which is 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 is going through an on-going renovation and
remerchandising, it is difficult to predict with accuracy what sales
will be on an individual tenant level. As such, we have employed the
following methodology.
For existing tenants who report sales, we have forecasted that
sales will continue at our projected sales growth rate as
discussed herein.
For tenants who do not report sales or who do not have
percentage clauses, we have assumed that a non-reporting tenant
will always occupy that particular space.
For new tenants, we have projected sales at the forecasted
average for the center at the start of the lease. In 1995
this would be approximately $262 per square foot. On
balance, our forecasts are deemed to be conservative.
Generally, most percentage rent is deemed to come from
existing tenants with very little forecasted from new
tenants. From our experience we know that a significant
number of new tenants will be into a percentage rent
situation by at least the midpoint of their leases.
Furthermore, it should be noted that JC Penney supplies a
large percentage of the mall's overage rent. In 1995
we calculate this to be $163,997, or 59 percent of all
overage rent.
Our conservative posture warrants that there exists some upside
potential through a reasonable likelihood of overage revenues
above our forecasted level.
Thus, in the initial full year of the investment holding period,
overage revenues are estimated to amount to $277,790 (net of
recaptures) equivalent to $1.38 per square foot of total GLA and 2.6
percent of potential gross revenues.
Sales Growth Rates
In the "Retail Market Analysis" section of this report, we discussed
that retail specialty store sales at the subject property have been
declining in recent years.
Retail sales in the Minneapolis MSA have been increasing at a compound
annual rate of 5.2 percent per annum since 1985, according to Sales and
Marketing Management. According to both the Cushman & Wakefield and
Korpacz surveys, major investors are looking at a range of growth rates
of 0 percent initially to a high of 6 percent in their computational
parameters. Most typically, growth rates of 4 percent to 5 percent are
seen in these surveys.
Nationally, retail sales (excluding automotive sales) have been
increasing at a compound annual rate of 5.74 percent since 1980.
Finally, the chart on the facing page shows the change in median sales
for a variety of tenant types as found in regional malls. The data
shows that over the three year period 1990 to 1993, the change in
median sales ranged from a low of -9.52 percent for Records and Tapes
to a high of 57.75 percent for Womens Specialty Clothing. During this
time period, the mean for this selected tenant category has increased
by 16.41 percent per annum from $174.51 to $275.28 per square foot.
Overall, among the 14 tenant categories most frequently found in
regional malls, sales have shown a compound annual growth rate of 3.87
percent.
After considering all of the above, we have forecasted that sales for
existing tenants will decline by 1.5 percent in 1995. This is
consistent with budgetary projections. Subsequently, we have
forecasted no growth for 1996, an increase of 2 percent in 1997 and 3
percent in 1998, followed by a more normalized increase of 3.5 percent
per annum thereafter.
Sales Growth Rate Forecast
__________________________
Period Annual Growth Rate
________________________________
1995 - 1.5%
1996 + 0.0%
1997 + 2.0%
1998 + 3.0%
1999-2004 + 3.5%
_______________________________
In all, we believe we have been conservative in our sales forecast for
new and turnover tenants upon the expiration of an initial lease. At
lease expiration, we have forecasted a 30 percent probability that a
tenant will vacate.
For new tenants, sales are established either based on ownership's
forecast for the particular tenant or at 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 were under-performers that prompted a 100 percent turnover
probability then sales are reset to the corresponding mall overage.
In most instances, no overage rent is generated from new tenants due to
our forecasted rent steps which serve to change the breakpoint.
Expense Reimbursement and Miscellaneous Income
By lease agreement, tenants are required to reimburse the lessor for
certain operating expenses. Included among these operating items are
real estate taxes, common area maintenance (CAM) and energy for a few
tenants. Miscellaneous income is essentially derived from specialty
leasing for temporary tenants, Christmas kiosks and other charges
including special pass-throughs. In the first full year of the
investment, it is projected that the subject property will generate
approximately $5,515,899 in reimbursements for these operating expenses
and $410,000 in other miscellaneous income.
Common area maintenance and real estate tax recoveries are generally
based upon the tenants pro-rata share of the expense item. Because it
is an older center, there exists numerous variations to the calculation
procedure of each. We have relied upon ownership's calculation for the
various recovery formula's for taxes and CAM. Generally for most mall
tenants, there are three types of CAM calculations. At rollover, all
of the tenants are assumed to be subject to the Type D recovery which
is the standard lease currently in effect. This recovery calculation
includes part of the management expense; indoor and outdoor common area
maintenance; depreciation and a portion of the mall's general and
administrative costs. Approximately 58 percent of the management fee
is recoverable. The standard lease provides for the recovery of these
expenses plus a 15 percent administrative fee.
Common Area Maintenance
Provided below is a summary of the standard CAM clause that exists for
a new tenant.
Common Area Maintenance Recovery Calculation
____________________________________________
CAM Expense Actual for year
(inclusive of portion of
management fee)
____________________________________________
Less: Contributions from department stores
____________________________________________
Add: 15% Administration Fee
_____________________________________________
Equals: Net pro-ratable CAM billable
to mall tenants on the basis
of gross leasable occupied
area (GLOA).
____________________________________________
All department stores pay varying amounts for CAM. Their contributions,
are collectively detailed under MAJOR'S CAM CONTRIBUTION on the cash
flow. The formulas are generally quite complicated, having evolved over
the years through additions and deletions to the expense structure. The
1995 budgeted CAM billings for the majors can be detailed as follows:
CAM 1995
Obligation Budget
________________________________
Carson's $ 377,991
________________________________
JC Penney $ 247,995
________________________________
Sears $ 397,129
________________________________
Midas Muffler $ 6,358
________________________________
Dayton's $ 341,783
________________________________
Total $1,371,256
________________________________
Real Estate Taxes
Generally, real estate tax recoveries are based upon a mall tenant's
pro-rata share (defined on the basis of GLOA). The majors have varying
contribution amounts that are first deducted from the gross expense
before allocating the balance to the mall shops.
JC Penney pays taxes on its building separately. They do make a
contribution based upon its allocated share of certain land taxes.
Dayton's pay taxes on its allocated portion of the enclosed mall and
parking area land taxes. Carson's had been paying taxes but we are
advised that there was a change to their deal and they no longer
contribute. The 1995 budgeted major's tax recoveries are estimated as
follows:
Tax Obligation 1995 Budget
________________________________
JC Penney $201,745
Dayton's $320,070
_________________________________
Total $521,815
Energy
Energy recoveries are related to HVAC charges for that portion of the
mall that uses the central plant. Generally, Dayton's is responsible
for all of the recovery. Central plant charges are passed through with
a profit of 15 percent. Kiosk tenants had been paying for energy but
management had stopped billing them for this expense.
Miscellaneous Income
Miscellaneous revenues are derived from a number of sources. One of
the more important is specialty leasing. The specialty leasing is
related to temporary tenants that occupy vacant in-line space. General
Growth has been relatively successful with this procedure at many of
their malls.
Other sources of miscellaneous revenues included forfeited security
deposits, temporary kiosk (Christmas) rentals, phone revenues, lottery
commissions, interest income and income from the renting of strollers
and the community room. The budget for 1995 projected miscellaneous
revenues of $283,800. A portion of this ($120,000) was for interest
which we typically do not include. Thus, we have forecasted
miscellaneous income of $150,000 in 1995. In addition, management is
projecting $265,200 from temporary tenants in 1995. We have used
$260,000 in our first year forecast. On balance, we have forecasted
these aggregate other revenues at $410,000 which we project will grow
by 3 percent per annum. Our forecast for these additional revenues is
net of provision for vacancy and credit loss.
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 and all the
tenants were actually 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 6.0 percent 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 6 percent factor as the mall leases up based upon
the following schedule.
1995 3%
1996 4%
1997 5%
1998-2004 6%
In this analysis we have also forecasted that there is either a 70
percent probability that an existing tenant will renew their lease.
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 the 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 (inclusive of the kiosks). Through
the 10 years of this cash flow analysis, the total allowance for
vacancy and credit loss, including provisions for downtime, ranges from
a low of 6.3 percent of total potential gross revenues to a high of
21.9 percent in the initial year of the holding period in the mall. On
average, the total allowance for vacancy and credit loss over the 10
year projection period is 10.5 percent of these revenues.
Total Rent Loss Forecast *
________________________
Year Loss Provision
_____________________________________
1995 21.9%
_____________________________________
1996 17.4%
1997 10.5%
1998 6.8%
1999 6.3%
2000 8.2%
2001 9.3%
2002 8.2%
2003 6.6%
2004 10.0%
_____________________________________
Avg. 10.5%
_____________________________________
* 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
conservatively 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 1995, effective gross
revenues ("Total Income" line on cash flow) are forecasted to amount to
approximately $10,269,305, equivalent to $50.95 per square foot of
total owned GLA.
Brookdale Center
Effective Gross Revenue Summary
Initial Year of Investment - 1995
_________________________________
Aggregate Sum Unit Rate Income Ratio
___________________________________________________________
Potential
Gross
Income $10,495,686 $ 52.07 100.0%
___________________________________________________________
Less:
Vacancy
and
Credit
Loss $ 226,381 $ 1.12 2.2%
__________________________________________________________
Effective
Gross
Income $10,269,305 $ 50.95 97.8%
__________________________________________________________
Expenses
The 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, and certain energy
expenses. As mentioned, some general and administrative expenses as
well as a portion of the management fee is recoverable. The
non-reimbursable expenses associated with the subject property include
certain general and administrative expenses, ownership's contribution
to the marketing fund, management charges (a portion is recovered as
part of CAM), miscellaneous expenses, a reserve for the replacement of
short-lived capital components, alteration costs associated with
bringing the space up to occupancy standards, and a provision for
capital expenditures. Unless otherwise cited, expenses are forecasted
to grow by 4 percent per annum over the holding period.
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 owner's 1995 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.
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, judgement 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. A portion of the
management fee is recoverable as part of CAM as is a portion of certain
general and administrative expenses. 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 like the subject where the CAM budget
is high, discretion must be exercised in not trying to pass along every
charge as the tenants will resist. Historically, the annual CAM
expense (before anchor contributions) can be summarized as follows:
Brookdale Center
Unit CAM Billings
"D" Lease
_________________
Year Aggregate Amount
________________________________________
1990 $1,652,300
1991 $1,911,600
1992 $1,650,200
1993 $1,901,800
1994 Forecasted $1,915,800
1995 Budgeted $1,944,800
________________________________________
The 1995 CAM budget is shown to be $1,944,800. An allocation of this
budget by line item is as follows:
1995 CAM Expense Allocation
___________________________
Administrative, Payroll and Office $ 411,200
Security $ 542,400
Maintenance $ 680,000
Snow Removal $ 60,000
Utilities $ 251,200
__________________________________________
Total $1,944,800
__________________________________________
Over the past three years, management has been capable of maintaining
the expense under $2,000,000. In our analysis, we have reflected a
first year expense of $1,950,000 (before inclusion of the management
fee). Billable CAM is determined after adding in 58 percent of the
management fee and depreciation, deducting major's contributions and
adding the 15 percent administrative fee. In 1995, this expense is
budgeted at $5.72 per square foot. Historically, it has ranged from
$4.55 to $6.15 per square foot as shown below.
Year CAM Per Square Foot
________________________________
1990 $4.55
1991 $5.89
1992 $4.90
1993 $5.91
1994 $5.78
_______________________________
1995 (Budget) $5.72
_______________________________
Real Estate Taxes - The projected taxes to be incurred in 1995 are
equal to $3,071,707. 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 which are estimated at
$521,815 in 1994. This expense item is projected to increase by 5
percent per annum over the balance of the investment holding period.
Energy - Energy costs consist of the cost to run the central plant as
it provides HVAC services to certain tenants. Energy costs have been
historically reported as follows:
Year Amount
______________________________
1990 $216,500
1991 $215,600
1992 $210,300
1993 $261,200
1994 $282,100
_______________________________
1995 (Budget) $231,900
_______________________________
We have estimated the 1995 expense at $235,000. The only department
store who contributes to this energy cost is Dayton's, whose 1995
contribution is estimated at $270,250. We are advised that ownership
can charge a 15 percent administrative fee for their costs in
administrating this program. Energy expenses are forecasted to grow by
4 percent per annum throughout the holding period.
Non-Reimbursable Expenses
The total annual non-reimbursable expenses of 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 4 percent per annum
thereafter.
General and Administrative (Non-CAM) - Expenses related to the
administrative aspects of the mall include costs particular to the
operation of the mall including salaries, travel and entertainment, and
dues and subscriptions. A provision is also made for professional
services including legal and accounting fees and other professional
consulting services. In 1995, we reflect general and administrative
expenses of $275,000.
Promotion - We have ascribed a 1995 expense of $100,000 for ownership's
contribution to the Merchants Association.
Miscellaneous - This catch-all category is provided for various
miscellaneous and sundry expenses that ownership will typically incur.
Such items as unrecovered repair costs, non-recurring expenses,
expenses associated with maintaining the 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 $30,234, which is equal to $0.15 per square foot of owned
GLA. 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 $205,641.
Alternatively, this amount is equivalent to approximately 2.0 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 ownership does not separately charge leasing
commissions, we have used the high end of the range as providing for
compensation for these services. In addition, a portion of the
management fee is deducted before passing on the balance to the mall
tenants as part of CAM.
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 $10.00 per
square foot for turnover space (initial cost growing at expense growth
rate) weighted by our turnover probability of 30 percent. We have
forecasted a rate of $1.00 per square foot for renewal (rollover)
tenants, based on a renewal probability of 70 percent. The blended
rate based on our 70/30 turnover probability is therefore $3.10 per
square foot. It is also noted that ownership has been relatively
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. In order to facilitate the lease-up of the
Carson's space which is in raw condition, we have forecasted a
workletter of $25.00 per square foot. Also, we have utilized a tenant
workletter of $15.00 per square foot for currently vacant space in 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.
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 approved but we can make some provisions with reasonable
certainty for certain repairs. Capital expenditures utilized for this
analysis include miscellaneous capital projects, asbestos abatement,
and capital reserves. Capital projects on-going at Brookdale Center
include the building systems upgrades, lot lighting and signage, roof
and parking lot replacement and seal coating, and other capital items
identified within General Growth's 1995 Annual Budget. We have also
made a provision for an interior renovation in 1997. It was our opinion
that a prudent investor would make some provision for necessary repairs
and upgrades. To this end, we have reflected expenditures of $500,000
in 1995, $400,000 in 1996, $200,000 in 1997 and $100,000 per annum
thereafter. In addition, the property is in need of general upgrading.
We have reflected a cost of $4,500,000 equivalent to approximately
$22.50 per square foot of mall GLA to be incurred in 1997.
ACM Abatement - General Growth has also budgeted for asbestos abatement
in the mall as tenant space is turned over and abatement is required
during renovation. We have therefore included abatement as a capital
expenditure in our cash flow. In 1995, asbestos abatement is scheduled
to total $150,000. This expense decreases to $75,000 for 1996, and
$50,000 in 1997 to 1999.
Dayton's Operating Agreement - As discussed, Dayton's operating
covenant expires in 1996. In order to keep this important anchor
tenant at the mall, ownership should prudently expect to contribute
toward a retrofit of the store. We have budgeted $7,000,000 which is
equivalent to approximately $36.00 per square foot.
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, thereafter increasing by our expense growth rate throughout
our cash flow analysis.
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 income
is forecasted to be equal to $4,401,723 which is equivalent to 42.9
percent of effective gross income. Deducting other expenses including
capital items results in a net cash flow loss of ($3,609,819).
Brookdale Center
Operating Summary
Initial Year of Investment - 1995
_________________________________
Aggregate Sum Unit Rate* Operating Ratio
______________________________________________________
Effective
Gross
Income $10,269,305 $50.95 100.0%
______________________________________________________
Operating
Expenses $ 5,867,582 $29.11 57.1%
______________________________________________________
Net Income $ 4,401,723 $21.84 42.9%
______________________________________________________
Other
Expenses $ 8,011,542 $39.75 78.0%
______________________________________________________
Cash Flow ($ 3,609,819) ($17.91) ( 25.28%)
______________________________________________________
* Based on total owned GLA of 201,561 SF
Our cash flow model has forecasted the following compound annual growth
rates over the ten year holding period 1995-2004.
Net Income 2.86%
Overall, this is a reasonable forecast for a property of the subject's
calibre and growth pattern which should attract some investor interest.
Investment Parameters
After projecting the income and expense components of the subject
property, investment parameters must be set in order to forecast
property performance over the holding period. These parameters include
the selection of capitalization rates (both initial and terminal) and
application of the appropriate discount or yield rate.
Selection of Capitalization Rates
The overall capitalization rate bears a direct relationship between net
operating income generated by the real estate in the initial year of
investment (or initial stabilized year) and the value of the asset in
the marketplace. Overall rates are also affected by the existing
leasing schedule of the property, the strength or weakness of the local
rental market, the property's position relative to competing
properties, and the risk/return characteristics associated with
competitive investments.
In recent years, investors have shown a shift in preference to initial return
as overall capitalization rates have increased over the past several
years. Analysis of market sales of regional malls shows that
capitalization rates have increased from a mean of 5.97 percent in 1988, to
a mean of 7.64 percent in 1993. These sales, as tracked by Cushman &
Wakefield, have included investment grade regional malls throughout the
United States. In 1993, fourteen sales represented a range in
capitalization rates.
Overall Capitalization Rates
Regional Mall Sales
____________________________
Overall Capitalization Rates
Regional Mall Sales
____________________________
Year Range Mean Basis Point Change
_______________________________________________________
1988 4.99%-8.00% 5.97% -
_______________________________________________________
1989 4.57%-7.26% 5.39% -58
_______________________________________________________
1990 5.06%-9.11% 6.29% +90
_______________________________________________________
1991 5.60%-7.82% 6.44% +15
_______________________________________________________
1992 6.00%-8.00% 7.31% +87
_______________________________________________________
1993 7.00%-9.00% 7.64% +33
_______________________________________________________
1994 7.40%-10.29% 8.63% +99
_______________________________________________________
The data above shows that with the exception of 1989, the average cap
rate has shown a rising trend each year. Between 1988 and 1989, the
average rate declined by 58 basis points. This was partly a result of
dramatically fewer transactions in 1989 as well as the sale of
Woodfield Mall at a reported cap rate of 4.57 percent. In 1990 the
average cap rate jumped 90 basis points to 6.29 percent. Among the 16
transactions we surveyed that year, there was a marked shift of
investment criteria upward with additional basis point risk added due
to the deteriorating economic climate for commercial real estate.
Furthermore, the problems with department store anchors added to the
perceived investment risk.
1992 saw owners become more realistic in their pricing as some looked
to move product because of other financial pressures. The 87 basis
point rise to 7.31 percent reflected the reality that in many markets
malls were not performing as strongly as expected. A continuation of
this trend was seen in 1993 as the average rate has increased by 33
basis points. Only seven transactions have been surveyed for 1994
which reflect a wide range in product quality. The mean OAR of 8.63
percent includes only two transactions in the 7.0 percent range. There
does appear to be strong evidence that the rise in cap rates has
stabilized and that the demand for good quality retail product will
begin to lower yields and force up prices. With the creation of so
many retail REITs over the past year, many of which are flush with
cash, their appetite to acquire property could have such an affect on
pricing.
The Cushman & Wakefield Winter 1994 survey reveals that going-in cap
rates for regional shopping centers range between 6.50 and 9.50 percent
with a low average of 7.60 and high average of 8.40 percent,
respectively; a spread of 80 basis points. Generally, the change in
average capitalization rates over the Fall/Winter 1993 survey shows
that the low average increased by 20 basis points, while the upper
average decreased by 12 points. Terminal, or going-out rates are now
8.00 and 8.80 percent, representing an increase of 32 and 16 basis
points, respectively, from Fall/Winter 1993 averages.
Cushman & Wakefield Appraisal Services
National Investor Survey - Regional Malls (%)
____________________________________________
Investment Winter 1994 Summer 1994 Fall/Winter 1993
Parameters LOW HIGH LOW HIGH LOW HIGH
______________________________________________________________________
OAR/Going-In 6.50-9.50,7.50-9.50 6.50-9.50,6.50-10 6.75-8,7.50-10.00
7.6 8.4 7.6 8.30 7.40 8.52
______________________________________________________________________
OAR/Terminal 7.00-9.50,7.50-10.50,7.00-9.5,7.5-10 7.5-9.0,7.5-11.00
8.0 8.8 8.20 8.90 7.68 8.64
______________________________________________________________________
IRR 10-11.50, 10-13 9-11, 11-13 10-15 10.50-15
10.5 11.5 10.60 11.60 11.11 12.09
______________________________________________________________________
The fourth quarter 1994 Peter F. Korpacz survey finds that cap rates
have remained relatively stable. They recognize that there is extreme
competition for the few premier malls that are offered for sale which
should exert downward pressure on rates.
NATIONAL REGIONAL MALL MARKET
FOURTH QUARTER 1994
_____________________________
KEY INDICATORS CURRENT LAST
Free & Clear Equity IRR QUARTER QUARTER YEAR AGO
______________________________________________________________________
RANGE
AVERAGE 10.00%-14.00% 10.00%-14.00% 10.00-14.00%
11.60% 11.60% 11.65%
CHANGE (Basis Points) - - 0 - 5
Free & Clear Going-In Cap Rate
RANGE
AVERAGE 6.25%-11.00% 6.00%-11.00% 6.00%-11.00%
7.73% 7.73% 7.70%
Residual Cap Rate
RANGE
AVERAGE 7.00%-11.00% 7.00%-11.50% 7.00-11.50%
8.30% 8.32% 8.34%
CHANGE (Basis Points) - - 2 - 4
______________________________________________________________________
Source: Peter Korpacz Associates, Inc. - Real Estate Investor Survey
Fourth Quarter - 1994
As can be seen from the above, the average IRR has decreased by 5 basis
points to 11.60 percent from one year ago. However, it is noted that
this measure has been relatively stable over the past twelve months.
The quarter's average initial free and clear equity cap rate rose 3
basis points to 7.73 percent from a year earlier, while the residual cap
rate decreased 4 basis points to 8.30 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.
Equitable Real Estate Investment Management, Inc. reports in their
Emerging Trends in Real Estate - 1995 that their respondents give retail
investments reasonably good marks for 1995. It is estimated that the
bottom of the market for retail occurred in 1993. During 1994, value
changes for regional malls and power centers is estimated to be 1.4 and
3.5 percent, respectively. Other retail property should see a rise of
1.7 percent in 1994. Forecasts for 1995 show regional malls leading the
other retail categories with a 2.8 percent increase. Power centers and
other retailers are expected to have increases of 2.6 and 2.2 percent,
respectively. Long term prospects (1995-2005) for regional malls fare
the best for all retail properties which is expected to outstrip total
inflation (4.0 percent) with a 43 percent gain.
The bid/deal spread has narrowed due to a pick up in transactions. On
average, the bid/ask spread for retail property is 60 to 70 basis
points, implying a pricing gap of 5 to 10 percent.
Capitalization Rate Bid/Ask Characteristics (%)
_______________________________________________
Type Bid Ask Bid/Ask Spread Deal
____________________________________________________________
Regional
Mall 8.1 7.3 .8 7.5
Power
Center 9.3 8.7 .6 8.8
Other 9.7 9.1 .6 9.3
____________________________________________________________
Prospects for regional malls and smaller retail investments are
tempered by the choppy environment featuring increased store
competition and continued shakeout. Population increases are expected
to be concentrated in lower income households, not the middle to upper
income groups. Through the balance of the 1990s, retail sales are
expected to outpace inflation on an annual basis of only 2 percent.
Thus, with a maturing retail market, store growth and mall investment
gains will come at the expense of competition.
Emerging Trends sees a 15 to 20 percent reduction in the number of
malls nationwide before the end of the decade. The report goes on to
cite that after having been written off, department stores are emerging
from the shake-out period as powerful as ever. Many of the nations
largest chains are reporting impressive profit levels, part of which
has come about from their ability to halt the double digit sales growth
of the national discount chains. Mall department stores are
aggressively reacting to power and outlet centers to protect their
market share. Department stores are frequently meeting discounters on
price.
Despite the competitive turmoil, Emerging Trends, interviewees remain
moderately positive about retail investments.
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 a bankruptcy involving two department store divisions that
dominate the Philadelphia and Washington D.C. markets. 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. However, their cost cutting was
deep and painful as it involved closure to nearly 100 stores.
Federated Department Stores has also been acclaimed as a text book
example on how to successfully emerge from bankruptcy. They have
recently merged with Macy's to form one of the nation's largest
department store companies with sales in excess of $13.0 billion
dollars. The explosive growth of the category killers has caused
department stores to aggressively cut costs and become more efficient
in managing their inventory.
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.
Investors have shown a shift in preference to initial return, placing probably
less emphasis on the DCF. Understandably, this thinking has evolved after
a few hard years of reality where optimistic cash flow projections did not
materialize. The DCF is still, in our opinion, a valid valuation technique
that when properly supported, can present a realistic forecast of a
property's performance and its current value in the marketplace.
Generally, we are inclined to group and characterize regional malls
Our survey of 1993 regional mall sales shows a mean overall
capitalization rate of 7.65 percent. The average terminal
capitalization rate was 13 basis points higher at 7.78 percent while
the average discount rate was 11.49 percent. We are still in the
process of confirming 1994 activity but preliminary results show an
average overall rate of 8.63 percent and an IRR of 11.27 percent.
Based upon this discussion, we are inclined to group and characterize
regional malls.
Cap Rate Range Category
6.5% to 7.0% Top 20 malls in the country.
7.0% to 8.5% Dominant Class A investment grade property, excellent
demographics (top 50 markets), and considered to
present a significant barrier to entry within its trade
area.
8.5% to 10.5% Somewhat broad characterization of investment quality
properties ranging from primary MSAs to second tier
cities. Properties at the higher end of the scale are
probably somewhat vulnerable to new competition in
their market.
10.5% to 12.0% Remaining product which has limited appeal or
significant risk which will attract only a smaller,
select group of investors.
Brookdale Center is an older property that has been impacted by its
competition, changing demographics, and aging physical plant. In
addition, the threat of competition has intensified and the possibility
exists that Dayton's could leave should one of the proposed malls be
built.
However, we do recognize that management has been addressing the
physical issues and continues to be relatively successful in attracting
new tenants to the mall. The renovation of the Carson's Throat area
will be a long term benefit to the property.
Finally, we don't believe that the conversion of the Carson's store to
a Mervyn's will have a material impact on the center's investment
appeal. While new to the region, Dayton's is making a major commitment
to the Twin Cities area by converting seven units to this new store
format. The lower price points offered by Mervyn's will compliment the
higher priced apparel found at the traditional Dayton's. Mervyn's
market niche is more representative of Brookdale's trade area. While
it will compete with Kohl's, the two stores should act as a more
cohesive draw to the mall and enhance its total trade area draw.
On balance, a property with the characteristics of the subject would
potentially trade at an overall rate between 8.75 and 9.0 percent based
on first year income if it were operating on a stabilized operating
income basis.
For the reversion year, additional basis points would be added to the
going-in rate to account for future risks of operating the property.
This contingency is typically used to cover any risks associated with
lease-up of vacant space, costs of maintaining occupancy, prospects of
future competition, and the uncertainty of maintaining forecasted
growth rates over the holding period. Investors may structure a
differential of up to 100 basis points in their analysis depending on
the quality and attributes of the property and its market area. In the
surveys cited, typical reversion, or going-out rates run between 10 and
60 basis points above the initial cap. However, because of the risk
associated with the subject, we believe that a wider range is
warranted. By adding 50 to 100 points to the subject's overall rate,
the implied terminal capitalization rate would run between 9.25 and
10.0 percent. By applying a rate of say, 9.75 percent to the reversion
year's net operating income core reserves, capital expenditures,
leasing commissions, and alterations, yields an overall sale price at
the end of the holding period of approximately $62.82 million for the
subject (based on net income of $6,124,844 in calendar year 2005).
From the projected reversionary value, we have made a deduction to
account for the various transaction costs associated with the sale of
an asset of this type. These costs amount to 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
the pre-tax 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
_________________________
Gross Sale Price Less Costs of Sale
at Disposition & Misc. Expenses @ 2% Net Proceeds
______________________________________________________________
$62,819,000 $1,256,380 $61,562,620
_____________________________________________________________
Selection of Discount Rate
The discounted cash flow analysis makes several assumptions which
reflect typical investor requirements for yield on real property.
These assumptions are difficult to directly extract from any given
market sale or by comparison to other investment vehicles. Instead,
investor surveys of major real estate investment funds and trends in
bond yield rates are often cited to support such analysis.
A yield or discount rate differs from an income rate, such as
cash-on-cash (equity dividend rate), in that it takes into
consideration all equity benefits, including the equity reversion at
the time of resale and annual cash flow from the property. The
internal rate of return is the single-yield rate that is used to
discount all future equity benefits (cash flow and reversion) into the
initial equity investment. Thus, a current estimate of the subject's
present value may be derived by discounting the projected income stream
and reversion year sale at the property's yield rate.
Yield rates on long term real estate investments range widely between
property types. As cited in Cushman & Wakefield's Winter 1994 survey,
investors in regional malls are currently looking at broad rates of
return between 10.0 and 13.00 percent, down slightly from both the
Summer 1994 and the Fall/Winter 1993 surveys. The indicated low and
high means are 10.50 and 11.50 percent, respectively. Peter F. Korpacz
reports an average internal rate of return of 11.60 percent for the
fourth quarter 1994, down 5 basis points from year ago levels. CB
Commercial's survey also suggests an 11.60 percent IRR, up 20 points
from one year ago.
The various sales discussed in the Sales Comparison Approach displayed
expected rates of return between 10.75 and 12.50 percent for 1993, with
a mean of 11.53 percent for those sales reporting IRR expectancies.
The range reported represents primarily Class A, investment grade
malls. Rates for marginal Class B centers in second tier locations
typically show rates in excess of 12.00 percent.
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 (%) January 30, 1995 Year Ago
_______________________________________________________________
Reserve Bank Discount Rate 4.75 3.00
Prime Rate (Monthly Average) 8.50 6.00
3-Month Treasury Bills 5.73 2.99
U.S. 10-Year Bonds 7.60 5.64
U.S. 30-Year Bonds 7.75 6.23
Telephone Bonds 8.62 7.15
Municipal Bonds 6.70 5.45
Source: New York Times
_______________________________________________________________
This compilation of yield rates from alternative investments reflects
varying degrees of risk as perceived by the market. Therefore, a
riskless level of investment might be seen in a three month treasury
bill at 5.73 percent. A more risky investment, such as telephone
bonds, would currently yield a much higher rate of 8.62 percent. As of
this writing, the prime rate has been increased to 8.50, while the
discount rate has increased to 4.75 percent. Ten year treasury notes
are currently yielding around 7.62 percent, while 30-year bonds are at
7.75 percent.
Real estate investment typically requires a higher rate of return
(yield) and is much influenced by the relative health of financial
markets. A regional mall 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 regional mall thus attempts to consider the
underlying credit and security of the income stream, and includes an
appropriate premium for liquidity issues relating to the asset. There
has historically been a consistent relationship between the spread in
rates of return for real estate and the "safe" rate available through
long-term treasuries or high-grade corporate bonds. A wider gap
between return requirements for real estate and alternative investments
has been created in recent years due to illiquidity issues, the absence
of third party financing, and the decline in property values.
Investors have suggested that the regional mall market has become
increasingly "tiered" over the past two years. The country's premier
malls are considered to have the strongest trade areas, excellent
anchor alignments, and significant barriers of entry to future
competitive supply. These and other "dominant" malls will have average
mall shop sales above $300 per square foot and be attractive investment
vehicles in the current market. It is our opinion that the subject
would attract considerable interest from institutional investors if
offered for sale in the current marketplace. There are few 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 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 12.5 and 13.0
percent.
Investment 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 anticipated cash
flows over an ten year period commencing on January 1, 1995.
A sale or reversion is deemed to occur at the end of the 10th calendar
year (December 31, 2004) based upon capitalization of the following
year's net operating income. This is based upon the premise that a
purchaser is buying the following year's net income. Therefore, our
analysis reflects this practice by capitalizing the first year of the
next holding period.
The present value was 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 was based on our
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 regional and super
regional mall sales.
Cash Flow Assumptions
Our cash flows forecasted for the mall have been presented. To
reiterate, the formulation of these cash flows incorporated into our
computer model the following general assumptions.
1) The pro forma is presented on a calendar year basis commencing
on January 1, 1995. The present value analysis is based on a
10 year holding period commencing from that date. This period
reflects 10 years of operations and follows an adequate time
for the property to proceed through an orderly lease-up and
continue to benefit from its on-going remerchandising. In this
regard, we have projected that the investment will be sold at
year end 2004.
2) Existing lease terms and conditions remain unmodified until
their expiration. At expiration, it has been assumed that
there is a 70 percent probability that the existing retail
tenants will renew their lease. Executed and high probability
pending leases have been assumed to be signed in accordance
with negotiated terms as of the date of valuation. Some
tenants have renewal options which are generally favorable. In
most instances we have assumed that options are exercised.
3) 1995 base date market rental rates for existing tenants have
been established according to tenant size with consideration
given to location within the mall, the specific merchandise
category, as well as the tenants sales history. Lease terms
throughout the total complex vary but for new in-line mall
tenants are generally 10 years with step-ups in the 4th and 8th
years. Upon renewal, it is assumed that new leases are also
written for 10 years with the same rent step schedule. An
exception exists in the instance where a tenant had been paying
percentage rent and is forecasted to continue to pay percentage
rent over the ensuing 10 year period. In these instances, we
have assumed that a flat lease will be written. Kiosk leases
are assumed to be written for 5 year terms with a 10 percent
increase in year 4.
4) Market rents have been established for 1995. Subsequently, it
is our assumption that market rental rates for mall tenants
will be flat in 1996 and then increase by 1 percent in 1997, 2
percent in 1998, 3 percent in 1999, and 3.5 percent per annum
on average thereafter over the investment holding period.
5) Most tenants have percentage rental clauses providing for the
payment of overage rent. We have relied upon sales data
through 1994 as provided by management. In our analysis, we
have forecasted that sales will decline by 1.5 percent in 1995
and then grow by 2 percent in 1997, 3 percent in 1998, and 3.5
percent per annum thereafter.
6) Expense recoveries are based upon terms specified in the
various lease contracts. As identified, due to the age of the
mall and its variety of components, there are a myriad of
reimbursement methods. The new standard lease contract for real
estate taxes, and common area maintenance billings for interior
mall tenants is based upon a tenants pro rata share with the
latter carrying an administrative surcharge of 15 percent.
Pro-rata share is calculated on leased (occupied) area as
opposed leasable area after deduction for the contributions of
department stores for these expense pools. Energy (HVAC) is
recoverable from Dayton's with a 15 percent administrative fee.
7) Income lost due to vacancy and non-payment of obligations has
been based upon our turnover probability assumption as well as
a global provision for credit loss. Upon the expiration of a
lease, there is 30 percent probability that the retail tenant
will vacate the suite. At this time we have forecasted that
rent loss equivalent to 6 months rent would be incurred to
account for the time associated with bringing the space back
on-line. In addition, we have forecasted an annual global
vacancy and credit loss ranging from 3.0 percent to 6.0 percent
of gross rental income. This global provision is applied to
all tenants excluding anchor department stores.
8) Operating expenses are generally forecasted to increase by 4
percent per year except for management which is based upon 4.5
percent of minimum and percentage revenues annually and taxes
which are forecasted to grow by 5 percent per year. Alteration
costs are assumed to escalate at our forecasted expense
inflation rate.
9) A provision for capital reserves initially equal to $.15 per
square foot of total owned GLA (mall shops) has been deducted.
An alteration charge of $10.00 per square foot rate to turnover
retail space with a $1.00 per square foot allowance for
rollover tenants. Raw space associated with the Carson's
Throat area has been allocated a $25.00 per square foot
workletter.
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 12.50 to 13.0
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 12.50 to 13.0 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 Brookdale Center appears below.
Brookdale Center
Valuation Matrix
________________
Terminal Rate 12.50% 12.75% 13.0%
______________________________________________________
9.50% $35,072,000 $34,406,000 $33,754,000
9.75% $34,573,000 $33,918,000 $33,277,000
10.00% $34,099,000 $33,454,000 $32,823,000
______________________________________________________
Through such a sensitivity analysis, it can be seen that the present
value of the subject property varies from approximately $32.8 to $35.1
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 of approximately 12.75 percent and a terminal rate of
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
$34,000,000 for the subject property. The indices of investment
generated through this indicated value conclusion are shown below.
Brookdale Center
Investment Indices
__________________
Equity Yield (IRR) 12.72%
Overall Capitalization Rate * 12.95%
Price/SF of Owned Mall Shop GLA $168.68
________________________________________________
* Based on net income of $4,401,723 for first year (calendar year
1995)
** Based on 201,561 square feet
_____________________________________________________________________
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 analysis, 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.
The sales displayed in our summary charts developed overall rates
ranging from 5.60 to 10.29 percent.
Generally, new construction and centers leased at economic rates tend
to sell for relatively high overall capitalization rates. Conversely,
centers that are older and contain below-market leases reflecting
leasing profiles with good upside potential tend to sell with lower
overall capitalization rates. The subject has, in our opinion, some
good upside potential through releasing and remerchandising. However,
there remains a threat from increased competition in view of the
dynamic nature of the MSA.
In view of all of the above, we would anticipate that at the subject
would trade at an overall rate of approximately 8.75 to 9.25 percent
applied to first year income. Applying these rates to first year net
operating income before reserves, alterations and other expenses for
the subject of $4,401,723 results in a value of approximately
$47,586,000 to $50,305,000.
From these indicated values, we must consider a deduction for capital
expenditures, asbestos removal, and significant building alterations
planned over the near-term at the property. As such, we have estimated
the present worth of these expenditures, discounting them back at the
property's discount rate of approximately 12.75 percent. The
discounting of these figures can be seen below.
Present Value of Capital Expenditures
_____________________________________
Year Expense Net Present Value
1995 $ 7,954,290 $ 7,054,803
1996 $ 928,267 $ 730,197
1997 $ 5,147,099 $ 3,590,979
1998 $ 242,277 $ 149,915
1999 $ 164,665 $ 90,369
Total $14,436,598 $11,616,263
__________________________________________
By deducting $11,620,000 from the previously calculated values, we see
a range for the subject property of approximately $35,970,000 to
$38,685,000. On balance, we would be inclined to conclude at a point
somewhere near the middle of the range presented. Based on the above,
the resulting net valuation via direct capitalization is shown to be
$37,000,000 as of January 1, 1995.
Application of the Sales Comparison Approach 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 $33,900,000 - $36,400,000
Income Approach
Direct Capitalization $37,000,000
Discounted Cash Flow $34,000,000
_____________________________________________________
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 judgement 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. This
is also particularly relevant in the estimation of value at
stabilization. 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 ability 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 steam that is over or understated this
error is compounded by the capitalization process. Nonetheless, real
estate of the subject's caliber is commonly purchased on a direct
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
methodologies. The ranges in value exhibited by the Income Approach
are consistent with the leasing profiles. Each 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, 1995, was:
THIRTY FIVE MILLION DOLLARS
$35,000,000
"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.
The Appraisal has been made subject to the following assumptions and
limiting conditions:
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. The physical condition of the improvements considered by the
Appraisal is based on visual inspection by the Appraiser or
other person identified in the Appraisal. C&W assumes no
responsibility for the soundness of structural members nor for
the condition of mechanical equipment, plumbing or electrical
components.
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.
12. If the Appraisal has been prepared for The Resolution Trust
Corporation ("RTC"), it may be distributed to parties
requesting a copy in accordance with RTC policy. However, as
to such parties, the Appraisal shall be deemed provided for
informational purposes only and such recipients shall not be
entitled to rely on the Appraisal for any purpose nor shall C&W
or the Appraisers have any liability to such recipients based
thereon.
CERTIFICATION OF APPRAISAL
We certify that, to the best of our knowledge and belief:
1. Richard W. Latella, MAI inspected the property. Jay F. Booth did not
inspect the property but provided significant assistance in the
preparation of the cash flows and the report.
2. The statements of fact contained in this report are true and correct.
3. The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions, and are our personal,
unbiased professional analyses, opinions, and conclusions.
4. We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
5. Our compensation is not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the amount
of the value estimate, the attainment of a stipulated result, or the
occurrence of a subsequent event. The appraisal assignment was not based on a
requested minimum valuation, a specific valuation or the approval of a loan.
6. No one provided significant professional assistance to the persons
signing this report.
7. Our analyses, opinions, and conclusions were developed, and this report
has been prepared, in conformity with the Uniform Standards of
Professional Appraisal Practice of the Appraisal Foundation and the
Code of Professional Ethics and the Standards of Professional Appraisal
Practice of the Appraisal Institute.
8. The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
9. As of the date of this report, Richard W. Latella has completed the
requirements of the continuing education program of the Appraisal
Institute.
Richard W. Latella, MAI Jay F. Booth
Senior Director Valuation Advisory Services
Retail Valuation Group
1995 ANNUAL BUDGET FOR BROOKDALE CENTER
ADDENDA
OPERATING EXPENSE BUDGET
TENANT SALES REPORT
PRO-JECT LEASE ABSTRACT REPORT
PRO-JECT PROJECT ASSUMPTIONS REPORT
PRO-JECT TENANT REGISTER REPORT
PRO-JECT LEASE EXPIRATION REPORT
EMDS FULL DATA REPORT
CUSHMAN & WAKEFIELD INVESTOR SURVEY
APPRAISERS' QUALIFICATIONS
PARTIAL CLIENT LIST
CUSHMAN & WAKEFIELD APPRAISAL SERVICES
NATIONAL INVESTOR SURVEY - FALL/WINTER 1994
Listed by subcategory (detail in original Summary Report)
OFFICES--URBAN, CLASS A
OFFICES-SUBURBAN
INDUSTRIAL
RETAIL CENTERS OTHER THAN MALLS
REGIONAL MALLS
APARTMENTS
LODGING
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
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, National Retail Valuation Services, Cushman & Wakefield
Appraisal Division. 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 150 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
American Institute of Real Estate Appraisers, Chicago, Illinois
Basic Appraisal Principles, Methods and Techniques - 1980
Capitalization Theory and Techniques Part I - 1981
Capitalization Theory and Techniques Part III - 1981
Case Studies in Real Estate Valuation - 1982
Valuation Analysis and Report Writing - 1982
Investment Analysis - 1983
Capitalization Theory and Techniques Part II - 1986
Standards of Professional Practice - 1987
State of New Jersey, Rutgers University
Appraisal Principles - 1979
Property Tax Administration - 1979
QUALIFICATIONS OF JAY F. BOOTH
GENERAL EXPERIENCE
Jay F. Booth joined Cushman & Wakefield, Inc. New York Appraisal
Services in August 1993. As an associate appraiser, Mr. Booth is
currently working with Cushman & Wakefield's National Retail Valuation
Services Group. Cushman & Wakefield, Inc. is a national full service
real estate organization.
Mr. Booth previously worked for two years at Appraisal Group, Inc. in
Portland, Oregon where he was an associate appraiser. He assisted in
the valuation of numerous properties, 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 (Candidate)
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,
C hina; Kookmin University,
University, Seoul,
South Korea; Tokyo
International, Tokyo,
Japan
APPRAISAL EDUCATION
SPP Standards of Professional Practice, Parts A & B Appraisal Institute 1992
1BB Capitalization Theory & Techniques, Part B Appraisal Institute 1992
1BA Capitalization Theory & Techniques, Part A Appraisal Institute 1992
1A1 Real Estate Appraisal Principles Appraisal Institute
1991 901 Engineering Plan Development & Application Intl.,
Right of Way 1991
PROFESSIONAL AFFILIATION
Candidate MAI, Appraisal Institute No. M930181
Appraiser Assistant, State of New York No. 48000024088
PARTIAL CLIENT LIST
THE APPRAISAL DIVISION
NEW YORK REGION
CUSHMAN &
WAKEFIELD
PROFESSIONALS ARE JUDGED BY THE CLIENTS THEY SERVE
The APPRAISAL DIVISION enjoys a long record of service in a confidential
capacity to nationally prominent individuals and corporate clients, investors,
and government agencies. We have also served many of the nations largest law
firms. Following is a partial list of clients served by members of the
APPRAISAL DIVISION - NEW YORK REGION.
Air Products and Chemicals, Inc.
Aldrich, Eastman & Waltch, Inc.
Allegheny-Ludlam Industries
AMB Institutional Realty Advisors
America First Company
American Bakeries Company
American Brands, Inc.
American District Telegraph Company
American Express
American Home Products Corporation
American Savings Bank
Apple Bank
Archdiocese of New York
Associated Transport
AT&T
Avatar Holdings Inc.
Avon Products, Inc.
Bachner, Tally, Polevoy, Misher & Brinberg
Baer, Marks, & Upham
Balcor Inc.
BancAmerica
Banca Commerciale Italiana
Banco de Brasil, N.A.
Banco Santander Puerto Rico
Banque Paribas
Baker & Mackenzie
Bank of America
Bank of Baltimore
Bank of China
Bank of Montreal
Bank of New York
Bank of Nova Scotia
Bank of Tokyo Trust Company
Bank Leumi Le-Israel
Bankers Life and Casualty Company
Bankers Trust Company
Barclays Bank International, Ltd.
Baruch College
Battery Park City Authority
Battle, Fowler, Esqs.
Bear Stearns
Berkshire
Betawest Properties
Bethlehem Steel Corporation
Bloomingdale Properties
Borden, Inc.
Bowery Savings Bank
Bowest Corporation
Brandt Organization
Brooklyn Hospital
Burke and Burke, Esqs.
Burmah-Castrol
Cadillac Fairview
Cadwalader, Wickersham & Taft
Caisse National DeCredit
Campeau Corporation
Campustar
Canadian Imperial Bank of Commerce
Canyon Ranch
Capital Bank
Capital Cities-ABC, Inc.
Care Incorporated
Carter, Ledyard & Milburn
Chase Manhattan Bank, N.A.
Chemical Bank Corporation
Chrysler Corporation
C. Itoh & Company
Citibank, NA
Citicorp Real Estate
City University of New York
Clayton, Williams & Sherwood
Coca Cola, Inc.
Cohen Brothers
College of Pharmaceutical Sciences
Columbia University
Commonwealth of Pennsylvania
Consolidated Asset Recovery Company
Continental Realty Credit, Inc.
Copley Real Estate Advisors
Corning Glass Works
Coudert Brothers
Covenant House
Cozen and O'Connor
Credit Agricole
Credit Lyonnais
Credit Suisse
Crivello Properties
CrossLand Savings Bank
Dai-Ichi Kangyo Bank
Dai-Ichi Sempei Life Insurance
Daily News, Inc.
Daiwa Securities
Dart Group Corporation
David Beardon & Company
Davidoff & Malito, Esqs
Dean Witter Realty
DeMatteis Organization
Den Norske Bank
Deutsche Bank
DiLorenzo Organization
Dime Savings Bank
Dodge Trucks, Inc.
Dollar/Dry Dock Savings Bank
Donovan, Leisure, Newton & Irvine
Dreyer & Traub
Dun and Bradstreet, Inc.
Eastdil Realty Advisors
East New York Savings Bank
East River Savings Bank
East Rutherford Industrial Park
Eastman Kodak Company
Eaton Corporation
Eichner Properties, Inc.
Ellenburg Capital Corporation
Emigrant Savings Bank
Empire Mutual Insurance Company
Equitable Life Assurance Society of America
Equitable Real Estate
Famolare, Inc.
Farwest Savings & Loan Association
Federal Asset Disposition Authority
Federal Deposit Insurance Company
Federal Express Corporation
Federated Department Stores, Inc.
Feldman Organization
Findlandia Center
First Boston
First Chicago
First National Bank of Chicago
First New York Bank for Business
First Tier Bank
First Winthrop
Fisher Brothers
Fleet/Norstar Savings Bank
Flying J, Inc.
Foley and Lardner, Esqs.
Ford Bacon and Davis, Inc.
Ford Foundation
Ford Motor Company
Forest City Enterprises
Forum Group, Inc.
Franchise Finance Corporation of America
Fried, Frank, Harris, Shriver & Jacobson
Friendly's Ice Cream Corporation
Fruehauf Trailer Corporation
Fuji Bank
Fulbright & Jaworski
G.E. Capital Corporation
General Electric Credit Corporation
General Motors Corporation
Gerald D. Hines Organization
Gibson Dunn and Crutcher
Gilman Paper
Gladstone Equities
Glimcher Company
Glynwed, Ltd.
Goldman, Sachs & Co.
Greater New York Savings Bank
Greycoat Real Estate Corp.
Greyhound Lines Inc.
Grid Properties
GTE Realty
Gulf Oil
<PAGE>
HDC
HRO International
Hammerson Properties
Hartz Mountain Industries
Hawaiian Trust Company, Ltd.
Hertz Corporation
Home Federal
Home Savings of America
HongKong & Shanghai Banking Corporation
Horn & Hardart
Huntington National Bank
Hypo Bank
IDC Corporation
Ideal Corporation
ING Corporation
International Business Machines Corporation
International Business Machines Pension Fund
International Telephone and Telegraph Corporation
Investors Diversified Services, Inc.
Iona College
Irish Intercontinental Bank
Irish Life Assurance
Israel Taub
J & W Seligman & Company, Inc.
JMB Realty
J. B. Brown and Sons
J. C. Penney Company, Inc.
J. P. Morgan
Jamaica Hospital
James Wolfenson & Company
Jerome Greene, Esq.
Jewish Board of Family & Children's Services
Jones Lang Wootton
K-Mart Corporation
Kelly, Drye and Warren, Esqs.
Kennedy Associates
Kerr-McGee Corporation
Kidder Peabody Realty Corp.
Knickerbocker Realty
Koeppel & Koeppel
Krupp Realty
Kutak, Rock and Campbell, Esqs.
Ladenburg, Thalman & Co.
Lans, Feinberg and Cohen, Esqs.
Lands Division, Department of Justice
Lazard Realty
LeBoeuf,
Lefrak Organization
Lehman Brothers
Lennar Partners
Lepercq Capital Corporation
Lincoln Savings Bank
Lion Advisors
Lomas & Nettleton Investors
London & Leeds
Long Term Credit Bank of Japan, Ltd.
Lutheran Church of America
Lynton, PLC
Macluan Capital Corporation
Macy's
MacAndrews and Forbes
Mahony Troast Construction Company
Manhattan Capital Partners
Manhattan College
Manhattan Life Insurance
Manhattan Real Estate Company
Manufacturers Hanover Trust Company
Marine Midland Bank
Mason Tenders
Massachusetts Mutual Life Insurance Company
May Centers, Inc.
Mayer, Brown, Platt
McDonald's Corporation
McGinn, Smith and Company
McGrath Services Corporation
MCI Telecommunications
Mellon Bank
Mendik Company
Mercedes-Benz of North America
Meridian Bank
Meritor Savings Bank
Merrill Lynch Hubbard
Merchants Bank
Metropolis Group
Metropolitan Life Insurance Company
Metropolitan Petroleum Corporation
Meyers Brothers Parking System Inc.
Michigan National Corp.
Milbank, Tweed
Miller, Montgomery, Sogi and Brady, Esqs.
Mitsui Fudosan - New York Inc.
Mitsui Leasing, USA
Mitsubishi Bank
Mitsubishi Trust & Banking Corporation
Mobil Oil Corporation
Moody's Investors Service
Morgan Guaranty
Morgan Hotel Group
Morse Shoe, Inc.
Moses & Singer
Mudge Rose Guthrie Alexander & Ferdon, Esqs.
Mutual Benefit Life
Mutual Insurance Company of New York
National Can Company
National CSS
National Westminster Bank, Ltd.
Nelson Freightways
Nestle's Inc.
New York Bus Company
New York City Division of Real Property
New York City Economic Development Corporation
New York City Housing Development Authority
New York City School Construction Authority
New York Life Insurance Company
New York State Common Fund
New York State Employee Retirement System
New York State Parks Department
New York State Urban Development Corporation
New York Telephone Company
New York Urban Servicing Company
New York Waterfront
Niagara Asset Corporation
Norcross, Inc.
North Carolina Department of Insurance
NYNEX Properties Company
Olympia and York, Inc.
Orient Overseas Associates
Orix USA Corporation
Otis Elevator Company
Owens-Illinois Corporation
PaineWebber, Inc.
Pan American World Airways, Inc.
Paul, Weiss, Rifkind
Park Tower Associates
Parke-Davis and Company
Paul Weiss Rifkind, Esqs.
Penn Central Corporation
Penn Mutual Life Insurance Company
Pennsylvania Retirement Fund
Penthouse International
Pepsi-Cola Company
Peter Sharp & Company
Petro Stopping Center
Pfizer International, Inc.
Philip Morris Companies, Inc.
Philips International
Phoenix Home Life
Pittston Company
Polyclinic Medical School and Hospital
Port Authority of New York and New Jersey
Procida Organization
Proskauer Rose Goetz and Mandelsohn, Esqs.
Provident Bank
Prudential Securities
Pyramid Company
Rabobank Nederland
Ratner Group
RCA Corporation
Real Estate Recovery
Realty Income Corporation
Republic Venezuela Comptrollers Office
Revlon, Inc.
Rice University
Richard Ellis
Richards & O'Neil
Ritz Towers Hotel Corporation
River Bank America
Robert Bosch Corporation
Rockefeller Center, Inc.
Roman Catholic Diocese of Brooklyn
Roosevelt Hospital
Rosenman & Colin
RREEF
Rudin Management Co., Inc.
Saint Vincent's Medical Center of New York
Salomon Brothers Inc.
Salvation Army
Sanwa Bank
SaraKreek USA
Saxon Paper Corporation
Schroder Real Estate Associates
Schulman Realty Group
Schulte, Roth & Zabel
BDO Seidman
Seaman Furniture Company, Inc.
Security Pacific Bank
Semperit of America
Sentinel Realty Advisors
Service America Corp.
Shea & Gould, Esqs.
Shearman and Sterling, Esqs.
Shearson Lehman American Express
Shidler Group
Sidley & Austin
Silver Screen Management, Inc.
Silverstein Properties, Inc.
Simpson, Thacher and Bartlett, Esqs.
Skadden, Arps, Slate, Meagher & Flom
Smith Barney
Smith Corona Corporation
Sol Goldman
Solomon Equities
Sonnenblick-Goldman
Southtrust Bank of Alabama
Spitzer & Feldman, PC
Stahl Real Estate
Standard & Poors
State Teachers Retirement System of New York
State Teachers Retirement System of Ohio
Stauffer Chemical Corporation
Stephens College
Sterling Drug, Inc.
Stroheim and Roman, Inc.
Stroock and Stroock and Lavan, Esqs.
Sullivan and Cromwell, Esqs.
Sumitomo Life Realty
Sumitomo Mutual Life Insurance Company
Sumitomo Trust Bank
Sun Oil Company
Sutherland, Asbill & Brennan
Swiss Bank Corporation
Tenzer Greenblat, Esqs.
Textron Financial
The Shopco Group
Tobishima Associates
Tokyo Trust & Banking Corporation
Transworld Equities
Travelers Realty, Inc.
Triangle Industries
TriNet Corporation
<PAGE>
UBS Securities Inc.
UMB Bank & Trust Company
Union Bank of Switzerland
Union Carbide Corporation
Union Chelsea National Bank
United Bank of Kuwait
United Fire Fighters of New York
United Parcel Service
United Refrigerated
United States District Court, Southern District of New York
United States Life Insurance
United States Postal Service
United States Trust Company
Upward Fund, Inc.
US Cable Corp.
Vanity Fair Corporation
Verex Assurance, Inc.
Victor Palmieri and Company, Inc.
Village Bank
Vornado Realty Trust
W.P. Carey & Company, Inc.
Wachtell, Lipton, Rosen & Katz, Esqs.
Weil, Gotshal & Manges
Weiss, Peck & Greer
Wells Fargo & Co.
Westpac Banking Corporation
Western Electric Company
Western Union International
Westinghouse Electric Corporation
White & Case
Wilkie Farr and Gallagher, Esqs.
William Kaufman Organization
Windels, Marx, Davies & Ives
Winthrop Simston Putnam & Roberts
Wurlitzer Company
Yarmouth Group
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 6,693,502
<SECURITIES> 0
<RECEIVABLES> 367,556
<ALLOWANCES> (95,229)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 35,072,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 42,302,110
<CURRENT-LIABILITIES> 0
<BONDS> 33,652,305
<COMMON> 0
0
0
<OTHER-SE> 6,722,787
<TOTAL-LIABILITY-AND-EQUITY> 42,302,110
<SALES> 0
<TOTAL-REVENUES> 12,694,818
<CGS> 0
<TOTAL-COSTS> 6,416,550
<OTHER-EXPENSES> 3,241,636
<LOSS-PROVISION> 9,068,553
<INTEREST-EXPENSE> 6,145,897
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,567,268)
<EPS-PRIMARY> (.79)
<EPS-DILUTED> 0
</TABLE>
