United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended March 31, 1996
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from ______ to ______
Commission File Number: 1-9331
MIDWEST REAL ESTATE SHOPPING CENTER L.P.
Exact Name of Registrant as Specified in its Charter
Delaware 13-3384643
State or Other Jurisdiction of I.R.S. Employer Identification No.
Incorporation or Organization
3 World Financial Center, 29th Floor,
New York, NY Attn: Andre Anderson 10285
Address of Principal Executive Offices Zip Code
(212) 526-3237
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
Balance Sheets At March 31, At December 31,
1996 1995
Assets
Property held for disposition $ 24,500,000 $ 24,500,000
Cash and cash equivalents 5,857,086 5,971,023
Restricted cash 1,819,579 1,012,296
Accounts receivable, net of
allowance of $227,500 in 1996 and
$174,600 in 1995 465,839 537,561
Deferred rent receivable 123,093 112,931
Due from affiliates, net 123,270 115,062
Prepaid assets 37,043 92,607
Total Assets $ 32,925,910 $ 32,341,480
Liabilities and Partners' Deficit
Liabilities:
Accounts payable and accrued
expenses $ 1,077,337 $ 623,499
Zero coupon mortgage note payable 39,009,945 38,028,587
Total Liabilities 40,087,282 38,652,086
Partners' Deficit:
General Partner (119,778) (111,270)
Limited Partners (10,700,000
securities outstanding) (7,041,594) (6,199,336)
Total Partners' Deficit (7,161,372) (6,310,606)
Total Liabilities and
Partners' Deficit $ 32,925,910 $ 32,341,480
Statement of Partners' Deficit
For the three months ended March 31, 1996
Limited General
Partners Partner Total
Balance at December 31, 1995 $ (6,199,336) $ (111,270) $ (6,310,606)
Net loss (842,258) (8,508) (850,766)
Balance at March 31, 1996 $ (7,041,594) $ (119,778) $ (7,161,372)
Statements of Operations
For the three months ended March 31, 1996 1995
Income
Rental income $ 1,126,903 $ 1,154,032
Escalation income 1,223,013 1,397,889
Interest income 100,318 98,389
Miscellaneous income 73,474 318,527
Total Income 2,523,708 2,968,837
Expenses
Property operating expenses 674,596 682,099
Real estate taxes 617,700 772,358
Interest expense 1,806,358 858,134
Depreciation and amortization -- 295,177
General and administrative 58,318 77,331
Management fee 53,785 51,918
Professional fees 163,717 27,239
Total Expenses 3,374,474 2,764,256
Net Income (Loss) $ (850,766) $ 204,581
Net Income (Loss) Allocated:
To the General Partner $ (8,508) $ 2,046
To the Limited Partners (842,258) 202,535
$ (850,766) $ 204,581
Per limited partnership unit
(10,700,000 outstanding) $ (.08) $ .02
Statements of Cash Flows
For the three months ended March 31, 1996 1995
Cash Flows From Operating Activities:
Net income (loss) $ (850,766) $ 204,581
Adjustments to reconcile net income
(loss) to net cash provided by (used for)
operating activities:
Depreciation and amortization -- 295,177
Increase in interest on zero coupon
mortgage note payable 981,358 858,134
Increase (decrease) in cash arising
from changes in operating assets and
liabilities:
Restricted cash (807,283) --
Accounts receivable 71,722 14,508
Deferred rent receivable (10,162) (10,344)
Due from affiliates, net (8,208) (31,067)
Prepaid assets 55,564 51,216
Accounts payable and accrued expenses 453,838 855,958
Net cash provided by (used for)
operating activities (113,937) 2,238,163
Cash Flows From Investing Activities:
Additions to real estate -- (419,307)
Net cash used for investing activities -- (419,307)
Cash Flows From Financing Activities:
Distributions paid -- (756,565)
Net cash used for financing activities -- (756,565)
Net increase (decrease) in cash and
cash equivalents (113,937) 1,062,291
Cash and cash equivalents, beginning
of period 5,971,023 6,693,502
Cash and cash equivalents, end
of period $ 5,857,086 $ 7,755,793
Supplemental Disclosure of Cash
Flow Information:
Cash paid during the period for interest $ 825,000 $ --
Notes to the Financial Statements
The unaudited financial statements should be read in conjunction with the
Partnership's annual 1995 audited financial statements within Form 10-K.
The unaudited financial statements include all adjustments which are, in the
opinion of management, necessary to present a fair statement of financial
position as of March 31, 1996 and the results of operations and cash flows for
the three months ended March 31, 1996 and 1995 and the statement of partner's
deficit for the three months ended March 31, 1996. Results of operations for
the periods are not necessarily indicative of the results to be expected for
the full year.
Certain prior year amounts have been reclassified in order to conform to the
current year's presentation.
The following significant event has occurred subsequent to fiscal year 1995,
which requires disclosure in this interim report per Regulation S-X, Rule
10-01, Paragraph (a)(5).
On April 18, 1996, the Partnership announced that the Equitable Life Assurance
Society of the United States ("Equitable"), the holder of a mortgage note
secured by the Partnership's principal asset, Brookdale Center ("Brookdale"), a
regional shopping mall located in Brooklyn Center (Hennepin County), Minnesota,
agreed to postpone the date of the previously announced foreclosure sale of the
property until May 24, 1996 at the earliest. The Partnership and Equitable
have also executed a letter of intent that outlines the principle terms of a
proposed loan work-out relating to Brookdale and, if necessary, a plan of
reorganization for the Partnership under Chapter 11 of the Bankruptcy Code that
would be supported by Equitable.
The proposed terms contemplate that while the Mortgage would remain in default,
the Partnership would seek to market Brookdale to a third-party buyer. In the
event no acceptable third-party offer is received by November 15, 1996, or a
third party fails to close the acquisition by December 1, 1996, both the
Partnership and Equitable would have the right to transfer ownership of
Brookdale to Equitable and Equitable's participant, EML Associates ("EML"), for
a $500,000 cash purchase price. Equitable and EML would also be granted certain
limited rights of first refusal to acquire Brookdale. The net sales proceeds
from a third-party buyer, after costs of the sale and amounts owed to Equitable
under any debtor-in-possession financing, would be split as follows: first, up
to $750,000 to the Partnership and $30 million to Equitable on a pari passu
basis, then 50/50 on any additional net sales proceeds up to the next $6
million, with the balance, if any, to the Partnership. The Partnership does
not expect that the net sales proceeds from a third-party buyer, after costs of
the sale and payment of amounts owed to Equitable, will be material to the
Partnership.
Under the Chapter 11 arrangements as contemplated by the agreement, pending
sale, all available cash flow from Brookdale (after payment of property
expenses and administrative costs associated with the bankruptcy) will be paid
to Equitable. Equitable will fund necessary capital and leasing costs pursuant
to a super-priority, non-recourse, debtor-in-possession loan by Equitable
payable upon the disposition of Brookdale.
The contemplated arrangements are subject to the execution of a definitive
agreement, certain conditions precedent, the approval of the Board of Directors
of the Partnership's General Partner, the approval of Equitable's Investment
Committee and the approval of EML and its partners. There can be no assurance
that any definitive agreement will be reached.
Part 1, Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The General Partner has been attempting to sell the Partnership's remaining
property, Brookdale Center (the "Property" or "Brookdale"), and pay off the
Mortgage, which is held by The Equitable Life Assurance Society of the United
States ("Equitable") and secured by the Property. The General Partner was
unable to consummate a sale of the Property and repay the Mortgage prior to
June 30, 1995, the maturity date of the Mortgage. As a result, on July 5,
1995, Equitable issued a notice of default to the Partnership and commenced
advertising Brookdale for a public nonjudicial foreclosure sale to be held on
September 12, 1995. Such date was subsequently postponed on several occasions.
On April 12, 1996, Equitable agreed to postpone the date of the previously
announced foreclosure sale of the property until May 24, 1996 at the earliest.
In addition, the Partnership and Equitable executed a letter of intent that
outlines, as described below, the principle terms of a proposed loan work-out
relating to Brookdale and, if necessary, a plan of reorganization for the
Partnership under Chapter 11 of the Bankruptcy Code that would be supported by
Equitable.
The proposed terms contemplate that while the Mortgage would remain in default,
the Partnership would seek to market Brookdale to a third-party buyer. In the
event no acceptable third-party offer is received by November 15, 1996, or a
third party fails to close the acquisition by December 1, 1996, both the
Partnership and Equitable would have the right to transfer ownership of
Brookdale to Equitable and Equitable's participant, EML Associates ("EML"), for
a $500,000 cash purchase price. Equitable and EML would also be granted certain
limited rights of first refusal to acquire Brookdale. The net sales proceeds
from a third-party buyer, after costs of the sale and amounts owed to Equitable
under any debtor-in-possession financing, would be split as follows: first, up
to $750,000 to the Partnership and $30 million to Equitable on a pari passu
basis, then 50/50 on any additional net sales proceeds up to the next $6
million, with the balance, if any, to the Partnership. The Partnership does
not expect that the net sales proceeds from a third-party buyer, after costs of
the sale and payment of amounts owed to Equitable, will be material to the
Partnership. Under the Chapter 11 arrangements as contemplated by the
agreement, pending sale, all available cash flow from Brookdale (after payment
of property expenses and administrative costs associated with the bankruptcy)
will be paid to Equitable. Equitable will fund necessary capital and leasing
costs pursuant to a super-priority, non-recourse, debtor-in-possession loan by
Equitable payable upon the disposition of Brookdale.The contemplated
arrangements are subject to the execution of a definitive agreement, certain
conditions precedent, the approval of the Board of Directors of the
Partnership's General Partner, the approval of Equitable's Investment Committee
and the approval of EML and its partners.
Since August 2, 1995, General Growth Management, Inc. ("General Growth"), the
current property manager, has acted as the receiver of Brookdale as appointed
by the Minnesota District Court. In such capacity, General Growth collects the
rent proceeds from Brookdale's tenants and applies the proceeds to payments of,
among other things, Brookdale's operating expenses, maintenance costs, real
estate taxes, tenant improvements and leasing commissions, with any remaining
funds to be paid to Equitable for interest due under the Mortgage. From the
date of receivership through March 31, 1996, the net cash flow generated by
Brookdale was not available to the Partnership and is reflected on the
Partnership's balance sheet as restricted cash. During December 1995, $700,000
was forwarded to Equitable and applied to the Mortgage under the terms of the
receivership. In addition, during the first quarter of 1996, an additional
$825,000 was forwarded to Equitable, under the terms of the receivership, and
applied to the Mortgage. The increase in restricted cash from December 31,
1995 to March 31, 1996 is attributable to cash flow generated by Brookdale
partially offset by the $825,000 payment made to Equitable. Debt service
shortfalls, if any, may be advanced by Equitable and added to the principal
amount of the Mortgage. General Growth is being paid a receiver's fee equal to
4.45% of all fixed minimum rents and percentage or overage rents collected, the
same fee it received in its role as property manager. Should the Partnership
and Equitable execute a definitive agreement which includes a plan of
reorganization under Chapter 11 bankruptcy protection, the terms of such
agreement would supersede the terms of the existing court-appointed
receivership.
In an effort to facilitate the sale of Brookdale, the General Partner has
retained Jones Lang Wootton, an international real estate sales and advisory
firm with extensive experience in marketing large assets to the investment
community. We are hopeful that their efforts will result in an acceptable
offer to buy Brookdale. However, the serious difficulties facing the retail
industry, as well as other industry trends, are adversely impacting both sales
opportunities and market values for malls such as Brookdale.
As of the filing date of this report, the following tenants, or their parent
corporations, at the Mall have filed for protection under the U.S. Federal
Bankruptcy Code.
Tenant Square Footage Leased
Stuarts 8,069
J Riggings 2,815
Mr. Bulky 1,566
JW 1,410
Merry Go `Round* 3,378
* vacated in April 1996
These tenants occupy 17,238 square feet, or approximately 8.6% of Brookdale's
leasable area (exclusive of anchor tenants), and at this time their plans to
remain at Brookdale remain uncertain. Pursuant to the provisions of the U.S.
Federal Bankruptcy Code, these tenants may, with court approval, choose to
reject or accept the terms of their leases. Should any of these tenants
exercise the right to reject their leases, this could have an adverse impact on
cash flow generated by Brookdale and revenues received by the Partnership and
the Partnership's negotiations with Equitable with respect to the default on
the Mortgage.
At March 31, 1996, the Partnership had unrestricted cash totaling $5,857,086
compared to $5,971,023 at December 31, 1995. The decrease is due to
expenditures for Partnership operations and the absence of cash flow from
Brookdale being paid to the Partnership, due to the appointment of a receiver
on August 2, 1995 as described above.
Accounts receivable decreased from $537,561 at December 31, 1995 to $465,839 at
March 31, 1996. The decrease reflects the receipt of payments from tenants for
real estate taxes and an increase in the allowance for bad debt expense related
to one Brookdale tenant.
Prepaid assets decreased from $92,607 at December 31, 1995 to $37,043 at March
31, 1996 primarily due to the timing and recognition of payments for prepaid
insurance.
Accounts payable and accrued expenses increased from $623,499 at December 31,
1995 to $1,077,337 at March 31, 1996. The increase is due to the accrual for
1996 real estate taxes for Brookdale, partially offset by payments made for
prior year payables.
Zero coupon mortgage note payable increased from $38,028,587 at December 31,
1995 to $39,009,945 at March 31, 1996 due to the accrual of interest on the
Mortgage which matured on June 30, 1995. Pursuant to its terms, the Mortgage
accrues interest at a default rate of 19% per annum commencing July 1, 1995.
See "Liquidity and Capital Resources" above for a discussion of the default.
Dayton's land and building are owned by 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. Dayton's has not informed the Partnership of any
intention to leave the Mall when its operating covenant expires.
Results of Operations
Cash used for operating activities totaled ($113,937) for the period ended
March 31, 1996 compared to cash provided by operating activities of $2,238,163
for the same period in 1995. The reduced cash flow is primarily due to the
paying of all net cash flow from Brookdale to Equitable, which commenced on
August 2, 1995 (see "Liquidity and Capital Resources" above).
The Partnership recognized a net loss of $850,766 for the period ended March
31, 1996 compared to net income of $204,581 for the same period during 1995.
The change from net income to net loss is primarily due to increased interest
expense on the Mortgage.
Escalation income totaled $1,223,013 for the period ended March 31, 1996
compared to $1,397,889 for the same period in 1995. The decrease is primarily
due to lower recoverable real estate tax income.
Miscellaneous income totaled $73,474 for the three months ended March 31, 1996
compared to $318,527 during the same period in 1995. Miscellaneous income
during the 1995 period primarily consisted of lease buyout settlements for two
Brookdale tenants totaling $314,000, whereas the balance for the 1996 period
primarily consisted of a lease settlement for one Brookdale tenant totaling
$60,000.
Total expenses for the period ended March 31, 1996 totaled $3,374,474 compared
to $2,764,256 for the same period in 1995. The increase reflects increases in
interest expense and professional fees, partially offset by a decrease in
depreciation and amortization and real estate taxes. Real estate taxes for the
three months ended March 31, 1996 totaled $617,700 compared to $772,358 during
the same period in 1995. The decrease is due to a decrease in the assessed
value of Brookdale.
Interest expense for the three months ended March 31, 1996 totaled $1,806,358
compared to $858,134 during the same period in 1995. The increase is primarily
due to the accrual of higher interest on the Mortgage, which is accruing at a
default rate of 19% as described above.
Depreciation and amortization for the period ended March 31, 1996 totaled $0
compared to $295,177 for the same period in 1995. Effective January 1, 1996,
the Partnership's assets are no longer depreciable due to the adoption of
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of,"
which requires the carrying amount of assets held for disposition to be fair
value less costs to sell. Additionally, depreciation and/or amortization
should not be recorded during the period in which assets are being held for
disposition.
Professional fees for the period ended March 31, 1996 totaled $163,717 compared
to $27,239 for the corresponding period in 1995. The increase is primarily due
to higher legal and other professional fees in relation to the situation
surrounding the Mortgage as described under "Liquidity and Capital Resources"
above.
Sales for tenants (exclusive of anchor tenants) who operated at Brookdale for
each of the last two years were approximately $4,593,200 and $4,564,100 for the
two months ended February 29, 1996 and February 28, 1995, respectively. Total
tenant sales (exclusive of anchor tenants) were approximately $5,011,000 and
$4,961,000 for the two months ended February 29, 1996 and February 28, 1995,
respectively. As of March 31, 1996, Brookdale was 73% occupied (exclusive of
anchor and outparcel stores), compared with 78% at March 31, 1995.
Part II Other Information
Items 1-5 Not applicable.
Item 6 Exhibits and reports on Form 8-K.
(a) Exhibits -
(27) Financial Data Schedule
(99) Limited Appraisal of Real Property for
Brookdale Center as of January 1, 1996, as
prepared by Cushman & Wakefield, Inc.
(b) Reports on Form 8-K - No reports on Form 8-K were
filed during the quarter ended March 31, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MIDWEST REAL ESTATE SHOPPING CENTER, L.P.
BY: MIDWEST CENTERS INC.
General Partner
Date: May 15, 1996 BY: /s/ Paul L. Abbott
Director, President and
Chairman of the Board
Date: May 15, 1996 BY: /s/ Robert J. Hellman
Director, Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Mar-31-1996
<CASH> 7,676,665
<SECURITIES> 0
<RECEIVABLES> 816,432
<ALLOWANCES> (227,500)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 24,500,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,925,910
<CURRENT-LIABILITIES> 1,077,337
<BONDS> 39,009,945
<COMMON> 0
0
0
<OTHER-SE> (7,161,372)
<TOTAL-LIABILITY-AND-EQUITY> 32,925,910
<SALES> 0
<TOTAL-REVENUES> 2,523,708
<CGS> 0
<TOTAL-COSTS> 1,346,081
<OTHER-EXPENSES> 222,035
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,806,358
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (850,766)
<EPS-PRIMARY> $(.08)
<EPS-DILUTED> 0
</TABLE>
COMPLETE 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, 1996
Equitable Real Estate Shopping Centers L.P.
3 World Financial Center, 29th Floor
New York, New York 10013
Cushman & Wakefield, Inc.
Advisory Services
51 West 52nd Street, 9th Floor
New York, NY 10019
March 4, 1996
Equitable Real Estate Shopping Centers L.P.
3 World Financial Center, 29th Floor
New York, New York 10013
Re: Complete 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.
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 Brian J. Booth.
Richard W. Latella, MAI has reviewed and approved the report.
This is a Summary Appraisal Report which is intended to comply with the
reporting requirements set forth under Standards Rule 2- 2)b) of the Uniform
Standards of Professional Appraisal Practice for a Summary Appraisal Report.
As such, it presents only summary discussions of the data, reasoning, and
analyses that were used in the appraisal process to develop the appraiser's
opinion of value. Supporting documentation concerning the data, reasoning,
and analyses is retained in the appraiser's file. The depth of discussion
contained in this report is specific to the needs of the client and for the
intended use stated below. The appraiser is not responsible for unauthorized
use of this report. We are providing this report as an update to our last
analysis which was prepared as of January 1, 1995. As such, we have
primarily reported only changes to the property and its environs over the past
year.
As a result of our analysis, we have formed an opinion that the market value of
the leased fee estate in the referenced property, subject to the assumptions,
limiting conditions, certifications, and definitions, as of January 1, 1996,
was:
TWENTY FIVE MILLION DOLLARS
$25,000,000
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.
Brian J. Booth
Retail Valuation Group
Richard W. Latella, MAI
Senior Director
Retail Valuation Group
Certified General Real Estate Appraiser License No. 20026517
BJB:RWL:emf
C&W File No. 96-9039
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, 1996
Date of Inspection: January 19, 1996
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
Carson's to Mervyn's 1995
Type of Construction: Steel frame and masonry exterior
facility.
GLA Summary *
Owned GLA
Mall Shops 194,756 SF
Kiosks 5,166 SF
Total Owned Mall GLA 199,922 SF
Non-Owned Anchor Store Space
Sears 180,669 SF
Dayton's 195,368 SF
Mervyn's 140,336 SF
JC Penney ** 140,320 SF
Kohl's ** 75,000 SF
Anchor Owned TBA Stores 40,604 SF
Midas Muffler *** 8,254 SF
Total Anchor Area 780,551 SF
Total Occupancy Area 980,473 SF
* Primary space only (excludes secondary storage space).
** The land under the JC Penney and Kohl's is owned by the
partnership and leased to anchors.
*** Outparcel
Operating Data and Forecasts
Current Vacant Space 46,154 square feet
Current Occupancy Level 77% based on mall GLA; 93.7% overall.
Forecasted Stabilized Occupancy
(Mall Shops): 94% (exclusive of downtime provisions)
Forecasted Date of Stabilized
Occupancy: January 1, 2000
1996 Operating Expenses:
(Budget): $5,656,300
(Appraisers' Forecast): $5,333,399
Value Indicators
Cost Approach: N/A
Sales Comparison Approach: $24,800,000 - $28,800,000
Income Approach
Discounted Cash Flow: $25,000,000
Investment Assumptions
Rental Growth Rate: 1996-1998 Flat
1999 +1.5%
2000 +2.0%
2001-2005 +2.5%
Expense Growth Rate (General): 1996-2005 +3.5%
Tax Growth Rate: 1996-2005 +4.0%
Sales Growth Rate: 1996 -2.0%
1997 Flat
1998 +1.0%
1999 +2.0%
Other Income 2000-2005 +2.5%
Tenant Improvement Allowance
Raw Space: $40.00/SF
Currently Vacant
(Second Generation Space): $15.00/SF
Future Turnover Space: $10.00/SF
Renewing Tenants: $ 1.00/SF
Vacancy between Tenants: 6 months
Renewal Probability: 70%
Terminal Overall Rate: 11.25%
Cost of Sale at Reversion: 2.0%
Discount Rate: 13.50%
Value Conclusion: $25,000,000
Exposure Time Implicit in Value
Conclusion: Not more than 12 months
Resulting Indicators
Going-In Overall Rate: 17.61%
Price Per Square Foot of
Owned GLA: $125.05
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.
Special Assumptions (cont'd.)
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. TABLE OF CONTENTS
Page
PHOTOGRAPHS OF SUBJECT PROPERTY 1
INTRODUCTION 4
Identification of Property 4
Property Ownership and Recent History 4
Purpose and Function of the Appraisal 5
Extent of the Appraisal Process 5
Date of Value and Property Inspection 5
Property Rights Appraised 5
Definitions of Value, Interest Appraised, and Other Pertinent
Terms 6
Legal Description 7
REGIONAL ANALYSIS 8
NEIGHBORHOOD ANALYSIS 15
RETAIL MARKET ANALYSIS 16
THE SUBJECT PROPERTY 28
REAL PROPERTY TAXES AND ASSESSMENTS 30
ZONING 31
HIGHEST AND BEST USE 32
VALUATION PROCESS 33
SALES COMPARISON APPROACH 34
INCOME APPROACH 51
RECONCILIATION AND FINAL VALUE ESTIMATE 87
ASSUMPTIONS AND LIMITING CONDITIONS 89
CERTIFICATION OF APPRAISAL 91
ADDENDA 92
PHOTOGRAPH SHOWING VIEW OF CENTRAL MALL AREA
PHOTOGRAPH LOOKING AT THE NEW SEARS ENTRANCE FACING THE CENTRAL MALL
PHOTOGRAPH SHOWING VIEW OF THE ENTRANCE TO DAYTON'S
PHOTOGRAPH LOOKING AT THE MERVYN'S THROAT AREA
PHOTOGRAPH OF A TYPICAL IN-LINE TENANT
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 980,473 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 (then Carson Pirie Scott, now
Mervyn's) was constructed as Brookdale became the nation's first enclosed four
anchor mall. 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 average 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. Based on mall shop GLA, Brookdale Mall is
currently about 77 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.
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. Dayton Hudson has acquired
the Carson Pirie Scott store. It was converted to a Mervyn's store during
the spring of 1995.
We are also advised that ownership has been marketing the property for
some time. We are not aware of any serious offers to purchase the property at
this writing.
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, 1996. Our analysis
reflects conditions prevailing as of that date. Our last appraisal was
completed on January 1, 1995 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 Ronald Thomas,
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 1996 including the budget for planned capital
expenditures and repairs.
- Conducted market research of occupancies, asking rents,
concessions and operating expenses at competing retail properties
including interviews with on-site managers and a review of our own
data base from previous appraisal files.
- Prepared 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 a Sales Comparison and Income Approach to value, and
reconciled to a final conclusion of value.
Date of Value and Property Inspection
On January 22, 1996 Brian J. Booth inspected the subject property and its
environs. Richard W. Latella, MAI did not inspect the property but provided
significant assistance in the preparation of the report and the cash flows
and has reviewed and approved the report.
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 OF GREATER MINNEAPOLIS AREA
REGIONAL ANALYSIS
-------------------
Introduction
The regional analysis section evaluates general demographic and economic
trends in the property's county and MSA 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
Annual % Annual %
Estimated Change Projected Change
County 1980 1994 1980-1994 2000 1994-2000
Hennepin 941,411 1,052,800 0.75% 1,109,820 1.06%
Anoka 195,998 273,600 2.25% 285,190 0.83%
Carver 37,046 57,500 2.97% 62,920 1.82%
Dakota 194,279 310,600 3.18% 346,130 2.19%
Ramsey 459,784 482,700 0.32% 504,110 0.87%
Scott 43,784 68,800 3.06% 77,410 2.39%
Washington 113,571 177,300 3.01% 180,180 0.32%
Total 1,985,873 2,423,300 1.34% 2,565,760 1.15%
Source: U.S. Census and estimates of the Metropolitan Council
The population of the metropolitan area increased by a simple average annual
rate of 1.3 percent between 1980 and 1994. 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 1994. 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 1994 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 1994 2000* 2010*
Hennepin: 47% 43% 43% 42%
Anoka 10% 11% 11% 11%
Carver 2% 2% 2% 3%
Dakota 10% 13% 13% 14%
Ramsey 23% 20% 20% 19%
Scott 2% 30% 3% 3%
Washington 6% 7% 7% 8%
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 1994. Their share of the population is expected to
increase to 39 percent by the year 2010.
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
dependent 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 1995.
TABLE C
Nonagricultural Wage and Salary Employment
Eleven County Area: 1994 Annual Averages
Industry Group 1993 % of Total 1994 % Change 1993-94
Manufacturing 270,200 18.0% 265,500 +1.8%
Construction 51,800 3.4% 49,000 +5.7%
TCU* 82,800 5.5% 78,500 +4.5%
Trade 356,800 23.7% 343,400 +3.9%
FIRE 111,000 7.4% 107,100 +3.6%
Services 423,100 28.2% 405,600 +4.3%
Government 207,900 13.8% 201,200 +3.3%
Total 1,502,800 100% 1,450,300 +3.6%
* 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 1994.
The greatest improvements were predictably in the services and trade
industries which, combined, employed 51.9 percent of the labor market in 1994.
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
1994. Employment growth during this time period generated 184,150 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.
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 1994 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 For 1995, the
region's unemployment rate was reported at 2.7 percent, well below the U.S.
average rate of 5.5 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%
1994 3.3% 5.6%
1995 2.7% 5.5%
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 1994 median household Effective Buying
Income (EBI) of $44,377 ranked 29th among the nation's largest 316
metropolitan statistical areas, according to Sales and Marketing
Management's 1995 Survey of Buying Power. The median EBI for the top 316
MSAs in 1994 was $39,443. For the State of Minnesota, the comparable number
was $38,076.
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
1989-1994
Year $10,000 to $20,000 to $35,000 to $50,000 and
$19,999 $34,999 $46,999 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%
1994 11.0% 19.4% 20.6% 42.3%
Source: Sales and Marketing Management's Survey of Buying Power, 1990-1995
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 1995
Minneapolis MSA State of Minnesota
Average Hosehold Income $55,212 $46,744
Median Household Income $43,571 $35,657
Per Capita Income $21,834 $18,579
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
Gutherie 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 Children's
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.
We are advised that negative press as of late citing changing demographics,
deterioration of the immediate area and safety issues has impacted
consumer's 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
-------------------------
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 of the trade area. This potential is commonly
referred to as inflow.
In areas that are benefited 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 National 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 (1995), 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
Property Developer/ Location Year GLA Anchors From
Owner Built (sq.ft.) Subject
Northtown Mall Angeles Blaine, 1972 800,000 Carson 8-10
Highway 10 & Corp. MN Pirie Scott miles
University Avenue 0 Kohl's north
Montgomery 15+/-min.
Ward Woolworth
Ridgedale Shopping Ridgedale Minnetonka, 1975 1,042,100 Carson 10 miles
Center Joint MN Pirie Scott southwest
Highway 12 & Venture Dayton's 15+min.
Plymouth Road JC Penney
Sears
Rosedale Shopping Equitable Roseville, 1969 1,400,000 Carson 10 miles
Center Real MN Pirie Scott east
Highway 36 & Estate Dayton's 15+/-min.
Fairview Investment JC Penney
Managers Montgomery
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 General Growth (formerly 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 Osseo
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
TABLE ILLUSTRATING DEMOGRAPHIC STATISTICS IN BROOKDALE
MALL'S TRADE AREA, MINNEAPOLIS MSA AND STATE OF MINNESOTA
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.
Between 1980 and 1995, ENDS reports that the population within the total
trade area increased by 112,764 residents to 589,608 reflecting a 23.65
percent increase or 1.43 percent per annum. Through 2000, the trade area is
expected to continue to increase to 619,379 residents which is equal to an
additional 5.05 percent increase or 0.99 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 1.43
percent and 1.04 percent per annum for the respective periods of 1980 through
1995 and 1995 through 2000.
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.
According to ENDS, the total trade area gained 57,402 households
between 1980 and 1995, an increase of 34.68 percent or 1.98 per annum.
Between 1995 and 2000 the area is expected to grow, but at a slower pace of
1.51 percent per year. We see that the secondary area is growing slightly
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 1995, it is
estimated to have decreased to 2.64.
MAP ILLUSTRATING PROJECTED POPULATION GROWTH FROM 1995 - 2000
IN BROOKDALE CENTER'S TRADE AREA
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 $52,716.
A comparison to the Minneapolis MSA is shown below:
Average Household Income Comparison
Primary Total Minneapolis
Area Area MSA
Average Hosehold Income $52,716 $51,753 $55,212
Median Household Income $43,712 $43,294 $43,571
Per Capita Income $20,063 $19,787 $21,834
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.
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
5.7 percent between 1985 and 1994. This was greater than the State of
Minnesota's composite growth over the same period of 5.0 percent.
Retail Sales
State of Minnesota/ Hennepin
Year Minnesota St. Paul County
MSA
1985 $27,241,195 $16,187,101 $8,255,326
1986 $28,044,123 $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
1994 $42,137,001 $26,742,318 $12,945,510
Compound Annual +5.0% +5.7% +5.1%
Growth 1985-94
Source: Sales & Marketing Management Survey of Buying Power (1986-1995).
MAP ILLUSTRATING 1995 AVERAGE HOUSEHOLD INCOME
IN BROOKDALE CENTER'S TRADE AREA
As can be seen, retail sales in Hennepin County have grown at rates below the
MSA and consistent with State levels with a compound annual change of 5.1
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 Reporting GLA* Unit Rate (SF) Change *
(Millions)
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%
1995 $ 35.96 142,584 $252.20 - 5.2%
Compound Annual - 1.83%
Change 1986-95
* Change reported is for unit rate performance.
Source: General Growth Company
The data above shows that mall shop sales have continued to fall since 1990.
December 1995 sales for tenants open for the past thirteen months were
$35,959,700, equivalent to $252.00 per square foot. This was down nearly
11.6 percent in terms of aggregate dollars and 5.2 percent on a reporting
unit rate basis. The decline was largely contributed to the renovation that was
in process within the Mervyn's Throat area as well as a change in consumer
perception of the mall related to safety issues and loitering teenagers.
By comparison, the Urban Land Institute's Dollars and Cents of Shopping
Centers (1995) reports national and regional sales averages for regional
and super-regional shopping malls. Nationally, average sales at
super-regional centers were reported at $203.09 per square foot in 1994, down
1.4 percent from 1993. For regional malls, average sales are reported to be
$176.16, virtually even from 1993. A comparison of national and regional
figures is shown on the following chart.
Regional/Super-Regional Centers
Area Average Median Lower Upper
Decile Decile
United States $176.16/ $163.54/ $125.88/ $285.40/
$203.09 $198.93 $140.46 $305.23
East $204.96/ $183.05/ $126.07/ $323.74/
$220.64 $183.81 $130.46 $379.81
West $188.63/ $167.46/ $124.00/ $264.89/
$190.51 $187.64 $143.01 $258.68
South $156.27/ $154.18/ $129.63/ $195.24/
$210.30 $207.99 $145.75 $293.70
Midwest $178.99/ $179.24/ $125.50/ $290.57/
$195.03 $192.42 $148.18 $261.09
Source: Urban Land Institute Dollars and Cents of Shopping Centers (1995)
As a regional mall in the midwest, the subject's 1995 sales performance of
$252 per square foot can be compared to its peers as shown below.
Average Subject
United States $203.09 $252
Midwest $195.03 $252
As can be seen, the subject is outperforming both its national peer
group and regional centers on average in terms of sales productivity.
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 1994 were approximately $142,328,700 (store by store comparisons for all
department stores were not available at this writing). This suggests a .87
percent increase over $141,100,000 in 1993. On a per square foot basis, the
department store average was $194.52 per square foot in 1994 and $191.74 in
1993.
We have been provided with 1994 sales information for Kohl's and JC Penney.
The mall manager, has estimated the sales for the remaining majors.
1994 Anchor Store Sales
Store Area(SF) Sales Unit Rate Change 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/Mervyn's 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.
November 1995 sales have been provided for JC Penney and Kohl's. For
year-to-date 1995, Kohl's sales were tracking approximately 5 percent
above 1994, and sales at JC Penney were down 5 percent from the same period
the prior year. According to the mall manager, Ron Thomas, sales at Sears
and Dayton's have remained consistent with 1994 sales. The new Mervyn's store
has reportedly had a slow start at the mall. The manager believes sales at
Mervyn's are below the former Carson Pirie Scott store.
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.
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 benefited 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 480,000. 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 benefited by excellent regional accessibility being
located approximately one mile from Interstate 94/694.
- The subject offers a diverse 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.
- Concerns at the mall include high occupancy costs, increasing vacancy
and declining sales. In addition, through its first six months of
operations, the new Mervyn's department store has not had the positive
material difference on the mall that was expected.
In conclusion, 1995 was a troublesome year for retail in general with Brookdale
Center being particularly affected. Management needs to make some hard
decisions about its future merchandising philosoply. 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 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 939,4869 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. There is one outparcel tenant (Midas Muffler) which
totals 8,254 square feet. A current leasing plan is provided on the facing
page.
Since our previous report, the major changes in the mall have mainly involved
the remodeling of the Sears department store. At the beginning of 1995,
Sears completed the remodeling of its entry. Previously, access to the
store was gained through the west mall portion of the center. After the
remodel, the entry to Sears now faces the central mall area. This
change has diminished foot traffic through the west mall area and has
initially had a negative impact on the mall in this area. Tenants
formerly located within the west mall such as Burger King, Kay Bee Toys,
and Baskin & Robins, vacated their spaces in 1995. In order to stop this
trend, management needs to find a destination type tenant for the west mall
which would increase foot traffic. We are not aware of any interested
tenants at this writing.
Other changes center around new tenant lease transactions, existing lease
renewals, and tenants who have been terminated. As a result, some remodeling
and renovation of tenant stores has occurred. Further discussion of these
activities is included in the Income Approach of this report.
During 1996 no major structural changes have been approved. It is noted that
the center has several structural problem such as roof repair, asbestos
removal, and the replacement of the main chiller that will have to be
considered.
Ownership has made some modest efforts to upgrade the mall and improve its
appearance. During 1996 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
ACM Abatement Retail Merchandising Units $ 144,000
Structure Remove baffless and repaint ceiling $ 110,000
Bump backs $ 25,000
Roof Reroof areas according to IRCA recommendations $ 212,000
Parking Lot Chip/seal and replacement according
to Zimmer Consultant $ 175,000
Lighting Upgrade $ 600,000
Lot Signs $ 45,000
Landscaping $ 20,000
Systems Chiller replacement $ 325,000
Energy Conservation Interior Lighting Retrofit $ 90,000
Leasing Five specialty leasing units $ 75,000
Amenities New planters, benches, ash/trash $ 75,000
Code Upgrades to electrical and physical plant $ 50,000
Total Capital Items $1,946,000
Items
FLOOR PLAN FOR BROOKDALE CENTER, BROOKLYN CENTER, MINNESOTA
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.
Occupancy at Brookdale Center is currently 76 percent. This represents a four
percent decline from a year ago. The majority of this space is within the
previously discussed West Mall area. In the spring of 1995 Carson's was
converted to a Mervyn's department store. Management was optimistic
about Mervyn's having a positive impact on the mall. However, through its
first six months of operations, the new store has not had the positive
material difference that was expected.
REAL PROPERTY TAXES AND ASSESSMENTS
The subject property is assessed by Hennepin County for the 1995 calendar
year. The assessed values and tax liabilities for the property are shown
below.
Tax Schedule
1995 1995
Assessed Tax
Parcel No. Description Value Liabilities
02-118-21-32-0008 Main Mall $49,019,700 $3,027,011
02-118-21-31-0055 Main Mall $ 2,124,600 $ 143,443
Parking
02-118-21-23-0021 Main Mall $ 3,000 $ 193
Parking
02-118-21-31-0056 Kohl's $ 2,753,800 $ 185,923
(land only)
02-118-21-32-0009 JC Penney $ 737,100 $ 47,456
(land only)
02-118-21-32-0010 JC Penney $ 147,800 $ 9,515
(land only)
Total $3,413,541
Taxes in 1995 were reported to be approximately 8 percent lower than 1994.
Of the $3,413,541 in tax liability in 1995, the majority or approximately $3.56
million is allocated to the mall and Kohl's.
We are advised by management that negotiations with taxing authorities and a
restructuring of assessments of Hennepin County should result in a reduction
in tax liability for 1996 of nearly 30 percent. They have budgeted
$2,471,000 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 $2,471,000 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
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.
SALES COMPARISON APPROACH
-----------------------------
Methodology
The Sales Comparison Approach provides an estimate of market value by
comparing recent sales of similar properties in the surrounding or competing
area to the subject property. Inherent in this approach is the principle of
substitution, which holds that, when a property is replaceable in the
market, its value tends to be set at the cost of acquiring an equally
desirable substitute property, assuming that no costly delay is encountered in
making the substitution.
By analyzing sales that qualify as arms-length transactions between willing
and knowledgeable buyers and sellers, market value and price trends can
be identified. Comparability in physical, locational, and economic
characteristics is an important criterion when comparing sales to the
subject property. The basic steps involved in the application of this approach
are as follows:
1. Research recent, relevant property sales and current offerings
throughout the competitive marketplace;
2. Select and analyze properties considered most similar to the subject,
giving consideration to the time of sale, change in economic
conditions which may have occurred since date of sale, and other
physical, functional, or locational factors;
3. Reduce the sale prices to a common unit of comparison, such as
price per square foot of gross leasable area 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; and
6. Interpret the adjusted sales data and draw a logical value conclusion.
The most widely-used, market-oriented units of comparison for properties such
as the subject are the sale price per square foot of gross leasable area
(GLA) purchased, and the overall capitalization rate extracted from the
sale. This latter measure will be addressed in the Income Approach which
follows this methodology. An analysis of the inherent sales multiple also
lends additional support to this 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.
Most institutional grade retail properties are existing, seasoned centers
with good inflation protection. These centers offer stability in income and
are strongly positioned to the extent that they are formidable barriers
to new competition. They tend to be characterized as having three to five
department store anchors, most of which are dominant in the market. Mall
shop sales are at least $300 per square foot and the trade area offers good
growth potential in terms of population and income levels. Equally
important are centers which offer good upside potential after face-lifting,
renovations, or expansion. With new construction down substantially,
owners have accelerated their renovation and remerchandising programs.
Little competition from over-building is likely in most mature markets within
which these centers are located. Environmental concerns and "no-growth"
mentalities in communities continue to be serious impediments to new retail
developments.
Over the past 18 months we have seen real estate investment return to favor
as an important part of many of the institutional investors' diversified
portfolios. Banks are aggressively competing for business trying to regain
market share they lost to Wall Street and the more secure life insurance
companies have reentered the market. The re-emergence of real estate
investment trusts (REITs) has helped to provide liquidity within the real
estate market, pushing demand for well-tenanted, quality property,
particularly regional malls. Currently, REITs are one of the most active
segments of the industry and are particularly attractive to institutional
investors due to their liquidity.
The market for dominant Class A institutional quality malls is tight, as
characterized by the limited amount of good quality product available. It is
the overwhelming consensus that Class A property would trade in the 7.0 to
8.0 percent capitalization rate range. Conversely, there are many second
tier and lower quality malls offered on the market at this time. With
limited demand from a much thinner market, cap rates for this class of malls
are felt to be in the much broader 8.5 to 15.0 percent range. Reportedly,
there are 50+/- malls on the market currently. Pessimism about the long term
viability of many of these lower quality malls has been fueled by the recent
turmoil in the retail industry. It is felt that the subject fits into this
latter category.
- When analyzing an investment opportunity, some of the more
important "hot buttons" as measured by the recurrence of the responses
include:
1. Occupancy Costs - This " health ratio " measure is of
fundamental concern today. Investors like to see
ratios under 13.0 percent and become quite concerned when they
exceed 15.0 percent. This appears to be by far the most
important issue to an investor today. Investors are looking
for long term growth in the cash flow and want to realize this
growth through real rent increases. High occupancy costs limit
the amount of upside through lease rollovers.
2. Market Dominance - The mall should truly be the dominant mall
in the market, affording it a strong barrier to entry. Some
respondents feel this is more important than the size of the
trade area itself.
3. Strong Anchor Alignment - Having at least three department
stores, two of which are dominant in that market. The
importance of the traditional department store as an anchor
tenant has returned to favor after several years of weak
performance and confusion as to the direction of the industry.
As a general rule, most institutional investors would not be
attracted to a two-anchor mall.
4. Dense Marketplace - Several of the institutional investors favor
markets of 300,000 to 500,000 people or greater within a 5 to 7
mile radius. Population growth in the trade area is also very
important. One advisor likes to see growth 50.0 percent better
than the U.S. average. Another investor cited that they will
look at trade areas of 200,000+/- but that if there is no
population growth forecasted in the market, a 50+/- basis point
adjustment to the cap rate at the minimum is warranted.
5. Income Levels - Household incomes of $50,000+ which tends to
be limited in many cases to top 50 MSA locations.
6. Good Access - Interstate access with good visibility and a
location within or proximate to the growth path of the community.
7. Tenant Mix - A complimentary tenant mix is important. Mall shop
ratios of 35+/- percent of total GLA are considered average with
75 to 80 percent allocated to national tenants. Mall shop sales
of at least $250 per square foot with a demonstrated positive
trend in sales is also considered to be important.
8. Physical Condition - Malls that have good sight lines, an
updated interior appearance and a physical plant in good shape
are looked upon more favorably. While several developers are
interested in turn-around situations, the risk associated with
large capital infusions can add at least 200 to 300 basis points
onto a cap rate.
9. Environmental Issues - The impact of environmental problems
cannot be understated. There are several investors who won't
even look at a deal if there are any potential environmental
issues no matter how seemingly insignificant.
10. Operating Covenants - Some buyers indicated that they would not
be interested in buying a mall if the operating covenants were
to expire over the initial holding period. Others weigh each
situation on its own merit. If it is a dominant center with
little likelihood of someone coming into the market with a new
mall, they are not as concerned about the prospects of loosing
a department store. If there is a chance of loosing an anchor,
the cost of keeping them must be weighed against the benefit.
In many of their malls they are finding that traditional
department stores are not always the optimum tenant but that a
category killer or other big box use would be a more logical
choice.
In the following section we will discuss trends which have become apparent
over the past several years involving sales of regional malls.
Regional Mall Property Sales
Evidence has shown that mall property sales which include anchor stores
have lowered the square foot unit prices for some comparables, and have
affected investor perceptions. In our discussions with major shopping
center owners and investors, we learned that capitalization rates and
underwriting criteria have become more sensitive to the contemporary
issues affecting department store anchors. Traditionally, department stores
have been an integral component of a successful shopping center and,
therefore, of similar investment quality if they were performing
satisfactorily.
During the 1980's a number of acquisitions, hostile take- overs and
restructuring occurred in the department store industry which changed the
playing field forever. Weighted down by intolerable debt, combined with a
slumping economy and a shift in shopping patterns, the end of the decade was
marked by a number of bankruptcy filings unsurpassed in the industry's
history. Evidence of further weakening continued into 1991-1992 with
filings by such major firms as Carter Hawley Hale, P.A. Bergner & Company, and
Macy's. In early 1994, Woodward & Lothrop announced their bankruptcy
involving two department store divisions that dominate the Philadelphia and
Washington D.C. markets. Recently, most of the stores were acquired by the
May Department Stores Company effectively ending the existence of the 134
year old Wanamaker name, the nation's oldest department store company.
More recently, however, department stores have been reporting a return to
profitability resulting from increased operating economies and higher sales
volumes. Sears, once marked by many for extinction, has more recently won
the praise of analysts. Federated Department Stores has also been acclaimed
as a text book example on how to successfully emerge from bankruptcy. They
have merged with Macy's and more recently acquired the Broadway chain to
form on of the nation's largest department store companies.
With all this in mind, investors are looking more closely at the strength of
the anchors when evaluating an acquisition. Most of our survey respondents
were of the opinion that they were indifferent to acquiring a center that
included the anchors versus stores that were independently owned if they
were good performers. However, where an acquisition includes anchor
stores, the resulting cash flow is typically segregated with the income
attributed to anchors (base plus percentage rent) analyzed at a higher cap rate
then that produced by the mall shops.
However, more recent data suggests that investors are becoming more
troubled by the creditworthiness of the mall shops. With an increase in
bankruptcies, store closures and consolidations, we see investors
looking more closely at the strength and vulnerabilities of the in-line
shops. As a result, there has been a marked trend of increasing
capitalization rates.
TABLE SHOWING 1995 REGIONAL MALL SALES
TABLE SHOWING 1994 REGIONAL MALL SALES
Cushman & Wakefield has extensively tracked regional mall transaction
activity for several years. In this analysis we will show sales trends since
1991. Summary charts for the older sales (1991-1993) are provided in the
Addenda. The more recent sales (1994/1995) are provided herein. These sales
are inclusive of good quality Class A or B+/- properties that are dominant
in their market. Also included are weaker properties in second tier
cities that have a narrower investment appeal. As such, the mall sales
(1991-95) presented in this analysis show a wide variety of prices on a per
unit basis, ranging from $59 per square foot up to $556 per square foot of
total GLA purchased. When expressed on the basis of mall shop GLA acquired,
the range is more broadly seen to be $93 to $647 per square foot.
Alternatively, the overall capitalization rates that can be extracted from
each transaction range from 5.60 percent to rates in excess of 11.0 percent.
One obvious explanation for the wide unit variation is the inclusion or
exclusion of anchor store square footage which has the tendency to distort
unit prices for some comparables. Other sales include only mall shop area
where small space tenants have higher rents and higher retail sales per
square foot. A shopping center sale without anchors, therefore, gains all
the benefits of anchor/small space synergy without the purchase of the anchor
square footage. This drives up unit prices to over $250 per square foot,
with most sales over $300 per square foot of salable area. A brief discussion
of historical trends in mall transactions follows.
- The fourteen sales included for 1991 show an average price per square
foot sold of $282. On the basis of mall shop GLA sold, these sales
present a mean of $357. Sales multiples range from .74 to 1.53 with a
mean of 1.17. Capitalization rates range from 5.60 to 7.82 percent with
an overall mean of 6.44 percent. The mean terminal capitalization rate
is approximately 100 basis points higher, or 7.33 percent. Yield rates
range between 10.75 and 13.00 percent, with a mean of 11.52 percent for
those sales reporting IRR expectancies.
- In 1992, the eleven transactions display prices ranging from $136 to
$511 per square foot of GLA sold, with a mean of $259 per square foot.
For mall shop area sold, the 1992 sales suggest a mean price of $320
per square foot. Sales multiples range from .87 to 1.60 with a mean of
1.07. Capitalization rates range between 6.00 and 7.97 percent with the
mean cap rate calculated at 7.31 percent for 1992. For sales reporting
a going-out cap rate, the mean is shown to be 7.75 percent. Yield
rates again range from 10.75 to around 12.00 percent with a mean of
11.56 percent.
- For 1993, a total of sixteen transactions have been tracked. These
sales show an overall average sale price of $242 per square foot based
upon total GLA sold and $363 per square foot based solely upon mall GLA
sold. Sales multiples range from .65 to 1.82 and average 1.15.
Capitalization rates continued to rise in 1993, showing a range between
7.00 and 10.10 percent. The overall mean has been calculated to be
7.92 percent. For sales reporting estimated terminal cap rates, the
mean is also equal to 7.92 percent. Yield rates for 1993 sales range
from 10.75 to 12.50 percent with a mean of 11.53 percent for those
sales reporting IRR expectancies. On balance, the year was notable for
the number of dominant Class A malls which transferred.
- Sales data for 1994 shows fourteen confirmed transactions with an
average unit price per square foot of $197 per square foot of total GLA
sold and $288 per square foot of mall shop GLA. Sales multiples range
from .57 to 1.43 and average .96. The mean going-in capitalization
rate is shown to be 8.37 percent. The residual capitalization rates
average 8.13 percent. Yield rates range from 10.70 to 11.50 percent and
average 11.17 percent. During 1994 many of the closed transactions
involved second and third tier malls. This accounted for the
significant drop in unit rates and corresponding increase in cap
rates. Probably the most significant sale involved the Riverchase
Galleria, a 1.2 million square foot center in Hoover, Alabama. LaSalle
Partners purchased the mall of behalf of the Pennsylvania Public School
Employment Retirement System for $175.0 million. The reported cap rate
was approximately 7.4 percent.
- Cushman & Wakefield has researched 14 mall transactions which have
occurred during 1995. The chart in the Addenda summarizes the
pertinent facts regarding each sale. With the exception of Sale No.
95-1 (Natick Mall) and 95-2 (Smith Haven Mall), by and large the
quality of malls which have sold are lower than what has been shown for
prior years. For example, the average transaction price has been
slipping. In 1993, the peak year, the average deal was nearly $133.8
million. Currently, it is shown to be $90.7 million which is even
skewed upward by Sale Nos. 95-1 and 95-2. The average price per square
foot of total GLA is calculated to be $152 per square foot. The range
in values of mall GLA sold are $93 to $607 with an average of $275 per
square foot. Characteristics of these lesser quality malls would be
higher initial capitalization rates. The range for these transactions
is 7.47 to 11.1 percent with a mean of 9.14 percent, the highest
average over the past five years. Most market participants feel that
continued turmoil in the retail industry will force cap rates to move
higher.
While these unit prices implicitly contain both the physical and economic
factors affecting the real estate, the statistics do not explicitly convey
many of the details surrounding a specific property. Thus, this single
index to the valuation of the subject property has limited direct
application. The price per square foot of mall shop GLA acquired yields one
common form of comparison. However, this can be distorted if anchor
and/or other major tenants generate a significant amount of income. The
following chart summarizes the range and mean for this unit of comparison by
year of sale.
Transaction Unit Rate Mean Sales
Year Range * Multiple
1991 $203 - $556 $357 1.17
1992 $226 - $511 $320 1.07
1993 $173 - $647 $363 1.15
1994 $129 - $502 $288 .96
1995 $ 93 - $607 $264 .98
* Includes all sales by each respective year.
As discussed, one of the factors which may influence the unit rate is whether
or not anchor stores are included in the total GLA which is transferred. Thus,
a further refinement can be made between those malls which have transferred
with anchor space and those which have included only mall GLA. Chart A,
shown below makes this distinction.
CHART A
Regional Mall Sales
Involving Mall Shop Space Only
1991 1992 1993 1994
Sale Unit NOI Sale Unit NOI Sale Unit NOI Sale Unit NOI
No. Rate Per SF No. Rate Per SF No. Rate Per SF No. Rate Per SF
91-1 $257 $15.93 92-2 $348 $25.27 93-1* $355 $23.42 94-1 $136 $11.70
91-2 $232 $17.65 92-9 $511 $33.96 93-4 $471 $32.95 94-3 $324 $22.61
91-5 $203 $15.89 92-11 $283 $19.79 93-5 $396 $28.88 94-12 $136 $14.00
91-6 $399 $24.23 93-7 $265 $20.55 94-14 $241 $18.16
91-7 $395 $24.28 93-14 $268 $19.18
91-8 $320 $19.51
91-10 $556 $32.22
Mean $337 $21.39 Mean $381 $26.34 Mean $351 $25.00 Mean $209 $16.62
* Sale included peripheral GLA.
From the above we see that the mean unit rate for sales involving mall
shop GLA only has ranged from approximately $209 to $381 per square foot. We
recognized that these averages may be skewed somewhat by the size of the
sample. To date, there have been no 1995 transactions involving only mall
shop GLA.
Alternately, where anchor store GLA has been included in the sale, the unit
rate is shown to range widely from $53 to $410 per square foot of salable area,
indicating a mean of $227 per square foot in 1991, $213 per square foot in
1992, $196 per square foot in 1993, $193 per square foot in 1994 and $145 per
square foot in 1995. Chart B following depicts this data.
CHART B
Regional Mall Sales
Involving Mall Shops and Anchor GLA
1991 1992 1993
Sale Unit NOI Sale Unit NOI Sale Unit NOI
No. Rate Per SF No. Rate Per SF No. Rate Per SF
91-3 $156 $11.30 92-1 $258 $20.42 93-2 $225 $17.15
91-4 $228 $16.50 92-3 $197 $14.17 93-3 $135 $11.14
91-9 $193 $12.33 92-4 $385 $29.43 93-6 $224 $16.39
91-11 $234 $13.36 92-5 $182 $14.22 93-7 $ 73 $ 7.32
91-12 $287 $17.83 92-6 $203 $16.19 93-9 $279 $20.66
91-13 $242 $13.56 92-7 $181 $13.60 93-10 $ 97 $ 9.13
91-14 $248 $14.87 92-8 $136 $ 8.18 93-11 $289 $24.64
92-10 $161 $12.07 93-12 $194 $13.77
93-13 $108 $ 9.75
93-14 $322 $24.10
93-15 $214 $16.57
Mean $227 $14.25 Mean $213 $16.01 Mean $196 $15.51
CHART B
Regional Mall Sales
Involving Mall Shops and Anchor GLA
1994 1995
Sale Unit NOI Sale Unit NOI
No. Rate Per SF No. Rate Per SF
SF
94-2 $296 $23.12 95-1 $410 $32.95
94-4 $133 $11.69 95-2 $272 $20.28
94-5 $248 $18.57 95-3 $ 91 $ 8.64
94-6 $112 $ 9.89 95-4 $105 $ 9.43
94-7 $166 $13.86 95-5 $ 95 $ 8.80
94-8 $ 83 $ 7.63 95-6 $ 53 $ 5.89
94-9 $ 95 $ 8.57 95-7 $ 79 $ 8.42
94-10 $155 $13.92 95-8 $ 72 $ 7.16
94-11 $262 $20.17 95-9 $ 96 $ 9.14
94-13 $378 $28.74 95-10 $212 $17.63
95-11 $ 56 $ 5.34
95-12 $ 59 $ 5.87
95-13 $143 $11.11
95-14 $287 $22.24
Mean $193 $15.62 Mean $145 $12.35
* Sale included peripheral GLA.
Analysis of Sales
Within Chart B, we have presented a summary of recent transactions
(1991-1995) involving regional and super-regional- sized retail shopping
malls from which price trends may be identified for the extraction of
value parameters. These transactions have been segregated by year of
acquisition so as to lend additional perspective on our analysis.
Comparability in both physical and economic characteristics are the most
important criteria for analyzing sales in relation to the subject property.
However, it is also important to recognize the fact that regional shopping
malls are distinct entities by virtue of age and design, visibility and
accessibility, the market segmentation created by anchor stores and tenant
mix, the size and purchasing power of the particular trade area, and
competency of management. Thus, the "Sales Comparison Approach", when
applied to a property such as the subject can, at best, only outline the
parameters in which the typical investor operates. The majority of these
sales transferred either on an all cash (100 percent equity) basis or its
equivalent utilizing market-based financing. Where necessary, we have
adjusted the purchase price to its cash equivalent basis for the purpose of
comparison.
As suggested, sales which include anchors typically have lower square
foot unit prices. In our discussions with major shopping center owners
and investors, we learned that capitalization rates and underwriting
criteria have become more sensitive to the contemporary issues dealing with
the department store anchors. As such, investors are looking more closely than
ever at the strength of the anchors when evaluating an acquisition.
As the reader shall see, we have attempted to make comparisons of
the transactions to the subject primarily along economic lines. For the
most part, the transactions have involved dominant or strong Class A
centers in top 50 MSA locations which generally have solid, expanding
trade areas and good income profiles. Some of the other transactions are
in decidedly inferior second tier locations with limited growth potential
and near term vacancy problems. These sales tend to reflect lower unit rates
and higher capitalization rates.
Value "As Is"
Because the subject is theoretically only selling mall shop GLA and no
owned department stores, we will look at the recent sales involving both
types in Chart A more closely. As a basis for comparison, we will analyze
the subject based upon projected NOI. The first year NOI has been projected
to be $22.02 per square foot (CY 1996), based upon 199,922+/- square feet
of owned GLA. Derivation of the subject's projected net operating income is
presented in the "Income Approach" section of this report as calculated by the
Pro-Ject model. With projected NOI of $22.02 per square foot, the subject
falls within the range exhibited by the comparable sales.
Since the income that an asset will produce has direct bearing on the
price that a purchaser is willing to pay, it is obvious that a unit price
which falls toward the middle of the range indicated by the comparables
would be applicable to the subject. The subject's anticipated net income
can be initially compared to the composite mean of the annual transactions
in order to place the subject in a frame of reference. This is shown on
the following chart.
Sales Mean Subject Subject
Year NOI Forecast Ratio
1991 $21.39 $22.02 103%
1992 $26.34 $22.02 84%
1993 $25.00 $22.02 88%
1994 $16.62 $22.02 132%
With first year NOI forecasted at approximately 84 to 132 percent of the
mean of these sales in each year, the unit price which the subject property
would command should be expected to fall within a relative range.
Net Income Multiplier Method
Many of the comparables were bought on expected income, not gross leasable
area, making unit prices a somewhat subjective reflection of investment
behavior regarding regional malls. In order to quantify the appropriate
adjustments to the indicated per square foot unit values, we have compared the
subject's first year pro forma net operating income to the pro forma income
of the individual sale properties. In our opinion, a buyer's criteria
for the purchase of a retail property is predicated primarily on the
property's income characteristics. Thus, we have identified a relationship
between the net operating income and the sales price of the property.
Typically, a higher net operating income per square foot corresponds to a
higher sales price per square foot. Therefore, this adjustment incorporates
factors such as location, tenant mix, rent levels, operating
characteristics, and building quality.
Provided below, we have extracted the net income multiplier from each of
the improved sales. We have included only the recent sales data
(1993-1994). The equation for the net income multiplier (NIM), which is the
inverse of the equation for the capitalization rate (OAR), is calculated as
follows:
NIM = Sales Price
------------
Net Operating Income
Net Income Multiplier Calculation
Sale No. NOI/SF Price/SF Net Income
Multiplier
93- 1 $23.42 $355 13.38
93- 4 $32.95 $471 14.29
93- 5 $28.88 $396 13.71
93- 7 $20.55 $265 9.90
93- 14 $19.18 $268 13.36
94- 1 $11.70 $136 11.62
94- 3 $22.61 $324 14.32
94- 12 $14.00 $136 9.72
94- 14 $18.16 $241 13.28
Mean $21.38 $288 12.62
Valuation of the subject property utilizing the net income multipliers (NIM)
from the comparable properties accounts for the disparity of the net operating
incomes ($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 13.38 $22.02 $294.63
93- 2 14.29 $22.02 $314.67
93- 3 13.71 $22.02 $301.89
93- 4 9.90 $22.02 $218.00
93- 5 13.36 $22.02 $294.19
94- 6 11.62 $22.02 $255.87
94- 7 14.32 $22.02 $315.33
94- 8 9.72 $22.02 $214.03
94- 9 13.28 $22.02 $292.43
Mean 12.62 $22.02 $277.89
From the process above, we see that the indicated net income multipliers range
from 9.72 to 14.32 with a mean of 12.62. The adjusted unit rates range from
$218.00 to $315.33 per square foot of owned GLA with a mean of $277.89 per
square foot.
We further 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 recognize that most of these transactions involved dominant, Class
A malls with good income growth potential. Arguably, this income
potential is reflected in the higher unit rates these properties tend to
achieve. Over the holding period, we forecast that net income growth will
slightly lag inflation. Finally, the subject's net income figure of $22.29
per square foot does not recognize the substantial capital expenditures that
we forecast are necessary for the long term viability of the mall. On
balance, we would characterize the subject as less desirable than these
sales which would warrant a unit rate below the adjusted mean and near the low
end of the range.
Considering the above average characteristics of the subject relative to the
above, we believe that a unit rate range of $220 to $230 per square foot is
appropriate. Applying this unit rate range to 199,922+/- square feet of owned
GLA results in a value of approximately $44.0 million to $46.0 million for the
subject as shown on the following page.
199,922 SF 199,922 SF
x $220 x $230
----------- -----------
$43,982,840 $45,982,060
Rounded Value Estimate - Market Sales Unit Rate Comparison
$44,000,000 to $46,000,000
Sales Multiple Method
Arguably, it is the mall shop GLA sold and its intrinsic economic profile
that is of principal concern in the investment decision process. A myriad
of factors influence this rate, perhaps none of which is more
important than the sales performance of the mall shop tenants.
Accordingly, the abstraction of a sales multiple from each transaction
lends additional perspective to this analysis.
The sales multiple measure is often used as a relative indicator of the
reasonableness of the acquisition price. As a rule of thumb, investors will
look at a sales multiple of 1.0 as a benchmark, and will look to keep it
within a range of .75 to 1.25 times mall shop sales performance unless
there are compelling reasons why a particular property should deviate.
The sales multiple is defined as the sales price per square foot of mall GLA
divided by average mall shop sales per square foot. As this reasonableness
test is predicated upon the economics of the mall shops, technically, any
income (and hence value) attributed to anchors that are acquired with the
mall as tenants should be segregated from the transaction. As an income (or
sales) multiple has an inverse relationship with a capitalization
rate, it is consistent that, if a relatively low capitalization rate is
selected for a property, it follows that a correspondingly above-average sales
(or income) multiple be applied. In most instances, we are not privy to
the anchor's contributions to net income. As such, the sales multiples
reported may be slightly distorted to the extent that the imputed value of the
anchor's contribution to the purchase price has not been segregated.
Sales Multiple Summary
Sale Going-In Sales
No. OAR Multiple
93-1 7.47% 0.92
93-4 7.00% 1.16
93-5 7.29% 1.16
93-7 10.10% 0.65
93-14 7.48% 0.99
94-1 8.60% 0.68
94-3 8.81% 0.81
94-12 10.29% 0.72
94-14 7.53% 0.93
Mean 8.29% 0.89
The sales that are being compared to the subject show sales multiples that
range from 0.65 to 1.16 with a mean of about 0.89. As is evidenced, the more
productive malls with higher sales volumes on a per square foot basis tend
to have higher sales multiples.
Based upon forecasted 1996 performance, as well as anticipated
changes to the market area, the subject is projected to produce comparable
sales of $250 per square foot for all reporting tenants. This is a 1%
reduction from 1995 sales.
In the case of the subject, the overall capitalization rate being utilized
for this analysis is considered to be substantially higher than 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, 0.75 to 0.80 to the forecasted sales of $250 per
square foot, the following range in value is indicated.
Unit Sales Volume (Mall Shops) $250 $250
Sales Multiple x 0.75 x 0.80
------- -------
Adjusted Unit Rate $187.50 $200.00
Mall Shop GLA x 199,922 x 199,922
------- -------
Value Indication $37,485,375 $39,984,400
The analysis shows an adjusted value range of approximately $37.5 to $40.0
million. Inherent in this exercise are mall shop sales which are projections
based on our investigation into the market which might not fully measure
investor's expectations. It is clearly difficult to project with any
certainty what the mall shops might achieve in the future, particularly as the
lease-up is achieved and the property brought to stabilization. While we may
minimize the weight we place on this analysis, it does, nonetheless, offer
a reasonableness check against the other methodologies. We have also
considered in this analysis the fact that the owned anchors are forecasted to
contribute approximately $364,579 in revenues in 1996 (base rent obligations
and overage). If we were to capitalize this revenue separately at a 10.5
percent rate, the resultant effect on value is approximately $3.5 million.
Arguably, department stores have qualities that add certain increments of
risk over and above regional malls, wherein risk is mitigated by the diversity
of the store types. A recent Cushman & Wakefield survey of free-standing
retail building sales consisting of net leased discount department stores,
membership warehouse clubs, and home improvement centers, displayed a range in
overall capitalization rates between 8.8 and 10.9 percent with a mean of
approximately 9.6 percent. All of the sales occurred with credit worthy
national tenants in place. The buildings ranged from 86,479 to 170,000
square feet and were located in high volume destination retail areas.
Trends indicate that investors have shown a shift in preference to
initial return and, as will be discussed in a subsequent section, overall
capitalization rates have been showing increases over the past several
years. Moreover, when the acquisition of a shopping mall includes anchor
department stores, investors will typically segregate income attributable to
the anchors and analyze these revenues with higher capitalization rates than
those revenues produced by the mall shops.
Therefore, based upon the preceding discussion, it is our opinion that
overall capitalization rates for department stores are reasonably reflected
by a range of 9.5 to 11.0 percent. We have chosen the lower end of the
range due to the locational attributes of the subject's trade area and
characteristics of the subject property including a lease with
contractual rent increases.
Therefore, adding the anchor income's implied contribution to value of $3.5
million, the resultant range is shown to be approximately $41 to $43.5
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 $41,000,000 to $43,500,000
Conclusion "As Is"
We have considered all of the above relative to the physical and economic
characteristics of the subject. It is difficult to relate the subject to
comparables that are in such widely divergent markets with different cash
flow characteristics. The subject does best fit the profile of an older
mall that is merchandised reasonably well to meet the needs of its trade
area. We do note that the subject's upside potential appears modest as the
lease-up of the vacant space and the repositioning of tenants continues. Much
of the vacancy is attributed to the space within the Mervyn's throat area.
As will be seen in the Income Approach, NOI in the first full year of
investment, 1996, is approximately 6 percent below 1997 levels. Furthermore,
NOI is projected to increase by an additional 6 percent in 1998.
We recognize that an investor may 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 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 the
ownership's part in order to induce them to stay. Not far beyond this date is
the expiration of both Sears and Mervyn's in 1999.
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: 199,922+/-
Price Per SF of Salable Area: $220 to $230
Indicated Value Range: $44,000,000 to $46,000,000
Sales Multiple Analysis
Indicated Value Range $41,000,000 to $43,500,000
The parameters above show a value range of approximately $41.0 to $46.0
million for the subject with $41.0 to $45.0 million being a more defined
conclusion.
This range does not account for the expenditures that are forecasted to be
necessary to maintain the forecasted net income over the life of the
investment holding period. These expenses are discussed in more detail in the
Income Approach section of this report but included here would be
various physical improvement projects as well as asbestos removal.
As the lease-up is forecasted to continue over the next four years, a
prospective buyer would incur leasing commissions and tenant improvement
allowances. Finally, we have also accounted for costs with respect to
extending Dayton's operating covenant, a mall-wide renovation in 1997, as well
as considerable capital improvements over the next three years. 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
(1996) of these expenditures to be approximately $16.2 million. By
deducting this amount from the estimates above, a range in value between
$24,800,000 and $28,800,000 is indicated for the subject property by the
Sales Comparison Approach, as of January 1, 1996.
INCOME APPROACH
-----------------
Introduction
The Income Approach is based upon the economic principle that the value of a
property capable of producing income is the present worth of anticipated
future net benefits. The net income projected is translated into a present
value indication using the capitalization process. There are various
methods of capitalization that are based on inherent assumptions concerning
the quality, durability and pattern of the income projection.
Where the pattern of income is irregular due to existing leases that will
terminate at staggered, future dates, or to an absorption or stabilization
requirement on a newer development, 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 not
forecasted to achieve stabilization for several years. Thus, the direct
capitalization method has been omitted from 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, 1996. 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.
TABLE SHOWING PROJECTED ANNUAL CASH FLOW FOR BROOKDALE MALL
FROM 1996 TO 2006
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 judgment of the risks involved. Our
valuation endeavors to reflect the most likely actions of typical buyers and
sellers of property interest similar to the subject. In this regard we see
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;
4. 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;
5. 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 and temporary tenant income adds an
additional important source of revenue in the complete operation of the
subject property. In the initial year of the investment, 1996, it is
projected that the subject property will generate approximately $9,948,767 in
potential gross revenues, equivalent to $49.76 per square foot of total
appraised (owned) GLA of 199,922 square feet. Mall GLA as used herein
refers to the total of in-line shops area and kiosks. These forecasted
revenues may be allocated to the following components:
Brookdale Center
Revenue Summary
Initial Year ofInvestment - 1996
Revenue Amount Unit Income
Component Rate * Ratio
Minimum Rent $4,348,039 $21.75 43.7%
Overage Rent $ 260,838 $ 1.30 2.6%
Expense Recoveries $4,864,890 $24.33 48.9%
Miscellaneous Income $ 475,000 $ 2.38 4.8%
Total $9,948,767 $49.76 100.0%
* Reflects total owned GLA of 199,922 SF
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 1996 is shown to be
$4,005,323. Minimum rent may be allocated to the following components:
Brookdale Center
Minimum Rent Allocation
1996 Revenue Applicable GLA* Unit Rate(SF)
Mall Shops $3,809,393 194,756 SF $19.56
Kiosks $ 342,716 5,166 SF $66.34
Total $4,005,323 199,922 SF $20.03
* 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.
1995 Leasing Activity
1995 was a relatively slow year in terms of leasing activity, considering the
large amount of vacant space which was created with the completion of the
Mervyn's throat area. The space was completed at a cost of approximately $1
million and was available for tenant leasing throughout the year. Provided
below is a summary of some of the new leasing activity for 1995 throughout
the mall.
- Foot Locker formerly occupied 2,038 square feet in suite 145. In July
they expanded into suite 140 which was formerly occupied by Bachmans.
The new suite 140 now totals 3,626 square feet. Foot Locker signed a
ten year lease at a flat rate of $37.00 per square foot per year. Foot
Locker was responsible for all costs involved with creating the new
space.
- Piercing Pagoda leased a new 250 square foot kiosk space for four years
at $32,000 per annum.
- Champs took space 183, a prime suite of 5,134 square feet on the center
concourse. The lease commenced in January, 1995 and is for 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 was funded in 1995.
- Carlton Cards took Space 145 totaling 1,470 square feet for
approximately ten years. The initial annual rent is $28.00 per square
foot and includes two dollar step-ups in rent every two years with the
final rent per square foot ending at $36.00.
- Gordon's Jewelers signed a ten year lease extension for space 164 which
totals 1,328 square feet. The lease commenced in November and has an
initial annual rent of $60.00 per square foot. The rent increases to
$65.00 per square foot in February 1999 and to $70.00 per square foot
in February 2003.
- Magic Nails took space 275 totaling 796 square feet. The four year
lease commenced in October and has a flat rent of $30.00 per square
foot over the entire term.
- Five tenants whom vacated their spaces in 1995 were Sbarro's, Glamour
Shots, Burger King, and Kay Bee Toys.
- Arby's signed a three year renewal for their existing suite 290. The
three year agreement has a flat annual rent of $8.00 per square foot,
which reflects an approximate 50% decrease from the previous rent.
TABLE ILLUSTRATING RECENT LEASING ACTIVITY - MALL SHOP
TENANTS BY SIZE - BROOKDALE CENTER (MINNEAPOLIS, MN)
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 21 leases
show weighted averages ranging from $15.20 to $50.00 per square foot. As
can be seen, the weighted average lease rate is $21.69 per square foot.
Brookdale Center
Recent Leasing Activity
In-Line Shops Only
Allocated by Size
Category No. of Weighted
Leases Average
Category 1: Less Than 750 SF 2 $50.00
Category 2: 751 1,200 SF 5 $30.81
Category 3: 1,201 - 2,000 SF 4 $27.75
Category 4: 2,001 3,500 SF 4 $20.50
Category 5: 3,501 - 5,000 SF 3 $25.87
Category 6: 5,001 - 10,000 SF 3 $15.20
First Year Rent
Total Average 21 $21.69
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 $15.20 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 $25.87 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 page. On average, these
ratio comparisons provide a realistic check against projected market rental
rate assumptions.
TABLE COMPARING OCCUPANCY COSTS FOR
VARIOUS MSAs AROUND THE UNITED STATES
TABLE CALCULATING AVERAGE MALL SHOP RENT
AT BROOKDALE CENTER
From this analysis we see that the ratio of base rent to sales ranges
from 7.1 to 10.6 percent, while the total occupancy cost ratios vary from 9.6
to 17.3 percent when all recoverable expenses are included. The surveyed mean
for the eighteen malls analyzed is 8.7 percent and 13.4 percent, respectively.
Some of the higher ratios are found in older malls situated in urban areas
that have higher operating structures due to less efficient layout and
designs, older physical plants, and higher security costs, which in some
malls can add upwards of $2.00 per square foot to common area maintenance.
These relative measures can be compared with two well known publications, The
Score by the International Council of Shopping Centers and Dollars & Cents
of Shopping Centers (1995) by the Urban Land Institute. The most recent
publications indicate base rent to sales ratios of approximately 6.8 to 8.0
percent and total occupancy cost ratios of 12.0 and 12.3 percent,
respectively.
In general, while the rental ranges and ratio of base rent to sales vary
substantially from mall to mall and tenant to tenant, they do provide general
support for the rental ranges and ratio which is projected for the subject
property.
Conclusion - Market Rent Estimate for In-Line Shops
Previously, in the "Retail Market Analysis" section of the appraisal, we
discussed the subjects' sales potential. Comparable mall sales in
calendar year 1995 are projected to be $255 per square foot, a four percent
decline from 1994 sales. Sales are projected to decline slightly (2 percent)
in 1996 to approximately $250 per square foot. Most of the decline is
attributed to the large number of vacant suites within the Mervyn's
Throat area. As these suites begin to be absorbed the mall will become more
attractive to potential shoppers and sales should begin to increase.
In the previous discussions, the overall attained rent was shown to be
$21.69 per square foot on average.
After considering all of the above, we have developed a weighted average
rental rate of approximately $20.00 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 $20.00 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
facing page chart.
Occupancy Cost - Test of Reasonableness
Our weighted average rent of approximately $20.00 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 - 1996
Tenant Cost Estimated Expenses/SF
Economic Base Rent $ 20.00
(Weighted Average)
Occupancy Costs (A)
Common Area Maintenance (1) $ 6.37
Real Estate Taxes (2) $ 12.35
Other Expenses (3) $ 2.00
Total Tenant Costs $ 40.82
Projected Average Sales (1996) $250.00
Rent to Sales Ratio 8.04%
Cost of Occupancy Ratio 16.32%
(1) CAM expense is based on average occupied area (GLOA) of mall shop GLA.
Generally, the standard lease clause provides for a 15 percent
administrative factor less certain exclusions. including anchor
contributions. The standard denominator is based on occupied (leased)
versus leasable area. A complete discussion of the standard recovery
formula is presented later in this report.
(2) Tax estimate is based upon an average occupied area (GLOA) which is the
recovery basis for taxes. It is exclusive of majors contributions
(department stores) and reflects the reduction in taxes in accordance with
the budget.
(3) Other expenses include tenant contributions for water and sewer, and
other miscellaneous items.
Total costs, on average, are shown to be 16.32 percent of projected average
1996 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 $12.35. Although
this is a $3.00 per square foot decline from 1995, it is still high compared
with national averages and would be a concern to any potential tenant. However,
the high average costs 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 Mervyn's Throat
strategy. For instance, the average occupied GLA is projected to increase from
159,912 square feet in 1996 to 184,866 square feet in 1998. As the lease-up
and remerchandising continues, we would expect that sales have a good chance
to increase to levels in excess of our conservative growth rate assumption.
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
Suite# Tenant Size(SF) Term Rent Unit Rate
3501 Piercing Pagoda 250 5/95 -4/99 $32,000 $128.00
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 Robins 378 2/90 -1/95 $25,742 $ 68.10
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 $32,000 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.
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 four year period through January 2000. We have identified
46,154 square feet of vacant space, net of newly executed leases and pending
deals which have good likelihood of coming to fruition. This is equivalent
to 23.09% percent of mall GLA and 4.7 percent overall.
Of this total approximately 19,689 square feet or 43 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, two leases for 2,972 square feet were signed in the
throat area: Regis Hair Style (1,103 square feet) and Radio Shack (1,869
square feet).
During 1995, four in-line suites and one kiosk were vacated totaling 11,415
square feet. The following table summarized the vacated tenants.
Tenant Suit Area (SF)
Baskin Robins 3510 378
Burger King 250 2,407
Kay-Bee Toys 270 3,883
Lechters 246 2,946
Sbarro 245 1,801
Total 11,415
It is noted that all of these tenants were located within the west mall portion
of the center. This is the court area that led to the former Sears entrance.
Since the reconfiguration of the Sears entrance towards the central mall area,
foot traffic within the west mall has slowed and sales for in-line tenants
has reportedly suffered. In order to stop this trend, management needs to
find a destination type tenant for the west mall which would increase foot
traffic.
TABLE ILLUSTRATING LEASE-UP/ABSORPTION PROJECTIONS
FOR BROOKDALE CENTER
The chart on the facing page details our projected absorption schedule.
The absorption of the in-line space over a four year period is equal to
2,885 square feet per quarter. We have conservatively assumed that the
space will all lease at the 1996 base date market rent estimate as
previously referenced which implies no rent inflation for this absorption
space.
Anchor Tenants
The final category of minimum rent is derived by the contractual
ground lease obligations among the two anchor tenants. In 1996, these
revenues total $195,930. The following schedule details the major tenant rent
obligations.
Schedule of Anchor Tenant Revenues
Demised Lease Expiration Annual
Tenant Area With Options Rent
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. A review of investor's expectations
regarding income growth shows that projections generally range between
3.00 and 4.00 percent for retail centers. Cushman & Wakefield's Winter
1995 survey of pension fund, REITs, bank and insurance companies,
and institutional advisors reveals that current income forecasts are utilizing
average annual growth rates between zero and 5.0 percent. The low and
high mean is shown to be 2.8 and 3.9 percent, respectively. (see Addenda
for survey results). The Peter F. Korpacz Investor Survey (Fourth Quarter
1995) shows slightly more conservative results with average annual rent
growth of 3.16 percent.
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 Mervyn'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. Our market rent growth rate
forecast is summarized in the following chart.
Market Rent Growth Rate Forecast
Period Annual Growth Rate *
1996-1998 0.0%
1999 +1.5%
2000 +2.0%
2001-2005 +2.5%
* Indicated growth rate over the previous year's rent
Releasing Assumption
The typical lease term for new in-line retail leases in centers such as
the subject generally ranges from five to twelve years. Market practice
dictates that it is not uncommon to get rent bumps throughout the lease terms
either in the form of fixed dollar amounts or a percentage increase based
upon changes in some index, usually the Consumer Price Index (CPI). Often
the CPI clause will carry a minimum annual increase and be capped at a higher
maximum amount.
For new leases in the regional malls, ten year terms are most typical.
Essentially, the developer will deliver a "vanilla" suite with mechanical
services roughed in and minimal interior finish. This allows the retailer
to finish the suite in accordance with their individual specifications.
Because of the up-front costs incurred by the tenants, they require a ten
year lease term to adequately amortize these costs. In certain
instances, the developer will offer some contribution to the cost of finishing
out a space over and above a standard allowance.
Upon lease expiration, it is our best estimate that there is a 70 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, 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
Lease Free Tenant
Tenant Type Term Rent Steps Rent Alterations
In-Line Mall Shops 10 years 10% in lease year 6 No Yes
Kiosks 5 years No rent step No No
yrs.
The rent step schedule upon lease expiration applies in most instances.
However, there is one exception to this assumption with respect to tenants
who are forecasted to be in a percentage rent situation during the onset
renewal period. This could occur due to the fact that a tenant's sales
were well above its breakpoint at the expiration of the base lease. In
these instances, we have assumed a flat rent during the ensuing lease term.
This conservative assumption presumes that ownership will not achieve rent
steps from a tenant who is also paying overage rent from day one of the
renewal term. Nonetheless, we do note that ownership has 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 1996), it is projected that
the subject property will produce approximately $4,348,039 in minimum rental
income. This estimate of base rental income is equivalent to $21.74 per
square foot of total owned GLA. Alternatively, minimum rental income
accounts for 45.0 percent of all potential gross revenues. Further analysis
shows that over the holding period (CY 1996-2005), minimum rent advances at
an average compound annual rate of 3.6 percent. This increase is a synthesis
of the mall's lease-up, fixed rental increases as well as market rents from
rollover or turnover of space.
Overage Rent
In addition to 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 sizable percentage income. As a
center matures, the level of overage rents typically becomes a larger
percentage of total revenue. It is a major ingredient protecting the equity
investor against inflation. In the "Retail Market Analysis" section of this
report, we discussed the historic and forecasted sales levels for the mall
tenants.
Because the mall has been involved in a number of changes, 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 below.
- For tenants who do not report sales or who do not have percentage
clauses, we have assumed that a non- reporting tenant will always
occupy that particular space.
- For new tenants, we have projected sales at the forecasted average for
the center at the start of the lease. In 1996 this would be
approximately $250 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. 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 $260,838 (net of recaptures) equivalent to
$1.30 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 5.7 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 6.2 percent since 1980, and 4.9 percent per
annum since 1990.
After considering all of the above, we have forecasted that sales for
existing tenants will decline by 2.0 percent in 1996. This is consistent with
recent performance at the mall as well as budgetary projections. Subsequently,
we have forecasted no growth for 1997, an increase of 1 percent in 1998 and
2.0 percent in 1999, followed by a more normalized increase of 2.5 percent
per annum thereafter.
Sales Growth Rate Forecast
Period Annual Growth
Rate
1996 - 2.0%
1997 Flat
1998 + 1.0%
1999 + 2.0%
2000-2005 + 2.5%
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 $4,864,890 in
reimbursements for operating expenses and $475,000 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 1996
budgeted CAM billings for the majors can be detailed as follows:
CAM 1996 Obligation Budget
Mervyn's $ 341,604
JC Penney $ 232,032
Sears $ 382,248
Dayton's $ 315,816
Total $1,271,700
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. Mervyn's (formerly when it was Carson's) had been paying taxes
but we are advised that there was a change to their deal and they no
longer contribute. The 1996 budgeted major's tax recoveries are
estimated as follows:
Tax 1996
Obligation Budget
JC Penney $194,748
Dayton's $283,680
Total $478,428
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, and income from the renting of strollers and the community
room. The budget for 1996 projects miscellaneous revenues of $212,000. A
portion of this ($30,000) was for interest which we typically do not
include. Thus, we have forecasted miscellaneous income of $175,000 in
1996. In addition, management is projecting $300,000 from temporary
tenants in 1996. We have used $300,000 in our first year forecast. On
balance, we have forecasted these aggregate other revenues at $475,000 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 7.0 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 7 percent factor as the mall leases up based upon the
following schedule.
1996 3%
1997 4%
1998 5%
1999 6%
2000-2005 7%
In this analysis we have also forecasted that there is 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 7.77
percent of total potential gross revenues to a high of 23.01 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
11.42 percent of these revenues.
Total Rent Loss Forecast (%)
CY Year Physical Vacancy Global Vacancy Total Vacancy*
1996 20.01 3.00 23.01
1997 15.78 4.00 19.78
1998 7.53 5.00 12.53
1999 1.87 6.00 7.87
2000 1.48 7.00 8.48
2001 1.43 7.00 8.43
2002 0.87 7.00 7.87
2003 0.77 7.00 7.77
2004 3.27 7.00 10.27
2005 1.16 7.00 8.16
Mean 5.42 6.00 11.42
* Includes provision for unforeseen vacancy and credit loss as well
as provision for weighted downtime.
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 1996, effective gross
revenues ("Total Income" line on cash flow) are forecasted to amount to
approximately $9,735,680, equivalent to $48.70 per square foot of total owned
GLA.
Brookdale Center
Effective Gross Revenue Summary
Initial Year of Investment - 1996
Aggregate Sum Unit Rate Income Ratio
Potential Gross Income $9,948,767 $49.76 100.0%
Less: Vacancy and Credit Loss $ 213,087 $ 1.07 2.1%
Effective Gross Income $9,735,680 $48.70 97.9%
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, leasing commissions and a provision for capital
expenditures. Unless otherwise cited, expenses are forecasted to grow by 3.5
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 1996 budget for these expense items. This information
is provided in the Addenda. We have compared this information to published
data which are available, as well as comparable expense information. Finally,
this information has been tempered by our experience with other regional
shopping centers.
Expense Growth Rates
Expense growth rates are generally forecasted to be more consistent with
inflationary trends than necessarily with competitive market forces. The
Winter 1995 Cushman & Wakefield survey of regional malls found the low and
high mean from each respondent to be 3.75 percent. The Fourth Quarter 1995
Korpacz survey reports that the range in expense growth rates was from 3.0
percent to 5.0 percent with an average of 3.98 percent, down 13 basis points
from one year ago. Unless otherwise cited, expenses are forecasted to grow
by 3.5 percent per annum over the holding period.
Reimbursable Operating Expenses
We have analyzed each item of expense individually and attempted to
project what the typical investor in a property like the subject would
consider reasonable, based upon informed opinion, judgment and experience.
The following is a detailed summary and discussion of the reimbursable
operating expenses incurred in the operation of the subject property during
the initial year of the investment holding period.
Common Area Maintenance - This expense category includes the annual cost
of miscellaneous building maintenance contracts, recoverable labor and
benefits, security, insurance, landscaping, snow removal, cleaning
and janitorial, exterminating, supplies, trash removal, exterior
lighting, common area energy, gas and fuel, equipment rental, interest
and depreciation, and other miscellaneous charges. 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 $1,767,800
1994 $1,868,000
1995 Forecast $1,927,700
1996 Budgeted $1,882,700
The 1996 CAM budget is shown to be $1,822,700. An allocation
of this budget by line item is as follows:
1995 CAM Expense Allocation
Administrative, Payroll and Office $ 242,800
Security $ 475,900
Maintenance $ 696,300
Liability Insurance $ 219,500
Utilities $ 248,200
Total $ 1,822,700
Over the past five years, management has been capable of maintaining the
expense under $2,000,000. In our analysis, we have reflected a
first year expense of $1,900,000 (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.
Real Estate Taxes - The projected taxes to be incurred in 1996 are equal to
$2,471,000. As discussed, the standard recovery for this expense is
charged on the basis of average occupied area of non-major mall
tenant GLA. Taxes are charged to the mall tenants after first
deducting department store contributions. This expense item is projected
to increase by 4 percent per annum over the balance of the investment
holding period.
TABLE COMPARING COMMON AREA MAINTENANCE EXPENSE FOR
VARIOUS MSAs AROUND THE UNITED STATES
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 $245,700
1996(Budget) $217,200
We have estimated the 1996 expense at $220,000. The only department store
who contributes to this energy cost is Dayton's, whose 1995
contribution is estimated at $249,800. 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 3.5 percent per annum throughout the holding period.
TABLE ANALYZING OPERATING INCOME & EXPENSE FOR BROOKDALE CENTER
1992 TO 1994 ACTUAL, 1995 FORECAST, 1996 BUDGET
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 3.5 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 1996, we reflect general and administrative
expenses of $300,000.
Promotion - We have ascribed a 1996 expense of $200,000 for ownership's
contribution to the Merchants Association. This expense is
considered high, however in our opinion is required to aid in the lease-up
of vacant spaces. Promotional expenses are decreased to $150,000 in
1997, and to $100,000 in 1998, and then grown by the expense growth rate.
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
$35,000.
Management - The annual cost of managing the subject property is
projected to be 4.5 percent of minimum and percentage rent. In the
initial year of our analysis, this amount is shown to be $207,399.
Alternatively, this amount is equivalent to approximately 2.1 percent
of effective gross income. Our estimate is reflective of a typical
management agreement with a firm in the business of providing professional
management services. This amount is considered typical for a retail
complex of this size. Our investigation into the market for this
property type indicates an overall range of fees of 3 to 5 percent. Since
we have reflected a structure where we separately charge leasing
commissions, we have used the mid-point 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 Mervyn's throat area space which is
in raw condition, we have forecasted a workletter of $25.00 per square
foot. For all other currently vacant second generation space, we have
used a rate of $15.00 per square foot in order to expedite the lease-up.
All alteration 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 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 1996 Annual
Budget. We have also made a provision for an interior renovation during
1997 and 1998.
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 $650,000 in 1996, $450,000 in 1997, $350,000 in 1998,
$250,000 in 1999, 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 split up between 1997 and 1998.
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 1996, asbestos
abatement is scheduled to total $150,000. This expense decreases to
$100,000 for 1997, and $50,000 in 1998 and 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. Based on conversations with management,
we have budgeted $10,000,000 which is equivalent to approximately
$51.20 per square foot.
Renovation - Another expense that will be necessary to keep Dayton's at
the mall, as well as attract new tenants, will be a complete
renovation of the property. Based on conversations with management, this
expense is estimated at $5,000,000 and is incurred in 1997.
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 sizable. 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 $4,402,281 which is equivalent to 45.2 percent of effective gross
income. Deducting other expenses including capital items results in a net cash
flow loss of ($6,634,144).
Brookdale Center
Operating Summary
Initial Year of Investment - 1996
Aggregate Sum Unit Rate* Operating Ratio
Effective Gross Income $ 9,735,680 $48.70 100.0%
Operating Expenses $ 5,333,399 $26.68 54.8%
Net Income $ 4,402,281 $22.02 45.2%
Other Expenses $11,036,425 $55.20 113.0%
Cash Flow ($ 6,634,144) ($33.18) (68.1%)
* Based on total owned GLA of 199,922 square feet.
Our cash flow model has forecasted the following compound annual growth
rates over the ten year holding period 1996-2005.
Net Operating Income 2.74%
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, also referred to as the internal rate of
return (IRR).
Selection of Capitalization Rates
Overall Rate
The overall capitalization rate bears a direct relationship between net
operating income generated by the real estate in the initial year of
investment (or initial stabilized year) and the value of the asset in the
marketplace. Overall rates are also affected by the existing leasing
schedule of the property, the strength or weakness of the local rental
market, the property's position relative to competing properties, and the
risk/return characteristics associated with competitive investments.
The trend has been for rising capitalization rates. We feel that much of
this has to do with the quality of the product that has been selling. Sellers
of the better performing dominant Class A malls have been unwilling to
waver on their pricing. Many of the malls which have sold over the past 18
to 24 months are found in less desirable second or third tier locations or
represent turnaround situations with properties that are posed for expansion
or remerchandising. With fewer buyers for the top performing assets, sales
have been somewhat limited.
Overall Capitalization Rates
Regional Mall Sales
Year Range Mean Basis Point Change
1988 5.00% - 8.00% 6.16% -
1989 4.58% - 7.26% 6.05% -11
1990 5.06% - 9.11% 6.33% +28
1991 5.60% - 7.82% 6.44% +11
1992 6.00% - 7.97% 7.31% +87
1993 7.00% -10.10% 7.92% +61
1994 6.98% -10.29% 8.37% +45
1995 7.47% -11.10% 9.14% +79
The data above shows that, with the exception of 1989, the average cap rate
has shown a rising trend each year. Between 1988 and 1989, the average
rate declined by 11 basis points. This was partly a result of dramatically
fewer transactions in 1989 as well as the sale of Woodfield Mall at a reported
cap rate of 4.58 percent. In 1990, the average cap rate jumped 28 basis
points to 6.33 percent. Among the 16 transactions we surveyed that year,
there was a marked shift of investment criteria upward with additional basis
point risk added due to the deteriorating economic climate for commercial
real estate. Furthermore, the problems with department store anchors added
to the perceived investment risk.
1992 saw owners become more realistic in their pricing as some looked to
move product because of other financial pressures. The 87 basis point rise to
7.31 percent reflected the reality that, in many markets, malls were not
performing as strongly as expected. A continuation of this trend was seen in
1993 as the average rate increased by 61 basis points. The trend in deals
over the past two year period shows a respective rise in average cap rates of
45 and 59 basis points. For the year, 1994 transactions were a mix of
quality ranging from premier, institutional grade centers (Biltmore
Fashion Park, Riverchase Galleria) to B-centers such as Corte Madera Town
Center and Crossroads Mall. The continuation of this trend into 1995 is in
evidence as owners of the better quality malls are either aggressively
pricing them or keeping them off of the market until it improves further. Also,
the beating that REIT stocks took has forced up their yields thereby putting
pressure on the pricing levels they can justify.
Much of the buying over the past 18 to 24 months has been opportunistic
acquisitions involving properties selling near or below replacement cost.
Many of these properties have languished due to lack of management focus or
expertise as well as a limited ability to make the necessary capital
commitments for growth. As these opportunities become harder to find, we
believe that investors will again begin to focus on the stable returns of the
dominant Class A product.
The Cushman & Wakefield's Winter 1995 survey reveals that going-in cap
rates for regional shopping centers range between 7.0 and 9.0 percent with a
low average of 7.47 and high average of 8.25 percent, respectively; a spread
of 78 basis points. Generally, the change in average capitalization rates
over the Spring 1995 survey shows that the low average decreased by 3
basis points, while the upper average increased by 15 points. Terminal, or
going-out rates are now averaging 8.17 and 8.83 percent, representing a
decrease of 22 basis points and 23 basis points, from Spring 1995 averages.
Cushman & Wakefield Valuation Advisory Services
National Investor Survey - Regional Malls (%)
Investment Winter 1994 Spring 1995 Winter 1995
Parameters Low High Low High Low High
OAR/Going-In 6.50-9.50 7.50-9.50 7.00-8.50 7.50-8.50 7.00-8.00 7.50-9.00
7.6 8.4 7.50 8.1 7.47 8.25
OAR/Terminal 7.00-9.50 7.50-10.50 7.50-8.75 8.00-9.25 7.00-9.00 8.00-10.00
8.0 8.8 7.95 8.6 8.17 8.83
IRR 10.00-11.5 10.00-13.0 10.00-11.5 11.00-12.0 10.00-11.5 10.50-12.0
10.5 11.5 10.70 11.4 10.72 11.33
The Fourth Quarter 1995 Peter F. Korpacz survey finds that cap rates have
remained relatively stable. They recognize that there is extreme competition
for the few premier malls that are offered for sale which should exert
downward pressure on rates. However, most of the available product is B or C
quality which are not attractive to most institutional investors. The survey
did, however, note a dramatic change for the top tier investment category of
20 to 30 true "trophy" assets in that investors think it is unrealistic to
assume that cap rates could fall below 7.0 percent.
NATIONAL REGIONAL MALL MARKET
FOURTH QUARTER 1995
KEY INDICATORS CURRENT LAST YEAR AGO
Free & Clear Equity IRR QUARTER QUARTER
RANGE 10.00%-14.00% 10.00%-14.00% 10.00%-14.00%
AVERAGE 11.55% 11.55% 11.60%
CHANGE (Basis Points) - 0 - 5
Points)
Free & Clear Going-In Cap Rate
RANGE 6.25%-11.00% 6.25%-11.00% 6.25%-11.00%
AVERAGE 7.86% 7.84% 7.73%
CHANGE (Basis Points) - + 2 +13
Residual Cap Rate
RANGE 7.00%-11.00% 7.00%-11.00% 7.00%-11.00%
AVERAGE 8.45% 8.45% 8.30%
CHANGE (Basis Points) - 0 +15
Source: Peter Korpacz Associates, Inc. - Real Estate Investor Survey Fourth
Quarter - 1995
As can be seen from the above, the average IRR has decreased by 5 basis
points to 11.55 percent from one year ago. However, it is noted that this
measure has been relatively stable over the past three months. The quarter's
average initial free and clear equity cap rate rose 13 basis points to 7.86
percent from a year earlier, while the residual cap rate increased 15 basis
points to 8.45 percent.
Most retail properties that are considered institutional grade are
existing, seasoned centers with good inflation protection that offer
stability in income and are strongly positioned to the extent that they are
formidable barriers to new competition. Equally important are centers which
offer good upside potential after face-lifting, renovations, or expansion.
With new construction down substantially, owners have accelerated renovation
and re-merchandising programs. Little competition from over-building is
likely in most mature markets within which these centers are located.
Environmental concerns and "no- growth" mentalities in communities are now
serious impediments to new retail development.
Finally, investors have recognized that the retail landscape has been
fundamentally altered by consumer lifestyles changes, industry consolidations
and bankruptcies. This trend was strongly in evidence as the economy
enters 1996 in view of the wave of retail chains whose troublesome
earnings are forcing major restructures or even liquidations. (The reader is
referred to the National Retail Overview in the Addenda of this report).
Trends toward more casual dress at work and consumers growing pre- occupation
with their leisure and home lives have created the need for refocused
leasing efforts to bring those tenants to the mall that help differentiate
them from the competition. As such, entertainment, a loosely defined concept,
is one of the most common directions malls have taken. A trend toward
bringing in larger specialty and category tenants to the mall is also in
evidence. The risk from an owners standpoint is finding that mix which works
the best.
Nonetheless, the cumulative effect of these changes has been a rise in rates
as investors find it necessary to adjust their risk premiums in their
underwriting.
Based upon this discussion, we are inclined to group and characterize
regional malls into the general categories following:
Cap Rate Range Category
7.0% to 7.5% Top 20 to 25+/- malls in the country.
7.5% to 8.5% Dominant Class A investment grade property, high sales
levels, relatively good health ratios, excellent
demographics (top 50 markets), and considered to
present a significant barrier to entry within its
trade area.
8.5% to 10.5% Somewhat broad characterization of investment quality
properties ranging from primary MSAs to second tier
cities. Properties at the higher end of the scale are
probably somewhat vulnerable to new competition in
their market.
10.5% to 12.0% Remaining product which has limited appeal or
significant risk which will attract only a smaller,
select group of investors.
Conclusion - Initial Capitalization Rate
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.
We do not believe that the conversion of the former 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. Although through
its first six months Mervyn's has not had so much of a positive impact as
expected, the lower price points offered by Mervyn's 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.
We do recognize that management has been addressing the physical issues
and continues to be modestly successful in attracting new tenants to
the mall. The renovation of the Mervyn's throat area will be a long term
benefit to the property. However, due to the uncertainty of Dayton's, the
overall physical state of the mall, as well as increased competition, any
investor would view the subject as an investment risk and would require the
potential for high returns.
On balance, a property with the characteristics of the subject would
potentially trade at an overall rate between 10.75 and 11.25 percent based on
first year income if it were operating on a stabilized operating income basis.
Terminal Capitalization Rate
The residual cash flows annually generated by the subject property comprise
only the first part of the return which an investor will receive. The
second component of this investment return is the pre-tax cash proceeds
from the resale of the property at the end of a projected investment
holding period. Typically, investors will structure a provision in their
analyses in the form of a rate differential over a going-in capitalization rate
in projecting a future disposition price. The view is that the improvement is
then older and the future is harder to visualize hence a slightly higher
rate is warranted for added risks in forecasting. On average, our rate
survey shows a 38 basis point differential.
Therefore, to the range of stabilized overall capitalization rates, we have
added 25 basis points to arrive at a projected terminal capitalization rate
ranging from 11.00 to 11.50 percent. This provision is made for the risk of
lease up and maintaining a certain level of occupancy in the center, its level
of revenue collection, the prospects of future competition, as well as the
uncertainty of maintaining the forecasted growth rates over such a holding
period. In our opinion, this range of terminal rates would be appropriate
for the subject. Thus, this range of rates is applied to the following
year's net operating income before reserves, capital expenditures, leasing
commissions and alterations as it would be the first received by a new
purchaser of the subject property. Applying a rate of say 11.25 percent for
disposition, a current investor would dispose of the subject property at the
end of the investment holding period for an amount of approximately
$51,246,053 based on 2006 net income of approximately $5,765,181.
From the projected reversionary value to an investor in the subject property,
we have made a deduction to account for the various transaction costs
associated with the sale of an asset of this type. These costs consist of
2.0 percent of the total disposition price of the subject property as an
allowance for transfer taxes, professional fees, and other miscellaneous
expenses including an allowance for alteration costs that the seller pays
at final closing. Deducting these transaction costs from the computed
reversion renders pre-tax the net proceeds of sale to be received by an
investor in the subject property at the end of the holding period.
Net Proceeds at Reversion
Less Costs of Sale and
Net Income 2006 Gross Sale Price Miscellaneous Expenses Net Proceeds
Expenses @ 2.0%
$5,765,181 $51,246,053 $1,024,921 $50,221,132
Selection of Discount Rate
The discounted cash flow analysis makes several assumptions which reflect
typical investor requirements for yield on real property. These assumptions
are difficult to directly extract from any given market sale or by
comparison to other investment vehicles. Instead, investor surveys of
major real estate investment funds and trends in bond yield rates are often
cited to support such analysis.
A yield or discount rate differs from an income rate, such as cash-on-cash
(equity dividend rate), in that it takes into consideration all equity
benefits, including the equity reversion at the time of resale and annual
cash flow from the property. The internal rate of return is the single-yield
rate that is used to discount all future equity benefits (cash flow and
reversion) into the initial equity investment. Thus, a current estimate of
the subject's present value may be derived by discounting the projected
income stream and reversion year sale at the property's yield rate.
Yield rates on long term real estate investments range widely between property
types. As cited in Cushman & Wakefield's Winter 1995 survey, investors in
regional malls are currently looking at broad rates of return between 10.0
and 12.00 percent, down slightly from our last two surveys. The indicated
low and high means are 10.72 and 11.33 percent, respectively. Peter F.
Korpacz reports an average internal rate of return of 11.55 percent for
the Fourth Quarter 1995, down 5 basis points from the year ago level.
The yield rate on a long term real estate investment can also be compared with
yield rates offered by alternative financial investments since real estate
must compete in the open market for capital. In developing an appropriate risk
rate for the subject, consideration has been given to a number of different
investment opportunities. The following is a list of rates offered by other
types of securities.
Market Rates and Bond Yields (%) February, 1996
Reserve Bank Discount Rate 5.00
Prime Rate (Monthly Average) 8.25
3-Month Treasury Bills 4.86
U.S. 10-Year Notes 6.06
U.S. 30-Year Bonds 6.47
Telephone Bonds 7.70
Municipal Bonds 5.68
Source: New York Times
This compilation of yield rates from alternative investments reflects varying
degrees of risk as perceived by the market. Therefore, a riskless level of
investment might be seen in a three month treasury bill at 4.86
percent. A more risky investment, such as telephone bonds, would currently
yield a much higher rate of 7.70 percent. The prime rate is currently 8.25
percent, while the discount rate is 5.00 percent. Ten year treasury
notes are currently yielding around 5.06 percent, while 30-year bonds are at
6.47 percent.
Real estate investment typically requires a higher rate of return (yield)
and is much influenced by the relative health of financial markets. A
retail center investment tends to incorporate a blend of risk and credit
based on the tenant mix, the anchors that are included (or excluded) in the
transaction, and the assumptions of growth incorporated within the cash flow
analysis. An appropriate discount rate selected for a retail center thus
attempts to consider the underlying credit and security of the income
stream, and includes an appropriate premium for liquidity issues relating to
the asset.
There has historically been a consistent relationship between the spread in
rates of return for real estate and the "safe" rate available through
long-term treasuries or high-grade corporate bonds. A wider gap between
return requirements for real estate and alternative investments has been
created in recent years due to illiquidity issues, the absence of third party
financing, and the decline in property values.
Investors have suggested that the regional mall market has become
increasingly "tiered" over the past two years. The country's premier
malls are considered to have the strongest trade areas, excellent anchor
alignments, and significant barriers of entry to future competitive supply.
These and other "dominant" malls will have average mall shop sales above $300
per square foot and be attractive investment vehicles in the current market.
It is our opinion that the subject would attract high interest from
institutional investors if offered for sale in the current marketplace. There
is not an abundance of regional mall assets of comparable quality currently
available, and many regional malls have been included within REITs,
rather than offered on an individual property basis. However, we must
further temper our analysis due to the fact that there remains some risk
that the inherent assumptions employed in our model come to full fruition.
Finally, application of these rate parameters to the subject should entail
some sensitivity to the rate at which leases will be expiring over the
projection period. Provided on the following page is a summary of the
forecasted lease expiration schedule for the subject. A complete
expiration report is included in the Addenda.
Lease Expiration Schedule
Calendar Year No. of Leases GLA(SF) Cumulative %
1996 -- --- ---
1997 10 22,738 11.4%
1998 6 9,701 16.2%
1999 5 3,662 18.1%
2000 8 17,783 27.0%
2001 9 17,114 35.5%
2002 6 10,436 40.7%
2003 7 8,073 44.8%
2004 16 39,246 64.4%
2005 6 13,958 71.4%
* Includes mall shops and kiosks
From the above, we see that a large percentage (27 percent) of the GLA will
expire by 2000 and that by the end of 2003, approximately 45 percent of
mall shop GLA will expire. The largest expiration year is 2004 when
leases totaling 39,246 square feet of the center will expire. Over the total
projection period, over 71 percent will expire. Overall, consideration is
given to this in our selection of an appropriate risk rate. We would also
note that much of the risk factored into such an analysis is reflected in
the assumptions employed within the cash flow model, including rent and sales
growth, turnover, reserves, and vacancy provisions.
We have briefly discussed the investment risks associated with the subject.
On balance, it is our opinion that an investor in the subject property would
require an internal rate of return between 13.00 and 14.00 percent.
Present Value Analysis
Analysis by the discounted cash flow method is examined over a holding period
that allows the investment to mature, the investor to recognize a return
commensurate with the risk taken, and a recapture of the original
investment. Typical holding periods usually range from 10 to 20 years and
are sufficient for the majority of institutional grade real estate such as
the subject to meet the criteria noted above. In the instance of the subject,
we have analyzed the cash flows anticipated over a ten year period commencing
on January 1, 1996.
A sale or reversion is deemed to occur at the end of the 10th year (December
31, 2005), based upon capitalization of the following year's net
operating income. This is based upon the premise that a purchaser in the
10th year is buying the following year's net income. Therefore, our
analysis reflects this situation by capitalizing the first year of the
next holding period.
The present value is formulated by discounting the property cash flows at
various yield rates. The yield rate utilized to discount the projected cash
flow and eventual property reversion has been based on an analysis of
anticipated yield rates of investors dealing in similar investments. The
rates reflect acceptable expectations of yield to be achieved by investors
currently in the marketplace shown in their current investment criteria and
as extracted from comparable property sales.
Cash Flow Assumptions
Our cash flows forecasted for the mall have been presented. To reiterate,
the formulation of these cash flows incorporated into our computer model the
following general assumptions.
1. The pro forma is presented on a calendar year basis commencing on
January 1, 1996. The present value analysis is based on a 10 year
holding period commencing from January 1, 1996. This period reflects
10 years of operations and follows an adequate time for the property to
proceed through an orderly lease-up and continue to benefit from any
remerchandising. In this regard, we have projected that the investment
will be sold at the year ending December 31, 2005.
2. Existing lease terms and conditions remain unmodified until their
expiration. At expiration, it has been assumed that there is an 70.0
percent probability that 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.
3. 1996 base date market rental rates for existing tenants have been
established according to tenant size with consideration given to
location within the mall, the specific merchandise category, as well as
the tenants sales history. Lease terms throughout the total complex
vary but for new in-line mall tenants are generally 5 to 12 years.
While some have been flat, others have one or two step-ups over the
course of the term. Upon renewal, it is assumed that new leases are
written for an average of 10 years with a step of 10 percent in year 6.
An exception exists in the instance where a tenant is determined to be
paying base rent which is above market, or where percentage rent is
being generated in the base lease and is forecasted to continue over
the ensuing period. In these instances, we have assumed that a flat
lease will be written. Kiosk leases are written for 5 year terms with
no rent increase.
4. Market rents have been established for 1996 based upon an overall
average of about $20.00 per square foot for in-line mall shop space.
Subsequently, it is our assumption that market rental rates for mall
tenants will remain flat through 1998, increase by 1.5 percent in 1999,
2.0 percent in 2000, and 2.5 percent per year thereafter.
5. Most tenants have percentage rental clauses providing for the payment
of overage rent. We have relied upon average sales data as provided by
management. Sales for 1996 are forecasted at 2.0% below 1995 sales or
approximately $250 per square foot. In our analysis, we have
forecasted that sales will be flat in 1997 and then grow by 1.0 percent
in 1998, 2.0 percent in 1999, and 2.5 percent per year throughout the
balance of the holding period.
6. Expense recoveries are based upon terms specified in the various lease
contracts. The standard lease contract for real estate taxes and
common area maintenance billings for interior mall tenants is based
upon a tenants pro rata share with the latter carrying an
administrative surcharge of 15 percent. Pro-rata share is generally
calculated on leased (occupied) area as opposed to leasable area.
Department store contributions are deducted before pass through to the
mall shops. 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
30.0 percent probability that the retail tenant will vacate the suite.
At this time we have forecasted that rent loss equivalent to 6 months
rent would be incurred to account for the time associated with bringing
the space back on-line. In addition, we have forecasted an annual
global vacancy and credit loss of gross rental income which we have
stepped-up to a stabilized level of 6.0 percent. This global provision
is applied to all tenants excluding anchor department stores.
8. Specialty leasing and miscellaneous income consists of several
categories. Specialty leasing is generated by the mall's successful
cart program as well as the temporary in-line tenants which fill in
during periods of downtime between permanent in-line tenants.
Miscellaneous income is generated by chargebacks for tenant work,
forfeited security deposits, stroller rentals, telephones, etc. We
have grown all miscellaneous revenues by 3.0 percent per annum.
9. Operating expenses have been developed from management's budget from
which we have recast certain expense items. Expenses have also been
compared to industry standards as well as our general experience in
appraising regional malls throughout the country. Operating expenses
are generally forecasted to increase by 3.5 percent per year except for
management which is based upon 4.5 percent of minimum and percentage
rent annually. Taxes are forecasted to grow at 4.0 percent per year.
Alteration costs are assumed to escalate at our forecasted expense
inflation rate.
10. A provision for capital reserves of $30,000 equal to approximately
$0.15 per square foot of total owned GLA. An alteration charge of
either $10.00 or $15.00 per square foot has been utilized for new mall
tenants. Renewal tenants have been given an allowance of $1.00 per
square foot. Raw space associated with the Mervyn's Throat area has
been allocated a $40.00 per square foot workletter. Provision for other
capital expenditures have been made for deferred maintenance, asbestos
removal, and interior renovation and the remodel of the Dayton's store.
TABLES SHOWING REVERSION CALCULATION AND SALE YIELD MATRIX ANALYSIS
FOR BROOKDALE CENTER
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 13.00 to 14.00 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 13.00 to 14.00 percent at 50 basis point intervals on
equity capital over the holding period. This range of rates reflects the
risks associated with the investment. Discounting these cash flows over the
range of yield and terminal rates now being required by participants in the
market for this type of real estate places additional perspective upon our
analysis. A valuation matrix for the subject appears on the facing page.
Through such a sensitivity analysis, it can be seen that the present value of
the subject property varies from approximately $23.6 to $26.4 million. Giving
consideration to all of the characteristics of the subject previously
discussed, we feel that a prudent investor would require a yield which falls
near the middle of the range outlined above for this property.
Accordingly, we believe that based upon all of the assumptions inherent in
our cash flow analysis, an investor would look toward as IRR around 13.50
percent and a terminal rate around 11.25 percent as being most
representative of the subject's value in the market.
In view of the analysis presented here, it becomes our opinion that the
discounted cash flow analysis indicates a market value of $25.0 million for the
subject property as of January 1, 1996. The indices of investment generated
through this indicated value conclusion are shown on the following page.
DISCOUNTED CASH FLOW ANALYSIS
Brookdale Center (Minneapolis, MN)
Cushman & Wakefield, Inc.
Year Net Discount Present Value Composition Annual Cash
No. Cash Flow Factor @ 13.5% of Cash Flows of Yield on Cash Returns
One ($6,634,144) x 0.881057 = ($5,845,061) -23.44% -26.54%
Two ($1,630,019) x 0.776262 = ($1,265,322) -5.08% -6.52%
Three $4,258,700 x 0.683931 = $2,912,658 11.68% 17.03%
Four $4,619,275 x 0.602583 = $2,783,495 11.16% 18.48%
Five $4,931,330 x 0.530910 = $2,618,091 10.50% 19.73%
Six $5,015,389 x 0.467762 = $2,346,008 9.41% 20.06%
Seven $5,205,153 x 0.412125 = $2,145,174 8.60% 20.82%
Eight $5,321,425 x 0.363106 = $1,932,240 7.75% 21.29%
Nine $5,042,702 x 0.319917 = $1,613,246 6.47% 20.17%
Ten $5,447,247 x 0.281865 = $1,535,389 6.16% 21.79%
Total Present Value of Cash Flows: $10,775,917 43.22% 12.63% Avg
Reversion:
Eleven $5,765,181 (1) / 11.25% = $51,246,053
Less: Cost of Sale @ 2% $ 1,024,921
Net Reversion $50,221,132
x Discount Factor 0.281865
Total Present Value of Reversion $14,155,587 56.78%
Total Present Value $24,931,504 100.00%
ROUNDED: $25,000,000
Owned GLA (SF): 199,922
Per Square Foot of Owned GLA: $125
Implicit Going-In Capitalization Rate:
Year One NOI $4,402,281
Going-In Cap Rate 17.61%
CAGR Concluded Value to Reversion 6.74%
Note: (1) Net Operating Income
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.
RECONCILIATION AND FINAL VALUE ESTIMATE
Application of the Sales Comparison Approach and Income Approach 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 $24,800,000
Income Approach
Discounted Cash Flow $28,800,000
This is considered a narrow range in possible value given the magnitude of the
value estimates. Both approaches are well supported by data extracted from
the market. There are, however, strengths and weaknesses in each of these
two approaches which require reconciliation before a final conclusion of value
can be rendered.
Sales Comparison Approach
The Sales Comparison Approach arrived at a value indicted for the property by
analyzing historical arms-length transaction, reducing the gathered
information to common units of comparison, adjusting the sale data for
differences with the subject and interpreting the results to yield a
meaningful value conclusion. The basis of these conclusions was the
cash-on-cash return based on net income and the adjusted price per square
foot of gross leasable area sold. An analysis of the subject on the basis
of its implicit sales multiple was also utilized.
The process of comparing historical sales data to assess what purchasers have
been paying for similar type properties is weak in estimating future
expectations. Although the unit sale price yields comparable conclusions, it
is not the primary tool by which the investor market for a property
like the subject operates. In addition, no two properties are alike with
respect to quality of construction, location, market segmentation and
income profile. As such, subjective judgment necessarily become a part of
the comparative process. The usefulness of this approach is that it
interprets specific investor parameters established in their analysis and
ultimate purchase of a property. In light of the above, the writers are of
the opinion that this methodology is best suited as support for the
conclusions of the Income Approach. It does provide useful market
extracted rates of return such as overall rates to simulate investor
behavior in the Income Approach.
Income Approach
Discounted Cash Flow Analysis
The subject property is highly suited to analysis by the discounted cash
flow method as it will be bought and sold in investment circles. The focus
on property value in relation to anticipated income is well founded since the
basis for investment is profit in the form of return or yield on invested
capital. The subject property, as an investment vehicle, is sensitive to all
changes in the economic climate and the economic expectations of investors.
The discounted cash flow analysis may easily reflect changes in the
economic climate of investor expectations by adjusting the variables used to
qualify the model. In the case of the subject property, the Income
Approach can analyze existing leases, the probabilities of future
rollovers and turnovers and reflect the expectations of overage rents.
Essentially, the Income Approach can model many of the dynamics of a complex
shopping center. The writers have considered the results of the discounted
cash flow analysis because of the applicability of this method in
accounting for the particular characteristics of the property, as well as
being the tool used by many purchasers.
Conclusions
We have briefly discussed the applicability of each of the methods
presented. Because of certain vulnerable characteristics in the Sales
Comparison Approach, it has been used as supporting evidence and as a final
check on the value conclusion indicated by the Income Approach methodology.
The value exhibited by the Income Approach is consistent with the leasing
profile of the mall. It indicates complimentary results with the
Sales Comparison Approach, the conclusions being supportive of each method
employed, and neither range being extremely high or low in terms of the other.
As a result of our analysis, we have formed an opinion that the market value
of the leased fee estate in the referenced property, subject to the
assumptions, limiting conditions, certifications, and definitions, as of
January 1, 1996, was:
TWENTY FIVE MILLION DOLLARS
$25,000,000
ASSUMPTIONS AND LIMITING CONDITIONS
-------------------------------------
"Appraisal" means the appraisal report and opinion of value stated
therein; or the letter opinion of value, to which these Assumptions and
Limiting Conditions are annexed.
"Property" means the subject of the Appraisal.
"C&W" means Cushman & Wakefield, Inc. or its subsidiary which issued the
Appraisal.
"Appraiser(s)" means the employee(s) of C&W who prepared and signed the
Appraisal.
This appraisal is made subject to the following assumptions and limiting
conditions:
1. This is a Summary Appraisal Report which is intended to comply with
the reporting requirements set forth under Standards Rule 2-2)b)
of the Uniform Standards of Professional Appraisal Practice for
a Summary Appraisal Report. As such, it presents only summary
discussions of the data, reasoning, and analyses that were used in
the appraisal process to develop the appraiser's opinion of
value. Supporting documentation concerning the data, reasoning,
and analyses is retained in the appraiser's file. The depth of
discussion contained in this report is specific to the needs of the
client and for the intended use stated below. The appraiser is
not responsible for unauthorized use of this report. We are
providing this report as an update to our last analysis which was
prepared as of January 1, 1995. As such, we have primarily
reported only changes to the property and its environs over the
past year.
2. No opinion is intended to be expressed and no responsibility is
assumed for the legal description or for any matters which are
legal in nature or require legal expertise or specialized knowledge
beyond that of a real estate appraiser. Title to the Property is
assumed to be good and marketable and the Property is assumed to
be free and clear of all liens unless otherwise stated. No survey
of the Property was undertaken.
3. The information contained in the Appraisal or upon which the
Appraisal is based has been gathered from sources the Appraiser
assumes to be reliable and accurate. Some of such information may
have been provided by the owner of the Property. Neither the
Appraiser nor C&W shall be responsible for the accuracy or
completeness of such information, including the correctness of
estimates, opinions, dimensions, sketches, exhibits and factual
matters.
4. The opinion of value is only as of the date stated in the
Appraisal. Changes since that date in external and market
factors or in the Property itself can significantly affect
property value.
5. The Appraisal is to be used in whole and not in part. No part
of the Appraisal shall be used in conjunction with any other
appraisal. Publication of the Appraisal or any portion
thereof without the prior written consent of C&W is prohibited.
Except as may be otherwise stated in the letter of engagement, the
Appraisal may not be used by any person other than the party to
whom it is addressed or for purposes other than that for which
it was prepared. No part of the Appraisal shall be conveyed to
the public through advertising, or used in any sales or
promotional material without C&W's prior written consent.
Reference to the Appraisal Institute or to the MAI designation is
prohibited.
6. Except as may be otherwise stated in the letter of engagement, the
Appraiser shall not be required to give testimony in any court or
administrative proceeding relating to the Property or the
Appraisal.
7. The Appraisal assumes (a) responsible ownership and competent
management of the Property; (b) there are no hidden or unapparent
conditions of the Property, subsoil or structures that render the
Property more or less valuable (no responsibility is assumed for
such conditions or for arranging for engineering studies that may
be required to discover them); (c) full compliance with all
applicable federal, state and local zoning and environmental
regulations and laws, unless noncompliance is stated, defined
and considered in the Appraisal; and (d) all required licenses,
certificates of occupancy and other governmental consents have
been or can be obtained and renewed for any use on which the
value estimate contained in the Appraisal is based.
8. The forecasted potential gross income referred to in the
Appraisal may be based on lease summaries provided by the owner or
third parties. The Appraiser assumes no responsibility for the
authenticity or completeness of lease information provided by
others. C&W recommends that legal advice be obtained regarding the
interpretation of lease provisions and the contractual rights of
parties.
9. The forecasts of income and expenses are not predictions of the
future. Rather, they are the Appraiser's best estimates of current
market thinking on future income and expenses. The Appraiser
and C&W make no warranty or representation that these forecasts
will materialize. The real estate market is constantly fluctuating
and changing. It is not the Appraiser's task to predict or in any
way warrant the conditions of a future real estate market; the
Appraiser can only reflect what the investment community, as of
the date of the Appraisal, envisages for the future in terms of
rental rates, expenses, supply and demand.
10. Unless otherwise stated in the Appraisal, the existence
of potentially hazardous or toxic materials which may have
been used in the construction or maintenance of the improvements
or may be located at or about the Property was not considered in
arriving at the opinion of value. These materials (such as
formaldehyde foam insulation, asbestos insulation and other
potentially hazardous materials) may adversely affect the value
of the Property. The Appraisers are not qualified to detect such
substances. C&W recommends that an environmental expert be
employed to determine the impact of these matters on the opinion of
value.
11. Unless otherwise stated in the Appraisal, compliance with
the requirements of the Americans With Disabilities Act of 1990
(ADA) has not been considered in arriving at the opinion of
value. Failure to comply with the requirements of the ADA may
adversely affect the value of the property. C&W recommends that
an expert in this field be employed.
CERTIFICATION OF APPRAISAL
We certify that, to the best of our knowledge and belief:
1. Brian J. Booth inspected the property, and Richard W. Latella, MAI,
has reviewed and approved the report but did not inspect the property.
2. The statements of fact contained in this report are true and correct.
3. The reported analyses, opinions, and conclusions are limited only
by the reported assumptions and limiting conditions, and are our
personal, unbiased professional analyses, opinions, and conclusions.
4. We have no present or prospective interest in the property that is
the subject of this report, and we have no personal interest or bias
with respect to the parties involved.
5. Our compensation is not contingent upon the reporting of a
predetermined value or direction in value that favors the cause of the
client, the amount of the value estimate, the attainment of a
stipulated result, or the occurrence of a subsequent event. The
appraisal assignment was not based on a requested minimum valuation, a
specific valuation or the approval of a loan.
6. No one provided significant professional assistance to the persons
signing this report.
7. Our analyses, opinions, and conclusions were developed, and this report
has been prepared, in conformity with the Uniform Standards of
Professional Appraisal Practice of the Appraisal Foundation and the
Code of Professional Ethics and the Standards of Professional Appraisal
Practice of the Appraisal Institute.
8. The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
9. As of the date of this report, Richard W. Latella, MAI has completed
the requirements of the continuing education program of the Appraisal
Institute.
/s/Brian J. Booth
Brian J. Booth
Retail Valuation Group
/s/Richard W. Latella
Richard W. Latella, MAI
Senior Director
Retail Valuation Group
Certified General Real Estate Appraiser License No. 20026517
ADDENDA
---------
NATIONAL RETAIL OVERVIEW
OPERATING EXPENSE BUDGET (1996)
TENANT SALES REPORT (1995)
PRO-JECT LEASE ABSTRACT REPORT
PRO-JECT PROLOGUE ASSUMPTIONS REPORT
PRO-JECT TENANT REGISTER REPORT
PRO-JECT LEASE EXPIRATION REPORT
ENDS FULL DATA REPORT FOR PRIMARY AND TOTAL TRADE AREA
REGIONAL MALL SALES (1991-1993)
CUSHMAN & WAKEFIELD INVESTOR SURVEY
APPRAISERS' QUALIFICATIONS
PARTIAL CLIENT LIST
CUSHMAN & WAKEFIELD, INC.
NATIONAL RETAIL OVERVIEW
Prepared by: Richard W. Latella, MAI
NATIONAL RETAIL MARKET OVERVIEW
Introduction
Shopping centers constitute the major form of retail activity in the United
States today. Approximately 55 percent of all non- automotive retail sales
occur in shopping centers. It is estimated that consumer spending
accounts for about two-thirds of all economic activity in the United States.
As such, retail sales patterns have become an important indicator of
the country's economic health.
During the period 1980 through 1995, total retail sales in the United
States increased at a compound annual rate of 6.16 percent. Data for the
period 1990 through 1995 shows that sales growth has slowed to an annual
average of 4.93 percent. This information is summarized on the following
chart. The Commerce Department reports that total retail sales fell
three-tenths of a percent in January 1996.
Total U.S. Retail Sales(1)
Year Amount Annual Change
(Billions)
1980 $ 957,400 N/A
1985 $1,375,027 N/A
1990 $1,844,611 N/A
1991 $1,855,937 .61%
1992 $1,951,589 5.15%
1993 $2,074,499 6.30%
1994 $2,236,966 7.83%
1995 $2,346,577 4.90%
Compound Annual
Growth Rate +6.16%
1980-1995
CAGR: 1990 - 1995 +4.93%
(1)1985 - 1995 data reflects recent revisions by the U.S. Department of
Commerce: Combined Annual and Revised Monthly Retail Trade.
Source: Monthly Retail Trade Reports Business Division, Current Business
Reports, Bureau of the Census, U.S. Department of Commerce.
The early part of the 1990s was a time of economic stagnation and
uncertainty in the country. The gradual recovery, which began as the
nation crept out of the last recession, has shown some signs of weakness as
corporate downsizing has accelerated. But as the recovery period reaches into
its fifth year and the retail environment remains volatile, speculation
regarding the nation's economic future remains. It is this uncertainty which
has shaped recent consumer spending patterns.
Personal Income and Consumer Spending
Americans' personal income advanced by six-tenths of a percent in
December, which helped raise income for all of 1995 by 6.1 percent, the
highest gain since 6.7 percent in 1990. This growth far outpaced the 2.5
percent in 1994 and 4.7 percent in 1993. Reports for February 1996 however,
reported that income grew at an annual rate of eight-tenths of a percent,
the biggest gain in thirteen months, and substantially above January's anemic
growth rate of one-tenth of a percent.
Consumer spending is another closely watched indicator of economic
activity. The importance of consumer spending is that it represents
two-thirds of the nation's economic activity. Total consumer spending rose
by 4.8 percent in 1995, slightly off of the 5.5 percent rise in 1994 and 5.8
percent in 1993. These increases followed a significant lowering on
unemployment and bolstered consumer confidence. The Commerce Department
reported that Americans spent at an annual rate of $5.01 trillion in January
1996, a drop of five-tenths of a percent. It was the third drop in five
months.
Unemployment Trends
The Clinton Administration touts that its economic policy has dramatically
increased the number of citizens who have jobs. Correspondingly, the
nation's unemployment rate continues to decrease from its recent peak in
1992. Selected statistics released by the Bureau of Labor Statistics are
summarized as follows:
Selected Employment Statistics
Civilian Labor Force Employed
Total Workers Total Workers Unemployment
Year(1) (000) % Change (000) % Change Rate
1990 124,787 .7 117,914 .5 5.5
1991 125,303 .4 116,877 -.9 6.7
1992 126,982 1.3 117,598 .6 7.4
1993 128,040 .8 119,306 1.5 6.8
1994 131,056 2.4 123,060 3.1 6.1
1995 132,337 .98 124,926 1.5 5.6
CAGR 1.18 1.16
1990-1995
(1)Year ending December 31
Source: Bureau of Labor Statistics U.S. Department of Labor
During 1995, the labor force increased by 1,281,000 or approximately
1.0 percent. Correspondingly, the level of employment increased by
1,866,000 or 1.5 percent. As such, the year end unemployment rate dropped by
five-tenths of a percent to 5.6 percent. For 1995, monthly job growth averaged
144,000. On balance, over 8.0 million jobs have been created since the
recovery began.
Housing Trends
Housing starts enjoyed a good year in 1994 with a total of 1.53 million
starts; this up 13.0 percent from 1.45 million in 1993. Multi-family was up
60.0 percent in 1994 with 257,00 starts. However, the National Asociation of
Homebuilders forsees a downshift in activity throughout 1995 resulting from the
laggard effect of the Federal Reserves's policy of raising interest rates. The
.50 percent increase in the federal funds rate on February 1, 1995 was the
seventh increase over the past thirteen months, bringing it to its highest
level since 1991. Sensing a retreat in the threat of inflation, the Fed
reduced the Federal Funds rate by 25 basis points in July 1995 to 5.75 percent.
Total housing starts rose by 6.0 percent to a seasonally adjusted annual
rate of 1.42 million units. Since family housing starts in November were at
1,102,00 units while multi-family jumped by 77,000 at an annual rate.
Applications for building permits rose by 3.2 percent to a rate of 1.28
million. The median new home price of new homes sold in the first nine months
of 1995 was $132,000. The median was $130,000 for all of 1994. The Commerce
Department reported that construction spending rose 2.9 percent in October to
an annual rate of $207.7 billion, compared to $217.9 billion in all of 1994.
The home ownership rate seems to be rising, after remaining stagnant over
the last decade. For the third quarter of 1995, the share of households that
own their homes was 65 percent, compared to 64.1 percent for a year earlier.
Lower mortgage rates are cited as a factor.
Gross Domestic Product
The report on the gross domestic product (GDP) showed that output for
goods and services expanded at an annual rate of just .9 percent in the
fourth quarter of 1995. Overall, the economy gained 2.1 percent in 1995, the
weakest showing in four years since the 1991 recession. The .9 percent
rise in the fourth quarter was much slower than the 1.7 percent expected
by most analysts. The Fed sees the U.S. economy expanding at a 2.0 to 2.25
percent pace during 1996 which is in-line with White House forecasts.
The following chart cites the annual change in real GDP since 1990.
Real GDP
Year % Change
1990 1.2
1991 - .6
1992 2.3
1993 3.1
1994 4.1
1995 * 2.1
* Reflects new chain weighted system of measurement. Comparable
1994 measure would be 3.5%
Source: Bureau of Economic Analysis
Consumer Prices
The Bureau of Labor Statistics has reported that consumer prices rose
by only 2.5 percent in 1995, the fifth consecutive year in which inflation
was under 3.0 percent. This was the lowest rate in nearly a decade when
the overall rate was 1.1 percent in 1986. All sectors were down
substantially in 1995 including the volatile health care segment which
recorded inflation of only 3.9 percent, the lowest rate in 23 years.
The following chart tracks the annual change in the CPI since 1990.
Consumer Price Index(1)
Year CPI % Change
1990 133.8 6.1
1991 137.9 3.0
1992 141.9 2.9
1993 145.8 2.7
1994 149.7 2.7
1995 153.5 2.5
(1) All Urban Workers
Source: Dept. of Labor, Bureau of Labor Statistics
Other Indicators
The government's main economic forecasting gauge, the Index of Leading
Economic Indicators shows that the vibrant 1994 economy continues to cool off.
The index is intended to project econoic growth over the next six months. The
Conference Board, an independent business group, reported that the index
rose two-tenths of a percent in December 1995, breaking a string of three
straight declines. It has become apparent that the Federal Reserve's
conservative monetary policy has had an effect on the economy and some
economists are calling for a further reduction in short term interest rates.
The Conference Board also reported that consumer confidence rebounded in
February 1996, following reports suggesting lower inflation. The board's
index of consumer confidence rose 9 points to 97 over January when
consumers worried about the government shutdown, the stalemate over the
Federal budget and the recent flurry of layoff announcements by big
corporations.
In another sign of increasingly pinched household budgets, consumers
sharply curtailed new installment debt in September 1995, when installment
credit rose $5.4 billion, barely half as much as August. Credit card
balances increased by $2.8 billion, the slimmest rise of the year. For the
twelve months through September 1995, outstanding credit debt rose 13.9
percent, down from a peak of 15.3 percent in May. Still, installment debt
edged to a record 18.8 percent of disposable income, indicating that
consumers may be reaching a point of discomfort with new debt.
The employment cost index is a measure of overall compensation
including wages, salaries and benefits. In 1995 the index rose by only 2.9
percent, the smallest increase since 1980. This was barely ahead of
inflation and is a sign of tighter consumer spending over the coming
year.
Economic Outlook
The WEFA Group, an economic consulting company, opines that the current
state of the economy is a "central bankers" dream, with growth headed
toward the Fed's 2.5 percent target, accompanied by stable if not
falling inflation. They project that inflation will remain in the 2.5 to
3.0 percent range into the foreseeable future. This will have a direct
influence on consumption (consumer expenditures) and overall inflation rates
(CPI).
Potential GDP provides an indication of the expansion of output, real
incomes, real expenditures, and the general standard of living of the
population. WEFA estimates that real U.S. GDP will grow at an average annual
rate between 2.0 and 2.5 percent over the next year and at 2.3 percent
through 2003 as the output gap is reduced between real GDP and potential GDP.
After 2003, annual real GDP growth will moderate, tapering to 2.2 percent per
annum.
Consumption expenditures are primarily predicated on the growth of
real permanent income, demographic influences, and changes in relative
prices over the long term. Changes in these key variables explain much of
the consumer spending patterns of the 1970s and mid-1980s, a period during
which baby boomers were reaching the asset acquisition stages of their lives;
purchasing automobiles and other consumer and household durables. Increases in
real disposable income supported this spending spurt with an average annual
increase of 2.9 percent per year over the past twenty years. Real
consumption expenditures increased at an average annual rate of 3.1 percent
during the 1970s and by an average of 4.0 percent from 1983 to 1988. WEFA
projects that consumption expenditure growth will slow to 2.0 percent per year
by 2006 as a result of slower population growth and aging. It is also
projected that the share of personal consumption expenditures
relative to GDP will decline over the next decade. Consumer spending as a
share of GDP peaked in 1986 at 67.4 percent after averaging about 63.0
percent over much of the post- war period. WEFA estimates that consumption's
share of aggregate output will decline to 64.5 percent by 2003 and 62.7
percent by 2018.
Retail Sales
In their publication, NRB/Shopping Centers Today 1994 Shopping
Center Census, the National Research Bureau reports that overall retail
conditions continued to improve for the third consecutive year in 1994.
Total shopping center sales increased 5.5 percent to $851.3 billion in 1994,
up from $806.6 billion in 1993. The comparable 1993 increase was 5.0
percent. Retail sales in shopping centers (excluding automotive and
gasoline service station sales) now account for about 55.0 percent of
total retail sales in the United States.
Total retail sales per square foot have shown positive increases
over the past three years, rising by 8.7 percent from approximately $161 per
square foot in 1990, to $175 per square foot in 1994. It is noted that the
increase in productivity has exceeded the increase in inventory which bodes
well for the industry in general. This data is summarized on the following
table.
Selected Shopping Center Statistics
1990-1994
% Compound
1990 1991 1992 1993 1994 Change Annual
1990-93 Growth
Retail Sales in
Shopping Centers * $706.40 $716.90 $768.20 $806.60 $851.30 20.5% 4.8%
Total Leasable
Area** 4.4 4.6 4.7 4.8 4.9 11.4% 2.7%
Unit Rate $160.89 $157.09 $164.20 $169.08 $175.13 8.7% 2.1%
*Billions of Dollars
** Billions of Square Feet
Source: National Research Bureau
To put retail sales patterns into perspective, the following
discussion highlights key trends over the past few years.
- As a whole, 1993 was a good year for most of the nation's major
retailers. Sales for the month of December were up for most,
however, the increase ranged dramatically from 1.1 percent at
Kmart to 13.3 percent at Sears for stores open at least a year.
It is noted that the Sears turnaround after years of slippage
was unpredicted by most forecasters.
- With the reporting of December 1994 results, most retailers
posted same store gains between 2.0 and 6.0 percent. The
Goldman Sachs Retail Composite Comparable Store Sales Index, a
weighted average of monthly same store sales of 52 national
retail companies rose 4.5 percent in December. The weakest
sales were seen in women's apparel, with the strongest sales
reported for items such as jewelry and hard goods. Most
department store companies reported moderate increases in same
store sales, though largely as a result of aggressive
markdowns. Thus, profits were negatively impacted for many
companies.
- For 1994, specialty apparel sales were lackluster at best, with
only .4 percent comparable sales growth. This is of concern to
investors since approximately 30.0 percent of a mall's small
shop space is typically devoted to apparel tenants. Traditional
department stores experienced 3.4 percent same store growth in
1994, led by Dillard's 5.0 percent increase. Mass merchants'
year-to-year sales increased by 6.7 percent in 1994, driven by
Sears' 7.9 percent increase. Mass merchants account for 35.0 to
55.0 percent of the anchors of regional malls and their
resurgence bodes well for increased traffic at these centers.
- Sales at the nation's largest retailer chains rose tepidity in
January, following the worst December sales figures since the
1990-91 recession in 1995. Same store sales were generally
weak in almost all sectors, with apparel retailers being
particularly hard hit. Some chains were able to report
increases in sales but this generally came about through
substantial discounting. As such, profits are going to suffer
and with many retailers being squeezed for cash, 1996 is
expected to be a period of continued consolidations and
bankruptcy. The Goldman Sachs composite index of same store
sales grew by 1.1 percent in January 1996, compared to a 4.7
percent for January 1995.
Provided on the following chart is a summary of overall and same store
sales growth for selected national merchants for the most recent period.
Same Store Sales for the Month of January 1996
% Change From Previous Year
Name of Retailer Overall Same Store Basis
Wal-Mart +16.0% + 2.6%
Kmart + 4.0% + 7.7%
Sears, Roebuck & Company + 4.0% + 0.6%
J.C. Penney - 3.0% - 4.3%
Dayton Hudson Corporation + 8.0% + 2.0%
May Department Stores + 7.0% + 0.7%
Federated Department Stores + 3.0% + 5.1%
The Limited Inc. + 6.0% - 2.0%
Gap Inc. +48.0% + 6.0%
Ann Taylor - 1.0% - 17.0%
Source: New York Times
According to the Goldman sachs index, department store sales fell by 1.1
percent during January, discount stores rose by 4.5 percent, and specialty hard
goods retailers fell by 4.7 percent.
The outlook for retail sales growth is one of cautious optimism.
Some analysts point to the fact that consumer confidence has resulted
in increases in personal debt which may be troublesome in the long run.
Consumer loans by banks rose 13.9 percent in the twelve months that ended
on September 30, 1995. But data gathered by the Federal Reserve on
monthly payments suggest that debt payments are not taking as big a bite out
of income as in the late 1980s, largely because of the record refinancings at
lower interest rates in recent years and the efforts by many Americans to
repay debts.
GAFO and Shopping Center Inclined Sales
In a true understanding of shopping center dynamics, it is important to
focus on both GAFO sales or the broader category of Shopping Center Inclined
Sales. These types of goods comprise the overwhelming bulk of goods and
products carried in shopping centers and department stores and consist of
the following categories:
- General merchandise stores including department and other stores;
- Apparel and accessory stores;
- Furniture and home furnishing stores; and
- Other miscellaneous shoppers goods stores.
Shopping Center Inclined Sales are somewhat broader and include such
classifications as home improvement and grocery stores.
Total retail sales grew by 7.8 percent in the United States in 1994 to
$2.237 trillion, an increase of $162 billion over 1993. This followed an
increase of $125 billion over 1992. Automobile dealers captured $69+/-
billion of total retail sales growth last year, while Shopping Center
Inclined Sales accounted for nearly 40.0 percent of the increase ($64
billion). GAFO sales increased by $38.6 billion. This group was led
by department stores which posted an $18.0 billion increase in sales. The
following chart summarizes the performance for this most recent comparison
period.
Retail Sales by Major Store Type
1993-1994 ($MIL.)
1993-1994
Store Type 1994 1993 % Change
GAFO:
General Merchandise $282,541 $264,617 6.8%
Apparel & Accessories 109,603 107,184 2.3%
Furniture & Furnishings 119,626 105,728 13.1%
Other GAFO 80,533 76,118 5.8%
GAFO Subtotal $592,303 $553,647 7.0%
Convenience Stores:
Grocery $376,330 $365,725 2.9%
Other 21,470 19,661 9.2%
Subtotal $397,800 $385,386 3.2%
Drug 81,538 79,645 2.4%
Convenience Subtotal $479,338 $465,031 3.1%
Other:
Home Improvement &
Building Supplies Stores $122,533 $109,604 11.8%
Shopping Center-Inclined 1,194,174 1,128,282 5.8%
Subtotal 526,319 456,890 15.2%
Automobile Dealers 142,193 138,299 2.8%
Gas Stations 228,351 213,663 6.9%
Eating and Drinking Places 145,929* 137,365* 6.2%
All Other
Total Retail Sales $2,236,966 $2,074,499 7.8%
* Estimated sales
Source: U.S. Department of Commerce and Dougal M. Casey: Retail Sales and
Shopping Center Development Through The Year 2000 (ICSC White Paper)
GAFO sales grew by 7.0 percent in 1994 to $592.3 billion, led by furniture
and furnishings which grew by 13.1 percent. From the above it can be
calculated that GAFO sales accounted for 26.5 percent of total retail sales
and nearly 50.0 percent of all shopping center-inclined sales.
The International Council of Shopping Centers (ICSC) publishes a Monthly Mall
Merchandise Index which tracks sales by store type for more than 400 regional
shopping centers. The index shows that sales per square foot rose by 1.8
percent to $256 per square foot in 1994. The following chart identified the
most recent year-end results.
Index Sales per Square Foot
1993-1994 Percent Change
Store Type 1994 1993 ICSC Index
GAFO:
Apparel & Accessories:
Women's Ready-To-Wear $189 $196 - 3.8%
Women's Accessories and 295 283 + 4.2%
Specialties 231 239 - 3.3%
Men's and Boy's Apparel 348 310 +12.2%
Children's Apparel 294 292 + 0.4%
Family Apparel 284 275 + 3.3%
Women's Shoes 330 318 + 3.8%
Men's Shoes 257 252 + 1.9%
Family Shoes 340 348 - 2.2%
Shoes (Misc.) $238 $238 - 0.2%
SUBTOTAL
Furniture & Furnishings:
Furniture & Furnishings $267 $255 + 4.5%
Home Entertainment &
Electronics 330 337 - 2.0%
Miscellaneous 291 282 + 3.3%
SUBTOTAL $309 $310 - 0.3%
Other GAFO:
Jewelry $581 $541 + 7.4%
Other 258 246 + 4.9%
SUBTOTAL $317 $301 + 5.3%
TOTAL GAFO $265 $261 + 1.6%
NON-GAFO
FOOD:
Fast Food $365 $358 + 2.0%
Restaurants 250 245 + 2.2%
Other 300 301 - 0.4%
SUBTOTAL $304 $298 + 1.9%
OTHER NON-GAFO:
Supermarkets $236 $291 -18.9%
Drug/HBA 254 230 +10.3%
Personal Services 264 253 + 4.1%
Automotive 149 133 +12.2%
Home Improvement 133 127 + 4.8%
Mall Entertainment 79 77 + 3.2%
Other Non-GAFO Misc. 296 280 + 5.7%
SUBTOTAL $192 $188 + 2.4%
TOTAL NON-GAFO $233 $228 + 2.5%
TOTAL $256 $252 + 1.8%
Note: Sales per square foot numbers are rounded to whole dollars. Three
categories illustrated here have limited representation in the ICSC sample:
Automotive, +12.2%; Home Improvement, +4.8%; and Supermarkets, -18.9%.
Source: U.S. Department of Commerce and Dougal M. Casey.
GAFO sales have risen relative to household income. In 1990 these sales
represented 13.9 percent of average household income. By 1994 they rose to 14.4
percent. Projections through 2000 show a continuation of this trend to 14.7
percent. On average, total sales were equal to nearly 55.0 percent of
household income in 1994.
Determinants of Retail Sales Growth and U.S. Retail Sales by Key
Store Type 1990 1994 2000(P)
Determinants
Population 248,700,000 260,000,000 276,200,000
Households 91,900,000 95,700,000 103,700,000
Average Household Income $37,400 $42,600 $51,600
Total Census Money Income $3.4 Tril. $4.1 Tril. $5.4 Tril.
% Allocations of Income to Sales
GAFO Stores 13.9% 14.4% 14.7%
Convenience Stores 12.9% 11.7% 10.7%
Home Improvement Stores 2.8% 3.0% 3.3%
Total Shopping Center-
Inclined Stores 29.6% 29.1% 28.8%
Total Retail Stores 54.3% 54.6% 52.8%
Sales ($Billion)
GAFO Stores $472 $592 $795
Convenience Stores 439 479 580
Home Improvement Stores 95 123 180
Total Shopping Center-
Inclined Stores $1,005 $1,194 $1,555
TOTAL RETAIL SALES $1,845 $2,237 $2,850
Note: Sales and income figures are for the full year; population
and household figures are as of April 1 in each respective year.
P = Projected.
Source: U.S. Census of Population, 1990; U.S. Bureau of the Census Current
Population Reports: Consumer Income P6-168, 174, 180, 184 and 188; Berna Miller
with Linda Jacobsen, "Household Futures", American Demographics, March 1995;
Retail Trade sources already cited; and Dougal M. Casey: ICSC White Paper
GAFO sales have risen at a compound annual rate of approximately
6.8 percent since 1991 based on the following annual change in sales.
1990/91 2.9%
1991/92 7.0%
1992/93 6.6%
1993/94 7.0%
According to a recent study by the ICSC, GAFO sales are expected to
grow by 5.0 percent per annum through the year 2000, which is well above the
4.1 percent growth for all retail sales. This information is presented in the
following chart.
Retail Sales in the United States, by Major Store Type
1994 2000(P) Percent Change
Compound
Store Type ($ Billions) ($ Billions) Total Annual
GAFO:
General Merchandise $ 283 $ 370 30.7% 4.6%
Apparel & Accessories 110 135 22.7% 3.5%
Furniture/Home Furnishings 120 180 50.0% 7.0%
Other Shoppers Goods 81 110 35.8% 5.2%
GAFO Subtotal $ 592 $ 795 34.3% 5.0%
CONVENIENCE GOODS:
Food Stores $ 398 $ 480 20.6% 3.2%
Drugstores 82 100 22.0% 3.4%
Convenience Subtotal $ 479 $ 580 21.1% 3.2%
Home Improvement 123 180 46.3% 6.6%
Shopping Center-
Inclined Subtotal $1,194 $1,555 30.2% 4.5%
All Other 1,043 1,295 24.2% 3.7%
Total $2,237 $2,850 27.4% 4.1%
Note: P = Projected. Some figures rounded.
Source: U.S. Department of Commerce, Bureau of the Census and Dougal M. Casey.
In considering the six-year period January 1995 through December
2000, it may help to look at the six-year period extending from January
1989 through December 1994 and then compare the two time spans.
Between January 1989 and December 1994, shopping center- inclined
sales in the United States increased by $297 billion, a compound growth rate
of 4.9 percent. These shopping center- inclined sales are projected to
increase by $361 billion between January 1995 and December 2000, a compound
annual growth rate of 4.5 percent. GAFO sales, however, are forecasted to
increase by 34.3 percent or 5.0 percent per annum.
Industry Trends
According to the National Research Bureau, there were a total of 40,368
shopping centers in the United States at the end of 1994. During this year,
735 new centers opened, an 10.0 percent increase over the 667 that opened in
1993. The upturn marked the first time since 1989 that the number of openings
increased. The greatest growth came in the small center category (less than
100,000 square feet) where 457 centers were constructed. In terms of GLA
added, new construction in 1994 resulted in an addition of 90.16 million
square feet of GLA from approximately 4.77 billion to 4.86 billion square
feet. The following chart highlights trends over the period 1987 through
1995.
Census Data: 8-Year Trends
No. of Total Total Average Average % Change New % Increase
Year Centers GLA Sales GLA per Sales in Sales Cen- in Total
(Billions) Center per SF per SF ters Centers
- ---- ------ ------------- ------------ ------- ------- ------- ----- ----------
1987 30,641 3,722,957,095 $602,294,426 121,502 $161.78 2.41% 2,145 7.53%
1988 32,563 3,947,025,194 $641,096,793 121,212 $162.43 0.40% 1,922 6.27%
1989 34,683 4,213,931,734 $682,752,628 121,498 $162.02 -0.25% 2,120 6.51%
1990 36,515 4,390,371,537 $706,380,618 120,235 $160.89 -0.70% 1,832 5.28%
1991 37,975 4,563,791,215 $716,913,157 120,179 $157.09 -2.37% 1,460 4.00%
1992 38,966 4,678,527,428 $768,220,248 120,067 $164.20 4.53% 991 2.61%
1993 39,633 4,770,760,559 $806,645,004 120,373 $169.08 2.97% 667 1.71%
1994 40,368 4,860,920,056 $851,282,088 120,415 $175.13 3.58% 735 1.85%
Compound
Annual +4.01% +3.88% +5.07% -.13% +1.14% N/A N/A N/A
Growth
Source: National Research Bureau Shopping Center Database and Statistical Model
From the chart we see that both total GLA and total number of centers have
increased at a compound annual rate of approximately 4.0 percent since 1987.
New construction was up 1.85 percent in 1994, a slight increase over 1993 but
still well below the peak year 1987 when new construction increased by
7.5 percent. Industry analysts point toward increased liquidity among
shopping center owners, due in part to the influx of capital from securitized
debt financiang and the return of lending by banks and insurance companies.
REITs have also been a source of capital and their appetite for new product has
provided a convenient take out vehicle.
Among the 40,368 centers in 1994, the following breakdown by
size can be shown.
U.S. Shopping Center Inventory, January 1995
Square Feet
Number of Centers (Millions)
----------------- ---------------
Size Range (SF) Amount Percent Amount Percent
--------------- ------ ------- ------ -------
Under 100,000 25,450 63% 1,266 25%
100,000-400,000 13,035 32% 2,200 45%
400,000-800,000 1,210 3% 675 15%
Over 800,000 673 2% 750 15%
Total 40,368 100% 4,865 100%
Source: National Research Bureau (some numbers slightly rounded).
According to the National Research Bureau, total sales in shopping
centers have grown at a compound rate of 5.07 percent since 1987. With
sales growth outpacing new construction, average sales per square foot
have been showing positive increases since the last recession. Aggregate
sales were up 5.5 percent nationwide from $806.6 billion (1993) to $851.3
billion (1994). In 1994, average sales were $175.13 per square foot, up
nearly 3.6 percent over 1993 and 1.14 percent on average over the past seven
years. The biggest gain came in the super- regional category (more than 1
million square feet) where sales were up 5.05 percent to $193.13 per square
foot.
The following chart tracks the change in average sales per square foot
by size category between 1993 and 1994.
Sales Trends by Size Category
1993-1994
Average Sales Per Square Foot
Category 1993 1994 % Change
Less than 100,000 SF $193.10 $199.70 +3.4%
100,001 to 200,000 SF $156.18 $161.52 +3.4%
200,001 to 400,000 SF $147.57 $151.27 +2.5%
400,001 to 800,000 SF $157.04 $163.43 +4.1%
800,001 to 1,000,000 SF $194.06 $203.20 +4.7%
More than 1,000,000 SF $183.90 $193.13 +5.0%
Total $169.08 $175.13 +3.6%
Source: National Research Bureau
Empirical data shows that the average GLA per capita is increasing.
In 1994, the average for the nation was 18.7. This was up 17 percent from
16.1 in 1988 and more recently, 18.5 square feet per capita in 1993. Among
states, Florida has the highest GLA per capita with 28.1 square feet and South
Dakota has the lowest at 9.40 square feet. The estimate for 1995 is for an
increase to 19.1 per square foot per capita. Per capita GLA for regional malls
(defined as all centers in excess of 400,000 square feet) has also been rising.
This information is presented on the following chart.
GLA per
Capita All Regional
Year Centers Malls
1988 16.1 5.0
1989 17.0 5.2
1990 17.7 5.3
1991 18.1 5.3
1992 18.3 5.5
1993 18.5 5.5
1994 18.7 5.4
Source: International Council of Shopping Center: The Scope of The Shopping
Center Industry and National Research Bureau
The Urban Land Institute, in the 1995 edition of Dollars and Cents of
Shopping Centers, reports that vacancy rates range from a low of 2.0 percent
in neighborhood centers to 14.0 percent for regional malls. Super-regional
malls reported a vacancy rate of 7.0 percent and community centers were 4.0
percent based upon their latest survey.
The retail industry's importance to the national economy can also be seen
in the level of direct employment. According to F.W. Dodge, the construction
information division of McGraw-Hill, new projects in 1994 generated $2.6
billion in construction contract awards and supported 41,600 jobs in
construction trade and related industries. This is nearly half of the
construction employment level of 95,360 for new shopping center development in
1990. It is estimated that 10.18 million people are now employed in shopping
centers, equal to about one of every nine non-farm workers in the country.
This is up 2.9 percent over 1991.
Market Shifts - Contemporary Trends in the Retail Industry
During the 1980s, the department store and specialty apparel store
industries competed in a tug of war for consumer dollars. Specialty stores
emerged largely victorious as department store sales steadily declined as a
percentage of total GAFO sales during the decade, slipping from 47.0
percent in 1979 to 44.0 percent in 1989. During this period, many
anchor tenants teetered from high debt levels incurred during
speculative takeovers and leveraged buyouts of the 1980s. Bankruptcies and
restructuring, however, have forced major chains to refocus on their
customer and shed unproductive stores and product lines. At year end 1994,
department store sales, as a percentage of GAFO sales, were approximately 37.5
percent.
The continued strengthening of some of the major department store chains,
including Sears, Federated/Macy's, May and Dayton Hudson, is in direct
contrast to the dire predictions made by analysts about the demise of the
traditional department store industry. This has undoubtedly been brought
about by the heightened level of merger and acquisition activity in the 1980s
which produced a burdensome debt structure among many of these entities.
When coupled with reduced sales and cash flow brought on by the recession,
department stores were unable to meet their debt service requirements.
Following a round of bankruptcies and restructurings, the industry has
responded with aggressive cost-cutting measures and a focused merchandising
program that is decidedly more responsive to consumer buying patterns. The
importance of department stores to mall properties is tantamount to a
successful project since the department store is still the principal
attraction that brings patrons to the center.
On balance, 1994/95 was a continued period of transition for the retail
industry. Major retailers achieved varying degrees of success in meeting the
demands of increasingly value conscious shoppers. Since the onset of the
national economic recession in mid-1990, the retail market has been
characterized by intense price competition and continued pressure on profit
margins. Many national and regional retail chains have consolidated
operations, closed underperforming stores, and/or scaled back on expansion
plans due to the uncertain spending patterns of consumers.
Consolidations and mergers have produced a more limited number of retail
operators, which have responded to changing spending patterns by
aggressively repositioning themselves within this evolving market. Much of
the recent retail construction activity has involved the conversion of existing
older retail centers into power center formats, either by retenanting or
through expansion. An additional area of growth in the retail sector is in
the "supercenter" category, which consists of the combined grocery and
department stores being developed by such companies as Wal- Mart and Kmart.
These formats require approximately 150,000 to 180,000 square feet in order
to carry the depth of merchandise necessary for such economies of scale and
market penetration.
Some of the important developments in the industry over the past year can
be summarized as follows:
- The discount department store industry emerged as arguably
the most volatile retail sector, lead by regional chains in the
northeast. Jamesway, Caldor and Bradlees each filed for Chapter
11 within six months and Hills Stores is on the block. Jamesway
is now in the process of liquidating all of its stores. Filene's
Basement was granted relief from some covenant restrictions and
its stock price plummeted. Ames, based in Rocky Hill,
Connecticut, will close 17 of its 307 stores. Kmart continues to
be of serious concern. Its debt has been downgraded to junk bond
status. Even Wal-Mart, accustomed to double digit sales growth,
has seen some meager comparable sales increases. These trends
are particularly troubling for strips since these tenants are
typical anchors.
- The attraction of regional malls as an investment has
diminished in view of the wave of consolidations and bankruptcies
affecting in-line tenants. Some of the larger restructurings
include Melville with plans to close up to 330 stores, sell
Marshalls to TJX Companies, split into three publicly traded
companies, and sell Wilsons and This End Up; Petrie Retail, which
operates such chains as M.J. Carroll, G&G, Jean Nicole, Marianne
and Stuarts, has filed for bankruptcy protection; Edison Brothers
(Jeans West, J. Riggins, Oak Tree, 5-7-9 Shops, etc.) announced
plans to close up to 500 stores while in Chapter 11; J. Baker
intends to liquidate Fayva Shoe division (357 low-price family
footwear stores); The Limited announced a major restructuring,
including the sale of partial interests in certain divisions;
Charming Shoppes will close 290 Fashion Bug and Fashion Bug Plus
stores; Trans World Entertainment (Record Town) has closed 115 of
its 600 mall shop locations. Other chains having trouble include
Rickel Home Centers which filed Chapter 11; Today's Man, a 35
store Philadelphia based discount menswear chain has filed; nine
subsidiaries of Fretta, including Dixon's, U.S. Holdings and
Silo, filed Chapter 11; and Clothestime, also in bankruptcy will
close up to 140 of its 540 stores. Merry-Go-Round, a chain that
operates 560 stores under the names Merry-Go-Round, Dejaiz and
Cignal is giving up since having filed in January 1994 and will
liquidate its assets. Toys "R" Us has announced a global
reorganization that will close 25 stores and cut the number of
items it carries to 11,000 from 15,000. Handy Andy, a 50 year
old chain of 74 home improvement centers which had been in
Chapter 11, has decided to liquidate, laying off 2,500 people.
- Overall, analysts estimate that 4,000 stores closed in 1995 and as many
as 7,000 more will close in 1996. Mom-and-Pop stores, where 75 percent
of U.S. retailers employ fewer than 10 people have been declining for
the past decade. Dun and Bradstreet reports that retail failures are up
1.4 percent over Last year - most of them small stores who don't have
the financial flexibility to renegotiate payment schedule.
- With sales down, occupancy costs continue to be a major
issue facing many tenants. As such, expansion oriented retailers
like The Limited, Ann Taylor and The Gap, are increasingly
shunning mall locations for strip centers. This has put further
pressure on mall operators to be aggressive with their rent
forecasts or in finding replacement tenants.
- While the full service department store industry led by Sears has seen
a profound turnaround, further consolidation and restructuring
continues. Woodward & Lothrop was acquired by The May Department
Stores Company and JC Penney; Broadway Stores was acquired by
Federated Department Stores; Elder Beerman has filed Chapter 11 and
will close 102 stores; Steinbach Stores will be acquired by Crowley,
Milner & Co.; Younkers will merge with Proffitts; and Strawbridge and
Clothier has hired a financial advisor to explore strategic
alternatives for this Philadelphia based chain.
- Aside from the changes in the department store arena, the most notable
transaction in 1995 involved General Growth Properties' acquisition of
the Homart Development Company in a $1.85 billion year-end deal.
Included were 25 regional malls, two current projects and several
development sites. In November, General Growth arranged for the sale
of the community center division to Developers Diversified for
approximately $505 million. Another notable deal involved Rite Aid
Corporation's announcement that it will acquire Revco Drug Stores in a
$1.8 billion merger to form the nation's largest drug store company
with sales of $11 billion and 4,500+/- stores.
- As of January 1, 1995 there were 311 outlet centers with 44.4 million
square feet of space. Outlet GLA has grown at a compound annual rate
of 18.1 percent since 1989. Concerns of over-building, tenant
bankruptcies, and consolidations have now negatively impacted this
industry as evidenced by the hit the outlet REIT stocks have taken.
Outlet tenants have not been immune to the global troubles impacting
retail sales as comparable store sales were down 3.1 percent through
November 1995.
- Category Killers and discount retailers have continued to drive the
demand for additional space. In 1995, new contracts were awarded for
the construction or renovation of 260 million square feet of stores
and shopping centers, up from 173 million square feet in 1991
according to F.W. Dodge, matching the highest levels over the past two
decades. It is estimated that between 1992 and 1994, approximately
55.0 percent of new retail square footage was built by big box
retailers. In 1994, it is estimated that they accounted for 80.0
percent of all new stores. Most experts agree that the country is
over-stored. Ultimately, it will lead to higher vacancy rates and
place severe pressure on aging, capital intensive centers. Many
analysts predict that consolidation will occur soon in the office
products superstores category where three companies are battling for
market share - OfficeMax, Office Depot and Staples.
- Entertainment is clearly the new operational requisite for property
owners and developers who are incorporating some form of entertainment
into their designs. With a myriad of concepts available, ranging from
mini-amusement parks to multiplex theater and restaurant themes, to
interactive high-tech applications, choosing the right formula is a
difficult task.
Investment Criteria and Institutional Investment Performance
Investment criteria for mall properties range widely. Many firms and
organizations survey individuals active in this industry segment in
order to gauge their current investment criteria. These criteria can be
measured against traditional units of comparison such as price (or value)
per square foot of GLA and overall capitalization rates.
The price that an investor is willing to pay represents the current or
present value of all the benefits of ownership. Of fundamental importance is
their expectation of increases in cash flow and the appreciation of the
investment. Investors have shown a shift in preference to initial return,
placing probably less emphasis on the discounted cash flow analysis (DCF). A
DCF is defined as a set of procedures in which the quantity,
variability, timing, and duration of periodic income, as well as the quantity
and timing of reversions, are specified and discounted to a present
value at a specified yield rate. Understandably, market thinking has
evolved after a few hard years of reality where optimistic cash flow
projections did not materialize. The DCF is still, in our opinion, a valid
valuation technique that when properly supported, can present a realistic
forecast of a property's performance and its current value in the marketplace.
Equitable Real Estate Investment Management, Inc. reports in their
Emerging Trends in Real Estate - 1996 that their respondents give
retail investments generally poor performance forecasts in their latest
survey due to the protracted merchant shakeout which will continue into 1996.
While dominant, Class A malls are still considered to be one of the best
real estate investments anywhere, only 13.0 percent of the respondents
recommended buying malls. Rents and values are expected to remain flat
(in real terms) and no one disputes their contention that 15 to 20 percent of
the existing malls nationwide will be out of business by the end of the
decade. For those centers that will continue to reposition themselves,
entertainment will be an increasingly important part of their mix.
Investors do cite that, after having been written off, department
stores have emerged from the shake-out period as powerful as ever. The
larger chains such as Federated, May and Dillard's, continue to acquire the
troubled regional chains who find it increasingly difficult to compete
against the category killers. Many of the nations largest chains are
reporting impressive profit levels, part of which has come about from their
ability to halt the double digit sales growth of the national discount
chains. Mall department stores are aggressively reacting to power and
outlet centers to protect their market share. Department stores are
frequently meeting discounters on price.
While power centers are considered one retail property type currently in
a growth mode, most respondents feel that the country is over-stored and
value gains with these types of centers will lag other property types,
including malls, over five and ten year time frames.
The following chart summarizes the results of their current survey.
Retail Property Rankings and Forecasts
Invest Potential
Investment Potential 1996 Predicted Value Gains
Property -------------------- Rent ---------------------
Type Rating1 Ranking2 Increase 1 Yr. 5Yrs. 10Yrs.
Regional Malls 4.9 8th 2.0% 2% 20% 40%
Power Centers 5.3 6th 2.3% 1% 17% 32%
Community Centers 5.4 5th 2.4% 2% 17% 33%
1 Scale of 1 to 10
2 Based on 9 property types
The NCREIF Property Index represents data collected from the Voting
Members of the National Council of Real Estate Investment Fiduciaries. As
shown in the following table, data through the third quarter of 1995 shows
that the retail index posted a positive 1.23 percent increase in total
return. Increased competition in the retail sector from new and expanding
formats and changing locational references has caused the retail index to trail
all other property types. As such, the -2.01 percent decline in value
reported by the retail subindex for the year were in line with investors'
expectations.
Retail Property Returns
NCREIF Index
Third Quarter 1995 (%)
Period Income Appreciation Total Change in CPI
3rd Qtr. 1995 1.95 - .72 1.23 .46
One Year 8.05 -2.01 5.92 2.55
Three Years 7.54 -3.02 4.35 2.73
Five Years 7.09 -4.61 2.23 2.92
Ten Years 6.95 .54 7.52 3.53
Source: Real Estate Performance Report
National Council of Real Estate Investment Fiduciaries
It is noted that the positive total return continues to be affected by
the capital return component which has been negative for the last five years.
However, as compared to the CPI, the total index has performed relatively
well.
Real Estate Investment Trust Market (REITs)
To date, the impact of REITs on the retail investment market has been
significant, although the majority of Initial Property Offerings (IPOs)
involving regional malls, shopping centers, and outlet centers did not enter
the market until the latter part of 1993 and early 1994. It is noted that
REITs have dominated the investment market for apartment properties and have
evolved into a major role for retail properties as well.
As of November 30, 1995, there were 297 REITs in the United States, about
79.0 percent (236) which are publicly traded. The advantages provided by
REITs, in comparison to more traditional real estate investment opportunities,
include the diversification of property types and location, increased liquidity
due to shares being traded on major exchanges, and the exemption from corporate
taxes when 95.0 percent of taxable income is distributed.
There are essentially three kinds of REITs which can either be
"open-ended", or Finite-life (FREITs) which have specified liquidation
dates, typically ranging from eight to fifteen years.
- Equity REITs center around the ownership of properties where
ownership interests (shareholders)receive the benefit of returns
from the operating income as well as the anticipated appreciation
of property value. Equity REITs typically provide lower yields
than other types of REITs, although this lower yield is
theoretically offset by property appreciation.
- Mortgage REITs invest in real estate through loans. The return to
shareholders is related to the interest rate for mortgages placed by
the REIT.
- Hybrid REITs combine the investment strategies of both the equity and
mortgage REITs in order to diversify risk.
The influx of capital into REITs has provided property owners with an
significant alternative marketplace of investment capital and resulted in a
considerably more liquid market for real estate. A number of
"non-traditional" REIT buyers, such as utility funds and equity/income
funds, established a major presence in the market during 1993/94.
1995 was not viewed as a great year for REITs relative to the advances seen
in the broader market. Through the end of November, equity REITs
posted a 9.3 percent total return according to the National Association
of Real Estate Investment Trusts (NAREIT). The best performer among equity
REITs was the office sector with a 29.4 percent total return. This was
followed by self-storage (27.3%), hotels (26.7%), triple-net lease
(20.6%), and health care (18.8%). Two equity REIT sectors were in the red -
outlet centers and regional malls.
Retail REITs
As of November 30, 1995, there were a total of 47 REITs specializing
in retail, making up approximately 16 percent of the securities in the REIT
market. Depending upon the property type in which they specialize, retail
REITs are divided into three categories: shopping centers, regional
malls, and outlet centers. The REIT performance indices chart shown as
Table A on the following page, shows a two-year summary of the total retail
REIT market as well as the performance of the three composite categories.
Table A - REIT Performance Indicies
Y-T-D Total Dividend No. of REIT Market
Return Yield Securities Capitalization*
----------- ----------- -------------- ----------------
As of November 30, 1995
----------------------------------------------------------
Total Retail 0.49% 8.36% 47 $14,389.1
Strip Centers 2.87% 8.14% 29 $ 8,083.3
Regional Malls -2.47% 9.06% 11 $ 4,886.1
Outlet Centers -2.53% 9.24% 6 $ 1,108.7
-------------------------------------------------------
As of November 30, 1994
-------------------------------------------------------
Total Retail -3.29% 8.35% 46 $12,913.1
Strip Center -4.36% 7.98% 28 $ 7,402.7
Regional Malls 2.84% 8.86% 11 $ 4,459.1
Outlet Centers -16.58% 8.74% 7 $ 1,051.4
* Number reported in thousands
Source: Realty Stock Review
As can be seen, the 47 REIT securities have a market
capitalization of approximately $14.4 billion, up 11.5 percent from the
previous year. Total returns were positive through November 1995,
reversing the negative return for the comparable period 12 months earlier. It
is noted that the positive return was the result of the strength of the
shopping center REITs which constitute nearly 60 percent of the market
capitalization. Total retail REITs dividend yields have remained constant over
the last year at approximately 8.36 percent. Regional mall and shopping
center REITs dominate the total market, making up approximately 85 percent of
the 47 retail REITs.
While many of the country's best quality malls and shopping centers have
recently been offered in the public market, this heavily capitalized
marketplace has provided sellers with an attractive alternative to the more
traditional market for large retail properties.
Regional Mall REITs
The accompanying exhibit Table B summarizes the basic
characteristics of eight REITs and one publicly traded real estate
operating company (Rouse Company) comprised exclusively or predominantly of
regional mall properties. Excluding the Rouse Company (ROUS), the IPOs have
all been completed since November 1992. The nine public offerings with
available information have a total of 281 regional or super regional malls
with a combined leasable area of approximately 229 million square feet. This
figure represents more than 14.0 percent of the total national supply of
this product type.
The nine companies are among the largest and best capitalized domestic real
estate equity securities, and are considerably more liquid than more
traditional real estate related investments. Excluding the Rouse Company,
however, these companies have been publicly traded for only a short period,
and there is not an established track record. General Growth was the star
performer in 1995 with a 15 percent increase in its stock price following the
acquisition of the Homart retail portfolio from Sears for $1.85 billion -
the biggest real estate acquisition of the decade.
Table B Regional Mall REIT analysis
Cushman & Wakefield, Inc.
REIT Portfolio CBL CWN EJD GGP MAC ROUS SPG TCO URB
- --------------------------------------------------------------------------------
Company Overview
- --------------------------------------------------------------------------------
Total Retail Cen. 95 23 51 40 16 67 56 19 12
-Super Reg.* 5 1 28 14 4 27 21 16 7
-Regional 11 22 23 25 10 27 35 3 2
-Community 79 - 11 1 2 13 55 - 3
-Other - - - - - - 3 - -
Tot. Mall GLA** 17,129 12,686 44,460 28,881 10,620 44,922 39,329 22,031 8,895
Tot.Mall Shop GLA**6,500 4,895 15,300 12,111 - 19,829 15,731 9,088 2,356
Avg. Total GLA/Cen.**180 552 872 722 664 670 702 1,160 741
Avg. Shop GLA/Cen.** 68 213 300 303 - 296 281 478 196
- --------------------------------------------------------------------------------
Mall Operations
- --------------------------------------------------------------------------------
Reporting year 1994 1994 1994 1994 1994 1994 1994 1994 1994
Avg. Sales PSF
of Mall GLA $226 $204 $260 $245 $262 $285 $259 $335 $348
Minimum Rent/Sales
ratio 8.6% 7.1% 8.3% - - - 6.8% 10.2% 8.1%
Total Occupancy
Cost/Sales ratio 12.2% 10.0% 12.4% - 11.2% - 10.2% 14.8% 11.7%
Mall Shop
Occupancy Level 88.7% 84.0% 85.0% 87.0% 92.9% - 86.2% 86.6% 93.3%
- --------------------------------------------------------------------------------
Share Price
- --------------------------------------------------------------------------------
IPO Date 10/27/93 8/9/93 6/30/94 4/8/93 3/9/94 1996 12/26/93 11/18/92 10/6/93
IPO Price $19.50 $17.25 $14.75 $22.00 $19.00 - $22.25 $11.00 $23.50
Current Price
(12/15/95) $21.63 $ 7.38 $13.00 $19.13 $19.75 $19.63 $25.13 $ 9.75 $21.75
52-Week High $22.00 $14.13 $15.13 $22.63 $21.88 $22.63 $26.00 $10.38 $22.50
52-Week Low $17.38 $ 6.50 $12.00 $18.13 $19.25 $17.50 $22.50 $ 8.88 $18.75
- --------------------------------------------------------------------------------
Capitalization and Yields
- --------------------------------------------------------------------------------
Outstanding
Shares*** 30.20 36.85 89.60 43.37 31.45 47.87 95.64 125.85 21.19
Market Cap.*** $653 $272 $1,165 $830 $621 $940 $2,403 $1,227 $461
Annual Dividend $1.59 $0.80 $1.26 $1.72 $1.68 $0.80 $1.97 $0.88 $1.94
Dividend Yield
(12/15/95) 7.35% 10.84% 9.69% 8.99% 8.51% 4.08% 7.84% 9.03% 8.92%
FFO 1995**** $1.85 $1.50 $1.53 $1.96 $1.92 $1.92 $2.28 $0.91 $2.17
FFO Yield
(12/15/95) 8.55% 20.33% 11.77% 10.25% 9.72% 9.78% 9.07% 9.33% 9.98%
- --------------------------------------------------------------------------------
Source: Salomon Brothers and Realty Stock Review; Annual Reports
* Super Regional Centers (>=800,000 Sq. Ft)
** Numbers in thousands (000) includes mall only
*** Numbers in millions
**** Funds From Operations is defined as net income (loss) before depreciation,
amoritizatoin, other non-cash items, extrodinary items, gains or losses of
assets and before minority interests in the Operating Partnership.
CBL - CBL & Associates
CWN - Crown American
EJD - Edward Debartolo
GGP - General Growth
MAC - Macerich Company
ROUS - Rouse Company
SPG - Simon Property
TCO - Taubman Centers
URB - Urban Shopping
Shopping Center REITs
Shopping center REITs comprise the largest sector of the retail REIT
market accounting for 29 out of the total 47 securities. General
characteristics of eight of the largest shopping center REITs are
summarized on Table C. The public equity market capitalization of the eight
companies totaled $6.1 billion as of December 15, 1995. The two largest,
Kimco Realty Corp. and New Plan Realty Trust have a market capitalization
equal to approximately 34.5 percent of the group total.
While the regional mall and outlet center REIT markets struggled
through 1995, shopping center REITs showed a positive November 30, 1995
year-to-date return of 2.87%. Through 1995, transaction activity in the
national shopping center market has been moderate. Most of the action in
this market is in the power center segment. As an investment, power
centers appeal to investors and REITs because of the high current cash
returns and long-term leases. However, with their popularity, the potential
for overbuilding is high. Also creating skepticism within this market is the
stability of several large discount retailers such as Kmart, and other
discount department stores which typically anchor power centers. Shopping
center REITs which hold numerous properties where struggling retailers are
located are currently keeping close watch over these centers in the event
of these anchor tenants vacating their space.
Similar to the regional mall REITs, shopping center REITs have been
publicly traded for only a short period and do not have a defined track
record. While the REITs have been in existence for a relatively short
period, the growth requirements of the companies should place upward pressure
on values due to continued demand for new product.
Table C Shopping Center REIT analysis
Cushman & Wakefield, Inc.
REIT Portfolio DDR FRT GRT JPR KIM NPR VNO WRI
- --------------------------------------------------------------------------------
Company Overview
- --------------------------------------------------------------------------------
Tot. Properties 111 53 84 46 193 123 65 161
Tot. Retail Centers 104 53 84 40 193 102 56 141
Tot. Retail GLA* 23,600 11,200 12,300 6,895 26,001 14,500 9,501 13,293
Avg. Shop GLA/Cen.* 227 211 146 172 135 142 170 94
- --------------------------------------------------------------------------------
Mall Operations
- --------------------------------------------------------------------------------
Reporting year - - 1994 - 1994 - - 1994
Total Rental Income - - $71,101 -$125,272 - -$112,223
Average Rent/SF $6.04 - $5.78 - $4.82 - - $8.44
Total Oper. Expenses - - $45,746 - $80,563 - - $76.771
Oper. Expenses/SF - - $3.72 - $3.10 - - $5.78
Oper. Expenses Ratio - - 64.3% - 64.3% - - 68.4%
Total Occupancy Level 96.6% 95.1% 96.3% 94.0% 94.7% 95.4% 94.0% 92.0%
- --------------------------------------------------------------------------------
Share Price
- --------------------------------------------------------------------------------
IPO Date 1992 1993 1994 1994 1991 1973 1993 1985
IPO Price $19.50 $17.25 $14.75 $22.00 $19.00 - $22.25 -
Current Price
(12/15/95) $29.88 $23.38 $17.75 $20.63 $42.25 $21.63 $36.13 $36.13
52-Week High $32.00 $23.75 $22.38 $21.38 $42.25 $23.00 $38.13 $38.13
52-Week Low $26.13 $19.75 $16.63 $17.38 $35.00 $18.75 $32.75 $32.75
- --------------------------------------------------------------------------------
Capitalization and Yields
- --------------------------------------------------------------------------------
Outstanding Shares** 19.86 32.22 24.48 19.72 22.43 53.26 24.20 26.53
Market Cap.*** $ 567 $ 753 $ 435 $ 407 $ 948 $1,152 $ 872 $ 959
Annual Dividend $2.40 $1.64 $1.92 $1.68 $2.16 $1.39 $2.24 $2.40
Dividend Yield
(12/15/95) 8.03% 7.01% 10.82% 8.14% 5.11% 6.43% 6.20% 6.64%
FFO 1995**** $2.65 $1.78 $2.25 $1.83 $3.15 $1.44 $2.67 $2.80
FFO Yield
(12/15/95) 8.87% 7.61% 12.68% 8.87% 7.46% 6.66% 7.39% 7.75%
- --------------------------------------------------------------------------------
Source: Salomon Brothers and Realty Stock Review; Annual Reports
* Numbers in thousands (000) includes mall only
** Numbers in millions
*** Funds From Operations is defined as net income (loss) before depreciation,
amoritizatoin, other non-cash items, extrodinary items, gains or losses of
assets and before minority interests in the Operating Partnership.
DDR - Development Diversified
FRT - Federal Realty Inv.
GRT - Glimcher Realty
JPR - JP Realty Inc.
KIM - Kimco Realty Corp.
NPR - New Plan Realty
VNO - Vornado Realty
WRI - Weingarten Realty
Outlook
A review of various data sources reveals the intensity of the development
community's efforts to serve a U.S. retail market that is still growing,
shifting and evolving. It is estimated 25- 30 power centers appear to be
capable of opening annually, generating more than 12 million square feet
of new space per year. That activity is fueled by the locational needs of
key power center tenants, 27 of which indicated in recent year-end reports
to shareholders an appetite for 900 new stores annually, an average of 30 new
stores per firm.
With a per capita GLA figure of 19 square feet, most analysts are in
agreement that the country is already over-stored. As such, new centers
will become feasible through the following demand generators:
- The gradual obsolescence of some existing retail locations
and retail facilities;
- The evolution of the locational needs and format preferences
of various anchor tenants; and
- Rising retail sales generated by increasing population and
household levels.
By the year 2000, total retail sales are projected to rise from $2.237
trillion in 1994 to almost $2.9 trillion; shopping center-inclined sales are
projected to rise by $361 billion, from $1.194 trillion in 1994 to nearly $1.6
trillion in the year 2000. Those increases reflect annual compound growth
rates of 4.1 percent and 4.5 percent, respectively, for the six-year period.
On balance, we conclude that the outlook for the retail industry is
one of cautious optimism. Because of the importance of consumer spending to
the economy, the retail industry is one of the most studied and analyzed
segments of the economy. One obvious benefactor of the aggressive expansion
and promotional pricing which has characterized the industry is the
consumer. There will continue to be an increasing focus on choosing the
right format and merchandising mix to differentiate the product from the
competition and meet the needs of the consumer. Quite obviously, many of the
nations' existing retail developments will find it difficult if not
impossible to compete. Tantamount to the success of these older centers must
be a proper merchandising or repositioning strategy that adequately
considers the feasibility of the capital intensive needs of such an
undertaking. Coincident with all of the change which will continue to
influence the industry is a general softening of investor bullishness. This
will lead to a realization that the collective interaction of the fundamentals
of risk and reward now require higher capitalization rates and long term
yield expectations in order to attract investment capital.
GRAPHIC SHOWING OPERATING EXPENSE BUDGET (1996)
GRAPHIC SHOWING TENANT SALES REPORT (1995)
GRAPHIC SHOWING PRO-JECT LEASE ABSTRACT REPORT
GRAPHIC SHOWING PRO-JECT PROLOGUE ASSUMPTIONS REPORT
GRAPHIC SHOWING PRO-JECT TENANT REGISTER REPORT
GRAPHIC SHOWING PRO-JECT LEASE EXPIRATION REPORT
GRAPHIC SHOWING ENDS FULL DATA REPORT FOR PRIMARY AND TOTAL TRADE AREA
GRAPHIC SHOWING REGIONAL MALL SALES (1991-1993)
GRAPHIC SHOWING CUSHMAN & WAKEFIELD INVESTOR SURVEY
QUALIFICATIONS OF RICHARD W. LATELLA
----------------------------------------
Professional Affiliations
- -------------------------
Member, American Institute of Real Estate Appraisers
(MAI Designation #8346)
New York State Certified General Real Estate Appraiser #46000003892
Pennsylvania State Certified General Real Estate Appraiser #GA-001053-R
State of Maryland Certified General Real Estate Appraiser #01462
Minnesota Certified General Real Estate Appraiser #20026517
Commonwealth of Virginia Certified General Real Estate
Appraiser #4001-003348
State of Michigan Certified General Real Estate Appraiser #1201005216
New Jersey Real Estate Salesperson (License #NS-130101-A)
Certified Tax Assessor - State of New Jersey
Affiliate Member - International Council of Shopping Centers,ICSC
Real Estate Experience
- ----------------------
Senior Director, Retail Valuation Group, Cushman & Wakefield Valuation Advisory
Services. - Cushman & Wakefield is a national full service real estate
organization and a Rockefeller Group Company. While Mr. Latella's experience
has been in appraising a full array of property types, his principal focus is
in the appraisal and counseling for major retail properties and specialty
centers on a national basis. As Senior Director of Cushman & Wakefield's
Retail Group his responsibilities include the coordination of the firm's
national group of appraisers who specialize in the appraisal of regional malls,
department stores and other major retail property types. He has personally
appraised and consulted on in excess of 200 regional malls and specialty retail
properties across the country.
Senior Appraiser, Valuation Counselors, - Princeton, New Jersey, specializing
in the appraisal of commercial and industrial real estate, condemnation
analyses and feasibility studies for both corporate and institutional clients
from July 1980 to April 1983.
Supervisor, State of New Jersey, Division of Taxation, Local Property and
Public Utility Branch - in Trenton, New Jersey, as sisting and advising local
municipal and property tax assessors throughout the state from June 1977 to
July 1980.
Associate, Warren W. Orpen & Associates, - Trenton, New Jersey, assisting in
the preparation of appraisals of residential prop erty and condemnation
analyses from July 1975 to April 1977. Formal Education Trenton State College,
Trenton, New Jersey Bachelor of Science, Business Administration - 1977
As of the date of this report, Richard W. Latella, MAI, has completed the
requirements under the continuing education program of the Appraisal Institute.
QUALIFICATIONS OF BRIAN J. BOOTH
----------------------------------
General Experience
- ------------------
Brian J. Booth joined Cushman & Wakefield Valuation Advisory Services in 1995.
Cushman & Wakefield is a national full service real estate organization.
Mr. Booth previously worked for two years at C. Spencer Powell &
Associates in Portland, Oregon, where he was an associate appraiser. He
worked on the analysis and valuation of numerous properties including,
office buildings, apartments, industrials, retail centers, vacant land, and
special purpose properties.
Academic Education
- ------------------
Bachelor of Science (BS) Willamette University (1993)
Major: Business-Economics Salem, Oregon
Study Overseas (Spring 1992) London University
London, England
Appraisal Education
- -------------------
110 Appraisal Principles Appraisal Institute 1993
120 Appraisal Procedures Appraisal Institute 1994
310 Income Capitalization Appraisal Institute 1994
320 General Applications Appraisal Institute 1994
410 Standards of Professional Practice A Appraisal Institute 1993
420 Standards of Professional Practice B Appraisal Institute 1993
Professional Affiliation
- ------------------------
Candidate MAI, Appraisal Institute
PARTIAL CLIENT LIST
---------------------
VALUATION ADVISORY SERVICES
CUSHMAN & WAKEFIELD, INC.
NEW YORK
PROFESSIONALS ARE JUDGED BY THE CLIENTS THEY SERVE
VALUATION ADVISORY SERVICES enjoys a long record of service in a confidential
capacity to nationally prominent institutional and corporate clients,
investors, government agencies and many of the nations largest law firms.
Following is a partial list of clients served by members of VALUATION ADVISORY
SERVICES - NEW YORK OFFICE.
Aetna
Air Products and Chemicals, Inc.
Aldrich, Eastman & Waltch, Inc.
Allegheny-Ludlam Industries
AMB Institutional Realty Advisors
America First Company
American Bakeries Company
American Brands, Inc.
American District Telegraph Company
American Express
American Home Products Corporation
American Savings Bank
Apple Bank
Apple South
Archdiocese of New York
Associated Transport
Atlantic Bank of New York
AT&T
Avatar Holdings Inc.
Avon Products, Inc.
Bachner, Tally, Polevoy, Misher & Brinberg
Baer, Marks, & Upham
Balcor Inc.
BancAmerica
Banca Commerciale Italiana
Banco de Brasil, N.A.
Banco Santander Puerto Rico
Banque Paribas
Baker & Mackenzie
Bank of America
Bank of Baltimore
Bank of China
Bank of Montreal
Bank of New York
Bank of Nova Scotia
Bank of Seoul
Bank of Tokyo Trust Company
Bank Leumi Le-Israel
Bankers Life and Casualty Company
Bankers Trust Company
Banque Indosuez
Barclays Bank International, Ltd.
Baruch College
Battery Park City Authority
Battle, Fowler, Esqs.
Bayerische Landesbank
Bear Stearns
Berkshire
Bertlesman Property, Inc.
Betawest Properties
Bethlehem Steel Corporation
Bloomingdale Properties
Borden, Inc.
Bowery Savings Bank
Bowest Corporation
Brandt Organization
Brooklyn Hospital
BRT Realty Trust
Burke and Burke, Esqs.
Burmah-Castrol
Cadillac Fairview
Cadwalader, Wickersham & Taft
Caisse National DeCredit
Campeau Corporation
Campustar
Canadian Imperial Bank of Commerce
Canyon Ranch
Capital Bank
Capital Cities-ABC, Inc.
Care Incorporated
Carter, Ledyard & Milburn
Chase Manhattan Bank, N.A.
Chemical Bank Corporation
Chrysler Corporation
C. Itoh & Company
Citibank, NA
Citicorp Real Estate
City University of New York
Clayton, Williams & Sherwood
Coca Cola, Inc.
Cohen Brothers
College of Pharmaceutical Sciences
Collegiate Church Corporation
Columbia University
Commonwealth of Pennsylvania
Consolidated Asset Recovery Company
Consolidated Edison Company of New York, Inc.
Continental Realty Credit, Inc.
Copley Real Estate Advisors
Corning Glass Works
Coudert Brothers
Covenant House
Cozen and O'Connor
Credit Agricole
Credit Lyonnais
Credit Suisse
Crivello Properties
CrossLand Savings Bank
CSX
Dai-Ichi Kangyo Bank
Dai-Ichi Sempei Life Insurance
Daily News, Inc.
Daiwa Securities
Dart Group Corporation
David Beardon & Company
Davidoff & Malito, Esqs
Dean Witter Realty
Debevoise & Plimpton
DeMatteis Organization
Den Norske Bank
Deutsche Bank
DiLorenzo Organization
Dime Savings Bank
Dodge Trucks, Inc.
Dollar/Dry Dock Savings Bank
Donovan, Leisure, Newton & Irvine
Dreyer & Traub
Dun and Bradstreet, Inc.
Eastdil Realty Advisors
East New York Savings Bank
East River Savings Bank
East Rutherford Industrial Park
Eastman Kodak Company
Eaton Corporation
Eichner Properties, Inc.
Ellenburg Capital Corporation
Emigrant Savings Bank
Empire Mutual Insurance Company
Endowment Realty Investors
Enzo Biochem, Inc.
Equitable Life Assurance Society of America
Equitable Real Estate
European American Bank
F.S. Partners
Famolare, Inc.
Farwest Savings & Loan Association
Federal Asset Disposition Authority
Federal Deposit Insurance Company
Federal Express Corporation
Federated Department Stores, Inc.
Feldman Organization
Fidelity Bond & Mortgage Company
Findlandia Center
First Bank
First Boston
First Chicago
First National Bank of Chicago
First Nationwide Bank
First New York Bank for Business
First Tier Bank
First Winthrop
Fisher Brothers
Fleet Bank
Flying J, Inc.
Foley and Lardner, Esqs.
Ford Bacon and Davis, Inc.
Ford Foundation
Ford Motor Company
Forest City Enterprises
Forest City Ratner
Forum Group, Inc.
Franchise Finance Corporation of America
Fried, Frank, Harris, Shriver & Jacobson
Friendly's Ice Cream Corporation
Fruehauf Trailer Corporation
Fuji Bank
Fulbright & Jaworski
G.E. Capital Corporation
General Electric Credit Corporation
General Motors Corporation
Gerald D. Hines Organization
Gibson Dunn and Crutcher
Gilman Paper
Gladstone Equities
Glimcher Company
Glynwed, Ltd.
Goldman, Sachs & Co.
Greater New York Savings Bank
Greycoat Real Estate Corp.
Greyhound Lines Inc.
Grid Properties
GTE Realty
Gulf Coast Restaurants
Gulf Oil
HDC
HRO International
Hammerson Properties
Hanover Joint Ventures, Inc.
Hartz Mountain Industries
Hawaiian Trust Company, Ltd.
Hertz Corporation
Home Federal
Home Savings of America
HongKong & Shanghai Banking Corporation
Horn & Hardart
Huntington National Bank
Hypo Bank
IDC Corporation
Ideal Corporation
ING Corporation
Integon Insurance
International Business Machines Corporation
International Business Machines Pension Fund
International Telephone and Telegraph Corporation
Investors Diversified Services, Inc.
Iona College
Irish Intercontinental Bank
Irish Life Assurance
Israel Taub
Isetan of America, Inc.
J & W Seligman & Company, Inc.
JMB Realty
J. B. Brown and Sons
J. C. Penney Company, Inc.
J. P. Morgan
Jamaica Hospital
James Wolfenson & Company
Jerome Greene, Esq.
Jewish Board of Family & Children's Services
Jones Lang Wootton
K-Mart Corporation
Kelly, Drye and Warren, Esqs.
Kennedy Associates
Key Bank of New York
Kerr-McGee Corporation
Kidder Peabody Realty Corp.
Kitano Arms Corporation
Knickerbocker Realty
Koeppel & Koeppel
Kronish, Lieb, Weiner & Hellman
Krupp Realty
Kutak, Rock and Campbell, Esqs.
Ladenburg, Thalman & Co.
Lans, Feinberg and Cohen, Esqs.
Lands Division, Department of Justice
Lazard Freres
LeBoeuf, Lamb, Greene & MacRae
Lefrak Organization
Lehman Brothers
Lennar Partners
Lepercq Capital Corporation
Lexington Corporate Properties
Lexington Hotel Corporation
Lincoln Savings Bank
Lion Advisors
Lomas & Nettleton Investors
London & Leeds
Long Term Credit Bank of Japan, Ltd.
Lutheran Church of America
Lynton, PLC
Macluan Capital Corporation
Macy's
MacAndrews and Forbes
Mahony Troast Construction Company
Manhattan Capital Partners
Manhattan College
Manhattan Life Insurance
Manhattan Real Estate Company
Manufacturers Hanover Trust Company
Marine Midland Bank
Mason Tenders
Massachusetts Mutual Life Insurance Company
May Centers, Inc.
Mayer, Brown, Platt
McDonald's Corporation
McGinn, Smith and Company
McGrath Services Corporation
MCI Telecommunications
Mellon Bank
Memorial Sloan-Kettering Cancer Center
Mendik Company
Mercedes-Benz of North America
Meridian Bank
Meritor Savings Bank
Merrill Lynch Hubbard
Merchants Bank
Metropolis Group
Metropolitan Life Insurance Company
Metropolitan Petroleum Corporation
Meyers Brothers Parking System Inc.
Michigan National Corp.
Milbank, Tweed
Millennium Partners
Miller, Montgomery, Sogi and Brady, Esqs.
Mitsui Fudosan - New York Inc.
Mitsui Leasing, USA
Mitsubishi Bank
Mitsubishi Trust & Banking Corporation
Mobil Oil Corporation
Moody's Investors Service
Moran Towing Corporation
Morgan Guaranty
Morgan Hotel Group
Morse Shoe, Inc.
Moses & Singer
Mountain Manor Inn
Mudge Rose Guthrie Alexander & Ferdon, Esqs.
Mutual Benefit Life
Mutual Insurance Company of New York
National Audubon Society, Inc.
National Bank of Kuwait
National Can Company
National CSS
National Westminster Bank, Ltd.
Nelson Freightways
Nestle's Inc.
New York Bus Company
New York City Division of Real Property
New York City Economic Development Corporation
New York City Housing Development Authority
New York City School Construction Authority
New York Life Insurance Company
New York State Common Fund
New York State Employee Retirement System
New York State Parks Department
New York State Teachers
New York State Urban Development Corporation
New York Telephone Company
New York Urban Servicing Company
New York Waterfront
Niagara Asset Corporation
Nippon Credit Bank, Inc.
Nomura Securities
Norcross, Inc.
North Carolina Department of Insurance
NYNEX Properties Company
Olympia and York, Inc.
Orient Overseas Associates
Orix USA Corporation
Otis Elevator Company
Owens-Illinois Corporation
PaineWebber, Inc.
Pan American World Airways, Inc.
Paul, Weiss, Rifkind
Park Tower Associates
Parke-Davis and Company
Paul Weiss Rifkind, Esqs.
Penn Central Corporation
Penn Mutual Life Insurance Company
Pennsylvania Retirement Fund
Penthouse International
Pepsi-Cola Company
Peter Sharp & Company
Petro Stopping Center
Pfizer International, Inc.
Philip Morris Companies, Inc.
Philips International
Phoenix Home Life
Pittston Company
Polyclinic Medical School and Hospital
Port Authority of New York and New Jersey
Postel Investment Management
Prentiss Properties Realty Advisors
Procida Organization
Proskauer Rose Goetz and Mandelsohn, Esqs.
Provident Bank
Prudential Securities
Pyramid Company
Rabobank Nederland
Ratner Group
RCA Corporation
Real Estate Recovery
Realty Income Corporation
Remson Partners
Republic Venezuela Comptrollers Office
Revlon, Inc.
Rice University
Richard Ellis
Richards & O'Neil
Ritz Towers Hotel Corporation
River Bank America
Robert Bosch Corporation
Robinson Silverman Pearce Aron
Rockefeller Center, Inc.
Rockefeller Center Properties
Roman Catholic Diocese of Brooklyn
Roosevelt Hospital
Rosenman & Colin
Royal Bank of Scotland
RREEF
Rudin Management Co., Inc.
Saint Vincent's Medical Center of New York
Saks Fifth Avenue
Salomon Brothers Inc.
Salvation Army
Sanwa Bank
SaraKreek USA
Saxon Paper Corporation
Schroder Real Estate Associates
Schulman Realty Group
Schulte, Roth & Zabel
BDO Seidman
Seaman Furniture Company, Inc.
Security Pacific Bank
Semperit of America
Sentinel Realty Advisors
Service America Corp.
Shea & Gould, Esqs.
Shearman and Sterling, Esqs.
Shearson Lehman American Express
Shidler Group
Sidley & Austin
Silver Screen Management, Inc.
Silverstein Properties, Inc.
Simpson, Thacher and Bartlett, Esqs.
Skadden, Arps, Slate, Meagher & Flom
Smith Barney
Smith Corona Corporation
Sol Goldman
Solomon Equities
Sonnenblick-Goldman
Southtrust Bank of Alabama
Spitzer & Feldman, PC
Stahl Real Estate
Standard & Poors
State Teachers Retirement System of New York
State Teachers Retirement System of Ohio
Stauffer Chemical Corporation
Stephens College
Sterling Drug, Inc.
Stroheim and Roman, Inc.
Stroock and Stroock and Lavan, Esqs.
Sullivan and Cromwell, Esqs.
Sumitomo Life Realty
Sumitomo Mutual Life Insurance Company
Sumitomo Trust Bank
Sun Oil Company
Sutherland, Asbill & Brennan
Swiss Bank Corporation
Tenzer Greenblat, Esqs.
Textron Financial
Thatcher, Proffitt, Wood
The Shopco Group
Thomson Information/Publishing
Thurcon Properties, Ltd.
Tobishima Associates
Tokyo Trust & Banking Corporation
Transworld Equities
Travelers Realty, Inc.
Triangle Industries
TriNet Corporation
UBS Securities Inc.
UMB Bank & Trust Company
Unibank
Union Bank of Switzerland
Union Carbide Corporation
Union Chelsea National Bank
United Bank of Kuwait
United Fire Fighters of New York
United Parcel Service
United Refrigerated
United States District Court, Southern District of New York
United States Life Insurance
United States Postal Service
United States Trust Company
Upward Fund, Inc.
US Cable Corp.
Vanity Fair Corporation
Verex Assurance, Inc.
Victor Palmieri and Company, Inc.
Village Bank
Vornado Realty Trust
W.P. Carey & Company, Inc.
Wachtell, Lipton, Rosen & Katz, Esqs.
Waterfront New York Realty Corporation
Weil, Gotshal & Manges
Weiss, Peck & Greer
Wells Fargo & Co.
Westpac Banking Corporation
Western Electric Company
Western Union International
Westinghouse Electric Corporation
White & Case
Wilkie Farr and Gallagher, Esqs.
William Kaufman Organization
Windels, Marx, Davies & Ives
Winthrop Financial Associates
Winthrop Simston Putnam & Roberts
Witco Corporation
Wurlitzer Company
Yarmouth Group
