UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
Commission file number: 1-9419
SHOPCO LAUREL CENTRE, L.P.
and
LAUREL CENTRE DEPOSITARY CORP.
Exact name of Registrant as specified in its charter
Shopco Laurel Centre, L.P.
is a Delaware limited partnership 13-3392074
Laurel Centre Depositary Corp.
is a Delaware corporation 13-3392094
State or other jurisdiction of incorporation I.R.S. Employer Identification No.
3 World Financial Center, 29th Floor, New York, NY 10285-2900
Address of principal executive offices zip code
Registrant's telephone number, including area code: (212) 526-3237
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
4,660,000 UNITS REPRESENTING ASSIGNMENTS OF LIMITED PARTNERSHIP
INTERESTS Title of Class
AMERICAN STOCK EXCHANGE
Name of each exchange on which registered
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
(x)
Aggregate market value of voting stock held by non-affiliates of the
registrant: Not applicable.
Documents Incorporated by Reference: Amended and Restated Agreement of Limited
Partnership, dated April 16, 1987, incorporated by reference to Exhibit B to
the prospectus contained in the Registration Statement No. 33-11994
PART I
Item 1. Business
(a) General Development of Business
Shopco Laurel Centre, L.P., a Delaware limited partnership ("SLC" or the
"Partnership"), was formed on December 22, 1986. The affairs of SLC are
conducted by its general partner, Laurel Centre Inc. (the "General Partner",
formerly Shearson Laurel Inc.), a Delaware corporation. On April 16, 1987 the
Partnership commenced investment operations with the acceptance of
subscriptions of 4,660,000 depositary units of limited partnership units, the
maximum authorized by the limited partnership agreement ("Limited Partnership
Agreement"). Upon the admittance of the additional limited partners, the
Assignor Limited Partner withdrew from the Partnership. Registered holders
("Unitholders") received an assignment of the economic, voting and other rights
attributable to the limited partnership units held by the Assignor Limited
Partner. SLC is the sole general partner of Laurel Owner Partners Limited
Partnership (the "Owner Partnership"), a Maryland limited partnership that is
the owner of an e nclosed regional shopping mall located in Laurel, Maryland
("Laurel Centre" or the "Mall"). The sole limited partner of the Owner
Partnership is NAT Limited Partnership ("NAT"), a Delaware limited partnership
and an affiliate of The Shopco Group. NAT is not an affiliate of either SLC or
the General Partner. (SLC and NAT are collectively referred to as the "Owner
Partners").
On December 31, 1986, the Owner Partners acquired the Mall by purchasing all of
the partnership interests in the Laurel Company Limited Partnership (the
"Seller"), the owner of the Mall at such time, for a purchase price of
$59,150,000.
In conjunction with the upcoming maturity of the two mortgage loans securing
the Mall, the Partnership is exploring sales and refinancing alternatives. See
Item 7 for a discussion of the upcoming loan maturities and factors impacting a
possible sale or refinancing.
(b) Financial Information About Industry Segments
All of SLC's revenues, operating profit or loss and assets relate solely to its
interest as the general partner of the Owner Partnership. All of the Owner
Partnership's revenues, operating profit or loss and assets relate solely to
its ownership and operation of the Mall.
(c) Narrative Description of Business
SLC's sole business is acting as the general partner of the Owner Partnership.
The Owner Partnership's sole business is the ownership and operation of the
Mall. See Item 2 for a description of the Mall and its operations. SLC's
principal objectives are:
(i) provide quarterly cash distributions to the holders of Units
("Unit Holders"), substantially all of which should not be subject to
Federal income tax on a current basis due to Partnership tax deductions
for cost recovery on the Mall and accrued but unpaid interest on the
Zero Coupon Loan;
(ii) achieve long-term appreciation in the value of the Mall; and
(iii) preserve and protect SLC and Owner Partnership capital.
There is no guarantee that the Partnership's objectives will be achieved.
The Mall is managed on a day-to-day basis by Shopco Management Corp. (the
"Property Manager"), a New York corporation and an affiliate of NAT. The
Property Manager is responsible for rent collection, leasing and day-to-day
on-site management of the Mall. See Note 8 to the Consolidated Financial
Statements for the terms of the Management Agreement. The Owner Partnership's
business, as owner and operator of the Mall, is seasonal since a portion of its
revenue is derived from a percentage of the retail sales of certain tenants at
the Mall. Generally such sales are higher in November and December due to the
holiday season.
Employees
The Partnership has no employees. The affairs of the Partnership are conducted
by the General Partner. See Items 11 and 13 for further information.
Item 2. Properties
The Mall, which originally opened in 1979, consists of an enclosed regional
shopping mall containing a total of 95 retail stores and three attached anchor
stores J.C. Penney, Inc. ("J.C. Penney"), Montgomery Ward and Hecht's located
on approximately 12.28 acres. The retail tenant portion of the Mall is
contained on two levels, and parking is provided at Laurel Centre for
approximately 3,400 cars.
Laurel Centre contains approximately 660,548 square feet of gross leasable area
(including kiosk space) and is operated as an integral unit. The Owner
Partnership owns and leases to tenants approximately 380,990 square feet of
gross leasable area of Laurel Centre, of which approximately 244,126 square
feet is leasable to retail mall space tenants and approximately 136,864 square
feet is leased to J.C. Penney. The initial term of the J.C. Penney lease
expires on October 31, 2009. Five five-year renewal options are available on
the same terms and conditions. Hecht's owns its store at Laurel Centre, which
contains approximately 118,354 square feet of the gross leasable building area,
and leases the land under such store pursuant to a ground lease with the Owner
Partnership. The initial term of the ground lease expires on May 6, 2011.
Thirteen five-year renewal options are available on the same terms and
conditions. Montgomery Ward leases approximately 161,204 square feet of gross
l easable building area of Laurel Centre, together with the land on which it is
located and an adjacent parking area, from an independent third party with
which the Owner Partnership is not affiliated or related.
Adjacent to Laurel Centre is an open air shopping center of approximately
440,000 gross leasable square feet which is not owned by the Owner Partnership
but which, pursuant to a reciprocal easement agreement governing the owners of
the Mall and the adjacent shopping center, shares with the Mall certain areas
of ingress and egress.
The total building area of the Mall is allocated as shown in the table below.
Square Feet Square Feet Total
Leased to Owned by Square
Occupants Tenants Anchors Feet
J.C. Penney 136,864 - 136,864
Montgomery Ward - 161,204(1) 161,204
Hecht's - 118,354(2) 118,354
Enclosed Mall
Tenants 228,000 - 228,000
364,864 279,558 644,422
_____________________________
(1) Building and land are independently owned and are not subject to reversion
to Owner Partnership.
(2) Building is independently owned but reverts to Owner Partnership on
termination of ground lease.
Anchor Tenants
J.C. Penney leases 136,864 square feet or 20.7% of the gross leasable building
area, and is located at the northern end of the Mall. The annual minimum rent
payable under the J.C. Penney lease is $495,448 and the annual contingent rent
payable thereunder is 1 1/2% of net retail sales in excess of $24,772,384.
Expense contributions include a charge for common area maintenance, merchant
association dues and a portion of real estate taxes. J.C. Penney pays for gas,
electricity and water consumed at the leased premises, and for sewer charges
based on water consumption. The Owner Partnership, as landlord, is responsible
for making structural repairs to the J.C. Penney store, non-structural repairs
to the exterior of the J.C. Penney store and to repaint and decorate the
exterior of the J.C. Penney Store once every five years. The lease with J.C.
Penney contains an operating covenant pursuant to which J.C. Penney is
obligated to operate a department store until October 10, 1994, under the name
"J.C. Penney", or "Penney", or such other name as is used at a majority of its
stores in the Baltimore/Washington area.
Montgomery Ward leases its store, which is 161,204 square feet or 24.4% of the
gross leasable building area, the land on which the store is constructed and an
adjacent parking area totalling approximately twelve acres, from an independent
third party with which the Owner Partnership is neither affiliated nor related.
Expense contributions to be made by Montgomery Ward to the Owner Partnership
include a charge for common area maintenance and merchant association dues.
Montgomery Ward is obligated to pay all real estate taxes and assessments,
water charges and sewer rents levied against its site. The lease with
Montgomery Ward contains an operating covenant pursuant to which Montgomery
Ward was obligated to operate a department store until October 10, 1994, at the
Mall under the name of Montgomery Ward or such other name as is used by
Montgomery Ward by the majority of its department stores in the eastern part of
the United States.
A reciprocal operation and easement agreement (the "ROEA"), which governs the
Owner Partnership, Montgomery Ward and the owner of the Montgomery Ward
property, provides for the operation of Laurel Centre as an integral unit.
Among other things, the ROEA creates certain cross easements between the
Montgomery Ward parcel and the remainder of the Mall for access to and use of
common areas for such purposes as parking, vehicular and pedestrian traffic and
ingress and egress. The term of the ROEA expires on October 10, 2078. The
ROEA is binding on successors and assigns of the parties, and runs with the
land and binds future owners of the Montgomery Ward parcel and of the Mall.
Pursuant to the ROEA, Montgomery Ward and the owner of the Montgomery Ward
property are prohibited from voluntarily terminating the lease between them,
except that Montgomery Ward may exercise certain unilateral cancellation rights
contained in such lease. Pursuant to the ROEA, if the Montgomery Ward lease
expires or terminates prior to the expiration or termination of the ROEA, then
Montgomery Ward is released from all obligations thereafter accruing and the
owner of the Montgomery Ward property becomes automatically obligated and
liable therefor, except that the owner of the Montgomery Ward property is not
obligated to operate a Montgomery Ward store at the premises.
Hecht's leases a parcel of land pursuant to a ground lease on which it has
constructed a store containing approximately 118,354 square feet or 17.9% of
the gross leasable building area. Ownership of the anchor store currently
owned and occupied by Hecht's will revert to the Owner Partnership upon the
expiration of the ground lease. The rent payable thereunder is $10.00 per
annum. Expense contributions include a charge for maintenance of common areas
and real estate taxes. Hecht's is obligated to obtain all utilities directly
from the public utility, except natural gas and water which may be submetered.
Hecht's is obligated to pay all expenses in connection with the maintenance and
repair of its store.
The lease with Hecht's contains an operating covenant pursuant to which Hecht's
is obligated to operate a department store at the Mall until May 6, 1996 under
the name of "Hecht's" or "The Hecht Co." or such other name as is used by
Hecht's in the Baltimore- Washington area. The lease with Hecht's provides
that Hecht's does not have to operate if (i) J.C. Penney or Montgomery Ward
ceases to operate its store as a department store under a permitted name for a
period in excess of fifteen months, or (ii) less than seventy-five (75%) of the
gross leasable area of the retail mall stores is open for business for a period
of six consecutive months (Hecht's may suspend its operation at its Mall store
if such condition exists for a period of three (3) consecutive months), or
(iii) the Owner Partnership, as landlord, breaches its operating covenant, or
(iv) damage or destruction to the demised premises occurs during the last (2)
years of the operating covenant, or (v) damage or destruction occu rs to the
Mall and, upon restoration, the retail mall stores contain less than 200,000
square feet of gross leasable area, or (vi) damage or destruction occurs to the
Mall during the last (2) years of the operating lease and, pursuant to the
lease, the Owner Partnership elects to restore less than all of the damaged
area, or (vii) in a number of instances on the occurrence of condemnation of
all or a portion of the Mall, or (viii) if the Owner Partnership defaults under
the lease beyond applicable grace periods and Hecht's terminates the lease.
If, upon the expiration of its operating covenant, Hecht's notifies the Owner
Partnership that it intends to sublet the premises or assign its lease, the
Owner Partnership will have an option to purchase the Hecht's leasehold and
building. Hecht's is entitled to mortgage its leasehold interest and building.
J.C. Penney's and Montgomery Ward's operating covenants expired on October 10,
1994 and have not been renewed. The operating covenants of Hecht's is
scheduled to expire in May, 1996. Although all three stores remain liable for
all payments under their respective lease agreements, which do not begin to
expire until 2009, the expiration of their operating covenants allows them to
sublet the premises or assign their lease. To date, none of the three tenants
has given any indication that it intends to leave the Mall. While the center's
anchor tenant stores continue to register respectable sales performances, the
Partnership's ability to retain them at the center may depend upon continued
efforts to upgrade the Mall to ensure that anchor tenant sales levels do not
diminish. Accordingly, the General Partner has pursued, and will continue to
pursue, leasing and capital expenditure strategies intended to maintain the
long-term viability of the center's anchor tenant mix.
Rent
The following table sets forth SLC revenue for the last five years from base
rents and percentage rents, on the basis of Mall tenants and Anchor tenants:
1994 1993 1992 1991 1990
Base Rents
Mall Tenants $4,687,584 $4,539,564 $3,967,502 $3,883,832 $3,863,777
Anchor Tenants 495,448 495,448 495,448 495,448 495,444
Total Base Rents 5,183,032 5,035,012 4,462,950 4,379,280 4,359,221
Percentage Rents
Mall Tenants 343,061 338,712 370,589 456,757 797,568
Total Rental
Income $5,526,093 $5,373,724 $4,833,539 $4,836,03 $5,156,789
Mall Tenants
As of December 31, 1994, the Mall had 95 mall tenants (excluding anchor stores)
occupying approximately 213,000 square feet of gross leasable area, and was
93.4% occupied.
Historical Occupancy
The following table shows the historical occupancy percentage at the Mall at
December 31 of the indicated years.
1994 1993 1992 1991 1990
Including
Anchor Stores 97.9% 97.7% 98.1% 99.3% 99.0%
Excluding
Anchor Stores 93.4% 93.6% 95.1% 97.6% 97.5%
Physical Improvements
SLC completed several interior and exterior improvement projects which were
designed to enhance Laurel Centre's appeal in 1994. The improvements included
repairs to the parking deck and upgrades of security equipment. The capital
improvements completed during 1994 totalled $411,426.
In 1995, the General Partner will replace the Mall's HVAC system at a cost of
approximately $1.3 million. In addition, extensive repairs may be required for
the Mall's roof following the completion of an examination by an engineer.
These future improvements will be directed at allowing the Mall to compete
aggressively for renewals of existing tenants and new tenants that will improve
the tenant mix and reflect the changing needs of Laurel Centre's primary trade
area (the primary geographical area from which the Mall derives its repeat
sales and regular customers). The cost of these future improvements, including
the HVAC cost stated above will total approximately $1.5 million, and is
expected to be funded from operating cash flow and cash reserves.
Competition
The principal methods generally utilized by shopping malls to compete
effectively are (i) location in a prime trade area, (ii) leasing to reputable
anchor tenants (in order to attract customers and mall tenants), (iii) creating
and maintaining an adequate tenant mix and (iv) maintaining or upgrading the
mall's physical condition. Generally, the Mall has met each of the foregoing
goals.
Laurel Centre remains a dominant retail center within its primary trade area of
a 10 mile radius from the center, but competes with a number of nearby strip
malls and stand-alone discount retailers, many of which are new or newly
refurbished. Retail development in the area continues, and the number of
retailers in the Laurel area has grown considerably in recent years. The
General Partner believes that two malls are competitive with the Mall. Laurel
Lakes, an open air center located approximately 1/4 mile south of the Mall,
occupies approximately 455,000 square feet of space. Laurel Lakes is anchored
by Kmart, Best Buy Co., Safeway Stores and Kids "R" Us, and contains
approximately 58 retail mall stores.
Columbia Mall is located approximately 12 miles northwest of the Mall. Its
anchored by tenants, Hecht's, Sears, and Woodward and Lothrop, and includes
approximately 200 mall stores. The owners of Columbia Mall are planning a
fashion-oriented redevelopment program with the addition of a fourth anchor
tenant which has yet to be named.
Two currently proposed developments in the area of the Mall, the New Town
Center in Bowie and Konterra near Laurel may provide increased competition in
the future. Both projects, however, have not proceeded beyond the planning
stages and a construction date for either project is uncertain at this time.
The New Town Center, approximately 15 miles southeast of Laurel, is a planned
mixed use development which includes eleven office buildings with 1.3 to 1.4
million square feet of space, 1,340 residential units, 250 hotel rooms and a
five anchor regional mall with The Edward J. DeBartolo Corp. as a joint
partner. Four office buildings are completed, three of which are condominium
space and the fourth 110,0000 square foot building is 96% leased.
Konterra, whose planned location is immediately south of Laurel Centre Mall, is
expected to have a regional shopping center within its master planned
community. The project remains delayed as it is believed that the success of
Konterra depends greatly on the completion of the Intercounty Connector Route
for which funding is not completed. Based on its location, it is expected that
Konterra will adversely affect the Mall.
Item 3. Legal Proceedings
Neither SLC, nor the Owner Partnership is a party to, nor is either of them the
subject of, any material litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Unit Holders at a meeting or
otherwise during the three months ended December 31, 1994.
PART II
Item 5. Market for the Registrant's Limited Partnership Units and Related
Security Holder Matters
(a) Market Information
The Units are listed on the American Stock Exchange and trade under the symbol
"LSC". The high and low sales price of the Units on the American Stock
Exchange as reported on the consolidated transaction reporting system, during
the periods January 1, 1993 to December 31, 1993 and January 1, 1994 to
December 31, 1994 were as follows:
High Low
1993
First Quarter $ 4 1/8 $ 2 15/16
Second Quarter 4 1/16 3 1/8
Third Quarter 4 3 5/16
Fourth Quarter 3 15/16 3 1/8
1994
First Quarter $ 4 1/4 $ 3 5/16
Second Quarter 3 7/8 3 1/16
Third Quarter 3 5/16 2 7/8
Fourth Quarter 3 3/8 2 1/4
(b) Holders
As of December 31, 1994, there were 3,234 Unit Holders.
(c) Distribution of Net Cash Flow
SLC's policy is to distribute to the Unit Holders their allocable portion of
Net Cash Flow (as defined in the Partnership Agreement) in respect of each
fiscal year in quarterly installments based on estimated Net Cash Flow for the
current year. Distribution levels are also determined based on the
Partnership's need for reserves and estimates of future expenditures which can
impact distribution levels over time. Distributions of Net Cash Flow are paid
on a quarterly basis to registered Unit Holders on record dates established by
SLC, which generally are the last day of each quarter. If a Unit Holder
transfers a Unit prior to a record date for a quarterly distribution of Net
Cash Flow, the transferor Unit Holder may be subject to tax on part or all of
the net income from operations, if any, for such quarter (since net income from
operations is allocated on a monthly basis, rather than quarterly), but will
not be entitled to receive any portion of the Net Cash Flow to be distributed
wi th respect to such quarter. For the specific terms of Distribution of Net
Cash Flow and distribution of Net Proceeds, reference is made to pages 3 and 7
in the Partnership Agreement which is incorporated herein by reference.
Quarterly Cash Distributions Per Limited Partnership Unit
Distribution amounts are reflected in the period for which they are declared.
The record date is the last day of the respective quarter and the actual cash
distributions are paid approximately 45 days after the record date.
1994(1) 1993(1)
First Quarter $ .125 $ .125
Second Quarter .125 .125
Third Quarter .125 .125
Fourth Quarter .125 .125
TOTAL $ .50 $ .50
(1) All cash distributions in 1993 and 1994 constitute returns of
capital.
Related Security Holder Matters
The Partnership is a "publicly traded partnership" for purposes of Federal
income taxation. The Revenue Act of 1987 (the "Act") changed the Federal
income tax treatment of "publicly traded partnerships." Under the Act, the
Partnership could be taxed as a corporation for Federal income tax purposes
beginning in 1998 if the Partnership does not satisfy an income test under the
Act. While the Partnership currently expects to meet this income test, it is
unclear whether the Partnership will always meet the income requirements for an
exception to the rule treating a publicly traded partnership as a corporation.
Publicly traded partnerships are subject to a modified version of the passive
loss rules if they are not taxed as corporations. Under the modified rules
applicable to publicly traded partnerships, the passive loss rules are applied
separately for the items attributable to each publicly traded partnership.
Any Tax-Exempt Entity acquiring Units after December 17, 1987 (including any
acquired pursuant to a reinvestment plan) realizes unrelated business income
("UBI"), with respect to such Units for periods during which the Partnership is
a "publicly traded partnership", and such UBI may cause the Tax-Exempt Entity
to incur a federal income tax liability. It should be noted that the
Partnership agreement stated that "An investment in the Units is not suitable
for Tax-Exempt Entities, including Individual Retirement Accounts ("IRA's") and
Keogh and other retirement plans, because such investment would give rise to
unrelated business taxable income".
Item 6. Selected Financial Data.
(dollars in thousands except per interest data)
For the years ended December 31,
1994 1993 1992 1991 1990
Total Income $11,122,199 $10,597,213 $9,845,067 $9,450,299 $9,095,365
Net Income (Loss) $ (457,345) $ (244,452) $ (486,291) $ (390,460) $ 645,773
Net Income per
Limited Partnership
Unit (4,660,000
outstanding) $ (.10) $ (.05) $ (.10) $ (.08) $ .14
Real Estate, net of
accumulated
appreciation $56,344,774 $57,760,189 $59,113,389 $60,651,179 $60,311,654
Notes Payable and
Accrued Interest $50,476,031 $45,887,373 $41,733,243 $37,972,490 $34,548,696
Total Assets $68,287,685 $66,688,829 $65,112,312 $64,256,412 $64,937,350
The above selected financial data should be read in conjunction with the
Consolidated Financial Statements and notes thereto in Item 8.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
At December 31, 1994, the Partnership had cash totalling $10,431,820 which
represents a $2,746,810 increase from the December 31, 1993 balance of
$7,685,010. The increase is primarily a result of net cash provided by
operating activities exceeding cash distributions to limited partners and
expenditures for property improvements. The Partnership paid cash
distributions of $.50 per unit for 1994, including a fourth quarter cash
distribution of $.125 per unit paid on February 10, 1995. Based upon the
General Partner's current assessment of the Partnership's needs in the near
term, the General Partner expects to continue to build cash reserves. The level
of future cash distributions, however, will be reviewed by the General Partner
on a quarterly basis.
Due to the current limited availability of financing for real estate projects,
and the substantially more stringent underwriting criteria being applied when
financing is available, a primary focus of the Partnership will be its efforts
to address its current and future capital requirements. The Partnership's two
mortgage loans mature on October 15, 1996, at which time the Partnership will
be obligated to pay the lenders approximately $59.9 million, including interest
on its zero coupon first mortgage note. During 1993, Kemper sold its
participating interest in the loans to CBA Associates, Inc., which placed the
loans into a pool of mortgages to be held by a real estate mortgage investment
conduit. Although the terms of these loans have not changed, this sale may
affect the Partnership's ability to refinance or restructure the loans with CBA
Associates, Inc. at maturity in the event that refinancing is not available
elsewhere. The ability of the Partnership to obtain refinancing of its current
mortgages in whole or in part, or, as an alternative, to find a purchaser for
the Mall, may also be affected by general economic conditions, and factors such
as: (i) increased competition in the area; (ii) the status of the anchor
tenants; (iii) the need for capital improvements.
J.C. Penney's and Montgomery Ward's operating covenants expired on October 10,
1994 and have not been renewed. Hecht's expires in May, 1996. Although all
three stores remain liable for all payments under their respective lease
agreements, which do not begin to expire until 2009, the expiration of their
operating covenants allows them to sublet the premises or assign their lease.
To date, none of the three tenants has given any indication that it intends to
leave the Mall. While the center's anchor tenant stores continue to register
respectable sales performances, the Partnership's ability to retain them at the
center may depend upon continued efforts to upgrade the Mall to ensure that
anchor tenant sales levels do not diminish. Accordingly, the General Partner
has pursued, and will continue to pursue, leasing and capital expenditure
strategies intended to maintain the long-term viability of the center's anchor
tenant mix.
At December 31, 1994, the accounts receivable balance, net of allowance for
doubtful accounts, was $528,845 as compared to $464,478 at December 31, 1993.
The increase is primarily due to an increase in rental receivables as a result
of accruing rents on a straight-line basis over lease terms, and to an increase
in percentage rent and common area maintenance receivables.
At December 31, 1994 accounts payable and accrued expenses totalled $179,794 as
compared to $283,561 at December 31, 1993. The decrease is primarily due to a
decrease in electricity and legal expenses accrued at December 31, 1994.
The zero coupon first mortgage note payable increased $4,588,658 from December
31, 1993 to $48,456,864 at December 31, 1994, due to the accrual of interest on
the zero coupon note.
Results of Operations
1994 versus 1993
The results of operations are primarily attributable to the Mall's operations
and to a lesser extent the interest earned on cash reserves held by the
Partnership. Net cash flow from operating activities totaled $5,564,906 for
the year ended December 31, 1994, basically unchanged from the year ended
December 31, 1993.
For the year ended December 31, 1994, the Partnership reported a net loss of
$457,345 as compared to a net loss of $244,452 for the year ended December 31,
1993. The increased net loss in 1994 is primarily the result of an increase in
interest and property operating expenses offset by an increase in rental and
escalation income.
Rental income totalled $5,526,093 for the year ended December 31, 1994 as
compared to $5,373,724 for the year ended December 31, 1993. The increase is
primarily attributable to higher lease rates for new tenants and an increase in
temporary tenant income. Escalation income for the year ended December 31, 1994
totalled $5,004,831, as compared with $4,763,187 for the same period in 1993.
Escalation income represents billings to tenants for their proportional share
of common area maintenance, operating and real estate tax expenses. The
increase in escalation income is primarily due to an increase in property
operating costs and temporary tenant HVAC income from 1993 to 1994.
Additionally, the increase in escalation income reflects an increase in certain
costs of the renovation being charged back to Mall tenants.
Total expenses for 1994 were $11,582,091 as compared to $10,841,749 for 1993.
The increase is primarily due to higher interest and property operating
expense. Interest expense for 1994 increased from 1993, reflecting the
compounding of interest on the Zero Coupon Loan. Property operating expense
also increased for the year due primarily to increases in insurance,
association and professional fees, and payroll costs.
Mall tenant sales (exclusive of anchor tenants) for the twelve months ended
December 31, 1994 and 1993 were $58,674,000 and $62,732,000, respectively.
Mature tenant sales for the twelve months ended December 31, 1994 and 1993 were
$51,756,000 and $55,470,000, respectively. A mature tenant is defined as a
tenant that has been open for business and operating out of the same store for
twelve months or more. The General Partner attributes the decrease to a
decline in occupancy during the year at the Mall and a decline in consumer
spending on softgoods, particularly apparel, a trend experienced by retailers
across the country. At December 31, 1994 and 1993, the Mall was 93.4% and
93.6% occupied, respectively, exclusive of anchor tenants.
1993 versus 1992
Net cash provided by operating activities totaled $5,702,058 in 1993 compared
with $5,042,201 in 1992. The increase was primarily due to a lower net loss,
an increase in deferred interest payable on the zero coupon mortgage loan and
an increase in accounts payable. The Partnership reported a net loss of
$244,452 in 1993 compared to a net loss of $486,291 in 1992. The decrease in
net loss in 1993 is primarily the result of higher rental income, offset
partially by higher interest and property operating expenses in 1993.
Rental income totalled $5,373,724 in 1993, compared with $4,833,539 in 1992.
The increase is attributable to an increase in base rents resulting from lease
renewals and a change in tenant mix. Escalation income for the years ended
December 31, 1993 and 1992 totalled $4,763,187 and $4,671,457, respectively.
The increase in escalation income is primarily due to increases in reimbursable
property operating expenses and real estate taxes. The increase in
miscellaneous income is due to a lease termination payment received from a
tenant who vacated the Mall.
Total expenses for the year ended December 31, 1993 totalled $10,841,749
compared to $10,333,523 in 1992. The $508,226 increase is primarily due to
higher interest, property operating and real estate tax expenses, which was
partially offset by a decrease in depreciation and amortization.
Interest expense totalled $4,384,130 in 1993 as compared to $3,990,754 in 1992.
The increase is attributable to the compounding of interest on the Zero Coupon
Loan. Property operating expenses increased 4% in 1993, due to an increase in
reimbursable operating expenses and management fees. Real estate taxes
increased 4% in 1993 due to the increase in the assessed value of Laurel Centre
from 1992 to 1993.
Depreciation and amortization expenses decreased 4% to $1,835,776 for the year
ended December 31, 1993 due to the full amortization of certain Partnership
organization costs and deferred charges. General and administrative expenses
for the year ending December 31, 1993 totalled $245,158, compared with $227,073
in 1992. The increase is primarily due to legal costs pertaining to
investigation into placement of loans into a REMIC and its effect on the
Partnership.
Total mall tenant sales (exclusive of anchor tenants) for the years ended
December 31, 1993 and 1992 were approximately $60,501,000 and $62,209,000,
respectively. Sales for tenants (exclusive of anchor tenants) who operated at
the Mall for each of the last two years were approximately $55,369,000 and
$56,160,000. The General Partner believes that the Mall's sales were impacted
by declines in consumer spending on softgoods due to continued economic
uncertainties for most of 1993 and a decline in occupancy at the Mall. At
December 31, 1993 and 1992, the Mall was 93.6% and 95.1% occupied,
respectively, exclusive of anchor tenants.
Property Appraisal
The appraised value of the Mall at January 1, 1995 was $81,000,000, unchanged
from January 1, 1994. It should be noted that appraisals are only estimates of
current values and actual values realizable upon sale may be significantly
different. A significant factor in establishing an appraised value is the
actual selling price for properties which the appraiser believes are
comparable. Because of the nature of the Partnership's property and the
limited market for such properties, there can be no assurance that the other
properties reviewed by the appraiser are comparable. Additionally, the lower
level of liquidity as a result of the current restrictive capital environment
has had the effect of limiting the number of transactions in real estate
markets and the availability of financing to potential purchasers, which may
have a negative impact on the value of an asset. Further, the appraised value
does not reflect the actual costs which would be incurred in selling the
property, inclu ding brokerage fees and prepayment penalties.
Inflation
Inflation generally does not adversely affect the business of the Partnership
and the Owner Partnership relative to other industry segments. Most increases
in operating expenses incurred by the Mall are passed through to its tenants
under the terms of their leases. Alternatively, inflation may cause an
increase in sales revenue reported by the tenants at the Mall, which serves to
increase the Owner Partnership's revenue, since a portion of its rental income
is derived from "percentage rents" paid by certain tenants.
Item 8. Financial Statements and Supplementary Data.
See Item 14a for a listing of the Financial Statements and Supplementary data
filed in this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Partnership has no Directors or Executive Officers. The affairs of the
Partnership are conducted through the General Partner.
On July 31, 1993, Shearson Lehman Brothers, Inc. ("Shearson") sold certain of
its domestic retail brokerage and asset management businesses to Smith Barney,
Harris Upham & Co. Incorporated ("Smith Barney"). Subsequent to this sale,
Shearson changed its name to Lehman Brothers Inc. The transaction did not
affect the ownership of the Partnership or the Partnership's General Partners.
However, the assets acquired by Smith Barney included the name "Shearson."
Consequently, the general partner changed its name to Laurel Centre Inc. to
delete any references to "Shearson."
Certain executive officers and directors of the General Partner are now serving
(or in the past have served) as executive officers or directors of entities
which act as general partners of a number of real estate limited partnerships
which have sought protection under the provisions of the Federal Bankruptcy
Code. The partnerships which have filed bankruptcy petitions own real estate
which has been adversely affected by the economic conditions in the markets in
which the real estate is located and, consequently, the partnerships sought the
protection of the bankruptcy laws to protect the partnerships' assets from loss
through foreclosure.
Set forth below are the names, ages, positions, offices held, and brief
accounts of the business experience during the past five years of each Director
and Executive Officer of the General Partner and the Assignor Limited Partner,
each such person holding similar positions in the General Partner and the
Assignor Limited Partner. The following is a list of the officers and
directors of Laurel Inc. as of December 31, 1994, with the exception of
Kathleen B. Carey, whose service as a Director of the General Partner commenced
on March 8, 1995:
Name Age Office
Paul L. Abbott 49 Director, President, and Chief
Executive Officer
Robert J. Hellman 40 Director, Vice President, and
Chief Financial Officer
Kathleen Carey 41 Director
Elizabeth L. Jarvis 59 Director
Raymond C. Mikulich 42 Director
Richard A. Morton 42 Director
Joan B. Berkowitz 35 Vice President
Elizabeth Rubin 28 Vice President
Paul L. Abbott is a Managing Director of Lehman Brothers. Mr. Abbott joined
Lehman Brothers in August 1988, and is responsible for investment management of
residential, commercial and retail real estate. Prior to joining Lehman
Brothers, Mr. Abbott was a real estate consultant and a senior officer of a
privately held company specializing in the syndication of private real estate
limited partnerships. From 1974 through 1983, Mr. Abbott was an officer of two
life insurance companies and a director of an insurance agency subsidiary. Mr.
Abbott received his formal education in the undergraduate and graduate schools
of Washington University in St. Louis.
Robert J. Hellman is a Senior Vice President of Lehman Brothers and is
responsible for investment management of retail and commercial real estate.
Since joining Lehman Brothers in 1983, Mr. Hellman has been involved in a wide
range of activities involving real estate and direct investments including
origination of new investment products, restructurings, asset management and
the sale of commercial, retail and residential properties. Prior to joining
Lehman Brothers, Mr. Hellman worked in strategic planning for Mobil Oil
Corporation and was an associate with an international consulting firm. Mr.
Hellman received a bachelor's degree from Cornell University, a master's degree
from Columbia University, and a law degree from Fordham University.
Kathleen B. Carey is an attorney specializing in commercial real estate. She
is a graduate of the State University of New York at Albany and St. John's
University Law School. In 1987, she joined the Connecticut law firm of
Cummings & Lockwood and served as a partner in the firm from 1989 until
mid-1994. She is admitted to practice in New York and Connecticut, and worked
with firms in both states before joining Cummings & Lockwood. She resigned in
1994 and now resides in California. Ms. Carey's practice has involved all
facets of acquisitions, sales and financing of commercial properties, including
multifamily housing, office buildings and shopping centers. She has
represented developers and lenders in numerous transactions involving
properties located throughout the United States.
Elizabeth L. Jarvis has been a director of SLC since April 1987. Ms. Jarvis is
currently President and principal owner of Jarvis & Associates, specializing in
the development, merchandising, leasing and management of regional shopping
centers. From 1978 through 1982, prior to establishing Jarvis & Associates,
she was Senior Vice President of the Taubman Company, responsible for the
financial performance of nineteen shopping centers.
Raymond C. Mikulich is a Managing Director of Lehman, and since January 1988,
has been head of the Real Estate Investment Banking Group. Prior to joining
Lehman Brothers Kuhn Loeb in 1982, Mr. Mikulich was a Vice President with
LaSalle National Bank, Chicago, in the Real Estate Advisory Group, where he was
responsible for the acquisition of equity interests in commercial real estate.
Over his fifteen years in the real estate business, Mr. Mikulich has
orchestrated acquisitions and dispositions on behalf of individuals and
institutional investors alike. Mr. Mikulich holds a BA degree from Knox
College and a JD degree from Kent College of Law.
Richard A. Morton is a principal in entities that own and manage seven million
square feet of real estate. Mr. Morton is principal of Ashley Capital which is
in the business of owning and operating real estate. Mr. Morton worked with
Rosenberg Real Estate Equity Fund as the East Coast Director of Properties from
February 1982 to July 1983. From 1977 to 1982, Mr. Morton was employed by the
Prudential Insurance Company and from 1980 to 1982 as the General Manager of
the New York City Real Estate Investment Office.
Joan B. Berkowitz is a Vice President of Lehman Brothers, responsible for asset
management within the Diversified Asset Group. Ms. Berkowitz joined Lehman
Brothers in May 1986 as an accountant in the Realty Investment Group. From
October 1984 to May 1986, she was an Assistant Controller to the Patrician
Group. From November 1983 to October 1984, she was employed by Diversified
Holdings Corporation. From September 1981 to November 1983, she was employed
by Deloitte Haskins & Sells. Ms. Berkowitz, a Certified Public Accountant,
received a B.S. degree from Syracuse University in 1981.
Elizabeth Rubin is an Assistant Vice President of Lehman Brothers in the
Diversified Asset Group. Ms. Rubin joined Lehman Brothers in April 1992.
Prior to joining Lehman Brothers, she was employed from September 1988 to April
1992 by the accounting firm of Kenneth Leventhal and Co. Ms. Rubin is a
Certified Public Accountant and received a B.S. degree from the State
University of New York at Binghamton in 1988.
Item 11. Executive Compensation
The Directors and Officers of the General Partner do not receive any salaries
or other compensation from SLC, except that Elizabeth Jarvis and Richard Morton
and Kathleen Carey each receive $12,000 per year for serving as independent
Directors of the General Partner and $2,400 for attendance in person at any
meeting of the Board of Directors of the General Partner. Prior to September
1, 1993, Mr. Morton and Ms. Jarvis each received $10,000 per year for serving
as outside directors and $2,000 for attendance. During 1994, Ms. Jarvis
received $21,600 and Mr. Morton received $21,600.
The General Partner is entitled to receive 1% of Net Cash Flow distributed in
any fiscal year and to varying percentages of the Net Proceeds of capital
transactions. See page 3 of the Partnership Agreement for a description of
such arrangements which description is incorporated by reference thereto.
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of December 31, 1994, no one person was known by SLC to be the beneficial
owner of more than five percent of the Units.
Set forth below is a chart indicating as of December 31, 1994 the name and the
amount and nature of beneficial ownership of Units held by the General Partner
and Officers and Directors thereof. Only the General Partner and those
officers and directors thereof which beneficially own any units are listed. No
General Partner or any officer or directors thereof, or the officers and
directors of the General Partners as a group (13 persons), beneficially owns in
excess of 1% of the total Units outstanding.
Beneficial Ownership of Units Number of Units Owned
General Partner 0
Raymond Mikulich 500
___
(The General Partner and
all Officers and Directors
thereof as a group, 13 persons) 500
Item 13. Certain Relationships and Related Transactions
Certain Officers and Directors of the General Partner are employees of Lehman.
Lehman received a total of $3,262,000 in underwriting commissions in connection
with the public offering of the Units. Lehman, the General Partner, and their
respective affiliates received $890,000 as a reimbursement for their actual
out-of-pocket expenses incurred in connection with the organizing of SLC and
the Owner Partnership, including accounting, legal, printing, registration and
other fees and expenses. The General Partner received a total of $2,491,000
for various fees in consideration of various services rendered to SLC and the
Owner Partnership in connection with the Offering. Lehman Holdings received
$24,978 as an interest payment on the Gap Loan, which amount is equal to Lehman
Holding's cost of funds during the term of the Gap Loan. The General Partner
is entitled to receive 1% of SLC's Net Cash Flow from operations and varying
percentages of SLC's Net Proceeds from capital transactions. See pages 3 and 7
of the Partnership Agreement for a description of distribution agreements.
Capital Growth Mortgage Investors Fund, L.P. a Delaware limited partnership,
the general partner of which is an affiliate of Lehman, has acquired a 24%
interest in the Zero Coupon Loan. Laurel Capital Growth Investors Corp., a
Subchapter S corporation whose officers, directors and shareholders are current
or former employees of Shearson, acquired a 76% interest in the equity kicker
interest payment in the Zero Coupon Loan.
The General Partner and certain affiliates may be reimbursed by SLC for the
actual costs of goods, services and materials used for or by SLC or the Owner
Partnership including, but not limited to audit, appraisal, legal and tax
preparation fees as well as costs of data processing. Services are provided by
the General Partner and two unaffiliated companies. The Shareholder Services
Group provides partnership accounting and investor relations services for the
Registrant. Prior to May 1993, these services were provided by an affiliate of
a general partner. The Registrant's transfer agent and certain tax reporting
services are provided by Service Data Corporation.
As of December 31, 1994, and 1993, $4,266, and $4,200, respectively, was due to
affiliates for expenditures paid on behalf of SLC. For the years ended
December 31, 1994, 1993 and 1992, $56,290, $55,113 and $47,996, respectively,
was earned by affiliates.
On December 1, 1986, the Partnership entered into an agreement with Shopco
Management Corporation, an affiliate of NAT Limited Partnership, for the
management of the Mall. The agreement, which expired on December 31, 1992
provided for an annual fee equal to 3% of the gross rents collected from the
Mall, as defined, payable monthly. On September 1, 1993, the Partnership and
Shopco Management Corporation executed a new management agreement which
provides for an annual fee equal to 4.5% of the fixed minimum and percentage
rents effective January 1, 1993. Scheduled to expire on December 31, 1995,
this agreement allows for automatic renewal at one year intervals thereafter.
For the years ended December 31, 1994, 1993, and 1992, management fee expense
amounted to $276,795, $296,618 and $189,955, respectively.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2).
SHOPCO LAUREL CENTRE, L.P. AND CONSOLIDATED PARTNERSHIP
(a Delaware limited partnership)
Index to Financial Statements
Page
Number
Independent Auditors' Report F-1
Consolidated Balance Sheets
At December 31, 1994 and 1993 F-2
Consolidated Statements of Operations
For the years ended December 31, 1994, 1993 and 1992 F-3
Consolidated Statements of Partners' Capital
For the years ended December 31, 1994, 1993 and 1992 F-3
Consolidated Statements of Cash Flows
For the years ended December 31, 1994, 1993 and 1992 F-4
Notes to the Consolidated Financial Statements F-5
Schedule II - Valuation and Qualifying Accounts F-9
Schedule III - Real Estate and Accumulated Depreciation F-10
(b) Reports on Form 8-K in the fourth quarter of fiscal 1994: None
(c) Exhibits.
Subject to Rule 12b-32 of the Securities Act of 1934 regarding incorporation by
reference, listed below are the exhibits which are filed as part of this
report:
3.* SLC's Amended and Restated Agreement of Limited Partnership, dated as
of April 16, 1987, is hereby incorporated by reference to Exhibit B to the
Prospectus contained in Registration Statement No. 33-11994, which Registration
Statement (the "Registration Statement") was declared effective by the SEC on
April 9, 1987.
4.* The form of Unit Certificate is hereby incorporated by reference to
Exhibit 4.1 to the Registration Statement.
10.1* Investor Services Agreement between SLC and The Boston Company is
hereby incorporated by reference to Exhibit No. 10.1 to the Registration
Statement.
10.2* The Property Management Agreement between the Owner Partnership and the
Manager relating to the operation and leasing of the Mall is hereby
incorporated by reference to Exhibit No. 10.2 to the Registration Statement.
10.3* Closing Agreement among JMB Income Properties, Ltd. - VI, JMB Income
Properties Ltd. - VIII, SLC and NAT Limited Partnership is hereby incorporated
by reference to Exhibit No. 10.3 to the Registration Statement.
10.4* Demand Promissory Note from Shearson Group to the General Partner is
hereby incorporated by reference to Exhibit No. 10.4 to the Registration
Statement.
10.5* Documents relating to the Pre-Existing Mortgage held by Equitable Life
Assurance Society of the United States is hereby incorporated by reference to
Exhibit No. 10.5 to the registration Statement.
10.6* Letter from Equitable Life Assurance Society of the United States
consenting to the prepayment of the Pre-existing Mortgage is hereby
incorporated by reference to Exhibit No. 10.6 to the Registration Statement.
10.8* Documents relating to the Zero Coupon Loan are hereby incorporated by
reference to Exhibit No. 10.7 to the Registration Statement.
10.9* Indemnity Agreement between Shearson and Cushman & Wakefield, Inc. is
hereby incorporated by reference to Exhibit No. 10.9 to the Registration
Statement.
10.10* Reciprocal Operation and Easement Agreement is hereby incorporated by
reference to Exhibit No. 10.10 to the Registration Statement.
10.11* Easement Agreement is hereby incorporated by reference to Exhibit No.
10.11 to the Registration Statement.
10.13* The Second Mortgage Loan Agreement from Kemper to the Owner Partnership
dated December 28, 1990 which is hereby incorporated by reference to exhibit
10.13 of the Partnership's Annual Report on Form 10-K for the year ended
December 31, 1991.
10.14* Real Estate Management Agreement by and Between Laurel Owner Partners
Limited Partnership, As Owner, and Shopco Management Corp., As Agent, is hereby
incorporated by reference to exhibit 10.14 of the Partnership's Annual Report
on Form 10-K for the year ended December 31, 1993.
10.15 Summary of Real Property for Laurel Centre as of January 1, 1995, as
prepared by Cushman & Wakefield, Inc.
*Previously filed
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 1995
SHOPCO LAUREL CENTRE, L.P.
BY: Laurel Centre Inc.
General Partner
BY: /s/ Paul L. Abbott
Name: Paul L. Abbott
Title: Director, President and
Chief Executive Officer
BY: /s/ Robert J. Hellman
Name: Robert J. Hellman
Title: Director, Vice President
and Chief Financial Officer
LAUREL CENTRE DEPOSITARY CORP.
BY: /s/ Paul L. Abbott
Name: Paul L. Abbott
Title: Director, President and
Chief Executive Officer
BY: /s/ Robert J. Hellman
Name: Robert J. Hellman
Title: Director, Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
LAUREL CENTRE INC.
General Partner and
LAUREL CENTRE DEPOSITARY CORP.
Date: March 30, 1995
BY: /s/ Paul L. Abbott
Paul L. Abbott
Director, President and
Chief Executive Officer
Date: March 30, 1995
BY: /s/ Elizabeth Jarvis
Elizabeth Jarvis
Director
Date: March 30, 1995
BY: /s/ Richard A. Morton
Richard A. Morton
Director
Date: March 30, 1995
BY: /s/ Robert J. Hellman
Robert J. Hellman
Director, Vice President
and Chief Financial Officer
Date: March 30, 1995
BY: /s/ Raymond Mikulich
Raymond Mikulich
Director
Date: March 30, 1995
BY: s/ Joan Berkowitz
Joan Berkowitz
Vice President
Date: March 30, 1995
BY: /s/ Elizabeth Rubin
Elizabeth Rubin
Vice President
Date: March 30, 1995
BY: /s/ Kathleen Carey
Kathleen Carey
Director
Independent Auditors' Report
The Partners
Shopco Laurel Centre, L.P.
We have audited the consolidated financial statements of Shopco Laurel Centre,
L.P. and Consolidated Partnership (a Delaware limited partnership) as listed in
the accompanying index. In connection with our audits of the consolidated
financial statements, we have also audited the financial statement schedules as
listed in the accompanying index. These consolidated financial statements and
financial statement schedules are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedules based on our audits
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principals used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Shopco Laurel
Centre, L.P. and Consolidated Partnership as of December 31, 1994 and 1993,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1994 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick L.L.P.
Boston, Massachusetts
February 10, 1995
Consolidated Balance Sheets
December 31, 1994 and 1993
Assets 1994 1993
Real estate, at cost
(notes 3, 5 and 6):
Land $ 5,304,011 $ 5,304,011
Building 60,029,923 59,983,624
Improvements 3,181,448 2,818,627
68,515,382 68,106,262
Less accumulated depreciation
and amortization (12,170,608) (10,346,073)
56,344,774 57,760,189
Cash 10,431,820 7,685,010
Accounts receivable, net of
allowance of $131,759 in 1994
and $121,721 in 1993 528,845 464,478
Deferred rent receivable 309,478 115,929
Deferred charges, net of
accumulated amortization
of $218,353 in 1994 and
$353,068 in 1993 142,322 135,301
Prepaid expenses and other assets 530,446 527,922
Total Assets $68,287,685 $66,688,829
Liabilities, Minority Interest and Partners' Capital
Liabilities:
Accounts payable and
accrued expenses $ 179,794 $ 283,561
Zero coupon first
mortgage note payable
(note 5) 48,456,864 43,868,206
Second mortgage
note payable (note 6) 2,000,000 2,000,000
Second mortgage note
accrued interest payable 19,167 19,167
Due to affiliates (note 7) 9,891 9,825
Security deposits payable 14,633 12,133
Deferred income 766,727 788,766
Distribution payable (note 9) 588,384 588,384
Total Liabilities 52,035,460 47,570,042
Minority interest (526,787) (471,106)
Partners' Capital
(notes 1, 4 and 10):
General Partner 944,444 972,553
Limited Partners
(4,660,000 limited
partnership units
authorized, issued
and outstanding) 15,834,568 18,617,340
Total Partners'
Capital 16,779,012 19,589,893
Total Liabilities,
Minority Interest and
Partners' Capital $68,287,685 $66,688,829
See accompanying notes to the consolidated financial statements
Consolidated Statements of Operations
For the years ended December 31, 1994, 1993 and 1992
Income 1994 1993 1992
Rental income $ 5,526,093 $ 5,373,724 $ 4,833,539
Escalation income 5,004,831 4,763,187 4,671,457
Interest income 274,960 170,185 108,442
Miscellaneous income 316,315 290,117 231,629
Total Income 11,122,199 10,597,213 9,845,067
Expenses
Interest expense 4,822,735 4,384,130 3,990,754
Property operating expenses 3,642,418 3,325,995 3,197,505
Depreciation and amortization 1,873,237 1,835,776 1,907,886
Real estate taxes 1,034,656 1,050,690 1,010,305
General and administrative 209,045 245,158 227,073
Total Expenses 11,582,091 10,841,749 10,333,523
Loss before minority interest (459,892) (244,536) (488,456)
Minority interest 2,547 84 2,165
Net Loss $ (457,345) $ (244,452) $ (486,291)
Net Loss Allocated:
To the General Partner $ (4,573) $ (2,445) $ (4,863)
To the Limited Partners (452,772) (242,007) (481,428)
$ (457,345) $ (244,452) $ (486,291)
Per limited partnership unit
(4,660,000 outstanding) $ (.10) $ (.05) $ (.10)
Consolidated Statements of Partners' Capital
For the years ended December 31, 1994, 1993 and 1992
Limited General Total
Partners' Partner's Partners'
Balance at December 31, 1991 $24,000,775 $1,026,933 $25,027,708
Net loss (481,428) (4,863) (486,291)
Distributions (note 9) (2,330,000) (23,536) (2,353,536)
Balance at December 31, 1992 21,189,347 998,534 22,187,881
Net loss (242,007) (2,445) (244,452)
Distributions (note 9) (2,330,000) (23,536) (2,353,536)
Balance at December 31, 1993 18,617,340 972,553 19,589,893
Net loss (452,772) (4,573) (457,345)
Distributions (note 9) (2,330,000) (23,536) (2,353,536)
Balance at December 31, 1994 $15,834,568 $ 944,444 $16,779,012
See accompanying notes to the consolidated financial statements.
Consolidated Statements of Cash Flows
For the years ended December 31, 1994, 1993 and 1992
Cash Flows from Operating Activities:
1994 1993 1992
Net loss $ (457,345) $ (244,452) $ (486,291)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Minority interest (2,547) (84) (2,165)
Depreciation and
amortization 1,873,237 1,835,776 1,907,886
Increase in interest on
zero coupon mortgage payable 4,588,658 4,154,130 3,760,753
Increase (decrease) in cash
arising from changes in
operating assets and
liabilities:
Accounts receivable (64,367) 2,830 (80,417)
Deferred rent receivable (193,549) (99,629) (16,300)
Deferred charges (53,417) (26,334) -
Prepaid expenses and
other assets (2,524) 7,249 (43,547)
Accounts payable and
accrued expenses (103,767) 67,692 (46,123)
Due to affiliates 66 2,400 (844)
Security deposits payable 2,500 2,500 (4,168)
Deferred income (22,039) (20) 53,417
Net cash provided by
operating activities 5,564,906 5,702,058 5,042,201
Cash Flows from
Investing Activities:
Additions to real estate (411,426) (441,885) (242,252)
Cash-held in escrow - 69,074 190,402
Net cash used for
investing activities (411,426) (372,811) (51,850)
Cash Flows from
Financing Activities:
Cash distributions to partners (2,353,536) (2,353,536) (2,353,536)
Cash distributions -
Minority interest (53,134) (52,113) (65,143)
Net cash used for
financing activities (2,406,670) (2,405,649) (2,418,679)
Net increase in cash 2,746,810 2,923,598 2,571,672
Cash at beginning of period 7,685,010 4,761,412 2,189,740
Cash at end of period $10,431,820 $ 7,685,010 $ 4,761,412
Supplemental Disclosure of
Cash Flow Information:
Cash paid during the period
for interest $ 234,077 $ 230,000 $ 230,001
See accompanying notes to the consolidated financial statements.
Notes to the Consolidated Financial Statements
December 31, 1994, 1993 and 1992
1. Organization
Shopco Laurel Centre, L.P. ("SLC") was formed as a limited partnership on
December 22, 1986 under the laws of the State of Delaware. The Partnership is
the general partner of Laurel Owner Partners Limited Partnership (the "Owner
Partnership"), a Maryland limited partnership, which owns Laurel Centre (the
"Mall").
The general partner of SLC is Laurel Centre Inc. (the "General Partner")
formerly Shearson Laurel Inc., an affiliate of Lehman Brothers Inc., formerly
Shearson Lehman Brothers Inc. (see below).
On April 16, 1987, the Partnership commenced investment operations with the
acceptance of subscriptions of 4,660,000 depositary units of limited
partnership units, the maximum authorized by the limited partnership agreement
("Limited Partnership Agreement"). Upon the admittance of the additional
limited partners, the Assignor Limited Partner withdrew from the Partnership.
Registered holders ("Unit Holders") received an assignment of the economic,
voting and other rights attributable to the limited partnership units held by
the Assignor Limited Partner.
On July 31, 1993 Shearson Lehman Brothers Inc. sold certain of its domestic
retail brokerage and asset management businesses to Smith Barney, Harris Upham
& Co. Incorporated ("Smith Barney"). Subsequent to the sale, Shearson Lehman
Brothers Inc. changed its name to Lehman Brothers Inc. The transaction did not
affect the ownership of the general partner. However, the assets acquired by
Smith Barney included the name "Shearson". Consequently, effective November
12, 1993, the general partner changed its name to Laurel Centre Inc. to delete
any references to "Shearson".
2. Summary of Significant Accounting Policies
Basis of Accounting. The consolidated financial statements of SLC have been
prepared on the accrual basis of accounting and include the accounts of SLC and
the Owner Partnership. All significant intercompany accounts and transactions
have been eliminated.
Real Estate. The real estate, which consists of building, land and
improvements, are recorded at cost less accumulated depreciation and
amortization. Cost includes the initial purchase price of the property plus
closing costs, acquisition and legal fees and capital improvements.
Depreciation is computed using the straight-line method based on an estimated
useful life of 40 years. Depreciation of fixtures and equipment is computed
under the straight-line method over an estimated useful life of 12 years.
Amortization of tenant leasehold improvements is computed under the
straight-line method over the lease term.
Organization Costs and Deferred Charges. Costs and charges are amortized on a
straight-line basis over the following periods:
Fee for negotiating the acquisition of
the ownership of the Mall 40 years
Fee for negotiating the property
management and leasing agreement 6 years
Zero coupon loan legal fee 9.5 years
Refinancing fees 5.8 years
Fees paid in connection with the acquisition of the property have been included
in the purchase price of the property. Accordingly, such fees have been
allocated to the basis of the land, building and improvements and are being
depreciated over the estimated useful lives of those assets. Leasing
commissions are amortized on a straight-line basis over the lease term.
Offering Costs. Offering costs are non-amortizable and are deducted from
limited partners' capital.
Transfer of Units and Distributions. Net income or net loss from operations is
allocated to the Unit Holders. Upon the transfer of a unit, net income or net
loss from operations attributable to such unit generally is allocated between
the transferor and the transferee based on the number of days during the year
of transfer that each is deemed to have owned the unit. The Unit Holder of
record on the first day of a calendar month is deemed to have transferred their
interest on the first day of such month.
Distributions of operating cash flow, as defined in the Partnership Agreement,
are paid on a quarterly basis to Unit Holders on record dates established by
the Partnership, which generally fall on the last day of each quarter.
Income Taxes. No provision is made for income taxes since such liability is
the liability of the individual partners.
Net Income (Loss) Per Limited Partnership Unit. Net income (loss) per limited
partnership unit is calculated based upon the number of limited partnership
units outstanding during the year.
Rental Income and Deferred Rent. The Partnership rents its property to tenants
under operating leases with various terms. Deferred rent receivable consists
of rental income which is recognized on the straight-line basis over the lease
terms, but will not be received until later periods as a result of scheduled
rent increases.
3. Real Estate
SLC's real estate, which was purchased on December 1, 1986, consists of the
enclosed mall, the J.C. Penney Store and approximately 23 acres of land known
as Laurel Centre, located in Laurel, Maryland (the "Mall"). The following is a
schedule of minimum lease payments as called for under the lease agreements
with Mall tenants:
Year Ending
December 31,
1995 $ 4,635,352
1996 4,488,140
1997 4,331,049
1998 3,822,118
1999 3,582,020
Thereafter 13,451,749
$34,310,428
In addition to the minimum lease amounts, the leases provide for percentage
rents and escalation charges to tenants for common area maintenance and real
estate taxes. For the years ended December 31, 1994, 1993 and 1992, percentage
rents amounted to $343,061, $338,712 and $370,589, respectively, and are
included in rental income. For the years ended 1994, 1993 and 1992 temporary
tenant income amounted to $307,035, $272,589 and $148,737, respectively and are
included in rental income.
The appraised value of the mall at January 1, 1995 was $81,000,000.
4. Partnership Agreement
The SLC Partnership Agreement provides that, prior to the admission of the
Assignor Limited Partner, profits and losses were allocated 1% to the initial
limited partners and 99% to the General Partner. Thereafter, all income,
profits, losses and cash distributions from operations are allocated 1% to the
General Partner and 99% to the Unit Holders. Proceeds of sale and interim
capital transactions will be allocated 99.5% to the Unit Holders until the Unit
Holders receive their Unrecovered Capital and their Preferred Return Arrearage,
as defined. Thereafter, net proceeds will generally be distributed 89% to the
Unit Holders and 11% to the General Partner.
With respect to the Owner Partnership, SLC has a 98% interest and NAT Limited
Partnership has a 2% interest in the income, profits and cash distributions of
the Mall. Losses will be allocated 99% to SLC and 1% to NAT Limited
Partnership. Upon sale or an interim capital transaction, SLC will receive
99.5% and NAT Limited Partnership will receive .5% of the net proceeds thereof
until SLC receives an amount equal to its Unrecovered Capital and Preferred
Return Arrearage, as defined. Thereafter, any remaining proceeds will be
allocated 90% to SLC (11% to the General Partner and 89% to the Unit Holders)
and 10% to NAT Limited Partnership.
5. Zero Coupon First Mortgage Note Payable
Financing for the purchase of the Mall was provided by a Zero Coupon Loan from
Lending, Inc., formerly Shearson California Commercial Lending Inc., an
affiliate of the General Partner (together with its successors and assignees,
the "Zero Coupon Lender"), in the total amount of $22,500,000.
The nonrecourse Zero Coupon Loan accrues interest at an annual implicit rate of
10.2% per annum, compounded semi-annually. At maturity, defeasance or
prepayment in connection with a major casualty, the Partnership will pay
additional supplemental interest equal to 5% of any appreciation in value of
the Mall occurring during the term of the Zero Coupon Loan in excess of
$72,500,000 (the appraised value of the Mall as of January 1, 1987). The Zero
Coupon Loan does not require the payment of any principal or interest currently
and matures on October 15, 1996. It is secured by a first deed of trust on the
Mall and an assignment of leases. The accreted amount of the Zero Coupon Loan
at maturity will be $57,894,075.
During 1987, the Zero Coupon Lender sold a 76% participation interest in its
right under the Zero Coupon Loan to Kemper Investors Life Insurance Company
("Kemper") in the amount of $17,100,000. Subsequently, in 1993, Kemper sold
its participation interest to CBA Associates, Inc., ("CBA Associates"), a
conduit entity which placed the loan into a pool of mortgages to be held by a
Real Estate Mortgage Investment Conduit (the "REMIC Lender"). The
participation interest sold did not include the additional supplemental
interest obligation of the note of which 76% was subsequently acquired by
Laurel Capital Growth Investors Corp.
Additionally in 1987, the Zero Coupon Lender sold its remaining 24%
participation interest in its right under the Zero Coupon Loan to Capital
Growth Mortgage Investors, L.P., an affiliate of the General Partner, in the
amount of $5,400,000. The 24% participation sold to Capital Growth Mortgage
Investors, L.P. included the additional supplemental interest obligation of the
note.
6. Second Mortgage Note Payable
On December 12, 1990, the Partnership obtained a $2,000,000 note from Kemper.
The note bears interest at 11.5% and is secured by a second mortgage lien on
the real estate. Monthly payments of interest only are required until maturity
on October 15, 1996, at which time the principal balance is due.
During 1993, Kemper sold its note to CBA Associates which placed the loan into
a pool of mortgages to be held by the REMIC Lender.
7. Transactions with Related Parties
The General Partner or its affiliates earned fees and compensation during 1986
in connection with the acquisition, management, organization and administrative
services rendered to SLC of $2,491,000, representing $400,000 in organization
fees, $300,000 in a property management negotiations and supervision fee,
$500,000 in prepaid asset management fees and $1,291,000 in acquisition fees,
of which $5,625 was unpaid at December 31, 1994 and 1993.
As of December 31, 1994 and 1993, $4,266 and $4,200, respectively, is due to
affiliates for expenditures paid on behalf of the Partnership. For the years
ended December 31, 1994, 1993, and 1992, $56,290, $55,113, and $47,996,
respectively, was earned by the affiliates.
Cash. Certain cash amounts reflected on the Partnership's balance sheet at
December 31, 1994 were on deposit with an affiliate of the General Partner.
Cash reflected on the Partnership's balance sheet at December 31, 1993 was on
deposit with an unaffiliated party.
8. Management Agreement
On December 1, 1986, the Partnership entered into an agreement with Shopco
Management Corporation, an affiliate of NAT Limited Partnership, for the
management of the Mall. The agreement, which expired on December 31, 1992,
provided for an annual fee equal to 3% of the gross rents collected from the
Mall, as defined, payable monthly. On September 1, 1993, the Partnership and
Shopco Management Corporation executed a new management agreement which
provides for an annual fee equal to 4.5% of the fixed minimum and percentage
rents effective January 1, 1993. Scheduled to expire on December 31, 1995,
this agreement allows for automatic renewal at one year intervals thereafter.
For the years ended December 31, 1994, 1993 and 1992, management fee expense
amounted to $276,795, $296,618 and $189,955, respectively.
9. Distributions to Limited Partners
Distributions to limited partners for each of 1994, 1993 and 1992 were
$2,330,000 ($.50 per limited partnership unit). Cash distributions declared
payable to limited partners at December 31, 1994 and 1993 were $582,500 ($.125
per limited partnership unit). <PAGE>
10. Reconciliation of Consolidated Financial
Statement Net Loss and Partners' Capital to Federal Income Tax Basis Net Loss
and Partners' Capital Reconciliations of consolidated financial statement net
loss and partners' capital to federal income tax basis net loss and partners'
capital follow:
1994 1993 1992
Consolidated financial
statement net loss $ (457,345) $ (244,452) $ (486,291)
Tax basis depreciation
over financial statement
depreciation (272,504) (279,294) (249,433)
Tax basis recognition of
deferred charges under
financial statement recognition
of deferred charges - - 35,859
Tax basis real estate
taxes under (over) financial
statement real estate taxes 10,612 5,263 (16,839)
Tax basis rental income over
(under) financial statement
rental income (213,434) (114,790) 52,884
Tax basis minority interest
under financial statement
minority interest (9,296) (9,271) (9,270)
Federal income tax
basis net loss $ (941,967) $ (642,544) $ (673,090)
1994 1993 1992
Financial statement
basis partners' capital $16,779,012 $19,589,893 $22,187,881
Current year financial
statement net loss over
federal income tax
basis net loss (484,622) (398,092) (186,799)
Cumulative financial
statement net income over
federal income tax
basis net loss (4,669,385) (4,271,293) (4,084,494)
Federal income tax
basis partners' capital $11,625,005 $14,920,508 $17,916,588
Because many types of transactions are susceptible to varying interpretations
under Federal and state income tax laws and regulations, the amounts determined
above may be subject to change at a later date upon final determination by the
respective taxing authorities.
Schedule II Valuation and Qualifying Accounts
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions Period
Allowance for
doubtful accounts:
Year ended
December 31, 1992: $ 106,492 $ 64,365 $ 78,153 $ 92,704
Year ended
December 31, 1993: 92,704 32,267 3,250 121,721
Year ended
December 31, 1994: $ 121,721 $ 81,610 $ 71,572 $131,759
SHOPCO LAUREL CENTRE, L.P. AND CONSOLIDATED PARTNERSHIP
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1994
Cost Capitalized
Subsequent
Initial Cost to Partnership (A) To Acquisition
---------------------------------------
Land,
Buildings and Buildings and
Description Encumbrances Land Improvements Improvements
Shopping Center
Laurel, MD $50,456,864 $5,058,967 $56,039,671 $7,416,744
Total $50,456,864 $5,058,967 $56,039,671 $7,416,744
SHOPCO LAUREL CENTRE, L.P. AND CONSOLIDATED PARTNERSHIP
Schedule III - Real Estate and Accumulated Depreciation (cont.)
December 31, 1994
Gross Amount at Which Carried at Close of Period(B)
---------------------------------------------------
Buildings and Accumulated
Description Land Improvements Total Depreciation
Shopping
Center
Laurel, MD $5,304,011 $63,211,371 $68,515,382 $12,170,608
$5,304,011 $63,211,371 $68,515,382 $12,170,608
SHOPCO LAUREL CENTRE, L.P. AND CONSOLIDATED PARTNERSHIP
Schedule III - Real Estate and Accumulated Depreciation (cont.)
December 31, 1994
Life on which
Depreciation
in Latest
Date of Date Income Statements
Description Construction Acquired is Computed
Shopping Center
Laurel, MD 1979 12/86 Building 40 years
Imprvmnts 12 years
(A) The initial cost to the Partnership represents the original purchase price
of the property.
(B) For Federal income tax purposes, the costs basis of the land, building and
improvements at December 31, 1994 is $68,630,383.
A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended December 31, 1994, 1993 and 1992:
Real Estate investments: 1994 1993 1992
Beginning of year $68,106,262 $67,664,377 $67,422,125
Additions 409,120 441,885 242,252
Dispositions
End of year $68,515,382 $68,106,262 $67,664,377
Accumulated Depreciation:
Beginning of year $10,346,073 $ 8,550,988 $ 6,770,946
Depreciation expense 1,824,535 1,795,085 1,780,042
Dispositions
End of year $12,170,608 $10,346,073 $ 8,550,988
EXHIBIT 10.15
LIMITED APPRAISAL OF REAL PROPERTY
Laurel Centre
U.S. Route 1
City of Laurel,
Prince George's County, Maryland
IN A SUMMARY REPORT
As of January 1, 1995
Prepared For:
Laurel Owner Partners Limited Partnership
3 World Financial Center, 29th Floor
New York, New York 10285
Prepared By:
Cushman & Wakefield, Inc.
Valuation Advisory Services
51 West 52nd Street
New York, New York 10019
February 1, 1995
Laurel Owner Partners Limited Partnership
3 World Financial Center, 29th Floor
New York, New York 10285
Re: Limited Appraisal of Real Property
Laurel Centre
U.S. Route 1
City of Laurel, Prince George's County, Maryland
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 Laurel Owner Partners Limited Partnership
("Client") and it is intended only for the specified use of the Client. It
may not be distributed to or relied upon by other persons or entities without
written permission of the Appraiser.
The property was inspected by and the report was prepared by Richard W.
Latella, MAI. Jay F. Booth also inspected the property and provided
significant assistance in the preparation of the report and the cash flows
contained herein.
This is a limited appraisal prepared in accordance with the Departure
Provision of the Uniform Standards of Professional Appraisal Practice of the
Appraisal Foundation. The results of the appraisal are being conveyed in a
Summary report according to our agree- ment. By mutual agreement, this
limited appraisal contains something less than the work required by the
specific guidelines of the Uniform Standards of Professional Appraisal
Practice. In this case, the Cost Approach, which might have been appropriate
to this appraisal, has not been developed. We have relied upon the Sales
Comparison and Income Approaches as being particularly relevant to the
appraisal of this property. Furthermore, we are providing this report as an
update to our last analysis which was prepared as of January 1, 1994. As
such, we have primarily reported only changes to the property and its
environs over the past year.
As a result of our analysis, we have formed an opinion that the market value
of the leased fee estate in the referenced property, subject to the
assumptions, limiting conditions, certifications, and definitions, as of
January 1, 1995, was:
EIGHTY ONE MILLION DOLLARS
$81,000,000
This letter is invalid as an opinion of value if detached from the report,
which contains the text, exhibits, and an Addenda.
Respectfully submitted,
CUSHMAN & WAKEFIELD, INC.
Richard W. Latella, MAI
Senior Director
Retail Valuation Group
Maryland Certified General
Real Estate Appraiser License No. 10462
Jay F. Booth
Valuation Advisory Services
RWL:JFB:emf
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
Property Name: Laurel Centre
Location: U.S. Route 1
City of Laurel,
Prince George's County, Maryland
Interest Appraised: Leased fee
Date of Value: January 1, 1995
Date of Inspection: January 13, 1995
Ownership: Laurel Owner Partners
Limited Partnership
Land Area: 21.84 acres (appraised portion of
mall site)
Zoning: C-SH, Commercial Shopping Center
Highest and Best Use
If Vacant: Retail/commercial use built to its maxi-
mum feasible FAR.
As Improved: Continued retail/commercial use as a
regional shopping center.
Improvements
Type: Two-level regional mall.
GLA: Hecht's 118,354 SF *
Montgomery Ward 161,204 SF *
J.C. Penney 136,864 SF
Total Anchor Stores416,422 SF
Mall Shops 245,217 SF
Total GLA
(Occupancy Area) 661,639 SF
* Separately owned. The total ap-
praised GLA amounts to 382,081
square feet and includes J.C. Penney
and the Mall Shops.
Condition: Good
Operating Data and Forecasts
Current Occupancy: 93.6% based on mall shop GLA, (Inclu-
sive of pre-committed tenants)
Forecasted Stabilized Occupancy: 97.0%
Forecasted Date of Stabilized Occupancy: March 1, 1997
Operating Expenses
Forecasted (1995): $4,511,769 ($18.40/SF of mall GLA)
Value Indicators
Sales Comparison Approach: $79,600,000 to $81,600,000
Income Approach
Direct Capitalization: $81,500,000
Discounted Cash Flow: $81,000,000
Investment Assumptions
Rent Growth Rate: +2% - 1996
+3% - 1997
+4% - 1998-2004
Expense Growth Rate: +4% - 1994-2003
Sales Growth Rate: +2% - 1995
+3% - 1996
+4% - 1997-2004
Other Income: +3% - 1995-2004
Tenant Improvements-New
Mall Tenants: $ 8.00/SF
Tenant Improvements-Renewing
Mall Tenants: $ 1.50/SF
Vacancy between Tenants: 6 months
Renewal Probability: 75%
Terminal Capitalization Rate: 8.25%
Cost of Sale at Reversion: 2.0%
Discount Rate: 11.75%
Value Conclusion: $81,000,000
Exposure Time Implicit in Value Conclusion: Not more than 12 months
Resulting Indicators
Going-In Overall Rate: 8.11%
Price per Square Foot of Owned GLA: $212.00
Price per Square Foot of Mall Shop GLA: $330.32
Special Risk Factors: None
Special Assumptions
1. Throughout this analysis we have relied on information provided by
ownership and management which we assume to be accurate. Negotiations
are currently underway with additional mall tenants 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 Shopco. Such
leases are identified within the body of this report.
3. 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.
4. We are not aware of any environmental hazards or conditions on or about
the property that would detract from its market value. Our physical
inspection gave us no reason to suspect that such conditions might exist.
However, we are not experts in the detection of environmental
contaminants, or the cost to cure them if they do exist. We recommend that
appropriate experts be consulted regarding these issues. Our analysis
assumes that there are no environmental hazards or conditions affecting
the property.
5. 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.
6. Please refer to the complete list of assumptions and limiting conditions
included at the end of this report.
** PHOTOGRAPHS **
Exterior views of Laurel Centre.
Interior views of Laurel Centre.
TABLE OF CONTENTS
Page
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . .
Identification of Property. . . . . . . . . . . . . . 1
Property Ownership and Recent History . . . . . . . . 1
Purpose and Function of the Appraisal . . . . . . . . 1
Extent of the Appraisal Process . . . . . . . . . . . 2
Department from Specific Guidelines . . . . . . . . . 2-3
Date of Value and Property Inspection . . . . . . . . 3
Property Rights Appraised . . . . . . . . . . . . . . 3
Definitions of Value, Interest Appraised,and Other Pertinent Terms 3-4
Legal Description . . . . . . . . . . . . . . . . . . 3
REGIONAL ANALYSIS. . . . . . . . . . . . . . . . . . . . 5- 46
LOCATION ANALYSIS. . . . . . . . . . . . . . . . . . . . 47- 49
RETAIL MARKET ANALYSIS . . . . . . . . . . . . . . . . . 50- 72
THE SUBJECT PROPERTY . . . . . . . . . . . . . . . . . . 73
REAL PROPERTY TAXES AND ASSESSMENTS. . . . . . . . . . . 74
ZONING . . . . . . . . . . . . . . . . . . . . . . . . . 75
HIGHEST AND BEST USE . . . . . . . . . . . . . . . . . . 76
VALUATION PROCESS. . . . . . . . . . . . . . . . . . . . 77
SALES COMPARISON APPROACH. . . . . . . . . . . . . . . . 78-100
INCOME APPROACH. . . . . . . . . . . . . . . . . . . . . 101-152
RECONCILIATION AND FINAL VALUE ESTIMATE. . . . . . . . . 153-155
ASSUMPTIONS AND LIMITING CONDITIONS. . . . . . . . . . . 156-158
CERTIFICATION OF APPRAISAL . . . . . . . . . . . . . . . 159
ADDENDA
OPERATING EXPENSE BUDGET
TENANT SALES REPORT
PRO-JECT LEASE ABSTRACT REPORT
PRO-JECT PROLOGUE ASSUMPTIONS REPORT
PRO-JECT TENANT REGISTER REPORT
PRO-JECT LEASE EXPIRATION REPORT
ENDS FULL DATA REPORT
CUSHMAN & WAKEFIELD INVESTOR SURVEY
APPRAISERS' QUALIFICATIONS
PARTIAL CLIENT LIST
INTRODUCTION
Identification of Property
The Laurel Centre Mall is an enclosed regional mall located on U.S. Route 1
in Laurel, Maryland. It is an integral part of Laurel Centre, a 1,100,000
square foot regional shopping complex containing both enclosed and open air
sections. The enclosed mall is a two level, modern shopping complex with a
total occupancy area of 661,639 square feet. Anchor tenants consist of J.C.
Penney (136,864 square feet), Montgomery Ward (161,204 square feet), and
Hecht's (118,354 square feet). The latter two stores are independently
owned and are not a part of this appraisal. The gross leasable area of the
enclosed mall subject to this appraisal amounts to 382,081 square feet of
which mall stores occupy 245,217 square feet. This portion of the mall is
situated on a 21.84 acre site situated on the west side of U.S. Route 1 at
Cherry Lane.
The Laurel Centre Mall is the area's dominant retail center. It is
supported by an ex- panding population base with income levels above regional
averages. The immediate neighborhood continues to be the recipient of
significant commercial and residential growth.
Property Ownership and Recent History
Title to the subject is held by Laurel Owner Partners Limited Partnership.
It is current- ly occupied by a number of tenants as a place of business.
Details of the existing major tenant leases are contained in our files.
Purpose and Function of the Appraisal
The purpose of this limited appraisal is to provide an estimate of the
market value of the leased fee estate in the subject property as of January
1, 1995. Our analysis reflects conditions prevailing as of that date. Our
last appraisal was completed on January 1, 1994 and we have focused our
analysis on changes to the property and market conditions since that time.
The function of this appraisal is to provide an independent valuation
analysis and to assist in monitoring ownership's investment in the property.
Extent of the Appraisal Process
In the process of preparing this appraisal, we:
Inspected the exterior of the building and the site improvements and a
representative sample of tenant spaces with Joe Sirni, the mall
manager.
Interviewed representatives of the property management company, Shopco.
Reviewed leasing policy, concessions, tenant build-out allowances and
history of recent rental rates and occupancy with the mall manager.
Reviewed a detailed history of income and expense and a budget forecast
for 1995 including the budget for planned capital expenditures and
repairs.
Conducted market research of occupancies, asking rents, concessions and
operating expenses at competing retail properties including interviews
with on-site managers and a review of our own data base from previous
appraisal files.
Prepared an estimate of stabilized income and expense (for capitalization
purposes).
Conducted market inquiries into recent sales of similar regional malls to
ascertain sales price per square foot, net income multipliers and
capitalization rates. This process involved telephone interviews with
sellers, buyers and/or participating brokers.
Prepared Sales Comparison and Income Approaches to value.
Departure from Specific Guidelines
This is a limited appraisal prepared in accordance with the Departure
Provision of the Uniform Standards of Professional Appraisal Practice of the
Appraisal Foundation. In this case, the Cost Approach, which might have been
appropriate to this appraisal, has not been developed. Furthermore, the
report primarily addresses changes to the property and its environs over the
past year and does not provide a detailed discussion of these items.
By definition, a limited appraisal is considered to be less reliable than a
complete appraisal in that it does not contain all of the data and analysis
normally found in a complete appraisal.
Date of Value and Property Inspection
On January 13, 1995 Jay F. Booth inspected the subject property and its
environs. Richard W. Latella, MAI also inspected the property on January 15,
1995. Our date of value is January 1, 1995.
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.
REGIONAL ANALYSIS
Real estate is an immobile asset. Consequently, the economic trends
affecting the quality of one location relative to competing locations within
a market area, or as compared to another market area, are important. For
this reason, it is helpful to examine both past performance and future trends
affecting the economy. The following analysis examines key components of
the subject's region.
The market value of real property is influenced by four primary forces:
physical, social, economic and governmental factors. These forces determine
the supply and demand for real property which, in turn, determines its
market value. This discussion will examine the trends in the Baltimore and
Washington metropolitan areas which influence and create value in real
estate.
Laurel Centre depends heavily upon the strength of the regional economy that
is the foundation for market demand for its retail goods and services.
Disposable income and a climate favorable for retail spending are determined
in large part by the strength of the economic base of its trade area and
beyond.
Laurel Centre is influenced primarily by Baltimore, Maryland's economy and
Washington, D.C. Many of Laurel Centre's shoppers work in either of these
two cities or their suburbs. Transportation to either of these nodes of
employment have been improved over the past several years, thus more closely
linking Laurel to both cities. In turn, Laurel has developed as a bedroom
suburb and is now more dependent on both cities for its prosperity,
stability and growth.
Washington Metropolitan Area
Introduction
The real estate market is affected by a full circle of supply and demand
factors. As examples, growth trends in population and the number of
households affect the general demand for housing, offices, shopping centers,
warehouses; the employment opportunities and unemployment levels influence
the ability or desire to buy or rent and the quality/cost of the facilities
sought; demographics influence the types of units demanded; and general
economic conditions affect the attitudes of the populace towards the future.
The following analysis will review each of the major factors affecting the
supply and demand for real estate in the metropolitan area. The discussion
is organized to provide the reader with an overview of the area's geographic
scope and facilities infrastructure, followed by discussions of the key
economic factors affecting supply and demand under the following headings:
Background
Area Definition
Infrastructure
Population
Employment and The Economy
Household Demographics
Recent Trends
Background
Washington, D.C. is unique among American cities. As our nation's capital,
it serves as a focal point for our country both politically and economically.
In the role as host city for a major world power, it attracts people from all
over the world. Washington has been dubbed a "recession proof" city in that
it is insulated, as some have argued, from the full effects of economic ups
and downs by the stabilizing influence of the federal government as the
area's biggest employer. From the 1950s through the 1980s, the size of
government continually increased, which brought about an increase in
government employment and population in the Washington area.
Area Definition
The metropolitan Washington area is all of the Washington Metropolitan
Statistical Area (MSA) as defined by the U.S. Department of Commerce, Bureau
of the Census, as of June 1983. The Washington MSA includes: District of
Columbia; the Maryland Counties of Calvert, Charles, Frederick, Montgomery
and Prince George's; the Virginia Counties of Arlington, Fairfax, Loudoun,
Prince William and Stafford; and the Virginia independent Cities of
Alexandria, Fairfax, Falls Church, Manassas, and Manassas Park. Prior to the
1983 redefinition of the Washington MSA, the Maryland counties of Calvert and
Frederick and the Virginia county of Stafford were excluded. The addition of
these counties enlarged the metropolitan area from approximately 2,800 square
miles to 3,956 square miles. Please refer to the Washington MSA map on the
following page.
Effective December 31, 1992, the Department of Commerce created a new
Washington-Baltimore-D.C.-MD-VA-WVa CMSA (consolidated metropolitan
statistical area) that includes the primary Washington, D.C. and Baltimore
MSAs, plus a new Hagerstown MSA and nine additional counties in Virginia and
West Virginia. The expanded market was created to reflect the area's
household and employment patterns and is highly touted by economic
development agencies. The current Washington, D.C. metropolitan area is the
appropriate focus for this analysis, however, since the pertinent market is
more localized.
The population, housing and employment characteristics of the region are
best defined by starting at the area's central jurisdictions: the District of
Columbia, Arlington County, and the City of Alexandria; then moving outward
to the first suburban tier of counties: Fairfax County, City of Fairfax, City
of Falls Church, Prince George's County, and Montgomery County; and thence to
the outer tier of suburbs: Loudoun County, Prince William County, Manassas
and Manassas Park, Frederick County, Calvert County, Charles County, and
Stafford County.
Transportation
The Capital Beltway (I-495) is one of the most important factors driving
development in the Washington area. It has tied the Maryland and Virginia
suburbs together and significantly influenced real estate investment
patterns. One of the primary results has been a steady rise in land prices in
the vicinity of the Beltway. Apartments, light industrial facilities,
distribution warehouses, and shopping centers have gone up wherever the
Beltway crosses other major highways. Interestingly, closer-in sites have
often been by-passed in favor of locations adjacent to the Beltway.
In addition to the Beltway, Washington is connected to I-95, the major
north-south interstate highway that extends most of the length of the Atlantic
coast, and I-66, an east-west highway that begins in Washington, D.C. and
connects
westward to other interstate highways in Virginia and West Virginia.
The Washington Metropolitan Area Transit Authority (WMATA) provides transit
service in Maryland, the District of Columbia, and Virginia, including both
rapid rail and bus transportation. The rapid rail network, referred to as
MetroRail, will cover 103 miles with 86 stations in D.C, suburban Maryland
and Virginia when completed in the late 1990s. The construction of MetroRail
has had a major impact on land values around the stations and has spurred
dramatic new development, both in downtown Washington and in suburban areas.
Major new office and mixed use projects have been built around the Metro
stops. In particular, portions of downtown Washington and Arlington County
have experienced an economic revitalization due to the opening of MetroRail.
Apartment projects often market themselves as being close to MetroRail
stations and typically command rents at the high end of the market and higher
occupancies as a result. The same could be said for various primary
employment centers and major retail facilities.
In terms of air transportation, the Washington area is served by three major
airports: Washington National, Baltimore/Washington International and
Washington Dulles International. Washington National, located in Arlington
County, is located four and one- half miles from the U.S. Capitol, and
transports over 16 million passengers per year. The airport was built in the
1940s and is currently undergoing major renovations and expansion, which
primarily includes a new terminal building and improved parking.
Washington Dulles International Airport is bisected by the Loudoun County,
Fairfax County line and lies in the western part of the MSA. The Dulles
Access Road provides quick access to the airport, along with the Capital
Beltway (I-495) which connects Fairfax County to the Washington metropolitan
area. The Dulles Toll Road is a commuter road bordering the Dulles Access
Road that is being studied for expansion and extension to Leesburg (Route 15)
and past Dulles Airport.
Opened in 1962, Dulles Airport has been an important factor in the growth of
the regional economy of Northern Virginia. In 1985, it became the fastest
growing airport in the United States. Currently 19 airlines service the
airport with 500 daily departures serving 30,000 passengers. Three major
airlines have established regional hubs here including United Airlines,
Continental, and Delta Airlines. Further, international carriers including
Air France, British Airways, All Nippon Airways, TWA, Lufthansa and Swiss
Air.
The Baltimore/Washington International Airport (BWI) is located in the
southern portion of the Baltimore MSA in Anne Arundel County, ten miles from
downtown Baltimore, and 30 miles from Washington, D.C. This airport hosts 18
passenger airlines that provide direct air service to 135 cities in the
United States and Canada. BWI also provides service<PAGE>
to air-freight carriers
with its 110,000 square foot air cargo complex. When compared with Dulles
and Washington National Airport, BWI services 28 percent of commercial pass-
engers, 38 percent of commercial operations and 57 percent of freight
customers. BWI has spawned the development of 15 new business parks and
several hotels, has created nearly 10,000 jobs, and has generated a
state-wide economic impact of $1.7 billion in the form of business sales
made, goods and services purchased, and wages and taxes paid.
Government Services and Structures
The Washington, D.C. metropolitan area contains fourteen different municipal
jurisdictions, including the District of Columbia, ten counties and three
cities in two states. Local governments provide typical municipal services
found in a major metropolitan area, including welfare and social services,
refuse collection, emergency services, public education, and a variety of
regulatory functions. Each municipality has its own zoning ordinance and
governmental structure.
In addition to the local governments, the District of Columbia is the
headquarters for the federal government. Major federal agencies are located
throughout the District of Columbia and many of the surrounding suburbs. The
support functions for many agencies have been relocated to the less expensive
suburbs.
The area is also served by several cross-jurisdictional agencies. These
include the Maryland National-Capital Park and Planning Commission (MNCPPC)
which provides planning and zoning coordination to the Maryland suburbs. The
Washington Metropolitan Area Transit Authority (WMATA), which was referred to
earlier, is the regional public transit authority. The Metropolitan
Washington Council of Governments performs studies on metropolitan economic
and business issues and promotes the region to outsiders.
Public and Private Amenities
As the nation's capital, the District of Columbia houses many national
museums, monuments, and institutions that attract visitors to the area from
around the world. Washington, D.C. is one of the leading tourist destinations
for domestic travelers and foreign visitors to the United States. <PAGE>
In
addition, the metropolitan area is a strong supporter of the performing arts.
The Kennedy Center is the area's main stage for plays, opera, and symphony
presentations, but there are indoor and outdoor stages and theaters in all of
the adjacent jurisdictions. Professional athletics are played at RFK Stadium
(football) in southeast Washington, D.C. and the Capital Centre Arena
(basketball and hockey) in Landover, Maryland. Baseball is played at Oriole
Park at Camden Yard in Baltimore.
The region also offers numerous private and public golf courses, municipal
parks, and bicycle and jogging trails. One unique feature of the region's
outdoor attractions is the C&O Canal. The canal is maintained as a national
park and follows the Maryland side of the Potomac River between Georgetown in
northwest Washington, D.C. and Cumberland, Maryland. The Potomac River is an
active recreational areas for fishing and various kinds of boating.
The public and private primary schools in the region include many with
national standing. The school districts face the typical challenges
encountered in urban centers with mixes of high and low income neighborhoods
and growing immigrant populations without English language skills. On
average, the suburban school districts tend to be better funded than those in
the District of Columbia.
With respect to higher education, the region has a network of nationally
recognized universities and regional and community colleges, including George
Washington University, Georgetown University, American University, the
University of Maryland, Howard University, Gallaudet University, The
University of the District of Columbia, Catholic University, George Mason
University, and Trinity College.
In review, the metropolitan area has a well established infrastructure of
roadways, light rail and bus systems, airports, attractive business and
residential neighborhoods, and many quality of life features that continue to
make Washington, D.C. a desirable place to work and live. There are
continuing efforts by municipal agencies to improve public transportation,
especially the commuter rail system, so as to ease road congestion and lessen
air pollution. The District of Columbia and nearby suburban office
concentrations remain the area's primary business destinations. Thus,
improvement of the public transportation system to facilitate wider access to
the District and, more importantly, connecting the suburban business centers
is essential for long-term growth.
Population
This section will examine the population size and age trends for the
metropolitan area. A summary table is shown on the next page with a map
showing population density on the facing page. Employment, income, and
household related demographics will be reviewed separately.
According to the United States Census Bureau's 1990 data for MSA's and
CMSA's (Combined Metropolitan Statistical Areas), the Washington, D.C. MSA
ranks seventh in the nation in terms of total population.
The Washington area increased in population by 20.7 percent between 1980 and
1990, or an average annual rate of 2.1 percent. The rate of growth has
slowed somewhat with the population change between 1990 and 1993 having
decreased to 1.4 percent. Nonetheless, population growth in the region during
the 1980s far exceeded the growth during the 1970s, when the region grew by
an average of only 21,000 persons per year. During the 1980s, the region had
an average growth of roughly 67,000 persons per year.
Interestingly, however, while there was an overall increase in population,
this increase was by no means uniform within the component jurisdictions of
the Washington MSA. The 1980s saw a shift in population from the inner-city
and close-in suburbs to the more remote suburban areas, a trend which
continues even today. The District of Columbia decreased in population
during this period with an average annual population decline of 0.5 percent.
The annual rate of decline grew to 1.2 percent by 1993. Arlington County and
the City of Alexandria both grew moderately during the 1980s, but have shown
some decline between 1990 and 1993.
In contrast, the inner suburbs had an annual average growth rate of 2.5
percent during the 1980s, with both Fairfax County, Virginia, and Montgomery
County, Maryland having growth rates of 3.7 percent and 3.1 percent,
respectively. Both counties were the main suburban benefactors of commercial
office and retail development for this period and population increases were
primarily concentrated in the outer portions of the counties. <PAGE>
The largest
population increases occurred in the outer suburbs, areas beyond the first
tier communities surrounding the District. The average annual rate of
increase in these areas was 4.4 percent. However, the rate of increase has
fallen off since 1990, a phenomena concurrent with the slow down in the
economy and government downsizing.
The following chart presents population data and the average growth rates
for the various jurisdictions in the MSA.
Population Changes
1990 Census Estimates Versus 1980 Census
________________________________________
Population
Jurisdiction (Thousands)
1980 1990 1993 (est) Annual Average
Growth Rate (%)
1980-90 1990-93
____________________________________________________________________
Dist. of Columbia 638.3 606.9 584.8 -0.5 -1.2
Arlington County 152.6 170.9 170.0 1.2 -0.2
City of Alexandria 103.2 111.2 110.3 0.8 -0.3
Central Jurisdictions 894.1 889.0 865.1 -0.1 -0.9
Fairfax County 596.9 818.6 883.3 3.7 2.6
City of Fairfax 19.4 19.6 19.5 0.1 -0.2
City of Falls Church 9.5 9.6 9.5 0.1 -0.4
Montgomery County 579.1 757.0 804.4 3.1 2.1
Prince George's County 665.1 729.3 746.9 1.0 0.8
Inner Suburban Area 1870.0 2,334.1 2463.6 2.5 1.9
Loudoun County 57.4 86.1 94.5 5.0 3.3
Prince William County 144.7 215.7 237.8 4.9 3.4
Cities of Manassas/
Manassas Park 22.0 34.7 38.9 5.8 4.0
Frederick County 114.8 150.2 160.1 3.1 2.2
Calvert County 34.6 51.4 56.5 4.9 3.3
Charles County 72.7 101.2 108.6 3.9 2.4
Stafford County 40.5 61.2 68.3 5.1 3.9
Outer Suburban Area 486.7 700.5 764.7 4.4 3.1
____________________________________________________________________
METRO AREA TOTAL 3,250.8 3,923.6 4,093.4 2.1 1.4
____________________________________________________________________
Note: The list of municipalities corresponds to the DC-VA-MD MSA
prior to the December 31, 1992 expansion.
Source: U.S. Census Data and 1993 Estimate Provided By Equifax National
Decision Systems, Inc.
_______________________________________________________________________
We noted earlier that the District of Columbia actually lost population
over the past ten years while the suburban areas grew. It is important to
note, however, that this phenomenon is being seen in most major metropolitan
areas in the United States. Nevertheless, in relative terms, the population
decreases in Washington, D.C. versus population increases in suburban areas
is significantly less than that seen in other parts of the country, thus
attesting to the continuing strength and viability, albeit somewhat lessened
given the more recent recessionary trends, of the metropolitan area's inner
city.
Age Distribution
As can be seen in the following chart, the percentage of the region's infant
and elderly populations increased between 1980 and 1990. Interestingly,
however, the number of working aged residents increased the most in absolute
numbers. The number of youths and teenagers shrank. The table on the
following page displays the data.
Population Trends By Age
(Council of Governments Members)
________________________________
1980 1990 % Change
0 to 4 Years 192,372 262,578 +36.5%
5 to 17 Years 636,733 585,949 -7.2%
18-64 Years 2,020,989 2,509,056 +24.1%
Over 65 Years 235,875 317,538 +34.6%
_________________________________________________
Source: 1980 and 1990 Census Data; Metropolitan Washington Council of
Governments: Where We Live: Housing and Household Characteristics
in the Washington Metropolitan Region, April, 1993.
_________________________________________________
For the region, the District of Columbia was the only major jurisdiction to
lose working age adults (down 1.9 percent). The largest gains among working
age adults were in the inner suburbs of Montgomery and Prince George's County
in Maryland and Arlington, Fairfax, and Loudoun Counties in Virginia.
Increases in the elderly population were spread across all municipalities.
As of the 1990 Census, the population's age distribution was 21 percent under
30 years, 39 percent between the ages of 30 and 49 years, and 12 percent
between 50 and 64 years of age. These are the key working age groupings.
Employment and The Economy
The employment picture has a very significant effect on the demand for real
estate. High unemployment rates and business downsizing, for example, reduce
the number of households able to buy homes. Similarly, a growth economy
creates increasing demand for goods and services. This section will review
the recent trends and the outlook for employment in the Washington, D.C.
region.
We noted at the beginning of this section that the Washington D.C.
metropolitan area is often referred to as a recession-proof city, insulated
from the real effects of unemployment and economic volatility. This
characterization stems from the influence of the federal government as a
major employer, the recent federal announcements of governments downsizing
notwithstanding. It is also important to note that while the presence of the
federal government provides a stability factor unavailable in any other major
urban center, the region has established a diverse economic climate over the
past decade. This issue is addressed in the following section.
Employment Characteristics
Unlike other metropolitan areas, government has traditionally been the
largest employer in the Washington MSA, with almost one out of every four
jobs provided by the Federal, State or local governments. Furthermore, many
thousands of private sector jobs are provided by firms who either are
affiliated with, or dependent upon, the government.
The following table shows the area's employment as a percent of total
employment for each industry group for the past six years, and the
year-to-year growth rates in total employment.
Non-Agricultural Employment
Percent Share of Total Employment
(%)
_________________________________
Annual
Industry 1987 1988 1989 1990 1991 1992 1993 Growth %
Manufacturing 4.1 4.1 4.0 3.9 3.8 3.6 3.9 -0.9
Construction 6.4 6.6 6.6 6.0 4.8 4.4 4.4 -6.1
T.C.U. *1 4.8 4.9 4.9 4.8 4.8 4.7 4.5 -1.1
Wholesale Trade 3.6 3.6 3.5 3.5 3.4 3.3 3.4 -0.9
Retail Trade 16.4 16.2 16.1 15.9 15.6 15.4 15.4 -1.0
F.I.R.E. 2 5.9 5.9 5.8 5.9 5.9 5.8 5.7 -0.6
Services 31.9 32.4 33.0 33.7 34.3 34.9 35.1 +1.6
State Govt. 3.7 3.7 3.6 3.6 3.6 3.6 3.5 -0.9
Local Govt. 6.1 6.0 6.1 6.4 6.7 6.7 6.6 +1.3
Federal Govt. 17.2 16.6 16.4 16.3 17.1 17.5 17.3 +0.1
______________________________________________________________________
Total Employ.
(Thousands) 2,080.1 2,167.2 2,226.7 2,242.6 2,190.5 2,289.1 2,317.1 +1.8
Yr-to-Yr
Growth (%) +4.6 +4.2 +2.8 +0.7 -2.3 -0.1 +1.2
______________________________________________________________________
*1 Transportation, Communications, Utilities
*2 Finance, Insurance, Real Estate
Source: U.S. Department of Labor, Bureau of Labor Statistics, Wage and Salary
Employment, 1987-1993; Obtained From the District of Columbia
Department of Employment Services
______________________________________________________________________
The region enjoyed a period of unusual growth during the 1980s. The peak
year for job growth in the region was 1984, when growth reached 107,000 jobs.
This growth fell to 100,000 in 1985, and to 82,000 jobs in 1986. From 1986
to 1988, job growth settled at around 80,000 to 90,000 jobs per year, or in
the four percent per year range. Job growth dropped to 59,500 jobs (2.9
percent) in 1989, and declined by another two percent to only 15,900 jobs in
1990. By this time, the economy was being affected by the national recession
with the area's total employment declining by 52,100 jobs (minus 2.3 percent)
in 1991 and remaining relatively flat in 1992. Recent downturns notwith-
standing, the average growth rate for the 1987 to 1992 period still reflects
a one percent per year average. Incorporating 1993 figures, average annual
employment growth for the D.C. metropolitan area has averaged about 1.8
percent per annum over the past six years. Although the federal government
has historically been the major employer in the region, its share of
employment has remained around 17 percent. The aggregate federal employment
grew at an average annual rate of 1.4 percent between 1987 and 1992 and was
17.5 percent of total civilian employment in 1992. This rate has declined
over the past year.
The most dramatic change in employment in the Washington area has been in the
private sector, particularly the emergence of the service industry as the
fastest growing and now largest employment opportunity. In 1960, the
services industry employed 18 percent of all non-agricultural workers and
grew to 34.9 percent by 1992. In 1993, services accounted for 35.1 percent
of total non-farm employment. This sector grew at a compound annual rate of
approximately 3.1 percent per year between 1987 and 1992. Retail and
wholesale trades have maintained a steady portion of total employment, thus
indicating that employment in these sectors expands and contracts with the
economy.
Construction employment has fallen dramatically, mostly within the last three
years. The construction boom of the late 1980s came to an abrupt halt by late
1990, and the percent share of employment held by the construction sector
fell from 6.6 percent in 1988 and 1989 to 4.4 percent in 1992. The average
annual rate of decline over the period was 5.4 percent.
We noted earlier a growing diversification of the area's employment base. The
following list of major employers in the Washington area reflects the growing
diversity of the local economy, the continuing influence of educational
institutions, and the emergence of service-oriented firms.
Largest Private Employers
Ranked by Total Employees in Metro Area
_______________________________________
Rank Company Name Business Metro Area
Employees
__________________________________________________________________
1 Giant Foods,
Landover, MD Retail grocery/pharmacy 18,563
2 Marriott Corp.,
Bethesda, MD Hotel and food service management 14,011
3 Univ. of Maryland,
College Park, MD State university 9,400
4 Georgetown Univ.,
D.C. Private university 8,991
5 Metro, D.C. Public transportation 8,600
6 Safeway, Inc.,
Lanham, MD Retail grocery/pharmacy 8,350
7 IBM, Gaithersburg,
MD Computers, office equipment 8,000
8 George Washington
University &
Hospital, D.C. Private University and Hospital 6,836
9 Howard University,
D.C. Higher education 5,474
10 People's Drug
Stores, Inc.,
Alexandria, VA Retail drug stores 5,200
11 Potomac Electric
Power Co., D.C. Electric utility 5,200
12 Washington Hospital
Center, D.C. Health care 5,200
13 Mobil Corporation,
Merrifield, VA Petroleum Products 5,000
14 Sears, Roebuck and
Co., Bethesda, MD Retail 4,000
15 Science Applications Research, development,
Int'l Corp (SAIC), engineering, and
McLean, VA system integration 3,700
_________________________________________________________________
Source: Washington Business Journal, Book of Lists, 1992-1993 Reference Guide
If the federal government were included in the above list, the Department of
Defense would be the largest local employer, with over 86,000 employees. The
next closest is the Department of Health and Human Services with over 30,000
employees. The Treasury, Justice, Postal Service, and Commerce Departments
all have over 20,000 employees, and are larger individual employers than any
other local private firm.
The local governments are also major employers in the region. For example,
the City of Alexandria had over 5,100 employees between the city government,
Alexandria Hospital, and the public school system. Arlington, Fairfax, and
Loudoun Counties have, respectively, over 6,800, 25,500, and 3,900 employees
for the same functions. Montgomery County and Prince George's Counties are
similarly large local employers.
Unemployment Rates
According to the Census reports, the Washington region has one of the highest
labor force participation rates in the country, with more than 75 percent of
the population between the ages of 16 and 65 being part of the labor pool.
This is ten percent higher than the national average.
For most of the 1980s, the demand for workers was increasing at a faster rate
than the number of workers in the area, causing a labor shortage. The 1991
through 1992 recession, however, halted job growth in the area and drove up
unemployment rates. The related statistics are summarized below.
Unemployment Rates
Washington, D.C.-Maryland-Virginia MSA
______________________________________
Unemployment Rate 1987 1988 1989 1990 1991 1992 1993 Oct. 1994
3.1% 2.9% 2.7% 3.4% 4.5% 5.0% 4.5% 3.8%
______________________________________________________________________
Source: Metropolitan Council of Governments: Economic Trends in Metropolitan
Washington, 1987-1991 (The unemployment rates are not seasonally
adjusted.) Updated figures including 1992 obtained from the
District of Columbia Department of Employment Services.
The region's unemployment rate has been near three percent for most of the
past decade. This level is considered by most economists to be full
employment, and indicates a situation in which most people seeking employment
are likely to find it. The District of Columbia, however, has experienced
much higher unemployment rates than the surrounding municipalities. Over
this same period, the District's unemployment rate has been the following
between 1987 and 1992: 6.8, 4.8, 5.1, 6.7, 7.7, and 8.4 percent for each
year, respectively. The District's unemployment rates have increased in part
because many employed workers migrated to the suburbs. Only since 1991 have
the suburban areas experienced less than full employment, with average
unemployment rates being 4.0 percent and 4.5 percent, respectively, in 1991
and 1992. <PAGE>
As of October 1994, the most recent period for which statistics
are available, the unemployment rate in the MSA is estimated at 3.8 percent.
Generally, unemployment rates have fallen since the beginning of the year.
The outlook for employment in the region continues to be strong despite the
recent recession. Obviously, federal and local government employment is a
major contributor to the region's stability. Most of the swings in
employment have been experienced in the construction trades and retail
employment. These last two sectors are expected to remain soft for the next
few years with slow gains made as the economy stabilizes and demand for new
housing and commercial construction increases.
Federal Procurement
The federal government continues to be the region's major contractor for
services. Thus, the level of federal spending directly impacts local
employment in the services and other sectors of the economy. There was a
large surge in employment during the 1980s, for example, that was fueled
primarily by federal spending and an effort by the Reagan Administration
effort to "privatize" government functions. The following table shows the
recent history for federal procurement by defense and non-defense awards.
Federal Procurement Awards
(Thousands)
___________________________
Fiscal Year 1987 1988 1989 1990 1991 1992
___________________________________________________________________
Defense $6,964.9 $6,301.6 $5,964.4 $6,498.7 $7,060.0 $7,299.1
Non-Defense $4,453.2 $4,303.1 $5,044.8 $4,697.7 $7,925.9 $8,131.9
Total $11,418.1 $10,604.7 $11,009.2 $11,196.4 $14,985.9 $15,431.0
Percent
to DC 23.5% 26.0% 26.8% 26.2% 25.1% 26.8%
Percent to MD 32.1% 32.5% 35.0% 31.4% 30.0% 30.6%
Percent to VA 44.4% 41.5% 38.2% 42.4% 44.9% 42.6%
______________________________________________________________________
Source: Metropolitan Washington Council of Governments Economic Trends in
Metropolitan Washington, 1987-1991 for 1987-1990. Greater
Washington Research Center Federal Purchases of Goods and Services
for 1991 and 1992.
The bulk of the purchases are for services, constituting almost 66 percent of
the dollar value of transactions in 1992. Also, important to note is the
fact that products acquisitions fell by ten percent over the 1991 to 1992
period while research and development contracts remained relatively constant
over the same period. The ratio of expenditures between the three parts of
the region have remained mostly stable, with Fairfax, Arlington and
Alexandria capturing most of the Northern Virginia dollars and Montgomery and
Prince George's Counties capturing the lion's share of the Maryland
allocation.
Employment Outlook
The Greater Washington Research Center, sponsored by the Greater Washington
Board of Trade, recently published Metropolitan Washington's Economy: A
Review of its 1992 Performance and a Forecast for 1993. The Research
Center's analysis of the region's 1992 performance was that it generally
mirrored the national economy, with the fourth quarter's economic performance
pointing towards a broadening recovery for 1993.
The positive indicators included:
Net wage and salary growth for the first time in three years
Substantial increases in stock values, new home sales, basic business phone
line hookups, and sales tax collections
Increases in durable goods sales, tourism and federal purchases of goods and
services, plus declines in office vacancy rates and business bankruptcy
filings
Post-election increases in consumer confidence
Return to profitability of many companies in the finance and real estate
sectors
Fourth quarter improvements in a wide range of national economic indicators
Possible stimulus to the services sector by many of the changes proposed by
the federal budget
The negative indicators included:
Continued, though moderated, over-the-year declines in wage and salary jobs
in construction, manufacturing, trade and communications and public
utilities
Continued, though moderated, weakness in commercial real estate values
Continued negative effect of past declines in real estate values on the
property tax revenues of local governments
Lingering constraints on credit availability for businesses seeking to
expand
Public anxieties precipitated by the proposed 1994-1999 reduction of 11,000
Department of Defense civilian and military personnel in the Washington
metropolitan area
The principal uncertainties continuing to face the region are similar in
scope as those facing the national economy:
The rate and substantiality of the national economic recovery
The future course of consumer confidence
Consumer expectations about the local effect of the President's economic
program
Concern that as businesses become more profitable, they will rely on part-
time and temporary help to achieve new productivity rather than new hires
entailing permanent full-time jobs
Overall, the region's 1992-1994 performance was described as a year of
recovery as evidenced by the net increase in wage and salary jobs, with the
services and government sectors adding the most positions. The outlook for
1995 continues to be cautiously optimistic with expectations for slow growth
and continued strengthening.
Household Demographics
One of the more important demographic factors influencing the demand for
goods and services is the household. The household is the basic consuming
unit in the housing market. It is defined by the U.S. Census as a person or
group of people who jointly occupy a dwelling unit and who constitute a
single economic unit for the purposes of meeting housing expenses. The
household unit can be a family, two or more individuals living together, or a
single person.
The historical household growth patterns help define the region and are shown
in the following table. The forecasts were published by Equifax National
Decision Systems and were tabulated for them by an econometric modeling
service associated with a major university.
The figures show that the number of households in the region grew at an
average annual rate of 2.4 percent during the 1980s. The rate has slowed to
about 1.7 percent per year for 1990 through 1993, and is projected to slow to
about 1.3 percent for the next five years. As with the population figures
presented earlier, household formation has slowed or become negative in the
central jurisdictions. However, the inner suburbs have showed continued
growth with the strongest counties being Fairfax and Montgomery. The outer
suburbs had the strongest 1980s growth rates, but are projected to slow to an
average annual rate of 2.5 percent.
Household Changes
1990 Census Estimates Versus 1980 Census
________________________________________
Households Annual Average
Jurisdiction (Thousands) Growth Rate (%)
1980 1990 1993 Est. 1998 Fcst 1980-1990 1990-1993 Est. 1993-
1998
Fcst
-----------------------------------------------------------------------
Dist. of
Columbia 253.1 249.6 239.0 221.2 -0.1 -1.4 -1.5
Arlington
County 71.6 78.5 78.5 78.8 1.0 0.0 0.1
City of
Alexandria 49.0 53.3 53.6 54.3 0.9 0.2 0.3
Central
Juris-
dictions 373.7 381.4 371.1 354.3 0.2 -0.9 -0.9
Fairfax
County 205.2 292.3 319.3 359.0 4.3 3.1 2.5
City of
Fairfax 6.9 7.4 7.5 7.7 0.7 0.5 0.5
City of
Falls
Church 4.3 4.2 4.2 4.3 -0.2 0.0 0.5
Montgomery
County 207.2 282.2 302.4 327.6 3.6 2.4 1.7
Prince
George's
County 224.8 258.0 267.8 287.1 1.5 1.3 1.4
Inner
Suburban
Area 648.4 844.1 901.2 985.7 3.0 2.3 1.9
and other counties/cities/areas listed below, incorporated in REGION TOTAL:
Loudoun County
Prince William County
Cities of Manassas/
Manassas Park
Frederick County
Calvert County
Charles County
Stafford County
Outer Suburban Area
_____________________________________________________________________________
REGION TOTAL 1173.3 1459.3 1531.6 1631.8 2.4 1.7 1.3
_____________________________________________________________________________
Note: The list of municipalities corresponds to the DC-VA-MD MSA prior to
the December 31, 1992 expansion.
Source: U.S. Census Data Provided By National Decision Systems, Inc.
______________________________________________________________________________
The key items relating to Household (HH) Income and Statistics relating to
persons per dwelling unit (DU) are summarized on the following page.
TABLE: Selected Household Demographics for the Metropolitan Area
Source: U.S. Census Data and Projections Provided by Equifax National
Decision Systems, Inc.
Since 1980 there has been a drop in household size and, correspondingly, a
growth in the number of non-family households. Married couples continue to
represent over 50 percent of the total households. Single person households
grew at an annual rate of 2.5 percent and non-family households grew at an
annual rate of 6.1 percent during the last decade while single parent
households grew at an annual rate of 3.0 percent during the 1980s. The
growth in the single person and non-family household categories of households
contributes to housing demand, which generates demand across the economy.
Another important issue affecting the demand for real estate is household
income. The most recent statistics available for the metropolitan area come
from the 1990 Census, which collected 1989 household income figures. The
following table shows the percent distribution of income within the different
jurisdictions.
TABLE:
1990 Census: Percent Distribution of Household Income
(Council of Governments Members Only)
Source: 1990 Census Data as Presented by the Metropolitan Washington Council
of Governments in Where We Live: Housing and Household
Characteristics in the Washington Metropolitan Region, April, 1993
The survey includes only those municipalities that are members of the Council
of Governments. As such, Calvert, Charles, and Stafford Counties are
excluded. The metropolitan area as a whole shows a bi-polar distribution of
household income, with over 20 percent of the households having an annual
income below $25,000 and another group, over 20 percent, with annual incomes
above $75,000 per year. The increments between these extremes average around
13 percent of the total.
This relationship is not true of the central jurisdictions and the inner
suburbs. The District of Columbia has the highest ratio of low income
households. About 41 percent of the households have an annual income below
$25,000. Further, only 25 percent of the District's households have incomes
above $55,000 per year. The City of Alexandria and Arlington County are more
typical of the regional average.
The inner suburban counties typically have a higher ratio of households at the
upper income ranges. Over half of the households in Fairfax have incomes
above $55,000 per year, with Montgomery County not far behind. Prince
George's County has a more even distribution of household income than most
other jurisdictions, having been populated over the last ten years by
upwardly mobile families moving out of the District of Columbia but
looking for affordable housing options.
Buying Power/Income
In order to present a reliable comparison of the relative wealth of the
component jurisdictions in the Washington MSA, we have examined the effective
buying income of the region as reported by the Sales & Marketing Management's
Survey of Buying Power. According to the Survey of Buying Power (1994), the
Washington MSA had a median household effective buying income (EBI) of
$50,910. Among components, the median household EBI varied from a low of
$36,443 in the District to a household EBI high of $68,456 in Fairfax,
Virginia. In general, the suburbs had a higher effective buying income than
did the inner city areas. Prince George's County's median household EBI was
$46,488.
A region's effective buying income is a significant statistic because it
conveys the effective wealth of the consumer. This figure alone can be
misleading, however, if the consumer does not spend its money. Coupling
Washington's EBI with the areas significant retail sales does tend to
indicate that residents of this area do spend their money in the retail
marketplace. The Washington MSA ranks fifth nationally in total retail sales
and fourth in effective buying income. Washington ranks third in suburban
EBI and fifth in effective buying power. These statistics rank the MSA in
the top three percent in the country. Retail sales have rebounded strongly
since 1994 in the MSA. Please note the historical retail sales volumes on
the following chart. Retail sales growth had slowed considerably before
this rebound.
Historical Retail Sales Volume in Billions
Washington D.C. Metro Area
__________________________________________
1988 1989 1990 1991 1992 1993
____________________________________________________
Retail Sales
Volumes $31.471 $31.376 $32.925 $31.761 $36.615 $39.205
________________________________________________________________
Percent
Increase --- - 0.3% + 4.9% - 3.5% +15.3% +7.07%
________________________________________________________________
Source: Sales & Marketing Management "Survey of Buying Power"
________________________________________________________________
The compound annual growth for retail sales in the D.C. MSA has been 4.49
percent per year since 1988.
Summary
The long-term outlook for the metropolitan Washington area continues to be
good. The expanding population of the area indicates an increase in demand
for goods and services. The trend toward smaller household sizes provides
additional demand pressures for new housing. The major factors affecting
real property values are sound, and future trends appear to point toward
continued economic vitality for the region.
In the short term, the region has experienced the effects of the last
recession. Total employment in the region declined during this time.
However, unemployment levels were moderated by the influence of federal and
local government employment and contracts for services. The Washington
region continues to have one of the lowest unemployment levels in the United
States.
Overall, we believe that 1995 will be a period of continued slow growth and
steady improvement in the underlying factors affecting the real estate
markets. More importantly, we do not anticipate any further downturn in the
local economy on the scale of what has occurred in Texas, Florida or New
England. Many local economists and developers are signaling their belief
that the market has bottomed-out and a reversal has started or is imminent.
Real estate values are volatile in this climate, with some property values on
the decline while other areas remain stable. For the short-term, we expect
that real estate values will remain soft with some diminution in value in
certain sectors. For the long-term, the market appears to be sound, with
strong demographics and reasonable prospects for increasing values in the
future.
Baltimore Metropolitan Statistical Area
Area Definition
The Baltimore MSA is defined by the U.S. Department of Commerce, Bureau of
the Census, to include Baltimore City and the counties of Baltimore, Howard,
Anne Arundel, Harford, Carroll, and Queen Anne's. The Baltimore MSA
encompasses 2,618 square miles. (Refer to the Baltimore area map on the
facing page.) This analysis includes a discussion of the Baltimore area, and
then focuses on Howard County.
General Background
Historically, Baltimore has been an important port and rail center in the
mid-Atlantic region while its surrounding counties were generally
agricultural in character. The port of Baltimore, formed by the Patapsco
River estuary, was the distribution center by which the area's produce and
manufactured goods were shipped around the world. World Wars One and Two
brought significant new development to Baltimore. The city became a center
for war-related industry, with steel mills, oil and gas refineries, and
shipyards built along the harbor and surrounding waterways.
In the decades following World War II, the city of Baltimore suffered the
same fate as many other older eastern U.S. cities. With the construction of
new highways, the population began to move out to the surrounding counties.
Businesses and industries soon followed the workforce to the burgeoning
suburbs. Baltimore's historic manufacturing base went into decline, and the
old downtown core suffered from a lack of investment.
In the past two decades, however, both the private and public sector have
redirected investment into the city's center. As a result of these efforts,
downtown Baltimore has enjoyed a revitalization. The Inner Harbor
redevelopment, which includes a festival market on the waterfront, has
received national attention. Further, Baltimore has retained its status as
an important port, educational and cultural center. Although it faces
increasing competition from the Maryland counties that surround Washington,
D.C., Baltimore remains the financial, legal, corporate, and political center
for Maryland. The Baltimore area lies within 40 miles of the nation's
capital, and has benefitted from the growth of the Washington metropolitan
area.
Economic Forces
A discussion of economic forces includes such factors as employment, the
region's economic base, living costs, income, wage levels, utility costs and
the availability of mortgage credit. All of these factors impact the value
of real estate.
Employment and the Economy
The Baltimore area has undergone a difficult transition over the past 30
years, from a manufacturing base to a service economy. The following table
illustrates the shift in employment that has occurred from the manufacturing
sector to the service sector during the past three decades. The table also
shows the change in employment composition, from one weighted towards
manufacturing to a more balanced employment mix today.
Table I
Employment Trends
Baltimore MSA
(000's)
_________________
1960 1975 1993
% % %
No.s of Total No.s of Total No.s of Total
_________________________________________________________________
Construction 37.5 6% 68.5 8% 56.8 5%
Manufacturing 199.0 32% 170.0 20% 108.4 10%
Util./Transp./Post. 55.4 9% 50.0 6% 53.2 5%
Retail/Wholesale 126.7 20% 190.2 22% 251.5 23%
Finance/Insurance 32.8 5% 45.5 5% 73.6 7%
Services 82.8 13% 150.5 18% 343.7 31%
Government 94.8 15% 185.2 22% 208.0 19%
Totals 629.0.100% 859.9 100% 1,095.1.0100%
_________________________________________________________________
Source: U.S. Department of Labor, Bureau of Labor Statistics
As illustrated, manufacturing dominated the local economy in 1960,
representing 32 percent of all employment. Centered around the port of
Baltimore, shipping and steel manufacturing were among the major economic
activities in the region. With the redirection of the national economy,
many industrial firms such as Bethlehem Steel, General Motors, and Maryland
Dry Dock began to contract, and thousand of jobs disappeared. By 1990,
manufacturing jobs plummeted to 10 percent of the local workforce.
Conversely, the services sector jumped from 13 percent of employment in 1960
to 30 percent in 1990. The decline in manufacturing jobs is likely to
continue as the economy moves increasingly toward services, trade, and
technology-based employment.
Today, the private sector economy is broad-based, with services,
manufacturing, and technology-related businesses represented. This economic
diversity manifests itself in the type of industries based in the region. A
list of the largest private sector employers follows. The manufacturing
industry still maintains a presence, along with high-tech con- tractors,
educational institutions, public utilities, retailers and financial
institutions.
Table II
Top Ten Private Employers
Baltimore MSA
_________________________
Employers Employees
_____________________________________________________
Westinghouse Defense & Electronic Center 17,000
John Hopkins University 14,467
Bethlehem Steel Corporation 10,400
Baltimore Gas & Electric 9,022
C & P Telephone 6,680
Maryland National Bank 5,536
Johns Hopkins Hospital 5,100
Montgomery Ward & Co. 4,500
General Motors GM Assembly Division 4,150
St. Agnes Hospital 2,529
_____________________________________________________
Source: Baltimore Economic Development Council, 1992
The Baltimore region is home to four of Fortune's top 500 industrial firms.
The firms are listed in order of their sales rank in the Fortune Industrial
500.
Table III
Top Industrial Firms
Baltimore MSA
____________________
Company Major Activity Rank
______________________________________________________
Black & Decker Industrial/farm equipment 187
McCormick Food/spices 300
Crown Central Petroleum refining 308
Noxell Soaps/cosmetics 484
______________________________________________________
Source: Fortune Magazine, 1992
Government employment is also a major factor in the local economy, with 19
percent of the total jobs. Baltimore is only 40 miles from Washington, D.C.,
and benefits from its proximity to the nation's capital and its enormous
federal government presence. A list of major federal government agencies in
the Baltimore region is listed below.
Table IV
Major Federal Agencies in Baltimore Area
________________________________________
Rank Agency Employees
_______________________________________________________________
1 Fort Meade 16,300
2 Aberdeen Proving Grounds 14,000
3 Social Security Administration 13,900
4 Health Care Financing Administration 3,000
5 U.S. Naval Academy 2,655
6 Internal Revenue Service 1,700
7 U.S. Coast Guard Station 1,100
_______________________________________________________________
Source: Greater Baltimore Committee, 1990 Greater Baltimore Booklet
The area's large federal government workforce provides the region with a
measure of stability. Baltimore's unemployment rate has traditionally been
lower than the national average. However, for the past several years, the
rate stood slightly above national norms, evidence that the Baltimore region
is lagging the nation in recovering from the recent recession. The following
chart shows annual average unemployment rates for the Greater Baltimore area
versus the U.S. Although the growth in federal employment has leveled off,
forecasters do not anticipate any dramatic cutbacks in U.S. government jobs
in the region. Both private sector businesses and government agencies are
major users of warehouse facilities in the region, and have contributed to
the demand for new warehouse space.
Table V
Average Annual Unemployment Rate
Baltimore Area versus U.S
________________________________
Year Baltimore Area United States
___________________________________________
1983 7.8% 9.6%
1984 6.2% 7.5%
1985 5.1% 7.2%
1986 5.2% 7.0%
1987 4.7% 6.2%
1988 4.5% 5.5%
1989 4.0% 5.3%
1990 5.1% 5.5%
1991 6.6% 6.7%
1992 7.6% 7.4%
1993 7.3% 6.8%
Oct. 1994 5.9% 5.8%
__________________________________________
Source: U.S. Department of Labor, Bureau of Labor Statistics:
(1994 figures have not been seasonally adjusted).
Income
The ability of the population within an area to satisfy its material
desires for goods and services directly affects the price levels of real
estate and can be measured indirectly through retail sales. One measure
of the relative wealth of an area is average household disposable income
which is available for the purchase of food, shelter, and durable goods.
In order to present a comparison of the relative wealth of the component
jurisdictions in the Baltimore SMA, we have examined the effective buying
income of the region as reported by Sales & Marketing Management's Survey
of Buying Power. Effective buying income is essentially income after all
taxes, or disposable personal income.
According to the Survey of Buying Power-1994, the Baltimore MSA had a median
household Effective Buying Income (EBI) of $39,612 as of December 31, 1993.
Among components, the median household EBI varied from a low of $26,607 in
the City of Baltimore to a high of $55,598 in Howard County. The suburbs had
a higher effective buying income than did the inner city.
Table VI
Effective Buying Income (12/93)
Baltimore Standard Metropolitan Area
____________________________________
Buying Median
(000's) Power Household
Total EBI Index* EBI
BALTIMORE MSA 42,079,910 .9771 39,612
_______________________________________________________
Anne Arundel 8,484,934 .2026 48,128
Baltimore County 13,495,081 .3305 41,152
Baltimore City 9,093,318 .2086 26,607
Carroll 2,332,007 .0503 46,512
Harford 3,419,084 .0774 44,331
Howard 4,667,889 .0952 55,598
Queen Anne's 587,597 .0125 37,673
* Moderately Priced Products
_______________________________________________________
Source: The Survey of Buying Power Data Service 1993.
A region's effective buying income is a significant statistic because it
conveys the effective wealth of the consumer. The consumer drives the
economy, and creates demand for goods and services. This demand generates
the need for new housing, office buildings, retail centers, and warehouse
space. Nationally, the Baltimore MSA ranks 19th in total retail sales, 20th
in effective buying income, and 18th in effective buying power. These
statistics pair it closely with Seattle, Washington; Tampa-St. Petersburg;
and Riverside, California -- placing the Baltimore MSA in the top five
percent of the country.
Equally significant is the region's growth in total retail sales and
effective buying income over the past decade. The following chart tracks
this growth.
Table VII
Income Growth in the Baltimore S.M.A.
_______________________________________________
Effective Buying Income Retail Sales B.P.I.
_______________________________________________
1980 18,877,689 10,287,670 1.0199
1981 19,532,362 10,486,809 1.0231
1982 21,077,801 10,537,237 1.0286
1983 22,817,096 10,864,791 1.0193
1984 24,169,695 12,872,140 1.0201
1985 27,124,595 13,681,848 1.0321
1986 28,921,343 14,264,185 1.2902
1988 31,205,367 15,959,646 .9923
1989 34,505,342 16,905,854 1.0102
1990 36,179,630 17,489,333 .9991
1991 38,349,432 17,484,100 .9941
1992 39,799,720 18,446,721 .9800
1993 42,079,910 19,610,884 .9771
Compound Annual
Change
1980-1993 +6.91% +5.52% -0.36%
Compound Annual
Change
1988-1993 +6.16% +4.21% -0.31%
__________________________________________________________
Source: The Survey of Buying Power
This data shows the growth in consumer wealth in the
Baltimore MSA during the past decade. The population of the Baltimore MSA
not only has enjoyed an increase in buying power, but spending (as measured
by retail sales) in the market has kept pace with this growth. This slow but
steady growth is expected to continue in the coming years. <PAGE>
Living Costs
Living costs in the Baltimore region compare favorably with those in other
major cities along the Eastern Seaboard. Baltimore's costs are lower than
Atlanta, Washington, D.C., Philadelphia, and Boston. The following table
compares the costs among neighboring cities for major expense categories.
Table VIII
Comparative Living Costs Index
Selected Areas 1990
______________________________
All Items Groceries Housing Transportation
______________________________________________
Norfolk 102.2 99.2 100.3 105.6
Greater Baltimore 104.0 104.6 113.0 104.3
Atlanta 109.0 100.9 115.5 102.0
Washington, D.C. 127.2 107.5 168.0 118.3
Philadelphia 127.7 110.1 142.0 107.7
Boston 164.1 110.8 325.5 105.1
________________________________________________________________________
Source: American Chamber of Commerce, Inter-City Cost of Living Index
Labor Costs
Labor costs are an important consideration for employers. The following
chart shows the labor costs for selected activities, specifically those that
relate to manufacturing and warehouse users. Labor costs in the Baltimore
area compare favorably with other major cities on the East Coast.
Table IX
Greater Baltimore Wage Rates
Selected Activities, 1990
____________________________
Range of Hourly Earnings
________________________
Manufacturing Activities
Maintenance Mechanics $12.97 - $14.66
Maintenance Workers $7.77 - $10.06
Material Handling Workers $6.78 - $12.01
Tool and Die Maker $13.75 - $17.01
Distribution Activities
Motor Vehicle Mechanics $13.00 - $13.75
Truck Drivers $10.09 - $15.11
Warehousemen $9.66 - $13.77
___________________________________________________________________
Source: U.S. Department of Labor, Bureau of Labor Statistics, 1989
Utility Costs
The costs of utilities also are a key consideration for commercial and
industrial users. The Baltimore region has an extensive public utility
system. Baltimore Gas & Electric Company provides natural gas and
electricity service to the region. Its monthly bill for a 5,000 kilowatt
industrial user averaged $70,000 in 1989, versus $81,000 in Washington,
$108,000 in Pittsburgh, and $129,000 in Philadelphia. Consequently,
electricity costs are more affordable than neighboring regions. The region
has an abundance of water resources with a system of reservoirs providing the
majority of the area's water. Public water and sewer services are provided
by each jurisdiction. Chesapeake & Potomac Telephone (C&P) provides local
telephone and telecommunication services. All utility companies have
sufficient capacity to meet anticipated growth.
Social Trends
Population characteristics are the major indicator of social trends. Trends
in population have a significant influence on real estate values.
Specifically, the rate of growth or decline in an area's population base is
an important indicator of change within a regional economy. This has a
direct effect on real estate values. Since the supply of land is fixed, the
demand for real property will be affected by an increase or decrease in the
population base. An increase in population drives demand for new housing,
highways, services, and products, which in turn, drives up real estate
values. A decrease in population may result in a decline in real estate
values.
From 1980 to 1992, the region had a 10.9 percent increase in population.
This contrasts with a national increase of 13 percent. However, the
population increase was not uniform throughout the Baltimore region. As the
following table indicates, Howard County led the region with a robust 71.2
percent population gain, or 84,421 persons, increasing from 118,579 to
203,000. The city of Baltimore saw its population decline, by 7.8 percent or
61,775 persons, from 786,775 to 725,000. This trend of population draining
from the city to the suburbs began in the 1950s, and is expected to continue
as residents opt for lower taxes, better schools, and less congestion. The
counties located to the west and south of Baltimore, in what is known as the
Baltimore/Washington corridor, have led population growth, with Anne Arundel,
Howard and Carroll counties all increasing by fifteen percent or more since
1980. Businesses tend to follow the population, opting for the lower land
costs and easier highway access in the suburban counties. Howard County has
been a beneficiary of this trend, as the figures indicate.
Table X
Population Changes
1980 - 1992
__________________
Population Change
1992 1980 Amount Percent
___________________________________
BALTIMORE M.S.A. 2,442,400 2,201,436 240,964 10.9
Anne Arundel Cnty. 441,900 370,922 70,978 19.1
Baltimore County 709,500 655,675 53,825 8.2
Baltimore City 725,000 786,775 -61,775 -7.8
Carroll County 131,300 96,330 34,970 36.3
Harford County 195,700 145,993 49,707 34.0
Howard County 203,000 118,579 84,421 71.2
Queen Anne's County 36,000 27,162 8,838 32.5
___________________________________________________________
Source: Bureau of the Census 1991; Demographics USA 1993
In addition to the relationship between changes in population and property
values, there are other social factors which should be examined. For
example, the average household size within an area, when considered along
with population trends, gives an indication of potential demand for housing
and other goods and services.
The average household size can also have a significant influence on property
values. An increase in household size may signal a young, growing community
with a likely demand for more schools, child care facilities, medical
facilities, etc. Conversely, a decline in household size may indicate an
aging population thus the average household size should be examined in
conjunction with population trends. Table XI following shows the changes in
the number of households in the Baltimore MSA from 1980 to 1992. While there
was an 10.9 percent increase in metropolitan area population since 1980,
there was a 14.5 percent increase in the number of households region-wide.
However, during the same period, the average household size decreased from
2.79 to 2.64 persons per household. In short, the trend is toward smaller
households, but an increase in the number of total households. This change
is due to a number of factors including more single persons, later
parenthood, smaller family size, and a growing elderly population. There are
more persons living in smaller households than ever before. The trend will
likely increase the demand for goods and services, which will likely
strengthen the demand for warehouse space as well as other property types.
Table XI
Household Trends
Baltimore Metropolitan Area
1980 - 1992
___________________________________________________
Number of Size of
Households Change Households
1992 1980 Number Percent 1992 1980
________________________________________________________
BALTIMORE S.M.A. 904,000 789,750 114,250 14.47% 2.64 2.79
Anne Arundel 154,200 128,900 25,300 19.63% 2.76 2.99
Baltimore County 276,600 247,000 29,600 11.98% 2.52 2.68
Baltimore City 272,400 277,700 -5,300 -1.91% 2.58 2.74
Carroll County 45,200 32,900 12,300 37.39% 2.84 3.02
Harford County 68,200 49,300 18,700 37.93% 2.83 3.06
Howard County 74,300 45,100 29,200 64.75% 2.71 2.94
Queen Anne's
County 13,300 8,850 4,450 50.28% 2.68 2.84
______________________________________________________________________
Source: United States Census, 1991; Demographics USA, 1993.
In conclusion, the population of the region is increasing at an average rate
close to the national average. Household size is decreasing, but the total
number of households is increasing. This trend is expected to continue,
which will increase the demand for goods and services, and have a positive
impact on real estate values in the long-term.
Environmental Conditions
The environmental conditions that impact the value of real estate include
both natural and man-made attributes. These include climatic conditions,
soil and topography, toxic contaminants, natural barriers, and transportation
systems.
Terrain and Climate
Baltimore's elevation at 155 feet above sea level lies in a region midway
between the rigorous climates of the North and the mild ones of the South. It
is also adjacent to the modifying influences of the Chesapeake Bay and the
Atlantic Ocean. Since this region is near the usual path of the low-pressure
systems that move across the country, shifts in wind direction are frequent
and contribute to the changeable character of the weather. The net effect of
the Appalachian Mountains to the west and the ocean to the east is to produce
an equable climate compared with other climates farther inland at the same
latitude.
Rainfall at 40 inches per year is fairly uniform throughout the year but is
greatest in the late summer and early fall. This is also the time of
potential hurricanes and severe thunderstorms. In summer, Baltimore is
influenced by the great high pressure system known as the Bermuda High. This
high brings a constant flow of warm, humid air masses from the Deep South.
These air masses, as well as the proximity to water, account for the high
humidity here. The temperature reaches 90 degrees on 31 days. Winters are
moderate with an average of 22 inches of annual snowfall. There are
typically no zero degree days, and 100 days when the temperature reaches
freezing. Overall, the area has an moderate, four-season climate, typical of
the Middle Atlantic coastal region. According to the Places Rated Almanac,
Baltimore is ranked 122 of 333 metropolitan areas for desirability of
climate.
Transportation
Baltimore is centrally located in the mid-Atlantic region and has good access
to major markets along the East Coast and in the Midwest. The area is served
by an extensive transportation network which consists of highways,
rail-lines, an airport, seaport, and public transportation.
The Baltimore MSA is traversed by a series of multi-lane highways.
Interstate 95 runs north-south connecting the Mid-Atlantic corridor to other
coastal regions. Along with the Baltimore/Washington Parkway, I-95 provides
a link between the Baltimore and Washington beltways. The proximity to I-95
has encouraged the development of many industrial parks, particularly in
Howard County. Interstate 83 provides access to New York and Canadian
markets. Interstate 70 connects the Port of Baltimore with Pittsburgh and
the Midwest. Finally, all major arterials are accessible from Interstate 695,
Baltimore's five-lane circumferential beltway. Access to major interstate
highways is a major consideration for industrial users. The following chart
illustrates Baltimore's proximity to the East Coast and Midwest markets.
Highway Distances from Baltimore
(Miles)
________________________________
Washington, D.C. 40
Philadelphia. . 96
Richmond. . . . 143
New York. . . . 196
Pittsburgh. . . 218
Boston. . . . . 392
Chicago.. . . . 668
____________________________________________________________________________
Source: Department of Economic and Community Development, State of Maryland
The Baltimore region is served by five major and three short-line railroads
including AMTRAK, CSX, CONRAIL, and Norfolk Southern Railroad. Nearly 610
railroad route miles traverse the region. CSX, Conrail and Norfolk Southern
carry freight throughout the region to points north, south and west. AMTRAK
passenger service, originating out of Baltimore's Pennsylvania Station,
provides access to the Northeast corridor including Washington, Philadelphia,
New York and Boston. Three commuter trains operated by MARC/CSX, connect
Baltimore's Camden and Pennsylvania Stations to Washington's Union station.
Baltimore's buses connect nearly 80 miles of the city and provide access to
Annapolis, Maryland's State Capitol. The newly completed subway system links
Baltimore's downtown region with the northwesterly suburbs, traveling 14
miles, originating at the Inner-Harbor and terminating at Owings Mill. A
multi-million dollar addition has been approved that will extend the existing
subway from the Inner-Harbor to John Hopkins Hospital. A new, 27-mile long
light-rail system is under construction which will connect Hunt Valley to the
north with Glen Burnie to the south, with a spur to BWI Airport.
The Baltimore/Washington International Airport (BWI) is located in the
southerly portion of the Baltimore MSA in Anne Arundel County, ten miles from
downtown Baltimore. This modern airport hosts 18 passenger airlines that
provide direct air service to 135 cities in the United States and Canada. BWI
also provides service to air-freight carriers with its 110,000 square foot
air cargo complex. When compared with Dulles and Washington National Airport,
BWI services 28.6 percent of commercial passengers, 38.1 percent of
commercial operations and 57.3 percent of freight customers originating in
the Baltimore/ Washington area. BWI has spawned the development of 15 new
business parks and several hotels, and has created nearly 10,000 jobs.
Baltimore's water port stretches over 45 miles of developed waterfront and
reaches a depth of 42 feet. With its six million square feet of warehouse
and five million square feet of cold storage, the port serves 4,000 vessels
yearly. These extensive facilities can accommodate general, container, bulk
and break-bulk cargos, making it the second busiest containerized cargo port
in the Mid-Atlantic and Gulf coast regions.
Summary
The Baltimore region has a diverse economic base. Historically a
manufacturing center, its industrial base has shrunk over the past 30 years.
The service sector has grown and has a major share of the local employment
mix. Government is also a significant employer, and provides a measure of
stability to the region's economy. The population of the region is growing
moderately at a rate that is slightly below the national average. However,
the suburban counties have grown dramatically in the 1980s, as residents move
to the less-congested suburbs. The region has an extensive transportation
system with major interstate highways, a port, and international airport. It
is well-located along the mid-Atlantic coast, enabling it to serve major
markets.
The long-term outlook for metropolitan Baltimore is generally positive. The
economic trends of the past thirty years have profoundly changed the economy
of the Baltimore MSA. The service sector has begun to fill the void left by
the decline of heavy industries. The manufacturing industries, after a long
period of contraction, have begun to stabilize, and will continue to play a
important role in the region's economy.
Baltimore-Washington Area
The subject is part of the Baltimore-Washington Common Market. This is an
unofficial designation for the metropolitan statistical areas (MSAs) of
Washington and Baltimore, and St. Mary's County in southern Maryland. This
6,948 square mile region stretches from the Maryland/Pennsylvania border on
the north to the lower Potomac River on the south; from the Chesapeake Bay on
the east to the Appalachian Mountains on the west.
Historically, the federal city of Washington, D.C., and the industrial town
of Baltimore have been apart, not only geographically but also socially and
economically. Over the past decade, however, Baltimore, Washington, and
their surrounding counties have grown towards one another through a
combination of shared physical and institutional infrastructure, and labor
and economic resources.
Washington, whose economy has historically centered around the Federal
government, and Baltimore, whose economy was founded upon shipping and
manufacturing, are forging a new economic alliance that combines the
traditional strengths with today's growth industries. In many ways, the
boundaries between Washington and Baltimore have been blurred and today, many
look upon Baltimore and Washington as one consolidated market.
In fact, in 1992, the U.S. Census Bureau officially recognized the Common
Market as a single metropolitan area by designating the MSA's of Baltimore
and Washington as a Consolidated Metropolitan Statistical Area (CMSA). The
CMSA designation requires that the urbanized elements of the two MSA's be
contiguous and that ten percent of the resident working populations commute
between the two cities. In 1980, the common market was just below CMSA
status, needing an additional 1,200 commuters.
As consolidated, Washington, the 9th largest MSA nationally, and Baltimore,
the 17th largest MSA, join the ranks of the New York, Los Angeles and Chicago
metropolitan areas as one of the largest and wealthiest urban areas in the
country. The list below ranks the Baltimore-Washington market among the
country's leading CMSA's:
CMSA's Ranked by Population
and Number of Households (000's)
(As of 12/31/92)
________________________________
Population Households
_______________________
1. New York/No. New Jersey/Long Island 18,131.2 6,602.8
2. Los Angeles/Anaheim/Riverside 15,109.6 5,064.4
3. Chicago/Gary/Lake County 8,150.0 2,930.4
4. Baltimore-Washington 6,459.6 2,400.4
5. San Francisco/Oakland/San Jose 6,434.8 2,380.6
6. Philadelphia/Wilmington/Trenton 5,986.2 2,185.9
7. Detroit/Ann Arbor 4,689.5 1,733.5
8. Dallas/Ft. Worth 4,061.9 1,513.1
9. Boston/Lawrence/Salem 3,785.8 1,409.5
10. Houston/Galveston/Brazoria 3,784.7 1,354.4
Source: Sales and Marketing Management, Survey of Buying Power - 1993.
______________________________________________________________________
Impressive in terms of its size, the population of the
Baltimore-Washington common market is also young, affluent and well-educated.
Nearly 36 percent of all household heads and one-half of all workers are
under the age of 35 while the household Effective Buying Income of the 2.4
million families in Baltimore-Washington is the highest in the country. The
combined region has the largest number of engineers and scientists per capita
and 30 percent of the work force has college degrees, nearly twice the
national average.
This educated population is well-suited for the growing number of technical
and service sector jobs available in the Baltimore and Washington economies.
During the past decade, the technical and service sectors have surpassed the
federal government in Washington, and the manufacturing sector in Baltimore
as leading employers. Growth in areas such as high-tech, research and
development, bio-technology, finance, insurance, real estate and construction
has led to the addition of 688,600 new jobs since 1982, an increase of 22
percent. This growth rate is nearly 50 percent above the national average.
These industries have played a large role in physically closing the gap
between Baltimore and Washington. Only 20 miles from Beltway to Beltway, the
Baltimore-Washington corridor has become filled with firms seeking
affordable land, access to a comprehensive transportation network, close
proximity to an urban center, and access to the federal government.
Another important factor in the development of the Baltimore-Washington
corridor has been the allure of federal procurement contracts originating
from Washington D.C. During the 1980s, government policies called for
wide-ranging privatization of goods and service resulting in over $194
million in Federal procurement contracts. Spending growth in this area has
been significant, increasing 75 percent nationally and over 110 percent
locally. Goods and services purchased range from research and development, to
aeronautics and space technology, and from data processing services to
supplies and equipment.
Over 22,000 miles of public roads traverse the Baltimore-Washington region,
including six interstate highways. Baltimore and Washington are linked by
Interstate 95 and the Baltimore-Washington Parkway and both cities are
circled by beltways. These highways link the region's seaports and airports
and provide a distribution network that links the region to other southern,
northern and western markets.
The economic boom experienced in the Baltimore-Washington market from
1984-1989 resulted in a commensurate real estate boom. At the end of 1992,
the office inventory in the combined markets totalled over 300 million square
feet, ranking the Baltimore-Washington market 5th internationally behind
Manhattan, Los Angeles, Chicago and London.
In terms of the industrial market, the Baltimore-Washington region has about
85 million square feet of warehouse and flex space, with bulk distribution
space dominating in the Baltimore area, and office-warehouse and flex space
predominate in the Washington area.
Within the Common Market, Baltimore's competitive advantage will continue to
be its more affordable commercial and residential neighborhoods, its
extensive warehouse market, and its active port.
Conclusion
Laurel Centre's current level of retail activity and future expansion are
strongly support- ed by the region's consolidation and underlying economic
well-being. Population growth, additional household formation and good
employment levels all bode well for Laurel Centre. In a following section we
will discuss its competitive position in the market and identify those
demographic trends which continue to influence and shape its trade area.
LOCATION ANALYSIS
General
The subject property is located in the City of Laurel in Prince George's
County, Mary- land. The City of Laurel, comprising a total area of
approximately 225 square miles, is actually an integral part of a larger
economic and geographic entity known as the Baltimore- Washington Corridor
(BWC). Laurel's central location, equidistant from these two major urban
centers, places it in an important position in terms of benefiting from the
dynamic growth and diversification within the corridor.
Land Use Patterns
The subject's central corridor location, less than three miles from both
Interstate 95 and the Baltimore-Washington Parkway, has been the focus of
intense commercial, residential and industrial development. These two
interstates, together with U.S. Route 1 and Route 29 provide four major
north/south connectors running through Laurel. As such, major corporations
and developers have been attracted to the area's extensive highway system.
The area immediately surrounding and directly influencing the subject is
essentially a balanced blend of commercial and residential land uses. The
principal retail influence in the immediate area is the Laurel Centre itself.
Market Activity
Since our last appraisal, Konterra and the Konterra Business Campus
appear less certain than ever of coming to fruition. Konterra is a
long-term project to take shape as a mini-city over a 25 to 30 year
development plan. It consists of a 2,000 acre site just south of Laurel,
situated on both sides of Interstate 95. According to the conceptual plan,
the project provides for the following scenario; office-10 million square
feet on 475 acres; light industrial/research and development - 5 million
square feet on 350 acres; residential - 6,000 dwelling units and retail - 2
million square feet. In addition, 310 acres are reserved for special use
development. Phase I is the Business Campus section on 45 acres to be
developed mainly for research and development users. The ultimate success
of this project and, more particularly related to the retail segment, rests
with the completion of the Inter-County Connector which is proposed to
traverse the site. No anchors have been announced for the mall which is
envisioned to be an upscale center along the lines of Owings Mills. The
project is still bogged down in environmental review and the State Highway
Department continually revises the proposed route. Funding of the roadway
has still not been completed and it has been reported that no state funding
can be given at this time. The City of Laurel's planning office stated that
this project, if it were ever to be built, is probably 10 to 15 years away.
The mall would be developed by the Taubman Companies and encompass 1.5
million square feet on 200 acres. Visibility and access would be gained via
Interstate 95 and the proposed Intercounty Connector. The major obstacle to
this development is the continued debate and opposition to the Intercounty
Connector.
Bowie Town Center is another large scale mixed use development which is
being developed by a number of developers. Upon full build-out it will
include eleven office buildings with 1.3 to 1.4 million square feet of
space, a 1.5 million square foot, 5 anchor super regional mall, 1,340
residential units, and 250 hotel rooms. Four office buildings are completed,
three of which are condominium space and the fourth 110,000 square foot
building is 96 percent leased. Some of the residential units have also been
completed. In December, 1990, the DeBartolo Corp. purchased the mall site
from the Mark Vogel Company.
While DeBartolo has announced plans for a 1.12 to 1.25 million square
foot mall, no specific plans have been submitted for development. A
conceptual plan design has been approved which identifies general square
footage, access points to the property, and general land uses. However, no
approvals or permits have been issued and we are advised that the owner is
currently working on concepts for alternative uses with the city in the event
this project should fail. Some site work has taken place to channelize a
stream and there exists outstanding issues such as wetlands, flood plain, and
traffic mitigation which need to be resolved before this project can go
forward. Even if approvals were obtained in 1995, the city planning
department does not believe this project will be completed before 1997.
The mall would be situated at the Interstate 595/301 interchange,
approximately 15 miles southeast of the subject site.
A new Wal-Mark/Sam's Club opened in Maryland City (5 miles from the
subject) in October 1994. Wal-Mart is competitive on price and service and
carries a variety of products from clothing to automotive. This center is
situated on 50 acres at Route 198 and the B.W. Parkway.
Finally, there remains talk of a new football stadium to be built for
the Washington Redskins who currently play at RFK Stadium near D.C. One of
the proposed sites for the new complex is reportedly about one mile from the
subject, adjacent to the Laurel Racetrack. Although this proposal is still
speculative, it clearly supports strong interest in the Baltimore-Washington
Corridor.
Summary
In summary, the subject's environs present a balanced and complementary
mix of land uses. The Laurel Centre remains the area's dominant retail
complex. Other retail facilities serve to add additional drawing power to
the area. The residential back-up is expanding and houses a population with
mean income levels above national standards. Overall, access to the area is
very good. Based on our analysis, it is our opinion that the prospects for
real appreciation in area real estate values remains very good into the
foreseeable future. In the "Retail Market Analysis" section of this report,
we have compiled and analyzed other detailed demographic information so as to
qualify our conclusions as to the continued economic viability of the Laurel
Centre Mall.
RETAIL MARKET ANALYSIS
National Retail Overview
Regional and super-regional shopping centers constitute the major form of
retail activity in the United States today. It is estimated that consumer
spending accounts for about two-thirds of all economic activity in the United
States. As such, retail sales patterns have become an important indicator of
the country's economic health.
During the period 1980 through 1993, total retail sales in the United States
increased at a compound annual rate of 5.74 percent. Data for the period
1990 through 1993 shows that sales growth has slowed to an annual average of
4.75 percent. November 1994 sales (advance estimate) are up nearly 7 percent
over November 1993. This information is summarized below.
Total U.S. Retail Sales *
_________________________
Year Amount (Billions)
____________________________________________
1980 $ 793,300
1985 $1,072,400
1990 $1,425,200
1991 $1,447,000
1992 $1,564,356
1993 $1,638,202
Compound Annual Growth
1980-1993 + 5.74%
CAG: 1990 - 1993 + 4.75%
November 1993 $ 137,825
November 1994 ** $ 147,409
(+6.95%)
_______________________________________
* Excludes Automotive Group
** Advance Estimate
_______________________________________
Source: Monthly Retail Trade Reports Business Division,
Bureau of the Census, U.S. Department of Commerce.
Economic Trends
The early part of the 1990s was a time of economic stagnation and uncertainty
in the country. The gradual recovery, which began as the nation crept out of
the last recession, continues to gain strength. But as the recovery period
reaches into its third year, speculation regarding the nation's economic
future remains. Global economic troubles continue to impact the country's
slow economic growth trends.
Post recessionary trends offer important insight to this analysis,
particularly consumer behavior. In 1992, after an erratic year for retail
sales, the nation's leading chains reported stunningly strong sales in
December, their best holiday season since 1988. Although the first half of
the year had seen little growth in sales, year end 1992 retail sales
(exclusive of automobile sales) were up by 4.5 percent over 1991. Clearly,
the importance of the Christmas selling season is underscored by the fact
that some retailers generate up to 60.0 percent of sales and profits during
the last quarter of the year.
The first half of 1993 was characterized by consumers demonstrating a
willingness to spend more money in retail stores, but more often in
department stores than in apparel shops. Retail sales climbed 5.6 percent in
June 1993 as recorded by a Salomon Brothers monthly index that measures sales
of 22 major retailers at stores open at least one year. In June 1992, this
same-store growth index was up 3.8 percent. By and large, leading department
stores showed greater gains than apparel chains. The figures suggested the
possibility of a stronger second half of the year. Some analysts predicted
that sales would pick-up as the overall economy improved, causing buyers to
spend more, particularly in anticipation of higher taxes in 1994. For the
year, total retail sales (exclusive of auto- mobiles) were up by 4.72 percent
in 1993.
Americans' personal incomes and spending increased in 1993 at rates that
econo- mists saw as harbingers of a healthy expansion for 1994. Some of the
lowest interest rates in two decades spurred new home construction which
resulted in increased demand for such household goods as appliances and
furniture. The housing market accounts for a significant portion of the
gross domestic product. The Commerce Department reported that earnings rose
4.7 percent in 1993, helped by a 0.6 percent increase in December. The yearly
figure was nearly double the 2.7 percent rise in inflation. Consumer
spending rose 6.1 percent, the biggest increase since a 6.8 percent gain in
1990. As suggested, consumer spending represents two-thirds of the nation's
economic activity.
Year end 1994 results show that while the holiday season may have been
disappointing to certain merchants, especially apparel retailers, who were
forced to cut prices and profits, total consumer spending rose by 5.7 percent
from 1993 when it rose 5.8 percent. Although this was the smallest rise
since 1991 when it rose 3.8 percent, it was still a respectable finish. Much
of this optimism is being fueled by low unemployment and bolstered consumer
confidence. During 1994 approximately 3.5 million jobs were created. One
very significant bright spot in the economy is automobile sales which are
running near record levels.
According to the Commerce Department, per capita income rose 3.2 percent to
$20,781 nationwide in 1993. This was down from 4.9 percent growth in 1992
but above the 2.8 percent growth in 1991. Income growth varied dramatically
from no growth in North Dakota to 6.3 percent in Montana which was largely
fuelled by a housing boom which boosted lumber prices. Connecticut continued
to enjoy the highest per capita income at $27,957, while Mississippi
($14,708) was the lowest.
Fresh signs of persistent economic vigor were in evidence through September
1994 as the government published upbeat reports on housing and employment.
The Depart- ments of Commerce and Housing and Urban Development reported that
sales of new single-family homes climbed 9.7 percent in August over the
previous year. While the increase was spread across all four regions, it was
strongest in the northeast. The median new home price was $134,000, up from
$125,000 in July.
First time claims for unemployment benefits fell by 11,000 to 310,000 at the
end of September. This fits a pattern of recent improvement in the
employment rates. However, inflation fears persist due to an economy which
may be growing too quickly. In reaction, the bond markets have skidded with
long term treasuries pushing 8.0 percent for the first time in two and one
half years as investors have become wary of higher inflation.
Personal income jumped by .8 percent in December 1994 after a 1 percent dip
in November and registered the biggest gain in four years for all of 1994.
The increase in income was more than enough to offset the rise in spending as
the personal savings rate increased. The savings rate, a figure watched
widely by economists that shows savings as a percentage of disposable income,
rose to 4.8 percent in December 1994 from 4.3 percent in November.
The report on the gross domestic product (GDP) showed that output for goods
and services expanded at an annual rate of 4.5 percent in the fourth quarter
of 1994. Overall, the economy gained 4 percent in 1994, the strongest rate
in ten years when it was 6.2 percent in 1984. The data also implies that
vigorous growth may continue, and possibly accelerate, before higher interest
rates take their toll on the economy in 1995. Most economists predict a
slowdown with annual growth in the 3.0 to 3.5 percent range. In a separate
government report, American industry was operating at 84.6 percent of
capacity in October, the highest rate since 1989. A utilization rate above
85 percent or so is considered to be in danger of accelerating inflation.
Retail Sales
In their recent publication, The Scope of the Shopping Center Industry in the
United States - 1994, The International Council of Shopping Centers reports
that overall retail conditions continued to improve for the third consecutive
year in 1993. Total shopping center sales increased 5.5 percent to $830.2
billion in 1993, up from $787.2 billion in 1992. The comparable 1992
increase was 5.3 percent. Retail sales in shopping centers (excluding
automotive and gasoline service station sales) now account for about 55.0
percent of total retail sales in the United States.
Total retail sales per square foot have shown positive increases over the
past three years, rising by 4.8 percent from approximately $165 per square
foot in 1990, to $173 per square foot in 1993. It is noted that the increase
in productivity has slightly exceeded the increase in inventory which bodes
well for the industry in general. This data is summarized on the following
table.
Selected Shopping Center Statistics
1990-1993
_______________________________________________________________
% Change Compound
1990 1991 1992 1993 1990-93 Ann. Grwth.
Retail Sales in
Shopping Centers * $727.7 $747.8 $787.2 $830.2 14.1% 4.49%
Total Leasable Area ** 4.4 4.6 4.7 4.8 9.1% 2.94%
Unit Rate $165.0 $163.0 $167.0 $173.0 4.8% 1.59%
______________________________________________________________________
* Billions of Dollars
** Billions of Square Feet
Source: International Council of Shopping Centers. The Scope of the
Shopping Center Industry in the United States - 1994.
______________________________________________________________________
As a whole, 1993 was a good year for most of the nation's major retailers.
Sales for the month of December were up for most, however, the increase
ranged dramatically from 1.1 percent at Kmart to 13.3 percent at Sears for
stores open at least a year. It is noted that the Sears turnaround after
years of slippage was unpredicted by most forecasters. Unfortunately, for
most full service retailers, margins had been impacted by aggressive price
cutting and promotions as consumers have become more value conscious. For
the year, however, 1994 has offered mixed results. Data through the first
quarter of 1994 had shown that sales in March surged in comparison to the
setback in January which was attributed to poor weather. Many of the
nation's largest retailers have reported double- digit sales gains, lead by
Sears (16.8 percent) and Wal-Mart (15.0 percent). Salomon Brothers said its
retail index rose 11.1 percent in March, the biggest one month jump since
1991. By comparison, the March 1993 index rose 3.7 percent. Data through
the first half of 1994 shows that sales have continued their improving trend;
however, sales through the third quarter slowed below most retailers'
expectations. The Salomon Brothers index showed that retail sales in
September grew 3.9 percent from the month a year earlier. The comparable
September 1993 figure was 5.6 percent. While September is traditionally a
slow month, most retailers blamed the slow results on weather. With December
results recently in, most retailers posted same store gains of between 2 and
6 percent. Sears was the exception with an increase of 7.9 percent. The
Goldman Sachs Retail Composite Comparable Store Sales Index, a weighted
average of monthly same store sales of 52 national retail companies rose 4.5
percent in December. The weakest sales have been in womens' apparel with the
strongest sales reported for items such as jewelry and hard goods. Most
department store companies reported moderate increases in same store sales,
though largely as a result of aggressive markdowns. Thus, profits are
expected to be negatively affected for many companies.
Provided on the following chart is a summary of overall and same store sales
for selected national merchants for December 1994, the most recent month
available.
Same Store Sales for the Month of December, 1994
________________________________________________
% Change From Previous Year
___________________________
Name of Retailer Overall Same Store Basis
________________________________________________________
Wal-Mart +21.6% + 6.8%
Kmart + 1.6% + 3.0%
Sears, Roebuck & Co. + 8.0% + 7.9%
J.C. Penney + 5.3% + 5.4%
Dayton Hudson Corp. + 9.6% + 3.7%
May Department Stores + 8.3% + 5.5%
Federated Dept. Stores N/A + 2.2%
The Limited Inc. + 5.6% - 4.0%
Gap Inc. +12.0% + 0.0%
Dillard's + 7.7% + 5.0%
_______________________________________________________
Source: New York Times, January 6, 1995
_______________________________________________________
Some analysts point to the fact that consumer confidence has resulted in
increases in personal debt which may be troublesome in the long run. Consumer
loans by banks rose 14.4 percent in the twelve months that ended on September
30th. Credit card billings have jumped 25 percent in the last twelve
months. But data gathered by the Federal Reserve on monthly payments suggest
that debt payments are not taking as big a bite out of income as in the late
1980s, largely because of the record refinancings at lower interest rates in
recent years and the efforts by many Americans to repay debts. The ratio of
payments to income now stands around 15.9 percent, roughly what it was in
the mid-1980s, and considerably below the 17.9 percent of 1989.
Department Store Chains
The continued strengthening of some of the major department store chains,
including Sears, Federated/Macy's, May and Dayton Hudson, is in direct
contrast to the dire predictions made by analysts about the demise of the
traditional department store industry. This has undoubtedly been brought
about by the heightened level of merger and acquisition activity in the 1980s
which produced a burdensome debt structure among many of these entities. When
coupled with reduced sales and cash flow brought on by the recession,
department stores were unable to meet their debt service requirements.
Following a round of bankruptcies and restructurings, the industry has
responded with aggressive cost cutting measures and a focused merchandising
program that is decidedly more responsive to consumer buying patterns. The
importance of department stores to mall properties is tantamount to a
successful project since the department store is still the principal
attraction that brings patrons to the center.
Industry Trends
Since 1990, total U.S. shopping center GLA has increased by 400 million
square feet, a 9.1 percent increase or 2.9 percent growth per annum. This
change has outpaced annual population growth. In 1990 the total per capita
GLA was 17.7 square feet. By 1993, this figure advanced to 18.5 square feet
per person. According to the National Research Bureau, there were a total of
39,633 shopping centers in the United States in 1993, an increase of 1.7
percent from 38,966 shopping centers in 1992.
The total leasable area of U.S. Shopping Centers increased by 2.1 percent in
1993 to 4.77 billion square feet. As would be expected, construction of new
centers has dropped from a high of 91.8 million square feet (979 centers with
a contract value of $5.9 billion) in 1990, to 42.8 million square feet in
1993. According to F.W. Dodge, the construction information division of
McGraw-Hill, 451 new shopping centers were started in 1993. These new
projects generated $2.7 billion in construction contract awards and supported
43,700 jobs in the construction trade and related industries. This is nearly
half of the construction employment level of 95,360 for new shopping center
development in 1990. It is estimated that 10.044 million people are now
employed in shopping centers, equal to about one of every nine non-farm
workers in the country. This is up 2.2 percent over 1992.
On balance, 1993 was a period of transition for the retail industry. Major
retailers achieved varying degrees of success in meeting the demands of
increasingly value con- scious shoppers. Since the onset of the national
economic recession in mid-1990, the retail market has been characterized by
intense price competition and continued pressure on profit margins. Many
national and regional retail chains have consolidated operations, closed
underperforming stores, and/or scaled back on expansion plans due to the
uncertain spending patterns of consumers. The consolidations and mergers
have produced a more limited number of retail operators, which have responded
to changing spending patterns by aggressively repositioning themselves within
this evolving market. Much of the current retail construction activity
involves the conversion of existing older retail centers into power center
formats, either by retenanting or through expansion. An additional area of
growth in the retail sector is in the "supercenter" category, which consists
of the combined grocery and department stores being developed by such
companies as Wal-Mart and Kmart. These formats require approximately 150,000
to 180,000 square feet in order to carry the depth of merchandise necessary
for such economies of scale and market penetration.
Market Shifts
During the 1980s, the department store and specialty apparel store industries
competed in a tug of war for the consumer's dollar. Specialty stores emerged
largely victorious as department store sales steadily declined as a
percentage of total GAFO sales during the decade, slipping from 47.0 percent
in 1979 to 44.0 percent in 1989. During this period, many anchor tenants
teetered from high debt levels incurred during speculative takeovers and
leveraged buyouts of the 1980s. However, bankruptcies and restructuring
forced major chains to refocus on their customer and shed unproductive stores
and pro- duct lines. As a result, department store sales as a percentage of
GAFO sales rebounded sharply in the early 1990s. In fact, by year-end 1993,
department store share of GAFO sales had climbed back above 46.0 percent, its
highest level since 1979.
Despite the proliferation of non-store retailers (catalog shopping) during
the 1980s, general merchandise, apparel, furniture and other store (GAFO)
sales, generally considered to be a proxy for mall store sales, actually
increased steadily during the decade. As a percentage of total retail sales
(excluding automobiles), GAFO sales rose to approximately 35.0 percent by
year-end 1993 from 29.0 percent in 1980.
During the period 1985 to 1991, regional mall market share of total shopping
center expenditures declined from 30.0 to 24.0 percent according to a recent
study by Salomon Brothers. This is attributed to the faster pace of new
construction related to neighbor- hood, community, and power centers
nationally. The most notable increase in market share has come from growth
in community centers which are typically anchored by discounters such as
Wal-Mart, Target, and Kmart as shown on the following table.
Market Share of Shopping Centers
by Property Type
__________________________________
Type 1985 1991
__________________________________
Neighborhood Centers 38.0% 37.0%
Community Centers 31.0% 37.0%
Regional Malls 30.2% 24.0%
Power Centers .8% 2.0%
______________________________________________
Source: National Research Bureau, International Council of
Shopping Centers, Salomon Brothers
This repositioning of retail product has been a direct response to changing
consumer preferences. Both regional and super-regional shopping center
completions have declined by approximately 66.0 percent from their 1989
peaks, implying that positive net absorption should result as the economy
improves.
Outlook
Many analysts remain bullish with respect to the department store industry
which appears well prepared to take a competitive stance against the major
discounters and "category killers" in the second half of the decade. Sears
and JC Penney have undergone major restructurings and have seen comparable
store sales growth of 7.9 and 5.4 percent, respectively. The May Company has
focused on consolidating operations in order to strengthen its buying power
and lower expenses. They also expect to embark on an aggressive expansion
program that will expand 55 existing stores and add approximately 100 new
stores by 1998. Dillard's is often cited as an efficient operator and they
continue to expand into new markets with both new store construction and
selective acquisitions. Macy's recent merger with Federated has received
wide acclaim as the two have formed one of the nation's largest department
store companies with over 300 units and annual sales of over $13.0 billion.
Nonetheless, the competition among retailers of all types will remain
intense. The consumer stands to benefit from this price competition assuming
real increases in purchasing power can be maintained.
The WEFA Group, an economic consulting company, projects that potential
growth of the economy will slow moderately over the long-term. This will
have a direct influence on consumption (consumer expenditures) and overall
inflation rates (CPI).
The outlook for inflation faces a great deal of uncertainty in the long run.
Inflation has decelerated over the past year due primarily to slow rises in
crude material prices which, in turn, have been reflected in slower rises in
producer prices for finished goods. Inflation (as measured by the CPI-Urban)
has increased at an annual average rate of 3.7 percent since 1982. This is
in stark contrast to the average performance of 8.4 percent per year between
1971 and 1981. The Bureau of Labor Statistics has reported that consumer
prices rose by only 2.7 percent in 1994, the fourth consecutive year in which
inflation was under 3 percent. Apart from the volatile food and energy
sectors, the core inflation rate was only 2.6 percent in 1994, the lowest
rate since 1965. The WEFA Group projects that inflation rates will stabilize
at an annual rate near 3.5 percent in the long term.
Consumption expenditures are primarily predicated on the growth of real
permanent income, demographic influences, and changes in relative prices in
the long term. Changes in these key variables explain much of the consumer
spending patterns of the 1970s and mid-1980s, a period during which baby
boomers were reaching the asset acquisition stages of their lives; purchasing
automobiles and other consumer and household durables. Increases in real
disposable income supported this spending spurt with an average annual
increase of 2.9 percent per year over the past twenty years. Real
consumption expenditures increased at an average annual rate of 3.1 percent
during the 1970s and by an average of 4.0 percent from 1983 to 1988. WEFA
projects that consumption expenditure growth will slow to 2.0 percent per
year by 2003 as a result of slower population growth and aging. WEFA further
forecasts that personal consumption expenditures on services will expand by a
higher annual rate of about 2.3 percent in the long term.
It is projected that the share of personal consumption expenditures relative
to GDP will decline over the next decade. Consumer spending as a share of
GDP peaked in 1986 at 67.4 percent after averaging about 63.0 percent over
much of the post-war period. WEFA estimates that consumption's share of
aggregate output will decline to 64.5 percent by 2003 and 62.7 percent by
2018.
Potential GDP is a measure of the economy's ability to produce goods
and services. This potential provides an indication of the expansion of
output, real incomes, real expenditures, and the general standard of living
of the population. WEFA estimates that real U.S. GDP will grow at an average
annual rate of 2.7 percent through 2000 as the output gap is reduced between
real GDP and potential GDP. After 2000, annual real GDP growth will decline,
tapering to 2.3 percent per annum by 2003 and 2.1 percent by 2010.
Trade Area Analysis
Overview
A retail center's trade area contains people who are likely to patronize that
particular retail center. These customers are drawn by a given class of
goods and services from a particular tenant mix. A center's fundamental
drawing power comes from the strength of the anchor tenants as well as the
regional and local tenants which complement and sup- port 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 Laurel Centre, it
is import- ant 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 capture rate of area expenditure potential is
also influenced by the Columbia and An- napolis Malls as well as the Laurel
Lakes Centre.
Finally, there are several large strip centers anchored by discount
department and spe- cialty 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 dis- trict 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 under- standing of the area's retail structure. <PAGE>
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 benefitted by an excellent interstate highway system such
as the Washington-Baltimore Corridor, the percentage of sales generated by
inflow patrons can often run upwards to 25 percent or higher.
Once the trade area is defined, the area's demographics and economic profile
can be analyzed. This will provide key insight into the area's dynamics as
it relates to the subject. The sources of economic and demographic data
for the trade are analysis are as follows: Equifax Marketing Decision
Systems (EMDS), Sales and Marketing Management's Survey of Buying Power
1985-1992, The Urban Land Institute's Dollars and Cents of Shopping Centers
(1993), CACI, The Sourcebook of County Demographics, and The Census of Retail
Trade - 1992. We have also been provided with a specific retail study of the
mall's trade area and remerchandising recommendations by Hollander, Cohen &
McBride, 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. <PAGE>
Trade
Area Definition According to the latest consumer survey provided by Hollander
Cohen & McBride, Laurel Centre draws from the entire geographical corridor
between Washington, D.C. and Baltimore, Maryland. The trade area has been
identified as containing a total of 26 zip codes, plus an additional 37 zip
codes from tertiary regions. The primary and secondary zip codes are arrayed
on following tables.
The Primary Market segment, which generally falls within a 10 mile radius of
the cen- ter, includes the major (Zip Code) communities of Laurel,
Beltsville, College Park and Severn, as well as parts of Silver Spring and
Bowie to the south and Columbia to the north. Last year's Stillerman & Jones
survey estimated that approximately two-thirds (68 percent) of Laurel Centre
shoppers reside in the Primary Market, generating nearly 75 percent of its
sales. The latest survey showed that 50 percent of Laurel Centre's shoppers
reside in the primary market.
The Secondary Market is divided into two parts. The "South Secondary"
segment in- cludes Upper Marlboro, Bowie (one Zip Code), Lanham-Seabrook,
Greenbelt and four major Hyattsville Zip Codes, as well as part of Silver
Spring and several other communities within the general area. Thirteen
percent of Laurel Centre shoppers live in the South Secondary Market
segment. The "North Secondary" Market consists of two major zip codes in
Columbia and Ellicott City, a portion of South Baltimore and a few smaller
communities. Six percent of the shoppers reside in these areas. The
remaining 13 percent of Laurel Centre shoppers are from outside the defined
trade area ("Inflow"), but for the most part live within the surrounding
region.
Laurel Centre - Primary
_______________________
Primary City
_______________________
20707 Laurel
20708 Laurel
20723 Laurel
20724 Laurel
20770 Greenbelt
20705 Beltsville
__________________________________
Source: Hollander Cohen & McBride
___________________________________
Secondary
_________
20706 21045
20740 21114
20755 21144
20904 20002
21113 20737
20715 20772
20716 20782
20784 20783
21044 20794
20905 20866
Source: Hollander Cohen & McBride
__________________________________
Within this analysis we have elected to utilize the trade area as defined by
the above shown zip codes. So that we may lend additional insight into this
analysis, we have separated the trade area into a primary and secondary
market. These reports are provided in the Addenda. Population statistics
produced by Equifax National Decision Systems (ENDS), based on the combined
trade area zip codes, are provided on the facing page. We will refer to this
area as the subject's total trade area.
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.
Between 1980 and 1994, ENDS reports that the population within the total
trade area increased by 23.7 percent to 670,358. This trend is expected to
continue through 1999 as population is forecasted to increase by an
additional 5.7 percent to 708,347. A review of the component trade area
reports show that growth is forecasted for both the primary and secondary
markets.
Provided on the following page is a graphic representation of the projected
population growth for the trade area through 1999. While the majority of the
trade area is forecasted to post modest population gains, other areas are
expected to witness more moderate growth. Nonetheless, it is important to
recognize that within the total trade area of the mall there exists nearly
670,500 people with substantial aggregate purchasing power and few
destination retail establishments of Laurel Centre's caliber.
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 sin-
gle person households.
Between 1980 and 1994, the total trade area added 64,376 households,
increasing by 35.1 percent to 247,597 units. Again, the subject must be
viewed within the context of its location in a growing area with
opportunities for expansion. The reader is directed to the fact that with a
moderate population increase over the past two years, household units have
increased at a faster pace generally due to the factors cited above. Through
1999, a continuation of this trend is forecasted through all components of
the trade area. Accordingly, the household size is forecasted to continue to
decrease from its present 2.71 persons to 2.69 persons per household.
MAP of Laurel Centre Trade Area,
showing population % growth 1994-99
Such a relationship generally fits the observation that smaller households
with fewer children and higher incidence of single occupancy, especially
among young professionals, generally correlates with greater disposable
income.
Trade Area Income
A significant statistic for retailers is the trade area's income potential.
Within the total trade area, ENDS reports that average household income has
increased from $26,310 in 1980 to $61,337 in 1994, a 133.1 percent aggregate
increase which equates to a compounded increase of 6.2 percent per annum.
Median household income is currently estimated at $53,484 for the total trade
area, while per capita income is $23,178.
The Washington, D.C. MSA has, as part of it, some of the highest average
household income areas in the State of Maryland. Provided on the following
page is a graphic representation of the area's current income levels. Note
the concentration of relative wealth in the subject's trade area with the
highest concentration of income found in the south and northwest quadrants.
MAP of Laurel Centre Trade Area
showing households 94 by income
Retail Sales
Another important statistic for retailers is the amount of retail sales
within a trade area. The table below has summarized historic retail sales
for the State of Maryland, the Washington, D.C. MSA and Prince George's
County for the prior eight year period.
Retail Sales
1985-1993
(000)
____________
State of Washington Prince George's
Year Maryland MSA County
___________________________________________________
1985 $28,863,392 $25,219,988 $5,175,984
1986 $30,205,991 $26,757,621 $5,253,177
1987 $32,240,588 $29,194,343 $5,618,104
1988 $33,854,588 $31,471,548 $5,856,907
1989 $35,045,366 $31,376,074 $5,649,800
1990 $36,836,986 $32,925,657 $6,260,391
1991 $36,385,417 $31,761,066 $6,109,373
1992 $38,204,984 $36,615,796 $6,340,008
1993 $40,363,984 $39,205,140 $6,538,594
Compounded
Annual Growth
Rate +4.28% +5.67% +2.96%
Source: Sales and Marketing Management Survey of Buying Power (1986-1994)
__________________________________________________________________________
As can be seen from the above, Prince George's County retail sales have
lagged both the State of Maryland and the Washington MSA in terms of average
growth over the past eight years. The county's sales had been increasing at
relatively strong levels through 1988. However, 1989 marked a decrease of
3.5 percent which was the first in the last six years. Sales rebounded in
1990, increasing 10.8 percent over 1989. Then in 1991 sales declined again
by 2.4 percent to $6,109,373. Sales increased again in 1992 by 3.78 percent,
and in 1993 by 3.13 percent.
Mall Shop Sales
While retail sales trends within the MSA and region lend insight into the
underlying economic aspects of the market, it is the subject's sales history
that is most germane to our analysis. Sales reported for total mall shops
may be allocated as shown on the chart which follows.
TABLE showing Laurel Centre Retail Sales, 1986-1994
As can be seen from the above, total mall shop sales have increased at a
compound annual rate of 3.78 percent since 1986. In this regard, sales
increased from approximately $45.6 million to $61.35 million. We have
abstracted a unit rate in each year based upon a total reporting GLA. This
measure provides a skewed level of tenant performance since many tenants do
not report sales by lease agreement or fail to report sales for a particular
sales period. As such, it can be seen that for the 249,321 square feet of
reporting tenants in 1994, mall shop sales were equal to $246.08 per square
foot. This was down slightly from 1993. It should be pointed out that these
amounts are property totals and include sales from tenants who were
terminated during the year. Furthermore, it should be emphasized that the
sales reflect the aggregate change in sales and is not an indication of
comparable store sales. Finally, these results reflect 1994 estimates, which
do not include actual December 1994 sales.
Comparable store sales (also known as same store sales) reflect the annual
performance of stores in existence and reporting sales for the prior one year
period. In management's year end sales report, a detail of comparable store
sales under the category "Mature Sales" is presented. Comparable sales from
1991 to 1992 increased by 0.9 percent to $287.20 per square foot in 1992.
Figures for 1993 showed comparable store sales down slightly from $283.70 in
1992 to $280.90 in 1993. This decrease was been due in part to tenant
turnover in the mall as well as tenant relocations. A comparison of
comparable new tenants to the mall showed sales per square foot of $279.40
for 1993, up 4.27 percent from the 1992 figure of $267.70 per square foot.
For 1994, comparable/mature store sales have been tracking at $279.10 per
square foot, this compared to $286.30 for comparable tenants in 1993.
The Urban Land Institute's Dollars and Cents of Shopping Centers (1993)
report outlining the range and median sales per square foot of mall stores
for super-regional shopping centers utilizes a sample survey to derive
average sales figures. Nationally, the 1992 median sales dollars per square
foot for super-regional malls was approximately $195 per square foot within a
range of $132 to $303 per square foot. This study is also performed on a
regional basis. The eastern region exhibits a range of sales between $133
and $355 per square foot with a median of approximately $227 per square foot.
The subject has clearly outperformed these averages.
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.
Department store sales at the subject property reportedly reached $73,215,000
in 1993, reflecting an overall average of $175.82 per square foot. For 1994,
sales have been estimated at $73,874,000 or $177.40 per square foot, a 0.90
percent increase over 1993. A five year sales history is shown on the
following chart.
TABLE showing Laurel Centre Retail Sales (by 000)
featuring Department Stores, Year, and Total
Annual Growth Rate, 1990-1994
As can be seen, total department store sales have grown at a compound
average annual rate of 1.88 percent since 1990, led by Montgomery Ward's
growth of 3.12 percent per year.
J.C. Penney is the only major anchor which is included in this appraisal.
Sales in 1990 were slow, rising only 1.7 percent to $20,057,000 or $146.50
per square foot over 1989 figures. In 1991, sales dropped by 10.4 percent to
$17,980,000. There was a recovery in 1992 above 1991 levels as sales rose
13.4 percent to $20,383,000 or $148.93 per square foot. In 1993, sales at JC
Penney increased by 3.16 percent to $153.63 per square foot. Sales have
apparently risen again for 1994, approximately 4.60 percent above 1993
levels.
Montgomery Ward and Hecht's are the other anchor stores, but are individually
owned and not a part of this appraisal. They do, however, impact the subject
to the extent that they influence the mall stores through their ability to
generate traffic and increase sales. Similar to Penney's, both stores showed
sales that were relatively flat in 1990. Montgomery Ward increased sales by
.3 percent to $23,564,000 or $146.18 per square foot. Hecht's sales
increased by .4 percent in 1990 to $24,950,000 or $210.81 per square foot. It
would appear that the three anchor stores were all negatively impacted by the
adverse national retail climate during 1990 through 1991. However, all
stores have experienced some recovery since then, showing growth rates
between 0.29 and 3.12 percent.
As further discussion to the subject's position in the market, it is
necessary that we review the nature of competition.
Competition
Since our last appraisal, there has been no major new retail development in
the subject's vicinity which would pose as competition. The Laurel Lakes
Centre at U.S. 1 and Cypress Street has added Best Buy (October 1994) who
leased 51,325 square feet for fifteen years at a reported $10.50 per square
foot. Best Buy has reported affected sales at the subject for tenants, such
as Software, Etc., with competing merchandise. Other leases in the center
range from $9.00 to $25.00, with newer leases ranging from $11.00 to $18.00
per square foot. Approximately 23,082 square feet remains vacant here (5
percent), primarily in the courtyard/open air portion of the center which has
poor visibility.
The Mall in Columbia is a Rouse development that opened in 1971. It serves
as the retail center of the planned community of Columbia, Maryland. It has
190 specialty stores with three anchors: Hecht's (152,100 square feet),
Sears (121,000 square feet), and Woodward & Lothrop (164,700 square feet).
The mall is very successful, and its market has good growth potential given
the market's position halfway between Washington and Baltimore. Rouse is
planning a fashion-oriented redevelopment with Nordstrom, Macy's, and Lord &
Taylor as candidates. A store has yet to be named and the owner is
non-committal as to a start date. Nonetheless, while the mall is in need of
renovation, despite its physical condition it still does well. Recent
discussion suggests that Nordstrom is the likely candidate for addition to
this property.
Annapolis Mall, at Routes 178 and 450 in Annapolis, Maryland, was originally
built in 1980 by May Centers, Inc. It is a one-level, super-regional
shopping center with 130 specialty stores. The center has four anchors:
Hecht's (156,029 square feet), JC Penney (83,695 square feet), Montgomery
Ward (127,296 square feet), and Nordstrom (152,766 square feet). It has
recently completed an expansion and renovation which included the addition of
Nordstrom, a new food court and 103,000 square feet of new mall shop GLA.
Total GLA is now 924,628 square feet. Mall shop sales at Annapolis are
projected to have reached $350 per square foot by year-end 1994. This is up
from $297 per square foot in 1992. As previously mentioned, both Konterra
and Bowie Town Center remain impeded by delays to such a degree that it is
not possible to predict a start data for either project. The Konterra
project, however, now appears more remote than ever. Bowie Town Center
remains a potentially viable project. However, ownership is still
considering alternative uses for the site and mitigation of traffic, flood
plain issues, and wetlands remain a hold- up. It is not likely that this
center would be completed before 1997-1998.
Comments
Laurel Centre has had little difficulty in attracting new tenants to fill
space which turned over during the year. At the time of our inspection, it
was approximately 94 percent occupied with good prospects for some of the
available space. Several tenants turned over during the year and were
released with the new tenant undertaking renovation of the space. Many of
the existing tenants have been in the mall since it opened in 1979 and their
space is due for a major facelift. Other tenants have renewed or expanded
during the year. Management has also purposely kept space off of the market
in order to combine certain spaces to accommodate certain leasing strategies.
Further discussion of this activity may be found in the Income Approach.
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 and the other
shopping malls of this trade area reflect this trend toward market
segmentation. With anchor tenant's such as J.C. Penney, Hecht's and
Montgomery Ward, the subject property is clearly positioned toward the broad
center of the retail market.
Conclusion
We have analyzed the retail trade history and profile of the
Baltimore/Washington MSA and Prince George's County 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 was presented. The trade area profile encompassed
a zip code based survey from the subject. Marketing information relating to
these sectors was presented and analyzed in order to determine patterns of
change and growth as it impacts the Laurel Centre. Finally, we included a
brief discussion of some of the competitive retail centers in the market
area. The data is useful in giving quantitative dimensions of the total trade
area, while our comments serve to provide qualitative insight into this area.
The following summarizes our key conclusions:
1. The subject enjoys a visible and accessible location within the heart
of the dynamic Baltimore-Washington Corridor. The region has
experienced impressive population growth and household formation.
Developers have started or are proposing many significant projects
which will have positive ramifications for the subject.
2. The region has a stable and diverse employment base, and boasts of a
desirable quality of life. Its population has also expanded in
affluence as measured by average household income and market
expenditure potential.
3. Population and households within the subject's trade area have
continued to expand and the mall remains the dominant retail center
in the Laurel area. It has a complementary tenant mix and good
anchor stores that has resulted in impressive sales growth.
4. The potential for new competition in the two projects cited herein
still exists, albeit at an increased level of uncertainty. While
neither has started, both must be continually reviewed so that the
subject's merchandising and marketing strategy is properly focused.
On balance, it is our opinion that with continued competent management and
aggressive marketing, the Laurel Centre should remain as a viable entity.
Our outlook for the area continues to be positive with good prospects for
modest appreciating real estate values.
THE SUBJECT PROPERTY
The Laurel Centre Mall contains a gross occupancy area of 661,639 square feet
including three anchor tenants. Specifically, this appraisal addresses a
gross leasable area of 382,081 square feet. The Montgomery Ward (161,204
square feet) and the Hecht's (118,139 square feet) stores are independently
owned and not part of this analysis. The subject site (consisting of 21.84
acres), is situated on the west side of U.S. Route 1 at Cherry Lane in the
City of Laurel, Prince George's County, Maryland.
Since our previous report, the major changes in the mall have primarily
revolved around new tenant lease transactions, existing lease renewals, and
tenants who have been terminated. As a result, some remodelling and
renovation of tenant stores has occurred. Further discussion of these
activities is included in the Income Approach to this report.
Laurel Centre continues its efforts to upgrade the mall with capital
improvement projects. Recent projects have included painting, deck
landscaping, new entrance doors, sealing the parking decks, new signage,
installing decorative lighting, and food court repairs. Several of these
projects continued through 1994. Projects for 1995 include replacement of
the mall's HVAC system, scheduled to cost $1,032,920 in non-CAM capital
expenditures.
We would also note that structurally and mechanically the improvements appear
to be in good condition. However, this type of analysis is beyond our
expertise and is best made by a professional engineer. Our review of the
local environs reveals that there are no external influences which negatively
impact the value of the subject property.
REAL PROPERTY TAXES AND ASSESSMENTS
The subject property is assessed for the purpose of taxation by Prince
George's County. It is also taxed by the City of Laurel which follows the
county mandated assessment. The total assessment is therefore $25,573,640,
unchanged over the past two tax billings.
In 1994/95, the County's assessment was $25,464,850 for the main mall parcel
and $108,790 for a .7346 acre tract. Currently, the tax rate in the City of
Laurel is $1.414 per $100 of assessment. The county rate, inclusive of the
state portion as well as the various special districts, amount to $2.584 per
$100. Application of these two rates produce taxes of $1,022,390.93.
Ownership has budgeted $1,100,000 to account for projected phase-ins for
increasing assessments as well as the potential change in the tax rate during
1995/1996. Accordingly, we have utilized this amount in our cash flow.
ZONING
The subject property is zoned C-SH, Commercial Shopping Center by the City
of Laurel. This district permits a broad spectrum of general commercial uses
as those normally found in shopping centers of the subject type. Based on
conversations with the city zoning officer, the subject's current retail use
is in conformance with the intent of the C-SH district.
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. Further-
more, 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 allows the appraiser to estimate the value of
real estate by comparing recent sales of similar properties in the
surrounding or competing area to the subject property. Inherent in this
approach is the principle of substitution, which holds that "when a property
is replaceable in the market, its value tends to be set at the cost of
acquiring an equally desirable substitute property, assuming that no costly
delay is encountered in making the substitution."
By analyzing sales that qualify as arms-length transactions between willing,
knowledgeable buyers and sellers, market value and price trends can be
identified. Comparability in physical, locational, and economic
characteristics is an important criterion when comparing sales to the subject
property. The basic steps involved in the application of this approach are
as follows:
(1) Research recent, relevant property sales and current offerings through-
out 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, func-
tional, or locational factors;
(3) Reduce the sales price to a common unit of comparison, such as price per
square foot of gross leasable area that is to be sold;
(4) Make appropriate adjustments between the comparable properties and the
property appraised;
(5) Identify sales which include favorable financing and calculate the cash
equivalent price;
(6) Interpret the adjusted sales data and draw a logical value conclusion.
The most widely-used and market-oriented units of comparison for properties
such as the subject are the sale price per square foot of gross leasable area
(GLA) purchased and the overall capitalization rate extracted from an
analysis of the sale. An analysis of the inherent sales multiple also lends
additional support to this overall methodology.
Market Overview
The typical purchaser of properties of the subject's caliber includes both
foreign and domestic insurance companies, large retail developers, pension
funds, and real estate investment trusts (REIT's). The large capital
requirements necessary to participate in this market and the expertise
demanded to successfully operate an investment of this type, both limit the
number of active participants and, at the same time, expand the geographic
boundaries of the marketplace to include the international arena. Due to the
relatively small number of market participants and the moderate amount of
quality product available in the current marketplace, strong demand exists
for the nation's quality retail developments.
In recent years, interest in selling Class A properties had been tempered by
illiquidity in financing purchases because of persisting post recessionary
worries, lack of lending by banks that had been or continue to have financial
troubles, and a general lack of interest in real estate as a prime investment
vehicle. All of these factors have operated to raise yield and
capitalization rates for those few players currently in the marketplace for
Class A properties. Class B shopping centers have been more seriously
impacted according to buyers and sellers, making few transactions probable as
the product is withheld from the marketplace, or if offered, tends to be
unrealistically priced based upon current economic conditions.
Most institutional grade retail properties are existing, seasoned centers
with good inflation protection. These centers offer stability in income and
are strongly positioned to the extent that they are formidable barriers to
new competition. Equally important are centers which offer good upside
potential after face-lifting, renovations, or expansion. With new
construction down substantially, owners have accelerated their renovation and
remerchandising programs. Little competition from over-building is likely in
most mature markets within which these centers are located. Environmental
concerns and "no-growth" mentalities in communities are now serious
impediments to new retail developments.
The re-emergence of real estate investment trusts (REITs) has helped to
provide liquidity within the real estate market, pushing demand for
well-tenanted, quality property, particularly super-regional malls.
Currently, REITs are one of the most active segments of the industry and are
particularly attractive to institutional investors due to their liquidity.
Real Estate Investment Trust Market
To date, the impact of REITs on the regional mall investment market is not
yet clear since the majority of Initial Property Offerings (IPOs) involving
regional malls did not enter the market until the latter part of 1993 and
early 1994. It is noted, however, that REITs have dominated the investment
market for apartment properties and are expected to play a major role in
retail properties as well. While many of the country's best quality malls
have recently been offered in the public market, this heavily capitalized
marketplace has provided sellers with an attractive alternative to the more
traditional market for regional malls. The pricing of REITs and the
elimination of a significant portion of the supply of quality regional malls
could continue to favorably impact sellers of this property type. During the
past year, a number of institutional investors have either become more
aggressive in terms of acceptable returns, or have been eliminated from this
component of the market.
There are currently more than 230 REITs in the United States, about 77.0
percent (178) which are publicly traded. The advantages provided by REITs,
in comparison to more traditional real estate investment opportunities,
include the diversification of property types and location, increased
liquidity due to shares being traded on major exchanges, and the exemption
from corporate taxes when 95.0 percent of taxable income is distributed.
There are essentially three kinds of REITs which can either be "open-ended",
or Finite-life (FREITs) which have specified liquidation dates, typically
ranging from eight to fifteen years.
Equity REITs center around the ownership of properties where ownership
interests (shareholders) receive the benefit of returns from the operating
income as well as the anticipated appreciation of property value. Equity
REITs typically provide lower yields than other types of REITs, although
this lower yield is theoretically offset by property appreciation.
Mortgage REITs invest in real estate through loans. The return to
shareholders is related to the interest rate for mortgages placed by the
REIT.
Hybrid REITs combine the investment strategies of both the equity and
mortgage REITs in order to diversify risk.
During 1993, Hybrid REITs yielded an average of 7.28 percent as compared
with Equity REITs at 6.30 percent and Mortgage REITs at 10.44 percent. The
chart on the facing page summarizes the historic annual yield rates and
overall return performance of REITs for the past ten years.
Equity REITs clearly dominate the publicly traded marketplace, with an 80.0
percent share of the total market in terms of total capital. As of November
1993, total market capital amounted to $30.026 billion, nearly a 15.0 percent
increase over the August 1993 figure of $26.185 billion. Capital invested in
equity REITs has increased dramatically as well. In 1992, five equity REITs
raised $726.0 million in capital, while in 1993, forty three equity REITs
raised $8.616 billion in capital.
The significant increase in equity REIT capital investment exhibited during
the past two years has continued during the first portion of 1994, with ten
new equity REIT offerings through the first eight weeks, and $1,520.4 million
in total capital being raised. An additional ten REIT IPOs are currently in
Registration with the SEC as of February 1994.
The annual yields for all REITs have declined during the past four years,
to an average annualized yield of 6.94 percent overall for 1993. The average
annualized returns for the most recent two-year period are below the levels
of the past ten years. The influx of capital into REITs has provided
property owners with a significant alternative marketplace of investment
capital and resulted in a considerably more liquid market for real estate. A
number of "non-traditional" REIT buyers, such as utility funds and
equity/income funds, established a major presence in the market during 1993,
and there is strong evidence that public pension plans (including CalPers)
have committed or will soon commit significant capital to REIT investment.
Although the REIT market is volatile and has historically experienced rapid
increases and declines in pricing and returns, the lower yields and
substantial price appreciation during the past year has placed upward
pressure on values and pricing for more traditional (non-REIT) real estate
transactions. The lower yields acceptable for equity REITs incorporates the
marketplace's perception that real estate is in a recovery mode, which is
expected to result in continued price appreciation to offset the lower
initial yields. While the market and property specific due diligence used by
the underwriters of the REIT offerings does not necessarily mirror the more
thorough process used by more traditional institutional investors in real
estate, the existence of this marketplace could continue to drive property
values upward for the near term, particularly if inflation increases
noticeably.
Regional Mall REITs
The accompanying exhibit "Analysis of Regional Mall REITs" summarizes the
basic characteristics of seven REITs and one publicly traded real estate
operating company (Rouse Company) comprised exclusively or predominately of
regional mall properties. Excluding the Rouse Company (ROUS), the IPOs have
all been completed since November 1992. The Taubman (TCO) REIT IPO in
November 1992 represented the first equity REIT specializing in the
ownership, management, and development of enclosed regional mall shopping
centers. Prior to the Taubman offering, the public market for regional malls
was limited to the Rouse Company public offering. Six additional IPO's of
equity REITs, primarily involving enclosed regional shopping malls, have been
completed during the period November 1992 through December 1993. The public
equity market capitalization of the six REIT's (excluding Rouse and
DeBartolo) totalled $3.3 billion as of February 1994, and, combined with
restricted operating partnership units, totalled $6.9 billion. Including
equity, debt, and partnership units, the total capitalization of these six
REITs represented approximately $14 billion according to Solomon Brothers.
The combined leasable area owned and operated by the six REITs represents
approxi- mately 10.0 percent of the total regional mall inventory in the
United States. Including the Rouse Company portfolio and the April 1994 IPO
by DeBartolo Realty Corporation (involving 51 additional regional malls with
a combined leasable area of approximately 44.5 million square feet), the
eight public offerings included on the summary have a total of 260 regional
or super regional malls with a combined leasable area of approximately 200
million square feet. This figure represents more than 14.0 percent of the
total national supply of this product type. A number of other REITs (not
included on summary) that are not exclusively or predominately comprised of
regional malls also include numerous additional regional and super regional
mall product within the larger offering.
The eight companies summarized on the exhibit are among the largest and best
capitalized domestic real estate equity securities, and are considerably more
liquid than more traditional real estate related investments. Excluding the
Rouse Company, however, these companies have been publicly traded for only a
short period, and there is not an established track record. Regional mall
REITs experienced a "price correction" during November and December of 1993
(as did most equity REITs), but the market rallied during the first quarter
of 1994. The current (end of first quarter 1994) investment market concerns
regarding inflation have created a better environment for some equity REITs,
which theoretically will benefit from inflation and corresponding property
value increases. The DeBartolo Company IPO during April 1994 (originally
planned for year-end 1993) was well received by the marketplace and was
perceived by many investors as a "hedge" against inflation concerns.
The impact of this alternative market for regional malls on the traditional
investment for this type of asset is not yet clear. As noted previously, the
multi-family REITs, which are more established in the public markets than the
mall REITs, have had a significant impact on the investment market for
quality apartment product. The effective removal of a large percentage of
the total supply of regional mall product nationally from the non- public
investment sector should alter the supply and demand balance in favor of
current mall ownerships, effectively stabilizing or increasing values for
malls that satisfy REIT criteria. The following analysis of comparable
regional mall transactions suggests that the investment market for this type
of asset has stabilized during the past year, following a downward trend in
investment criteria during 1991 and 1992. The component of this stabilized
trend attributable to the recent REIT formations is not quantifiable, but the
emergence of this alternative marketplace logically should have a positive
impact on regional mall values for the near term.
Investment Criteria
Investment criteria for mall properties range widely. A more complete
discussion of investment indices can be found in the "Income Approach"
section of this report. This discussion details our use of capitalization
and yield rates for the subject property in relation to the sales presented
herein as well as an overview of current investors' criteria.
Most retail properties that are considered institutional grade are
existing, seasoned centers with good inflation protection that offer
stability in income and are strongly positioned to the extent that they are
formidable barriers to new competition. Equally important are centers which
offer good upside potential after face-lifting, renovations, or expansion.
With new construction down substantially, owners have accelerated renova-
tion and re-merchandising programs. Little competition from over-building is
likely in most mature markets within which these centers are located.
Environmental concerns and "no-growth" mentalities in communities are now
serious impediments to new retail development.
Equitable Real Estate Investment Management, Inc. reports in their Emerging
Trends in Real Estate - 1995 that their respondents give retail investments
reasonably good marks for 1995. It is estimated that the bottom of the
market for retail occurred in 1993. During 1994, value changes for regional
malls and power centers is estimated to be 1.4 and 3.5 percent, respectively.
Other retail property should see a rise of 1.7 percent in 1994. Forecasts
for 1995 show regional malls leading the other retail categories with a 2.8
percent increase. Power centers and other retailers are expected to have
increases of 2.6 and 2.2 percent, respectively. Long term prospects
(1995-2005) for regional malls fare the best for all retail properties which
is expected to outstrip total inflation (4.0 percent) with a 43 percent gain.
The bid/deal spread has narrowed due to a pick up in transactions. On
average, the bid/ask spread for retail property is 60 to 70 basis points,
implying a pricing gap of 5 to 10 percent.
Capitalization Rate Bid/Ask Characteristics (%)
_______________________________________________
Type Bid Ask Bid/Ask Spread Deal
Regional Mall 8.1 7.3 .8 7.5
Power Center 9.3 8.7 .6 8.8
Other 9.7 9.1 .6 9.3
_______________________________________________________
Prospects for regional malls and smaller retail investments are tempered by
the choppy environment featuring increased store competition and continued
shakeout. Population increases are expected to be concentrated in lower
income households, not the middle to upper income groups. Through the
balance of the 1990s, retail sales are expected to outpace inflation on an
annual basis of only 2 percent. Thus, with a maturing retail market, store
growth and mall investment gains will come at the expense of competition.
Emerging Trends sees a 15 to 20 percent reduction in the number of malls
nationwide before the end of the decade. The report goes on to cite that
after having been written off, department stores are emerging from the
shake-out period as powerful as ever. Many of the nations largest chains are
reporting impressive profit levels, part of which has come about from their
ability to halt the double digit sales growth of the national discount
chains. Mall department stores are aggressively reacting to power and outlet
centers to protect their market share. Department stores are frequently
meeting discounters on price.
Despite the competitive turmoil, Emerging Trends, interviewees remain
moderately positive about retail investments.
The RUSSELL-NCREIF Property Index represents data collected from the Voting
Members of the National Council of Real Estate Investment Fiduciaries. As
shown in the following table, data through the third quarter of 1994 shows
that the retail index posted a positive 1.67 percent increase in total
return. This performance exceeded the general index total return of 1.49
percent. Despite the decline in the aggregate or general market index
returns, retail has shown an improvement in total return of 54 basis points,
a moderate-to-low improvement in income returns of 7 basis points and an
appreciation gain of 48 basis points. Retail properties ranked third out of
the five property types in the index, up from fifth place in the previous
quarter.
TABLE showing Retail Property Returns,
Russell - NCREIF Index, Third Quarter 1994 (%)
Source: Real Estate Performance Report (3rd Quarter 1994)
National Council of Real Estate Investment Fiduciaries
and Frank Russell Company
It is noted that the positive total return has been partially affected by
the capital return component which continues to be negative for the last five
years. Finally, it is important to point out that retail has outperformed
the overall index over the past fifteen years as well as every other property
type surveyed. Compared to the CPI, it has performed particularly well.
Evidence has shown that mall property sales which include anchor stores
have lowered the square foot unit prices for some comparables, and have
affected investor perceptions. In our discussions with major shopping center
owners and investors, we learned that capitalization rates and underwriting
criteria have become more sensitive to the contemporary issues affecting
department store anchors. Traditionally, department stores have been an
integral component of a successful shopping center and, therefore, of similar
investment quality if they were performing satisfactorily.
During the 1980's a number of acquisitions, hostile take-overs and
restructurings occurred in the department store industry which changed the
playing field forever. Weighted down by intolerable debt, combined with a
slumping economy and a shift in shopping patterns, the end of the decade was
marked by a number of bankruptcy filings unsurpassed in the industry's
history. Evidence of further weakening continued into 1991- 1992 with
filings by such major firms as Carter Hawley Hale, P.A. Bergner & Company,
and Macy's. In early 1994, Woodward & Lothrop announced a bankruptcy
involving two department store divisions that dominate the Philadelphia and
Washington D.C. markets. More recently, however, department stores have been
reporting a return to profitability resulting from increased operating
economies and higher sales volumes. Sears, once marked by many for
extinction, has more recently won the praise of analysts. However, their
cost cutting was deep and painful as it involved the closure to nearly 100
stores. Federated Department Stores has also been acclaimed as a text book
example on how to successfully emerge from bankruptcy. They have recently
merged with Macy's to form one of the nation's largest department store
companies with sales in excess of $13.0 billion dollars.
With all this in mind, investors are looking more closely at the strength of
the anchors when evaluating an acquisition. Most of our survey respondents
were of the opinion that they were indifferent to acquiring a center that
included the anchors versus stores that were independently owned if they were
good performers. However, where an acquisition includes anchor stores, the
resulting cash flow is typically segregated with the income attributed to
anchors (base plus percentage rent) analyzed at a higher cap rate then that
produced by the mall shops.
Property Sales
The 46 sales (1991-94) presented in this analysis show a wide variety of
prices on a per unit basis, ranging from $95 per square foot up to $556 per
square foot of total GLA purchased. Alternatively, the overall
capitalization rates that can be extracted from each transaction range from
5.60 percent to 10.29 percent. One obvious explanation for the wide unit
variation is the inclusion or exclusion of anchor store square footage which
has the tendency to distort unit prices for some comparables. Other sales
include only mall shop area where small space tenants have higher rents and
higher retail sales per square foot. A shopping center sale without anchors,
therefore, gains all the benefits of anchor/small space synergy without the
purchase of the anchor square footage. This drives up unit prices to over
$250 per square foot, with most sales over $300 per square foot of salable
area.
Data through 1994 shows 7 confirmed transactions with an average unit rate
of $182 per square foot. We do recognize that the survey is skewed by the
size of the sample and the quality of the product which transferred, which is
viewed, on average, as being inferior to many of the properties which sold
during 1991-1993. As of this writing, we have been unable to confirm several
other transactions which we feel will serve to change the averages cited
herein.
The fourteen sales included for 1991 show an average price per square foot
sold of $264 and a mean of $282. On the basis of mall shop GLA sold, these
sales present an average price of $358 per square foot and a mean of $357.
Capitalization rates range from 5.60 to 7.82 percent with an overall mean of
6.44 percent. The mean terminal capitalization rate is approximately 100
basis points higher, or 7.33 percent. Yield rates range between 10.75 and
13.00 percent, with a mean of 11.52 percent for those sales reporting IRR
expectancies.
In 1992, the eleven transactions display prices ranging from $136 to $511
per square foot of GLA sold, with a weighted average of $239 and a mean of
$259 per square foot. For mall shop area sold, the 1992 sales suggest a mean
price of $320 per square foot. Capitalization rates range between 6.00 and
7.97 percent with the mean cap rate calculated at 7.31 percent for 1992.
For sales reporting a going-out cap rate, the mean is shown to be 7.75
percent. Yield rates again range from 10.75 to around 12.00 percent with a
mean of 11.56 percent.
For 1993, a total of fourteen transactions have been tracked. These sales
show an overall weighted average sale price of $250 per square foot based
upon total GLA sold and $394 per square foot based solely upon mall GLA sold.
The respective means equate to $265 and $383 per square foot for total GLA
and mall shop GLA sold, respectively. Capitalization rates continued to rise
in 1993, showing a range between 7.00 and 9.00 percent. The overall mean has
been calculated to be 7.65 percent. For sales reporting estimated terminal
cap rates, the mean is equal to 7.78 percent. Yield rates for 1993 sales
range from 10.75 to 12.50 percent with a mean of 11.49 percent for those
sales reporting IRR expectancies. On balance, the year was notable for the
number of dominant Class A malls which transferred. Some of the more
prominent deals include:
Sale 93-1, The Galleria at Ft. Lauderdale, was purchased in December of 1993
by a pension fund advisor for an institutional investor. The property
achieved an OAR of 7.47 percent and is considered to be a strong mall with
good growth potential.
Sale 93-2 involved the Kenwood Towne Centre, Cincinnati's high end fashion
mall anchored by Lazarus, McAlpin's and Parisian. Sales were forecasted in
excess of $400 per square foot in 1994.
Sale 93-4 was a year end deal in which Homart sold their 50 percent interest
in the Arden Fair Mall in Sacramento, California. This is considered to be
one of Homart's best malls, having recently undergone a major renovation and
expansion. Arden Fair is Sacramento's dominant mall, achieving a 7.00
percent cap at sale.
Sale 93-5 involved the Fiesta Mall, a dominant mall in the Phoenix area.
The mall was acquired by L&B Group for an undisclosed investment fund. The
high unit price per square foot and low capitalization rate are indicative of
the Fiesta Mall's strong market appeal.
Sale 93-6 is the Coronado Center, the dominant super-regional mall in
Albuquerque, New Mexico. The property reported average mall shop sales of
$250 per square foot at sale and achieved a reported OAR of 7.30 percent.
Sale 93-7 was the purchase of the remaining interest (29.5 percent) in a
strong super-regional mall in suburban Portland, Oregon. A pension fund
purchased this interest at a reported cap rate of 7.75 percent, reflective of
the minority position of the buyer.
Sale 93-8 The Garden State Plaza sold in July 1993 at an implied OAR of 7.40
percent. This is one of the truly dominant regional malls in the country
which sold to a Dutch pension fund. The implied 100 percent purchase price
was nearly twice the size of the next largest deal.
Sale 93-10 is the Carolina Place in Charlotte, North Carolina which sold in
June 1993 at an overall rate of 7.11 percent. This is a high profile
property which sold to a New York State pension fund after 15 months of
negotiations.
Sale 93-12 was sold by DeBartolo to the same Dutch pension fund purchasing
the Garden State Plaza. The Florida Mall sold in March of 1993 at a cap rate
of 7.48 percent. With mall shop sales of $447 per square foot, this was one
of DeBartolo's best producing malls.
During 1994 many of the closed transactions have involved second and third
tier malls with investment characteristics substantially below the subject
property. Probably the most significant sale involved the Riverchase
Galleria, a 1.2 million square foot center in Hoover, Alabama. LaSalle
Partners purchased the mall of behalf of the Pennsylvania Public School
Employment Retirement System for $175.0 million. The reported cap rate was
approximately 7.4 percent. Another significant deal involved Strafford
Square, a six anchor mall in the Chicago area which sold for a 7.5 percent
cap rate.
While these unit prices implicitly contain both the physical and economic
factors af- fecting the real estate, the statistics do not explicitly convey
many of the details surround- ing a specific property. Thus, this single
index to the valuation of the subject property has limited direct
application. For those centers selling just mall shop GLA, prices range from
approximately $203 to $556 per square foot of salable area. In 1991, the
mean for these transactions was $337 per square foot. In 1992, the mean for
the three sales was $381 per square foot. In 1993, the sale of the mall shop
space only shows a mean of $351 per square foot. In 1994, the mean fell to
$189 per square foot. The following table depicts this data.
CHART A showing Regional Mall Sales,
Involving Mall Shop Space Only, 1991-94
Alternately, where anchor store GLA has been included in the sale, the unit
rate is shown to range widely from $108 to $385 per square foot of salable
area, indicating a mean of $227 per square foot in 1991, $213 per square foot
in 1992, $221 per square foot in 1993, and $181 per square foot in 1994. The
chart following depicts this data.
CHART B showing Regional Mall Sales,
Involving Mall Shops and Anchor GLA
Analysis of Sales
We have presented a summary of recent transactions (1991-1994) involving
regional and super-regional-sized retail shopping malls from which price
trends may be identified for the extraction of value parameters. These
transactions have been segregated by year of acquisition so as to lend
additional perspective on our analysis. Comparability in both physical and
economic characteristics are the most important criteria for analyzing sales
in relation to the subject property. However, it is also extremely important
to recognize the fact that regional shopping malls are distinct entities by
virtue of age and design, visibility and accessibility, the market
segmentation created by anchor stores and tenant mix, the size and purchasing
power of the particular trade area, and competency of management. Thus, the
"Sales Comparison Approach", when applied to a property such as the subject
can, at best, only outline the parameters in which the typical investor
operates. The majority of 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. It is noted that, when viewed in terms of unit sales
productivity (sales per square foot of mall shop GLA), the subject would rank
near the mid point of the range exhibited which implicitly lends insight into
this analysis.
Because the subject is theoretically selling both mall shop GLA and owned
department stores, we will look at the recent sales involving both types in
Chart B more closely. As a basis for comparison, the subject has a calendar
year 1995 NOI of $17.20 per square foot, based upon 382,081 square feet of
owned GLA. The derivation of the subject's projected first year (CY 1995)
net operating income is presented in the "Income Approach" section of this
report. With NOI of $17.20 per square foot, the subject falls at the top of
the range exhibited by the comparable sales. These sales display an NOI
range of $14.25 to $17.13 per square foot over the past three years. The
mean NOI for the specific trans- actions in 1991 was $14.25 per square foot.
In 1992 we track the mean to be $16.01 per square foot. The 1993
transactions show a mean net income of $17.13 per square foot and in 1994 it
was $14.85 per square foot of total GLA sold.
Since the income that an asset will produce has direct bearing on the price
that a purchaser is willing to pay, it is obvious that a unit price which
falls above the range indicated by the comparables would be applicable to
the subject. As articulated, the mean sale price for these comparable sales
ranges between $181 and $227 per square foot of GLA sold. The subject's
anticipated net income can be initially compared to the composite mean of the
annual transactions in order to place the subject in a frame of reference.
This is shown on the following chart.
Sales Year Mean NOI (A) Subject Forecast (B) Subject Ratio
___________________________________________________________________
1991 $14.25 $17.20 121%
1992 $16.01 $17.20 107%
1993 $17.13 $17.20 100%
1994 $14.85 $17.20 116%
_______________________________________________________________
With first year stabilized NOI forecasted at approximately 100 to 121
percent of the mean of these sales in each year, the unit price for the
subject property would be expected to fall within a relative range.
Net Income Multiplier Method
Many of the comparables were bought on expected income, not gross leasable
area, making unit prices a somewhat subjective reflection of investment
behavior regarding regional malls. In order to quantify the appropriate
adjustments to the indicated per square foot unit values, we have compared
the subject's first year pro forma net operating income to the pro forma
income of the individual sale properties. In our opinion, a buyer's criteria
for the purchase of a retail property is predicated primarily on the
property's income characteristics. Thus, we have identified a relationship
between the net operating income and the sales price of the property.
Typically, a higher net operating income per square foot corresponds to a
higher sales price per square foot. Therefore, this adjustment in-
corporates factors such as location, tenant mix, rent levels, operating
characteristics, and building quality.
Provided below, we have extracted the net income multiplier from each of the
improved sales. The equation for the net income multiplier (NIM), which is
the inverse of the equation for the capitalization rate (OAR), is
calculated as follows:
NIM = Sales Price
____________________
Net Operating Income
We have included only the more recent sales data (1993/1994).
TABLE showing NOI AS A FUNCTION OF $/SF
TABLE showing a summary range of net income multipliers
and going-in capitalization rates exhibited by the
various regional mall sales
Valuation of the subject property utilizing the net income multipliers (NIM)
from the comparable properties accounts for the disparity of the net
operating incomes ($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.
TABLE showing Adjusted Unit Rate Summary
From the process above, we see that the indicated net income multipliers
range from 11.1 to 14.1 with a mean of 12.5. The adjusted unit rates range
from $191 to $243 per square foot of owned GLA.
We recognize that the sale price per square foot of gross leasable area,
including land, implicitly contains both the physical and economic factors of
the value of a shopping center. Such statistics by themselves, however, do
not explicitly convey many of the details surrounding a specific income
producing property like the subject. Nonetheless, the process we have
undertaken here is an attempt to quantify the unit price based upon the
subject's income producing potential.
Considering the characteristics of the subject relative to the above, we
believe that a unit rate range of $210 to $220 per square foot is
appropriate. Applying this unit rate range to the 382,081 square feet of
owned GLA results in a value of approximately $80,250,000 to $84,050,000 for
the subject as shown below.
382,081 SF 382,081 SF
x $210 x $220
$80,237,000 $84,058,000
___________ ___________
Estimated Value - Market Sales Unit Rate Comparison
$80,250,000 to $84,050,000
Sales Multiple Method
Arguably, it is the mall shop GLA sold and its intrinsic economic profile
that is of principal concern in the investment decision process. On the
basis of mall shop GLA sold, the transactions for this category show unit
rates ranging from $136 to nearly $556 per square foot. A myriad of factors
influence this rate, perhaps none of which is more important than the sales
performance of the mall shop tenants. Accordingly, the abstraction of a
sales multiple from each transaction lends additional perspective to this
analysis.
The sales multiple measure is often used as a relative indicator of the
reasonableness of the acquisition price. As a rule of thumb, investors will
look at a sales multiple of 1.0 as a benchmark, and will look to keep it
within a range of .75 to 1.25 times mall shop sales performance unless there
are compelling reasons why a particular property should deviate.
The sales multiple is defined as the sales price per square foot of mall GLA
divided by average mall shop sales per square foot. As this reasonableness
test is predicated upon the economics of the mall shops, technically, any
income (and hence value) attributed to anchors that are acquired with the
mall as tenants should be segregated from the transaction. As an income (or
sales) multiple has an inverse relationship with a capitalization rate, it is
consistent that, if a relatively low capitalization rate is selected for a
property, it follows that a correspondingly above-average sales (or income)
multiple be applied. In most instances we are not privy to the anchor's
contributions to net income. As such, the sales multiples reported may be
slightly distorted to the extent that the imputed value of the anchor's
contribution to the purchase price has not been segregated.
TABLE showing Sales Multiple Summary
The fourteen sales that are being compared to the subject show sales
multiples that range from 0.88 to 1.82 with a mean of about 1.22. As is
evidenced, the more productive malls with higher sales volumes on a per
square foot basis tend to have higher sales multiples. Furthermore, the
higher multiples tend to be in evidence where an anchor(s) is included in the
sale.
Based upon forecasted 1994 performance, together with our first year implied
growth rate of 2 percent, the subject is projected to produce comparable
sales equal to approximately $285 per square foot in 1995 for all tenants
including food court.
In the case of the subject, the overall capitalization rate being utilized
for this analysis is considered to be slightly above the mean exhibited by
the comparable sales. As such, we would be inclined to utilize a multiple
below the mean indicated by the sales. As such, we will utilize a lower
sales multiple to apply to just the mall shop space. Applying a ratio of,
say, 1.05 to 1.10 to the forecasted sales of $285 per square foot, the
following range in value would be indicated.
TABLE showing range in value
The analysis shows an adjusted value range of approximately $73.3 to $76.9
million. Inherent in this exercise are mall shop sales which are projections
based on our investigation into the market which might not fully measure
investor's expectations. It is clearly difficult to project with any
certainty what the mall shops might achieve in the future. While we may
minimize the weight we place on this analysis, it does, nonetheless, offer a
reasonableness check against the other methodologies. We have also
considered in this analysis the fact that anchor tenants (JC Penney)
contributes approximately $495,500 in revenues in 1995. These revenues
include building rent obligations. If we were to capitalize this revenue
separately at a 10 percent rate, the resultant effect on value is approxi-
mately $5.0 million.
Arguably, department stores have qualities that add certain increments of
risk over and above regional malls, wherein risk is mitigated by the
diversity of the store types. A recent Cushman & Wakefield survey of
free-standing retail building sales consisting of net leased discount
department stores, membership warehouse clubs, and home improvement centers,
displayed a range in overall capitalization rates between 8.9 and 10.9
percent with a mean of approximately 9.6 percent. All of the sales occurred
with credit worthy national tenants in place. The buildings ranged from
86,479 to 170,000 square feet and were located in high volume destination
retail areas.
Trends indicate that investors have shown a shift in preference to initial
return and, as will be discussed in a subsequent section, overall
capitalization rates have been showing increases over the past several years.
Moreover, when the acquisition of a shopping mall includes anchor department
stores, investors will typically segregate income attributable to the anchors
and analyze these revenues with higher capitalization rates than those
revenues produced by the mall shops. Therefore, based upon the preceding
discussion, it is our opinion that overall capitalization rates for
department stores are reasonably reflected by a range of 9.5 to 10.5 percent.
Therefore, adding the anchor income's implied contribution to value of $5.0
million, the resultant range is shown to be approximately $78.3 to $81.9
million.
Giving consideration to all of the above, the following value range is
warranted for the subject property based upon the sales multiple analysis.
Estimated Value - Sales Multiple Method
Rounded to $78,300,000 to $81,900,000
Conclusion
We have considered all of the above relative to the physical and economic
characteris- tics 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 a dominant
mall that is merchandised well to meet the needs of its trade area. Ownership
has been successful in bringing in more upscale stores to meet the changing
needs of its patrons. We do note that the subject's upside potential appears
excellent as the lease-up of the vacant space and the repositioning of
tenants continues. As will be seen in the Income Approach, NOI in the first
full year of investment, 1995 is almost 8.0 percent below 1996 levels.
Furthermore, NOI is projected to increase by an additional 5.8 percent in
1996. As such, we see good near term upside potential in the mall.
We recognize that an investor would view the subject's position as creating
a formidable barrier to entry for another mall operator. The property is
enhanced by its location in a relatively affluent market with a growing trade
area. Its anchor alignment is a proven combination throughout the area and
its leasing profile indicates good market acceptance at reasonably high
market rents.
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: 382,081
Price Per SF of Salable Area: $210 to $220
Indicated Value Range: $80,250,000 to $84,050,000
Sales Multiple Analysis
Indicated Value Range $78,300,000 to $81,900,000
The parameters above show a range of approximately $78.3 to $84.0 million
for the subject.
Based on our total analysis relative to the strengths and weaknesses of each
methodology, it would appear that the Sales Comparison Approach indicates a
market value within the more defined range of $81.0 to $83,0 for Laurel
Centre as of January 1, 1995.
However, as is discussed in further detail in the Income Approach, a
significant amount of capital expenditures are scheduled to be spent in 1995.
Furthermore, as the lease-up is forecasted to continue over the next two
years, a prospective buyer would incur tenant improvement allowances and
leasing commissions. It is our opinion that a prudent buyer would take these
expenses into consideration when viewing the property in its full context.
These costs are expected to total approximately $1,430,000 over the next two
years. By deducting this expenses from the estimates above, a range in value
between $79,600,000 and $81,600,000 is indicated for the subject property as
of January 1, 1995.
INCOME APPROACH
Introduction
The Income Approach is based upon the economic principle that the value
of a property capable of producing income is the present worth of anticipated
future net benefits. The net income projected is translated into a present
value indication using the capitalization process. There are various methods
of capitalization that are based on inherent assumptions concerning the
quality, durability and pattern of the income projection.
Where the pattern of income is irregular due to existing leases that will
terminate at staggered, future dates, or to an absorption or stabilization
requirement on a newer development, the discounted cash flow analysis is the
most accurate.
Discounted Cash Flow Analysis (DCF) is a method of estimating the present
worth of future cash flow expectancies by individually discounting each
anticipated collection at an appropriate discount rate. The indicated market
value by this approach is the accumulation of the present worth of future
projected years' net income (before income taxes and depreciation) and the
present worth of the reversion of the estimated property value at the end of
the projection period. The estimated value of the reversion at the end of
the projection period is based on the capitalization of the next year's
projected net income.
A second method of valuation, using the Income Approach, is to directly
capitalize a stabilized net income based on rates extracted from the market
or built up through mortgage equity analysis. This is a valid method of
estimating the market value of the property as of the achievement of
stabilized operations. In the case of the subject, operations are
considered to be at or near stabilization as of this writing. Thus, the
direct capitalization method will provide additional support in the valuation
process.
Discounted Cash Flow
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 the Laurel Centre, we have
utilized a 10 year holding period for the investment with the cash flow
analysis commencing on January 1, 1995. Although an asset such as the
subject has a much longer useful life, an investment analysis becomes more
meaningful if limited to a time period considerably less than the real
estate's economic life, but of sufficient length for an investor. A 10-year
holding period for this investment is long enough to model the asset's
performance and benefit from its continued lease-up and remerchandising, but
short enough to reasonably estimate the expected income and expenses of the
real estate.
The revenues and expenses which an informed investor may expect to incur
from the subject property will vary, without a doubt, over the holding
period. Major investors active in the market for this type of real estate
establish certain parameters in the computation of these cash flows and
criteria for decision making which this valuation analysis must in- clude if
it is to be truly market-oriented. These current computational parameters
are dependent upon market conditions in the area of the subject property as
well as the market parameters for this type of real estate which we view as
being national in scale.
By forecasting the anticipated income stream and discounting future value at
reversion to current value, the capitalization process may be applied to
derive a value that an investor would pay to receive that particular income
stream. Typical investors price real estate on their expectations of the
magnitude of these benefits and their judgement of the risks involved. Our
valuation endeavors to reflect the most likely actions of typical buyers and
sellers of property interest similar to the subject. In this regard we see
Laurel Centre as an important 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 a reasonable period of time to achieve stabilized occu-
pancy of the existing property and make all necessary improvements for
marketability;
3) Analysis of projected escalation recovery income based upon an analy-
sis 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,
leasing commissions and any extraordinary expenses 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 income adds an additional important source of revenue
in the complete operation of the subject property. In the initial year of
the investment, 1995, it is projected that the subject property will generate
approximately $11,256,844 in potential gross revenues (net of free rent),
equivalent to $29.46 per square foot of total appraised (owned) gross
leasable area of 382,081 square feet. Alternately, this amount is equal to
$45.91 per square foot of mall store gross leasable area based on 245,217
square feet. These forecasted revenues may be allocated to the following
components:
TABLE showing Laurel Centre Revenue Summary During
Initial Year of Investment by Revenue Component,
Amount, Unit, Rate, and Income Ratio
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 Shopco
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. It is our belief
that 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 ac-
curacy. 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; anchor tenant revenue consisting of base rent
obligations of the department store, and mall tenant revenues consisting of
all in-line mall shops. As a sub-category of in-line shop rents, we have
segregated kiosk rents and food court 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 analysis of recently
negotiated leases for new and relocation tenants at the subject provides
important insight into perceived market rent levels at Laurel Centre. In so
much as a tenant's ability to pay rent is based upon expected sales
performance, 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 comprises the majority of minimum rent.
Aggregate rent in the initial year of the holding period is shown to be
$4,965,203 or $20.25 per square foot based upon a total enclosed mall gross
leasable area of 245,217 square feet. Minimum rent may be allocated to the
following components:
Laurel Centre
Minimum Rent Allocation
Interior Mall Shops - 1995
__________________________
Revenue Applicable GLA (SF)* Unit Rate (SF)
__________________________________________________
Mall Shops $4,389,399 235,338 $18.65
Kiosks $ 185,001 2,496 $74.12
Food Court $ 390,803 7,383 $52.93
Total $4,965,203 245,217 $20.25
__________________________________________________
* Represents total leasable area as opposed to actual leased or
occupied area.
Our analysis of market rent levels has resolved itself to a variety of
influencing factors. Although it is typical that larger suites are leased
at lower per square foot rates and lower percentages, the type of tenant as
well as the variable of location within the mall can often distort this
size/rate relationship.
The following table presents an analysis of minimum rent levels achieved
within the subject property for in-line shop space. These revenues reflect
in-line mall shop spaces only and exclude food court tenants, kiosks, and
major department store tenants (these tenant types are treated separately in
a subsequent section of this report).
TABLE showing Mall Shop Minimum Rent Attainment
Leases In-Place, by Suite Size, Annualized Rent,
Applicable GLA, and Average Unit Rate/SF
It is noted that these rents reflect actual contract rents in place as of
this analysis.
From the previous chart, we would expect to see a general pattern of an
inverse relationship between suite size and rent. That is, as the suite size
increases, the average unit base rent achieved declines. Overall, for the
220,867 square feet of in-line shop tenants surveyed, the average attained
base rent for the mall is shown to be $20.36 per square foot in calendar year
1995. The objective here is to demonstrate a reasonably quantifiable pattern
between suite size and rent. As such, a declining rent trend relative to
suite size is generally in evidence. Category No. 1 (less than 750 square
feet) shows an average of $49.55 per square foot, while the last category
(5,001-15,000 square feet) shows an average of $9.91 per square foot.
Recent Leasing Activity
There have been some significant changes in regard to the tenant register
over the past year. These changes include new tenants to the mall, existing
tenant renewals, relocations, and expansions, and new vacancies. The chart
on the facing page presents a summary of 1994's leasing activity as well as
pending/signed 1995 transactions.
As can be seen, 27 transactions have been included, totalling 57,061 square
feet of space. These deals represent both new tenants and renewal tenants to
the mall. The average rent achieved is equal to $27.90 per square foot.
However, these are mostly smaller tenants which typically pay a higher rent
per square foot than larger suites. Also, a number of jewelry tenants have
been included; these tenants also pay higher rents because of their
substantially higher sales volume. To better understand leasing activity at
the subject, this type of analysis becomes more meaningful when broken down
by size category.
Recent Leasing By Size
To further develop our market rent assumptions in the mall, we have arrayed
the subject's most recent leases by size on the facing page chart. These
leases include new deals and tenant renewals within the mall. Since the bulk
of recent leasing has been by smaller tenants, we have broadened the scope to
include several larger lease transactions which are now one to two years old.
On balance, we have summarized a total of 37 leases involving in-line mall
shop space over the past two years. As can be seen, the overall weighted
average lease rate is $22.43 per square foot.
Laurel Centre
Recent Leasing Activity
In-Line Shops Only
________________________
Category No. of Leases Initial Base Rent (SF)
____________________________________________________________
1: Less Than 750 SF 3 $49.87 Avg.
2: 751 - 1,200 SF 5 $44.95 Avg.
3: 1,201 - 2,000 SF 10 $34.90 Avg.
4: 2,001 - 3,500 SF 8 $22.56 Avg.
5: 3,501 - 5,000 SF 8 $20.81 Avg.
6: 5,001 - 15,000 SF 3 $11.47 Avg.
Total Average 37 $22.43
Average First Year Rent
_________________________________________________________________
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. Category No. 1 (less
than 750 SF) shows an average of $49.87 per square foot. The average then
declines to $11.47 for category No. 6 (5,001-15,000 square feet).
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 $300 per square foot,
15 percent would be a reasonable cost of occupancy. Experience and research
show that most tenants will resist total occupancy costs that exceed 16 to 18
percent of sales. However, ratios of upwards to 20 percent are not uncommon.
Obviously, this comparison will vary from tenant to tenant and property to
property.
In higher end markets where tenants are able to generate sales above industry
averages, tenants can generally pay rents which fall toward the upper end of
the ratio range. Moreover, if tenants perceive that their sales will be
increasing at real rates that are in excess of inflation, they will typically
be more inclined to pay higher initial base rents.
In this context, we have provided an occupancy cost analysis for several
regional malls with which we have had direct insight over the past year. This
information is provided on the following pages. On average, these ratio
comparisons provide a realistic check against projected market rental rate
assumptions.
TABLE: Occupancy Cost Analysis Chart
From this analysis we see that the ratio of base rent to sales ranges from
6.9 to 10.3 percent, while the total occupancy cost ratios vary from 9.5 to
20.5 percent when all recoverable expenses are included. The surveyed mean
for the eighteen malls analyzed is 8.7 percent and 14.2 percent,
respectively. Some of the higher ratios are found in older malls situated in
urban areas that have higher operating structures due to less efficient
layout and designs, older physical plants, and higher security costs, which
in some malls can add upwards of $2.00 per square foot to common area
maintenance.
These relative measures can be compared with two well known publications, The
Score by the International Council of Shopping Centers and Dollars & Cents of
Shopping Centers (1993) by the Urban Land Institute. The most recent
publications indicate base rent to sales ratios of approximately 8 percent
and total occupancy cost ratios of 11.5 and 12.1 percent, respectively.
In general, while the rental ranges and ratio of base rent to sales vary
substantially from mall to mall and tenant to tenant, they do provide general
support for the rental ranges and ratio which is projected for the subject
property.
Conclusion - Market Rent Estimate for In-Line Shops
Previously, in the "Retail Market Analysis" section of the appraisal, we
discussed the subjects' sales potential. Comparable mall sales in calendar
year 1994 are projected to be $280 per square foot, based on comparable-store
sales. As will be discussed, we are projecting this figure to increase by
2.0 percent in 1995 to $285.60.
In the previous discussions, the overall attained rent for the project was
calculated to be $20.36 per square foot based upon annualized leases in-place
for calendar year 1995. Based upon recent leasing activity only, this
average was shown to be $22.43 per square foot. A comparison of leasing
activity is shown on the following chart.
TABLE showing In-Line Mall Shop Rent Comparison
by Size Category, Attained Rents, CY 1995,
Recent Leasing, Activity, Projected Market Rents
After considering all of the above, we have developed a weighted average
rental rate of approximately $22.10 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. Further-
more, this average of approximately $22.10 per square foot is believed to be
reasonable in light of the average rent attained by the recent leasing
activity.
The average rent is a weighted average rent for all in-line mall tenants
only. This average market rent has been allocated to space as shown on the
following chart.
TABLE showing Laurel Centre
In-Line Market Rent Assumption - 1995
Occupancy Cost - Test of Reasonableness
Our weighted average rent of $22.10 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.
TABLE showing Laurel Centre Total
Occupancy Cost Analysis - 1995
(A) Costs that are occupancy sensitive will decrease for new tenants on a
unit rate basis as lease-up occurs and the property stabilizes.
Average occupied area for mall tenant reimbursement varies relative
to each major recovery type.
(1) CAM expense is based on average occupied area (GLOA) of 225,685
square feet. Generally, the standard lease clause provides for a 15
percent administrative factor less certain exclusions. The
standard denominator is based on occupied (leased) versus leasable
area. A complete discussion of the standard recovery formula is
presented later in this report.
(2) Tax estimate is based upon an average occupied area (GLOA) which is
the recovery basis for taxes. It is exclusive of majors
contributions (tenants over 10,000 SF).
(3) Other expenses include tenant contributions for premises and mall
HVAC, merchant's association, marketing and other miscellaneous
items.
Total costs, on average, are shown to be 14.72 percent of projected average
1995 retail sales which we feel is high. This is due primarily to the fact
that common area maintenance costs at Laurel Centre include the pass
through of certain mall renovation costs. Additionally, it is also inclusive
of energy usage which is an expense that many exclude from an occupancy cost
ratio calculation since the tenant has substantial control as to its cost. We
are not troubled, however, by the high average since we feel that, as the
remerchandising continues, we would expect that sales have a good chance to
increase to levels in excess of our growth rate assumption. Finally, we
should not lose site of the fact that recent leasing levels in the mall
attest to its appeal. 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. Therefore, in many cases our assumed market rent would
deviate from the range indicated above in many instances.
Food Court
We have also elected to ascribe an individual unit market rate to the food
court tenants. The leasing plan provides for a 7,383 square foot food court
with 14 units (including three food court kiosks), indicating an average size
of 527 square feet per unit.
There is currently two vacancies in the food court, space A-10 totalling 427
square feet, and spaces A-17/18 totalling 200 square feet (kiosk).
Several recent leases in the food court have included Brass Hen, Boardwalk
Fries, and Master Wok. These leases/renewals have been arrayed on the facing
page table. As can be seen, of the eleven leases, the average lease rate
equals $55.27 per square foot with current sales averaging around $625.97 per
square foot (8.8 percent ratio). Some of the most recent leases have been at
rates in excess of $70 per foot, with Roy Rogers renewing at $30 per square
foot.
We have compared the food court leases at Laurel with other recent
comparables. The table following illustrates the average rate attainment
levels for food courts in various malls for which we have documented
information.
TABLE showing Food Court Rental Rate Comparisons
Food court tenants will typically pay a higher cost of occupancy than other
tenants at Laurel Centre. The budgeted charge for the food court common
areas (common seating) is $28.94 per square foot (for tenants with a 15
percent surcharge) and $31.87 per square foot (for tenants with a 25 percent
surcharge) for 1995 which is in addition to the standard CAM contribution.
Thus, the additional costs to a food court tenant in 1995 are nearly $51.73
per square foot for all pass-through charges.
Based upon our total analysis, we have ascribed an average market rent of
$55.00 per square foot for a food court tenant. Considering that food court
tenants are forecasted to have sales of approximately $625 per square foot in
1995, the implied occupancy cost would be 17.07 percent which is readily
achievable.
Kiosks
We have also segregated permanent kiosks within our analysis since they
typically pay a higher unit rent as well. As of the date of inspection, six
permanent kiosks were in occupancy, the pertinent terms of which can be
summarized accordingly:
TABLE showing Laurel Centre Kiosk Leases by
Suite, Tenant, Term, Size, Rent
TABLE showing Permanent Kiosks Recent Lease Transactions
by Property/Location,Tenant/Lease Date, Area,
Annual Rent/Term, Unit Rate
Based on the above, we have ascribed an initial market rent of $23,000 per
annum for permanent kiosks of 150 square feet and $28,000 per year for kiosks
over 300 square feet.
Concessions
Free rent is an inducement offered by developers to entice a tenant to
locate in their project over a competitor's. This marketing tool has become
popular in the leasing of office space, particularly in view of the
over-building which has occurred in many markets. As a rule, most major
retail developers have been successful in negotiating leases without
including free rent. Our experience with regional malls shows that free rent
is generally limited to new projects in marginal locations without strong
anchor tenants that are having trouble leasing as well as older centers that
are losing tenants to new malls in their trade area. Management reports that
free rent has been a relative non-issue with new retail tenants. A review of
the most recent leasing confirms this observation. It has generally been
limited to one or two months to prepare a suite for occupancy when it has
been given. The only reported free rent given at Laurel Centre over the past
two years was the J. Riggins deal where the tenant renewed for 10 years prior
to their lease expiration. The 31 months of abated rent was primarily based
upon their older base rent of $9.50 per square foot. At the end of the
abatement, the rent increased to a more market oriented $25 per square foot.
Furthermore, the tenant completely remodelled at their own cost.
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 allow- ances 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 $8.00 per square foot
to new (currently vacant) and future turnover space. We have also ascribed a
rate of $1.50 per square foot to rollover space. This assumption offers
further support for the attainment of the rent levels previously cited.
Absorption
Finally, our analysis concludes that the vacant interior mall space will be
absorbed over an approximate 24 month period through March 1997. We have
identified 15,644 square feet (net of newly executed leases and pending deals
which have a good likelihood of coming to fruition) as being available for
lease at present. This figure does not include the Dominion Bank space
(2,052 square feet) or Standard Federal space (1,271 square feet) which will
reportedly be vacated at the end of the year.
A scheduled lease-up of vacant space is provided on the facing page. The
allocation of the currently vacant interior mall space may be summarized as
follows:
_____________________________
In-Line Space 14,471 SF
Permanent Kiosks 546 SF
Food Court 627 SF
_____________________________
Total 15,644 SF
_____________________________
Our forecasted lease-up schedule for the vacant space shows that the
absorption of the in-line space is forecasted to occur through March 1997
which is equal to 1,955 square feet per quarter. We have assumed that space
will lease at 1995 base date market rents estimated for this analysis.
Department Stores
The final category of minimum rent is related to the anchor tenants which
pay rent at the subject property. As discussed, JC Penney is the only anchor
tenant which pays rent at Laurel. Both Hecht's and Montgomery Ward are
separately owned and do not pay ground or building rent. All anchors do
contribute to other recovery items discussed later.
Anchor tenant revenues are forecasted to amount to $495,448 in CY 1995. This
amount is equal to $3.62 per square foot of anchor store GLA and represents
9.1 percent of total minimum rent. The following schedule summarizes anchor
tenant rent obligations.
Laurel Centre
Scheduled Anchor Tenant Revenues
________________________________
Tenant Demised Area Expiration With Options Annual Rent Unit Rate
__________________________________________________________________________
J.C. Penney 136,864 SF 10/2034 $495,448 $3.62
__________________________________________________________________________
While anchor stores contribute a relatively low amount of rent on a unit rate
basis, it is important to recognize that the relative contribution which is
equal to just under 10 percent of minimum base rent is substantial. Rent
Growth Rates Market rent will, over the life of a prescribed holding period,
quite obviously follow an erratic pattern. According to surveys by both
Cushman & Wakefield's Appraisal Division and Peter Korpacz and Associates,
major investors active in the acquisition of regional malls are using growth
rates of 0 percent to 6 percent in their analysis, with 3 percent to 5
percent being most prevalent on a stabilized basis. It is not unusual in the
current environment to see investors structuring no growth or even negative
growth in the short term.
The Baltimore/Washington metropolitan area in general has been negatively
impacted by the recession. Sales at many retail establishments have been
down. The subject, while seeing growth over the past two years was
relatively flat in 1993 for mature, comparable sales and down slightly in
1994. Management has been aggressively leasing space as evidenced by the
number of new deals done. As such, we expect that sales should show an
increase over the ensuing year. 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.
Market Rent Growth Rate Forecast
________________________________
Period Annual Growth Rate *
1995 2.0%
1996 3.0%
1997-2004 4.0%
________________________________
* Effective growth over previous year's rent level.
Releasing Assumption
The typical lease term for new in-line retail leases in centers such as the
subject generally ranges from five to twelve years. Market practice dictates
that it is not uncommon to get rent bumps throughout the lease terms either
in the form of fixed dollar amounts or a percentage increase based upon
changes in some index, usually the Consumer Price Index (CPI). Often the CPI
clause will carry a minimum (4 percent) annual increase and be capped at a
higher maximum (6 to 7 percent) amount.
For new leases in the regional malls, ten year terms are most typical.
Essentially, the developer will deliver a "vanilla" suite with mechanical
services roughed in and minimal interior finish. This allows the retailer
to finish the suite in accordance with their individual specifications.
Because of the up-front costs incurred by the tenants, they require a ten
year lease term to adequately amortize these costs. In certain instances,
the developer will offer some contribution to the cost of finishing out a
space over and above a standard allowance.
Upon lease expiration, it is our best estimate that there is a 75 percent
probability that an existing retail tenant will renew their lease while the
remaining 25 percent will vacate their space at this time. While the 25
percent may be slightly high by some historic measures, we think that it is a
prudent assumption in light of the global issues facing today's retailers.
Furthermore, the on-going targeted remerchandising will result in early
terminations and relocations that will likely result in some expenditures by
ownership. An exception to this assumption exists with respect to existing
tenants who, at the expiration of their lease, have sales that are
substantially below the mall average and have no chance to ever achieve
percentage rent. In these instances, it is our assumption that there is a 100
percent probability that the tenant will vacate the property. This is
consistent with ownership's philosophy of carefully and selectively weeding
out under-performers.
As stated above, it is not uncommon to get increases in base rent over the
life of a lease. The subject's recent leasing activity attests to this
observation. Our global market assumptions for non-anchor tenants may be
summarized as shown on the following page.
Laurel Centre Renewal Assumptions
_________________________________
Tenant Lease Rent Free Tenant
Type Term Steps Rent Alterations
________________________________________________________________________
In-Line Mall Shops 10 yrs. under 750 SF
10%
in yrs
4 & 8 No Yes
751 - 1,200 SF
10% in yrs 4 & 8
1,201 - 2,000 SF
10% in yrs 4 & 8
2,001 - 3,500 SF
10% in yrs 4 & 8
3,501 - 5,000 SF
10% in yrs 4 & 8
5,001 - 15,000 SF
10% in yrs 4 & 8
___________________________________________________________________________
Food Court 10 yrs. 10% in 4th and 8th No No
lease years
___________________________________________________________________________
Kiosks (Permanent
and Food Court) 5 yrs. 10% increase in
4th year No No
___________________________________________________________________________
The rent step schedule upon lease expiration applies in most instances.
However, there is one exception to this assumption with respect to tenants
who are forecasted to be in a percentage rent situation during the onset
renewal period. This could occur due to the fact that a tenant's sales were
well above its breakpoint at the expiration of the base lease. In these
instances, we have assumed a flat rent during the ensuing ten year period.
This conservative assumption presumes that ownership will not achieve rent
steps from a tenant who is also paying overage rent from day one of the
renewal term. Nonetheless, we do note that ownership has been successful in
some instances in achieving rent steps when a tenant's sales place him in a
percentage rent situation from the onset of a new lease.
Upon lease rollover/turnover, the space is forecasted to be released at the
higher of the last effective rent (defined as minimum rent plus overage rent
if any) and the ascribed market rent as detailed previously increasing by our
market rent growth rate assumption.
Conclusion - Minimum Rent
In the initial full year of the investment (CY 1995), it is projected that
the subject property will produce approximately $5,472,317 in minimum rental
income. This estimate of base rental income is equivalent to $14.32 per
square foot of total owned GLA. Altern- atively, minimum rental income
accounts for 48.6 percent of potential gross revenues. Further analysis shows
that over the holding period (CY 1995-2004), minimum rent ad- vances at an
average compound annual rate of 4.1 percent. This increase is a synthesis of
the mall's lease-up, fixed rental increases, and 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. Most leases have a natural
breakpoint although some do have stipulated breakpoints. The average overage
percentage for small space retail tenants is in a range of 5 to 6 percent
with food court and kiosk tenants generally at 7 to 10 percent. Anchor
tenants typically have the lowest percentage clause with ranges of 1.5 to 3
percent which is common.
Traditionally, it takes a number of years for a retail center to mature and
gain acceptance before generating any sizeable percentage income. As a
center matures, the level of overage rents typically becomes a larger
percentage of total revenue. It is a major ingredient protecting the equity
investor against inflation.
In the "Retail Market Analysis" section of this report, we discussed the
historic and forecasted sales levels for the mall tenants.
Because of the dynamics of the economy and marketplace, it is difficult to
predict with accuracy what sales will be on an individual tenant level. As
such, we have employed the following methodology.
For existing tenants who report sales, we have forecasted that sales
will continue at our projected sales growth rate as discussed herein.
For tenants who do not report sales or who do not have percentage
clauses, we have assumed that a non-reporting tenant will always oc-
cupy that particular space.
For new tenants, we have projected sales at the forecasted average for
the center at the start of the lease. In 1995 this would be $285.60
per square foot for in-line tenants and $612.00 per square foot for
food court tenants.
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. 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 year of the investment holding period, overage revenues
are estimated to amount to $233,667 (net of recaptures) equivalent to $0.61
per square foot of owned GLA and 2.1 percent of potential gross revenues.
Sales Growth Rates
In the "Retail Market Analysis" section of this report, we discussed that
retail specialty store sales have shown a mixed performance but that overall,
mature store sales are down slightly from 1993 levels, totalling about $280
per square foot in 1994.
Retail sales in the Washington MSA have been increasing at a compound annual
rate of 5.67 percent per annum since 1985, according to Sales and Marketing
Management. According to both the Cushman & Wakefield and Korpacz surveys,
major investors are looking at a range of growth rates of 0 percent initially
to a high of 6 percent in their computational parameters. Most typically,
growth rates of 4 percent to 5 percent are seen in these surveys.
Nationally, retail sales (excluding automotive sales) have been increasing
at a compound annual rate of 5.73 percent since 1980.
Prince George's County (2.96 percent) has experienced slower growth per
annum than the State of Maryland (4.28 percent) since 1985. Total mall sales
at the subject have increased by 3.78 percent annually since 1986, while
anchor sales have witnessed an overall average increase of 1.88 percent per
annum.
Finally, the chart on the facing page shows the change in median sales for a
variety of tenant types as found in regional malls. The data shows that over
the three year period 1990 to 1993, the change in median sales ranged from a
low of -9.52 percent for Records and Tapes to a high of 57.75 percent for
Womens Specialty Clothing. During this time period, the mean for this
selected tenant category has increased by 16.41 percent per annum from
$174.51 to $275.28 per square foot. Overall, among the 14 tenant cate-
gories most frequently found in regional malls, sales have shown a compound
annual growth rate of 3.87 percent.
After considering all of the above, we have forecasted that sales for
existing tenants will increase by 2 percent in 1995 and 3 percent in 1996.
Subsequently, over the period 1997-2004, we have forecasted a 4 percent
increase per year in sales.
Sales Growth Rate Forecast
__________________________
Period Annual Growth Rate
______________________________________
1995 +2%
1996 +3%
1997-2004 +4%
______________________________________
Overall, we believe this to be a reasonable forecast for new and turnover
tenants upon the expiration of an initial lease. At lease expiration, we
have forecasted a 25 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 mall
average at that time.
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, insurance, common area maintenance (CAM), and for food court tenants,
special common area seating charges. Miscellaneous income is essentially
derived from specialty leasing for temporary tenants, Christmas kiosks and
other charges, including special pass-throughs. We also account for utility
income under miscellaneous revenues. In the first year of the investment, it
is projected that the subject property will generate approximately $3,743,860
in reimbursements for operating expenses and $1,807,000 in other
miscellaneous income, including utility income.
Common Area Maintenance
Common area maintenance and real estate tax recoveries are generally based
upon the tenants pro-rata share of the expense with the former carrying a 15
percent administrative surcharge for the cost of maintaining the program.
However, because of the age of the mall, there are a variety of CAM
contribution methods. For new leases, pro rata share is generally calculated
based upon average leased (occupied) area as opposed to total leasable area.
Both CAM and tax contributions are calculated after deducting major tenant
contributions. As many of the older leases expire, they are rolling over to
ownership's current lease format. The anchor stores pay a nominal CAM amount
by lease agreement.
Department Store Common Area Maintenance Obligations*
____________________________________________________
Store Size Contribution
J.C. Penney 136,864 SF Yrs 1-10 @ $.30/SF
+ $.05/SF every 5
yrs thereafter
Montgomery Ward 161,204 SF Yrs 1-10 @ $.10/SF
+ $.05/SF every 5
yrs thereafter
Hecht's 118,354 SF Fixed @ $.10/SF
______________________________________________________________________
* Department store CAM contributions in 1995 are estimated at $98,823.
In addition, the standard lease provides for the exclusion of tenants in
excess of 10,000 square feet from the calculation when computing a tenant's
pro-rata share. This has the effect of excluding Hermans, Marianne Plus, and
Limited Express. The category in the cash flow forecast entitled CAM Pool is
essentially comprised of the CAM contribution of the anchor and major (over
10,000 square feet) tenants. Under the standard lease, mall tenants will pay
their pro rata share of the balance of the CAM expense after the CAM Pool
contribution plus an administrative charge of 15 percent.
Provided on the following page is a summary of the standard clause that
exists for a new tenant at the mall.
Common Area Maintenance Recovery Calculation
CAM Expense
Actual hard cost for year exclusive of
interest and depreciation. *
Add
15% Administration fee
Add
Interest and depreciation
Less
Contributions from department stores and
mall tenants over 10,000 square feet.
Equals
Net pro-ratable CAM billable to mall
tenants on the basis of gross leasable
occupied area (GLOA)
* Actual cost includes total of all common area expenses
which is inclusive of some costs associated with the food
court as well as insurance. HVAC costs are excluded.
Real Estate Taxes
Anchor tenants again make contributions to taxes. J.C. Penney pays taxes
based on a formula that calculates increases over the 1982/83 base year.
Other tenants have various contribution methods. In general, the mall
standard will be for the mall tenants to pay their pro rata share based upon
average occupied area after anchor and major tenant contributions are
deducted.
J.C. Penney's tax contribution in 1995 is budgeted at $38,823 (3.529 percent
of tax bill). Hecht's taxes are included within the total tax bill of the
mall. They are billed by management for their estimated share. In 1995, the
budgeted amount is $170,062 (15.460 percent of bill). Ward's is assessed and
taxed separately by the taxing authorities. Finally, since the new mall
standard contribution is based upon an exclusion of tenants in excess of
10,000 square feet, both Hermans ($41,218), Marianne Plus ($43,298), and
Limited Express ($39,233) budgeted contributions are excluded. The bal- ance
of the 1995 budget tax expense or $761,462 is passed through to the mall
tenants.
Other Recoveries
Other recoveries consist of insurance income, common seating charges,
utility charges, temporary leasing, and CPI adjustment. Insurance billings
are essentially regulated to older leases within the mall. The newer lease
structure covers the cost of any of this items within the tenants CAM charge.
CPI adjustment is reflective of some older leases that have provisions for an
annual adjustment to base rent on the change in the CPI.
Common seating charges are assessed to the food court tenants which is a
charge imposed for the operation of the food court area. This charge is in
addition to the regular mall common area maintenance expense.
The final revenue categories consist of utility income, temporary leasing of
in-line space, revenue from temporary kiosks at Christmas time and
miscellaneous income. Utility income consists of HVAC income which is a
charge many tenants pay as a contribution toward the maintenance of the HVAC
plant; electricity income which results in a profit to the mall owner and
water billings which are essentially pass throughs of the actual cost.
The temporary leasing is related to temporary tenants that occupy vacant
in-line space. Shopco has been relatively successful with this procedure at
many of their malls. Other sources of miscellaneous revenues included
temporary seasonal kiosk rentals, forfeited security deposit, phone
revenues and interest income. Our forecast of $207,000 for these additional
revenues is net of a provision for vacancy and credit loss. Overall, it is
our assumption that these other revenues will increase by 3 percent per annum
over the holding period.
Allowance for Vacancy and Credit Loss
Both the investor and the appraiser are 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 ten- ants 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. For the duration of the holding
period, we have reflected a 3.0 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.
In this analysis we have also forecasted that there is a 75 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 food court and 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 3.28
percent of total potential gross revenues in 1999 to a high of 9.97 percent
in 1995 of the holding period in the mall. On average, the total allowance
for vacancy and credit loss over the 10 year projection period is 5.23
percent of these revenues as shown on the following schedule.
Total Rent Loss Forecast *
_________________________
Year Loss Provision
__________________________
1995 9.97%
1996 7.26%
1997 3.91%
1998 4.13%
1999 3.28%
2000 6.08%
2001 3.73%
2002 4.51%
2003 3.97%
2004 5.44%
Mean 5.23%
_____________________
* Includes 3.0 percent provision for unforeseen vacancy and credit loss
as well as provision for weighted average 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 ag- gregate
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 year of the investment, calendar year 1995, effective gross
revenues ("Total Income" line on cash flow) are forecasted to amount to
approximately $11,083,911, equivalent to $29.00 per square foot of owned
gross leasable area.
TABLE showing Laurel Centre
Effective Gross Revenue Summary
Initial Year of Investment - 1995
by Aggregate Sum, Unit Rate and Income Ratio
____________________________________________
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 (including insurance), utilities, and the
common seating charge. The non-reimbursable expenses associated with the
subject property include general and administrative expenses, ownership's
contribution to the merchant's association, management charges and miscel-
laneous expenses. Other expenses include a reserve for the replacement of
short-lived capital components, leasing commissions, alteration costs
associated with bringing the space up to occupancy standards, and a provision
for capital expenditures. Unless otherwise cited, expenses are forecasted
to grow by 4 percent per annum.
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 as well as the owner's
1994-95 forecasts for these expense items. This budget information is
provided in the Addenda. We have compared this information to published data
which are available, as well as comparable expense information. Finally,
this information has been tempered by our experience with other regional
shopping centers.
Reimbursable Operating Expenses
We have analyzed each item of expense individually and attempted to project
what the typical investor in a property like the subject would consider
reasonable, based upon informed opinion, judgement and experience. The
following is a detailed summary and discussion of the reimbursable
operating expenses incurred in the operation of the subject property during
the initial year of the investment holding period. Unless otherwise stated,
expenses are projected to increase by 4 percent per year for the holding
period.
Common Area Maintenance - This expense category includes the annual cost of
miscellaneous building maintenance contracts, recoverable labor and
benefits, security, insurance, landscaping, snow removal, cleaning and
janitorial, exterminating, supplies, trash removal, exterior lighting,
common area energy, gas and fuel, equipment rental, interest and
depreciation, and other miscellaneous charges. In addition, ownership can
generally recoup the cost of certain extraordinary capital items from the
tenants. In malls where the CAM budget is high, discretion must be
exercised in not trying to pass along every charge as the tenants will
resist. In 1993, common area maintenance was reported to be $1,351,949,
down approximately 15 percent from the budgeted CAM. For 1994, CAM was
budgeted at $1,687,675. In 1995, a budgeted CAM expense of $1,877,771 has
been projected in management's budget. We have forecast a common area
maintenance expense of $1,880,000 for 1995. On the basis of mall gross
leasable area, this amount is equal to $7.67 per square foot. As
discussed, the new standard lease agreement allows management to pass
along the CAM expense to tenants on the basis of occupied gross leasable
area. Furthermore, the interest and depreciation expense is a
non-operating item that serves to increase the basis of reimbursement from
the mall tenants. Most tenants are subject to a 15 percent administrative
surcharge although some tenants are assessed a 25 percent surcharge.
Real Estate Taxes - The projected taxes to be incurred in 1995 are equal to
$1,100,000. 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 5 percent per annum over the balance of the investment holding period.
Food Court CAM (Common Seating) - The cost of maintaining the food court
outside of the cost of standard mall common area maintenance is estimated
at $190,000 in the initial year of the holding period. Included here are
such items as payroll for administration, maintenance and security,
supplies and other miscellaneous expenses. On the basis of food court
gross leasable area of 7,383 square feet, this expense is equal to $25.73
per square foot. As articulated, food court tenants are assessed a
separate charge for this expense which typically carries a 15 or 25
percent administrative charge.
Utilities - The cost for such items as HVAC, electrical services and gas and
water to certain areas not covered under common area maintenance is
estimated at $835,000 in 1995. Management purchases electricity at
wholesale rates from the local utility then charges the mall tenants the
prevailing retail rate which results in a profit center. In 1993, the
actual recovery of utilities was $1,473,397. In 1994, utility income was
estimated at $1,500,000, an 80 percent surcharge over the projected
expense. For 1995, a reimbursement of $1,560,000 has been forecast, an
86.8 percent surcharge over the expense.
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.
General and Administrative - Expenses related to the administrative aspects
of the mall include costs particular to the operation of the mall
including office sup- plies and materials, 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. On balance, we have estimated an expense of $75,000
which is consistent with management's budget.
Merchant Association - Merchants Association charges represent the
landlord's contribution to the cost of the association for the property.
In the initial year, the cost is forecasted to amount to $125,000, a
significant increase over previous year's marketing expenses (usually
around $75,000) but more in line with a typical marketing expense rate of
$0.50 per square foot of mall shop area.
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
$50,000.
Management - The annual cost of managing the subject property is projected
to be 4.5 percent of minimum and percentage rent. In the initial year of
our analysis, this amount is shown to be $256,769. Alternatively, this
amount is equivalent to 2.3 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.
Alterations - The principal component of this expense is ownership's
estimated cost to prepare a vacant suite for tenant use. At the
expiration of a lease, we have made a provision for the likely expenditure
of some monies on ownership's part for tenant improvement allowances. In
this regard, we have forecasted a cost of $8 per square foot for turnover
space (initial cost growing at expense growth rate) weighted by our
turnover probability of 25 percent. We have fore- casted a rate of $1.50
per square foot for renewal (rollover) tenants, based on a renewal
probability of 75 percent. It is noted that ownership has been rela-
tively successful in releasing space in its "as is" condition. Evidence
of this is seen in our previously presented summary of recent leasing
activity at the mall. The provision made here for tenant work lends
additional conservatism our analysis. The blended rate based on our 75/25
turnover probability is therefore $3.13 per square foot. These costs are
forecasted to increase at our implied expense growth rate.
Leasing Commissions - Leasing commissions are now charged for the mall
shops at the rate of $2.00 per square foot for new leases and $1.25 per
square foot for renewal leases. Based upon our turnover probability of
75/25 percent, the weighted average rate is approximately $1.44 per square
foot.
Replacement Reserves - It is customary and prudent to set aside an amount
annually for the replacement of short-lived capital items such as the
roof, parking lot and certain mechanical items. The repairs and
maintenance expense category has historically included some capital items
which have been passed through to the tenants. This appears to be a
fairly common practice among most malls. However, we feel that over a
holding period some repairs or replacements will be needed that will not
be passed on to the tenants. Due to the inclusion of many of the capital
items in the maintenance expense category, the reserves for replacement
classification need not be sizeable. This becomes a more focused issue
when the CAM expense starts to get out of reach and tenants begin to
complain. For purposes of this report, we have estimated an expense
between $0.10 and $0.15 per square foot of owned GLA during the first year
($50,000), thereafter increasing by our expense growth rate throughout our
cash flow analysis.
Capital Expenditures - Forecasted capital expenditures have been projected
by management at approximately $1,033,000 for replacement of the HVAC
system. We have reflected this estimate in our calculation.
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 $6,572,142 which is equivalent to 59.3 percent of effective gross income.
Deducting other expenses including capital items results in net cash flow of
$5,298,744, equivalent to 47.8 percent of effective gross income.
Laurel Centre
Operating Summary
Initial Year of Investment - 1995
_________________________________
Aggregate Sum Unit Rate* Operating Ratio
_______________________________________________________________________
Effective Gross Income $11,083,911 $29.00 100.0%
Operating Expenses $ 4,511,769 $11.81 40.7%
Net Income $ 6,572,142 $17.20 59.3%
Other Expenses $ 1,273,398 $ 3.33 11.5%
______________________________________________________________________
Cash Flow $ 5,298,744 $13.87 47.8%
______________________________________________________________________
* Based on total owned GLA of 382,081 SF
Our cash flow model has forecasted the following compound annual growth rates
over the ten year holding period 1995-2004.
Net Income 3.89%
Cash Flow 6.09%
The 6.09 percent compound growth rate in cash flow is influenced by the
atypical expense item in 1995 for HVAC replacement. Exclusive of this year,
average growth is shown to be 3.55 percent. Overall, this is a reasonable
forecast for a property of the subject's calibre and an attractive growth
pattern for an investor.
Investment Parameters
After projecting the income and expense components of the subject property,
investment parameters must be set in order to forecast property performance
over the holding period. These parameters include the selection of
capitalization rates (both initial and terminal) and application of the
appropriate discount or yield rate.
Selection of Capitalization Rates
The overall capitalization rate bears a direct relationship between net
operating income generated by the real estate in the initial year of
investment (or initial stabilized year) and the value of the asset in the
marketplace. Overall rates are also affected by the existing leasing
schedule of the property, the strength or weakness of the local rental
market, the property's position relative to competing properties, and the
risk/return characteristics associated with competitive investments.
In recent years, investors have shown a shift in preference to initial return
as overall capitalization rates have increased over the past several years.
Analysis of market sales of regional malls shows that capitalization rates
have increased from a mean of 5.97 percent in 1988, to a mean of 7.64 percent
in 1993. These sales, as tracked by Cushman & Wakefield, have included
investment grade regional malls throughout the United States. In 1993,
fourteen sales represented a range in capitalization rates from 7.00 to 9.00
percent with an overall mean of 7.64 percent. The dearth in completed Class
A mall transactions through 1994 does not lend itself to analysis so we have
excluded the few from this discussion. The pronounced upward trend in
capitalization rates can be seen on the following chart.
Overall Capitalization Rates
Regional Mall Sales
____________________________
Year Range Mean Basis Point Change
____________________________________________________________
1988 4.99% - 8.00% 5.97% -
1989 4.57% - 7.26% 5.39% -58
1990 5.06% - 9.11% 6.29% +90
1991 5.60% - 7.82% 6.44% +15
1992 6.00% - 8.00% 7.31% +87
1993 7.00% - 9.00% 7.64% +33
1994 7.40% - 10.29% 8.63% +99
___________________________________________________________
/kbb
The data above shows that with the exception of 1989, the average cap rate has
shown a rising trend each year. Between 1988 and 1989, the average rate
declined by 58 basis points. This was partly a result of dramatically fewer
transactions in 1989 as well as the sale of Woodfield Mall at a reported cap
rate of 4.57 percent. In 1990 the average cap rate jumped 90 basis points to
6.29 percent. Among the 16 transactions we surveyed that year, there was a
marked shift of investment criteria upward with additional basis point risk
added due to the deteriorating economic climate for commercial real estate.
Furthermore, the problems with department store anchors added to the
perceived investment risk.
1992 saw owners become more realistic in their pricing as some looked to move
product because of other financial pressures. The 87 basis point rise to
7.31 percent reflected the reality that in many markets malls were not
performing as strongly as expected. A continuation of this trend was seen in
1993 as the average rate has increased by 33 basis points. Only seven
transactions have been surveyed for 1994 which reflect a wide range in
product quality. The mean OAR of 8.63 percent includes only two transactions
in the 7.0 percent range. There does appear to be strong evidence that the
rise in cap rates has stabilized and that the demand for good quality retail
product will begin to lower yields and force up prices. With the creation of
so many retail REITs over the past year, many of which are flush with cash,
their appetite to acquire property could have such an affect on pricing.
The Cushman & Wakefield Winter 1994 survey reveals that going-in cap rates for
regional shopping centers range between 6.50 and 9.50 percent with a low
average of 7.60 and high average of 8.40 percent, respectively; a spread of
80 basis points. Generally, the change in average capitalization rates over
the Fall/Winter 1993 survey shows that the low average increased by 20 basis
points, while the upper average decreased by 12 points. Terminal, or
going-out rates are now 8.00 and 8.80 percent, representing an increase of 32
and 16 basis points, respectively, from Fall/Winter 1993 averages.
Cushman & Wakefield Appraisal Services
National Investor Survey - Regional Malls (%)
Investment Winter 1994 Summer 1994
Parameters ------------------------------- -------------------------------
Low High Low High
OAR/Going-In 6.50 - 9.50 7.50 - 9.50 6.50 - 9.30 6.50 -10.00
7.6 8.4 7.6 8.30
OAR/TERMINAL 7.00 - 9.50 7.50 - 10.50 7.00 - 9.50 7.50 - 10.00
8.0 8.8 8.2 8.9
IRR 10.00 - 11.00 10.00 - 13.00 9.00 - 11.00 11.00 - 13.00
10.5 11.5 10.60 11.60
Fall/Winter 1993
--------------------------------
OAR/Going-In Low High
OAR/Going-In 6.75 - 8.00 7.50 - 10.00
7.40 8.52
OAR/Terminal 7.50 - 9.00 7.50 - 11.00
7.68 8.64
IRR 10.00 - 15.00 10.50 - 15.00
11.11 12.09
The fourth quarter 1994 Peter F. Korpacz survey finds that cap rates have
remained relatively stable. They recognize that there is extreme competition
for the few premier malls that are offered for sale which should exert
downward pressure on rates.
NATIONAL REGIONAL MALL MARKET
FOURTH QUARTER 1994
KEY INDICATORS
Free & Clear Equity IRR CURRENT QUARTER LAST QUARTER YEAR AGO
RANGE AVERAGE 10.00%-14.00% 10.00%-14.00% 10.0%-14.00%
11.6% 11.6% 11.65%
CHANGE (Basis Points) - - 0 - 5
Free & Clear Going-In Cap Rate
RANGE
AVERAGE 6.25%-11.00% 6.00%-11.00% 6.00%-11.00%
7.73% 7.73% 7.70%
CHANGE (Basis Points) - + 0 + 3
Residual Cap Rate
RANGE
AVERAGE 7.00%-11.00% 7.00%-11.00% 7.00%-11.50%
8.3% 8.32% 8.34%
CHANGE (Basis Points) - - 2 - 4
Source: Peter Korpacz Associates, Inc. - Real Estate Investor Survey Fourth
Quarter - 1994
As can be seen from the above, the average IRR has decreased by 5 basis points
to 11.60 percent from one year ago. However, it is noted that this measure
has been relatively stable over the past twelve months. The quarter's
average initial free and clear equity cap rate rose 3 basis points to 7.73
percent from a year earlier, while the residual cap rate decreased 4 basis
points to 8.30 percent.
Most retail properties that are considered institutional grade are existing,
seasoned centers with good inflation protection that offer stability in
income and are strongly positioned to the extent that they are formidable
barriers to new competition. Equally important are centers which offer good
upside potential after face-lifting, renovations, or expansion. With new
construction down substantially, owners have accelerated renovation and
re-merchandising programs. Little competition from over-building is likely
in most mature markets within which these centers are located. Environmental
concerns and "no- growth" mentalities in communities are now serious
impediments to new retail development.
Equitable Real Estate Investment
Management, Inc. reports in their Emerging Trends in Real Estate - 1995 that
their respondents give retail investments reasonably good marks for 1995. It
is estimated that the bottom of the market for retail occurred in 1993.
During 1994, value changes for regional malls and power centers is estimated
to be 1.4 and 3.5 percent, respectively. Other retail property should see a
rise of 1.7 percent in 1994. Forecasts for 1995 show regional malls leading
the other retail categories with a 2.8 percent increase. Power centers and
other retailers are expected to have increases of 2.6 and 2.2 percent,
respectively. Long term prospects (1995-2005) for regional malls fare the
best for all retail properties which is expected to outstrip total inflation
(4.0 percent) with a 43 percent gain.
The bid/deal spread has narrowed due to a pick up in transactions. On average,
the bid/ask spread for retail property is 60 to 70 basis points, implying a
pricing gap of 5 to 10 percent.
Capitalization Rate Bid/Ask Characteristics (%)
Type Bid Ask Bid/Ask Spread Deal
Regional Mall 8.1 7.3 .8 7.5
Power Center 9.3 8.7 .6 8.8
Other 9.7 9.1 .6 9.3
Prospects for regional malls and smaller retail investments are tempered by the
choppy environment featuring increased store competition and continued
shakeout. Population increases are expected to be concentrated in lower
income households, not the middle to upper income groups. Through the
balance of the 1990s, retail sales are expected to outpace inflation on an
annual basis of only 2 percent. Thus, with a maturing retail market, store
growth and mall investment gains will come at the expense of competition.
Emerging Trends sees a 15 to 20 percent reduction in the number of malls
nationwide before the end of the decade. The report goes on to cite that
after having been written off, department stores are emerging from the
shake-out period as powerful as ever. Many of the nations largest chains are
reporting impressive profit levels, part of which has come about from their
ability to halt the double digit sales growth of the national discount
chains. Mall department stores are aggressively reacting to power and outlet
centers to protect their market share. Department stores are frequently
meeting discounters on price.
Despite the competitive turmoil, Emerging Trends, interviewees remain
moderately positive about retail investments.
Evidence has shown that mall property sales which include anchor stores have
lowered the square foot unit prices for some comparables, and have affected
investor perceptions. In our discussions with major shopping center owners
and investors, we learned that capitalization rates and underwriting criteria
have become more sensitive to the contemporary issues affecting department
store anchors. Traditionally, department stores have been an integral
component of a successful shopping center and, therefore, of similar
investment quality if they were performing satisfactorily.
During the 1980's a number of acquisitions, hostile take-overs and
restructurings occurred in the department store industry which changed the
playing field forever. Weighted down by intolerable debt, combined with a
slumping economy and a shift in shopping patterns, the end of the decade was
marked by a number of bankruptcy filings unsurpassed in the industry's
history. Evidence of further weakening continued into 1991- 1992 with
filings by such major firms as Carter Hawley Hale, P.A. Bergner & Company,
and Macy's. In early 1994, Woodward & Lothrop announced a bankruptcy
involving two department store divisions that dominate the Philadelphia and
Washington D.C. markets. More recently, however, department stores have been
reporting a return to profitability resulting from increased operating
economies and higher sales volumes. Sears, once marked by many for
extinction, has more recently won the praise of analysts. However, their
cost cutting was deep and painful as it involved the closure to nearly 100
stores. Federated Department Stores has also been acclaimed as a text book
example on how to successfully emerge from bankruptcy. They have recently
merged with Macy's to form one of the nation's largest department store
companies with sales in excess of $13.0 billion dollars. The explosive
growth of the category killers has caused department stores to aggressively
cut costs and become more efficient in managing their inventory.
With all this in mind, investors are looking more closely at the strength of
the anchors when evaluating an acquisition. Most of our survey respondents
were of the opinion that they were indifferent to acquiring a center that
included the anchors versus stores that were independently owned if they were
good performers. However, where an acquisition includes anchor stores, the
resulting cash flow is typically segregated with the income at- tributed to
anchors (base plus percentage rent) analyzed at a higher cap rate then that
produced by the mall shops.
Investors have shown a shift in preference to initial return, placing
probably less emphasis on the DCF. Understandably, this thinking has evolved
after a few hard years of reality where optimistic cash flow projections did
not materialize. The DCF is still, in our opinion, a valid valuation
technique that when properly supported, can present a realis- tic forecast of
a property's performance and its current value in the marketplace. General-
ly, we are inclined to group and characterize regional malls (and their
anchors) by their overall investment appeal which incorporates a plethora of
factors not the least of which is stability of income.
Our survey of 1993 regional mall sales shows a mean overall capitalization
rate of 7.65 percent. The average terminal capitalization rate was 13 basis
points higher at 7.78 percent while the average discount rate was 11.49
percent. We are still in the process of confirming 1994 activity but
preliminary results show an average overall rate of 8.63 percent and an IRR
of 11.27 percent.
Based upon this discussion, we are inclined to group and characterize
regional malls.
Cap Rate Range Category
6.5% to 7.0% Top 20 malls in the country.
7.0% to 8.5% Dominant Class A investment grade
property, excellent demographics
(top 50 markets), and considered
to present a significant barrier
to entry within its trade area.
8.5% to 10.5% Somewhat broad characterization of
investment quality properties
ranging from primary MSAs to
second tier cities. Properties
at the higher end of the scale
are probably somewhat vulnerable
to new competition in their
market.
10.5% to 12.0% Remaining product which has limited
appeal or significant risk which
will attract only a smaller,
select group of investors.
Laurel Center is clearly one of the dominant malls in its region. In addition
to its three strong anchor stores, the mall shops are well merchandised and
should continue to enjoy high occupancy levels. The trade area is relatively
affluent and expanding and the physical plant is in good condition. The
potential for future competition is duly noted as an added risk.
We do note that occupancy costs are moderately high which has the effect of
restricting market or base rent growth. On balance, a property with the
characteristics of the subject would potentially trade at an overall rate
between 7.75 and 8.25 percent based on first year income operating on a
stabilized operating income basis.
For the reversion year, additional basis points would be added to the
going-in rate to account for future risks of operating the property. This
contingency is typically used to cover any risks associated with lease-up of
vacant space, costs of maintaining occupancy, prospects of future
competition, and the uncertainty of maintaining forecasted growth rates over
the holding period. Investors may structure a differential of up to 100
basis points in their analysis depending on the quality and attributes of the
property and its market area. In the surveys cited, typical reversion, or
going-out rates run between 10 and 60 basis points above the initial cap. By
adding 25 to 50 points to the subject's overall rate, the implied terminal
capitalization rate would run between 8.00 and 8.50 percent. By applying a
rate of say 8.25 to the reversion year's net operating income, before
reserves, capital expenditures, leasing commissions, and alterations, yields
an overall sale price at the end of the holding period of approximately
$115.68 million for the subject (based on net income of $9,543,620 in
calendar year 2005).
From the projected reversionary value, we have made a deduction to account
for the various transaction costs associated with the sale of an asset of
this type. These costs amount to 2.0 percent of the total disposition price
of the subject property as an allow- ance for transfer taxes, professional
fees, and other miscellaneous expenses including an allowance for alteration
costs that the seller pays at final closing. Deducting these trans- action
costs from the computed reversion renders the pre-tax net proceeds of sale to
be received by an investor in the subject property at the end of the holding
period.
Net Proceeds at Reversion
Gross Sale Price
at Disposition Less Costs of Sale and
Miscellaneous Expenses @ 2% Net Proceeds
$115,680,242
$2,313,605
$113,366,637
Selection of Discount Rate
The discounted cash flow analysis makes several assumptions which reflect
typical investor requirements for yield on real property. These assumptions
are difficult to directly extract from any given market sale or by comparison
to other investment vehicles. Instead, investor surveys of major real estate
investment funds and trends in bond yield rates are often cited to support
such analysis.
A yield or discount rate differs from an income rate, such as cash-on-cash
(equity dividend rate), in that it takes into consideration all equity
benefits, including the equity reversion at the time of resale and annual
cash flow from the property. The internal rate of return is the single-yield
rate that is used to discount all future equity benefits (cash flow and
reversion) into the initial equity investment. Thus, a current estimate of
the subject's present value may be derived by discounting the projected
income stream and reversion year sale at the property's yield rate.
Yield rates on long term real estate investments range widely between
property types. As cited in Cushman & Wakefield's Winter 1994 survey,
investors in regional malls are currently looking at broad rates of return
between 10.0 and 13.00 percent, down slightly from both the Summer 1994 and
the Fall/Winter 1993 surveys. The indicated low and high means are 10.50 and
11.50 percent, respectively. Peter F. Korpacz reports an average internal
rate of return of 11.60 percent for the fourth quarter 1994, down 5 basis
points from year ago levels. CB Commercial's survey also suggests an 11.60
percent IRR, up 20 points from one year ago.
The various sales discussed in the Sales Comparison Approach displayed
expected rates of return between 10.75 and 12.50 percent for 1993, with a
mean of 11.53 percent for those sales reporting IRR expectancies. The range
reported represents primarily Class A, investment grade malls. Rates for
marginal Class B centers in second tier locations typically show rates in
excess of 12.00 percent.
The yield rate on a long term real estate investment can also be compared
with yield rates offered by alternative financial investments since real
estate must compete in the open market for capital. In developing an
appropriate risk rate for the subject, consideration has been given to a
number of different investment opportunities. The following is a list of
rates offered by other types of securities.
Market Rates and Bond Yields (%) January 30, 1995 Year Ago
Reserve Bank Discount Rate 4.75 3.00
Prime Rate (Monthly Average) 8.50 6.00
3-Month Treasury Bills 5.73 2.99
U.S. 10-Year Bonds 7.60 5.64
U.S. 30-Year Bonds 7.75 6.23
Telephone Bonds 8.62 7.15
Municipal Bonds 6.70 5.45
Source: New York Times
This compilation of yield rates from alternative investments reflects
varying degrees of risk as perceived by the market. Therefore, a riskless
level of investment might be seen in a three month treasury bill at 5.73
percent. A more risky investment, such as telephone bonds, would currently
yield a much higher rate of 8.62 percent. As of this writing, the prime rate
has been increased to 8.50, while the discount rate has increased to 4.75
percent. Ten year treasury notes are currently yielding around 7.62 percent,
while 30-year bonds are at 7.75 percent.
Real estate investment typically requires a higher rate of return (yield)
and is much influenced by the relative health of financial markets. A
regional mall investment tends to incorporate a blend of risk and credit
based on the tenant mix, the anchors that are included (or excluded) in the
transaction, and the assumptions of growth incorporated within the cash flow
analysis. An appropriate discount rate selected for a regional mall thus
attempts to consider the underlying credit and security of the income stream,
and includes an appropriate premium for liquidity issues relating to the
asset.
There has historically been a consistent relationship between the spread in
rates of return for real estate and the "safe" rate available through
long-term treasuries or high- grade corporate bonds. A wider gap between
return requirements for real estate and alternative investments has been
created in recent years due to illiquidity issues, the absence of third party
financing, and the decline in property values.
Investors have suggested that the regional mall market has become
increasingly "tiered" over the past two years. The country's premier malls
are considered to have the strongest trade areas, excellent anchor
alignments, and significant barriers of entry to future competitive supply.
These and other "dominant" malls will have average mall shop sales above $300
per square foot and be attractive investment vehicles in the current market.
It is our opinion that the subject would attract considerable interest from
institutional investors if offered for sale in the current marketplace.
There are few regional mall assets of comparable quality currently available,
and many regional malls have been included within REITs, rather than offered
on an individual property basis. However, we must further temper our
analysis due to the fact that there remains some risk that the inherent
assumptions employed in our model come to full fruition.
On balance, it is our opinion that an investor in the subject property would
require an internal rate of return between 11.25 and 11.75 percent.
Investment Analysis
Analysis by the discounted cash flow method is examined over a holding
period that allows the investment to mature, the investor to recognize a
return commensurate with the risk taken, and a recapture of the original
investment. Typical holding periods usually range from 10 to 20 years and
are sufficient for the majority of institutional grade real estate such as
the subject to meet the criteria noted above. In the instance of the
subject, we have analyzed the anticipated cash flows over an ten year period
commencing on January 1, 1995.
A sale or reversion is deemed to occur at the end of the 10th calendar year
(December 31, 2004) based upon capitalization of the following year's net
operating income. This is based upon the premise that a purchaser is buying
the following year's net income. Therefore, our analysis reflects this
practice by capitalizing the first year of the next holding period.
The present value was formulated by discounting the property cash flows at
various yield rates. The yield rate utilized to discount the projected cash
flow and eventual proper- ty reversion was based on our analysis of
anticipated yield rates of investors dealing in similar investments. The
rates reflect acceptable expectations of yield to be achieved by investors
currently in the marketplace shown in their current investment criteria and
as extracted from regional and super regional mall sales.
Cash Flow Assumptions
Our cash flows forecasted for the mall have been presented. To reiterate,
the form- ulation 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 Janu-
ary 1, 1995. The present value analysis is based on a 10 year holding
period commencing from that date. This period reflects 10 years of
oper- ations and follows an adequate time for the property to proceed
through an orderly lease-up and continue to benefit from its on-going
remerchand- ising. In this regard, we have projected that the
investment will be sold at year end 2004.
2) Existing lease terms and conditions remain unmodified until their expira-
tion. At expiration, it has been assumed that there is either a 75
percent probability that the existing retail tenants will renew their
lease. Executed and high probability pending leases have been assumed
to be signed in ac- cordance with negotiated terms as of the date of
valuation. Some ten- ants have renewal options which are generally
favorable. In most in- stances we have assumed that options are
exercised.
3) 1995 base date market rental rates for existing tenants have been estab-
lished according to tenant size with consideration given to location
within the mall, the specific merchandise category, as well as the
tenants sales history. Lease terms throughout the total complex vary
but for new in- line mall tenants are generally 10 years with
structured step-ups in the 4th and 8th years. Upon renewal, it is
assumed that new leases are also written for 10 years with the same
rent step schedule. An exception ex- ists in the instance where a
tenant had been paying percentage rent and is forecasted to continue to
pay percentage rent over the ensuing 10 year period. In these
instances, we have assumed that a flat lease will be writ- ten. Kiosk
leases are assumed to be written for 5 year terms with a 10 percent
increase in year 4.
4) Market rents have been established for 1995. Subsequently, it is our as-
sumption that market rental rates for mall tenants will increase by 2
percent in 1996, 3 percent in 1997, and 4 percent per annum on average
thereafter over the investment holding period.
5) Most tenants have percentage rental clauses providing for the payment of
overage rent. We have relied upon sales data through 1994 as provid-
ed by management. In our analysis, we have forecasted that sales will
grow by 2 percent in 1995, 3 percent in 1996, and 4 percent per annum
thereafter.
6) Expense recoveries are based upon terms specified in the various lease
contracts. As identified, due to the age of the mall and its variety
of com- ponents, there are a myriad of reimbursement methods. The new
stand- ard lease contract for real estate taxes, and common area
maintenance billings for interior mall tenants is based upon a tenants
pro rata share with the latter carrying an administrative surcharge of
15 percent. Pro- rata share is calculated on leased (occupied) area as
opposed leasable area after deduction for the contributions of
department stores for these ex- pense pools. Food court tenants are
assessed a separate charge for the seating area.
7) Income lost due to vacancy and non-payment of obligations has been based
upon our turnover probability assumption as well as a global provi-
sion for credit loss. Upon the expiration of a lease, there is 25
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 in- curred to account for the time associated with bringing
the space back on-line. In addition, we have forecasted an annual
global vacancy and cre- dit loss equivalent to 3.0 percent of gross
rental income. This global pro- vision is applied to all tenants
excluding anchor department stores.
8) Operating expenses are generally forecasted to increase by 4 percent per
year except for management which is based upon 4.5 percent of mini- mum
and percentage revenues annually and taxes which are forecasted to grow
by 5 percent per year. Alteration costs are assumed to escalate at our
forecasted expense inflation rate.
9) A provision for capital reserves initially equal to $.10 to $.15 per
square foot of total owned GLA ($50,000) has been deducted. An
alteration charge of $8 per square foot rate to turnover retail space
with a $1.50 per square foot allowance for rollover tenants. Leasing
commissions are charged at the rate of $2.00 per square foot for new
leases and $1.25 per square foot for renewal leases.
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 11.25 to 11.75
percent. Accordingly, we have dis- counted 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 11.25 to 11.75 percent at 25 basis
point intervals on equity capital over the holding period. This range
of rates reflects the risks associated with the investment. Discounting
these cash flows over the range of yield and terminal rates now being
required by participants in the market for this type of real estate
places additional perspective upon our analysis. A valuation matrix
for the Laurel Centre appears below.
Laurel Centre
Valuation Matrix
Terminal Rate Discount Rate
-------------------------------------------------------------
8.00% 11.25% 11.50% 11.75%
$83,996,000 $82,612,000 $81,258,000
8.25% $82,776,000 $81,419,000 $80,092,000
8.50% $81,628,000 $80,296,000 $78,994,000
Through such a sensitivity analysis, it can be seen that the present value
of the subject property varies from approximately $78,994,000 to $83,996,000.
Giving consid- eration to all of the characteristics of the subject
previously discussed, we feel that a prud- ent investor would require a yield
which falls near the middle of the range outlined above for this property.
Accordingly, we believe that based upon all of the assumptions inherent in
our cash flow analysis, an investor would look toward as IRR of approximately
11.50 percent and a terminal rate of 8.25 percent as being most
representative of the subject's value in the market.
In view of the analysis presented here, it becomes our opinion that the
discounted cash flow analysis indicates a market value of $81,000,000 for the
subject property. The indices of investment generated through this indicated
value conclusion are shown on the following page.
Laurel Centre
Investment Indices
Equity Yield (IRR) 11.58%
Overall Capitalization Rate* 8.11%
Price/SF of Owned GLA** $212.00
Price/square foot of mall shop GLA*** $330.32
* Based on net income of $6,572,142 for first
year (calendar year 1995)
** Based on 382,081 square feet
*** Based upon 245,217 square feet.
We note that the computed equity yield is not necessarily the true rate of
return on equity capital. This analysis has been performed on a pre-tax
basis. The tax benefits cre- ated by real estate investment will serve to
attract investors to a pre-tax yield which is not the full measure of the
return on capital.
Direct Capitalization
To further support our value conclusion at stabilization derived via the
discounted cash flow analysis, we have also utilized the direct
capitalization method. In direct capital- ization an overall rate is applied
to the net operating income of the subject property. In this case, we will
again consider the indicated overall rates from the comparable sales in the
Sales Comparison Approach as well as those rates established in our Investor
Survey.
The sales displayed in our summary charts developed overall rates ranging
from 5.60 to 9.0 percent.
Generally, new construction and centers leased at economic rates tend to
sell for rela- tively high overall capitalization rates. Conversely, centers
that are older and contain be- low-market leases reflecting leasing profiles
with good upside potential tend to sell with lower overall capitalization
rates. The subject has, in our opinion, some good upside potential through
releasing and remerchandising. However, there remains a threat from
increased competition in view of the dynamic nature of the MSA.
In view of all of the above, we would anticipate that at the subject would
trade at an overall rate of approximately 7.75 to 8.25 percent applied to
first year income. Applying these rates to first year net operating income
before reserves, alterations and other ex- penses for the subject of
$6,572,142 results in a value of approximately $79,662,000 to $84,802,000.
From this range we would be inclined to conclude at a value of $83,000,000 by
direct capitalization which is indicative of an overall rate of 7.97 percent.
However, it is our opinion that a prudent investor in the property would
consider the 1995 capital expenditure for HVAC system replacement. By
deducting the projected expense of $1,033,000 from $83,000,000, the indicated
value for the subject would be $81,967,000. Thus, the indicated value via
direct capitalization as of January 1, 1995, was $82,000,000.
RECONCILIATION
AND FINAL VALUE ESTIMATE
Application of the Sales Comparison Approach and Income Approaches used in
the valuation of the subject property has produced results which fall within
a reasonably acceptable range. Restated, these are:
Methodology Market Value Conclusion
Sales Comparison Approach $79,600,000 - $81,600,000
Income Approach
Direct Capitalization $82,000,000
Discounted Cash Flow $81,000,000
This is considered a narrow range in possible value given the magnitude of
the value estimates. Both approaches are well supported by data extracted
from the market. There are, however, strengths and weaknesses in each of
these two approaches which require reconciliation before a final conclusion
of value can be rendered.
Sales Comparison Approach
The Sales Comparison Approach arrived at a value indicted for the property
by analyz- ing 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 in- vestor market for a property like
the subject operates. In addition, no two properties are alike with respect
to quality of construction, location, market segmentation and income profile.
As such, subjective judgement necessarily become a part of the comparative
pro- cess. 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 conclu- sions of the Income
Approach. This is also particularly relevant in the estimation of value at
stabilization. It does provide useful market extracted rates of return such
as overall rates to simulate investor behavior in the Income Approach.
Income Approach
Discounted Cash Flow Analysis
The subject property is highly suited to analysis by the discounted cash
flow method as it will be bought and sold in investment circles. The focus
on property value in relation to anticipated income is well founded since the
basis for investment is profit in the form of return or yield on invested
capital. The subject property, as an investment vehicle, is sensitive to all
changes in the economic climate and the economic expectations of invest- ors.
The discounted cash flow analysis may easily reflect changes in the economic
climate of investor expectations by adjusting the variables used to qualify
the model. In the case of the subject property, the Income Approach can
analyze existing leases, the probabilities of future rollovers and turnovers
and reflect the expectations of overage rents. Essentially, the Income
Approach can model many of the dynamics of a complex shopping center. The
writers have considered the results of the discounted cash flow analysis
because of the applicability of this method in accounting for the particular
characteristics of the property, as well as being the tool used by many
purchasers.
Capitalization
Direct capitalization has its basis in capitalization theory and uses the
premise that the relationship between income and sales price may be expressed
as a rate or its reciprocal, a multiplier. This process selects rates
derived from the marketplace, in much the same fashion as the Sales
Comparison Approach and applies this to a projected net operating income to
derive a sale price. The weakness here is the idea of using one year of cash
flow as the basis for calculating a sale price. This is simplistic in its
view of expectations and may sometimes be misleading. If the year chosen for
the analysis of the sale price contains an income steam that is over or
understated this error is compounded by the cap- italization process.
Nonetheless, real estate of the subject's caliber is commonly purchas- ed on
a direct capitalization basis. Overall, this methodology was given important
consid- eration in our total analysis.
Conclusions
We have briefly discussed the applicability of each of the methods
presented. Be- cause of certain vulnerable characteristics in the Sales
Comparison Approach, it has been used as supporting evidence and as a final
check on the value conclusion indicated by the Income Approach methodologies.
The ranges in value exhibited by the Income Approach are consistent with the
leasing profiles. Each indicates complimentary results with the Sales
Comparison Approach, the conclusions being supportive of each method
employed, and neither range being extremely high or low in terms of the
other.
As a result of our analysis, we have formed an opinion that the market value
of the leased fee estate in the referenced property, subject to the
assumptions, limiting condi- tions, certifications, and definitions, as of
January 1, 1995, was:
EIGHTY ONE MILLION DOLLARS
$81,000,000
ASSUMPTIONS AND LIMITING CONDITIONS
"Appraisal" means the appraisal report and opinion of value stated therein,
or the letter opinion of value, to which these Assumptions and Limiting
Conditions are annexed.
"Property" means the subject of the Appraisal.
"C&W" means Cushman & Wakefield, Inc. or its subsidiary which issued the
Appraisal.
"Appraiser(s)" means the employee(s) of C&W who prepared and signed the
Appraisal.
The Appraisal has been made subject to the following assumptions and limiting
conditions:
1. No opinion is intended to be expressed and no responsibility is
assumed for the legal description or for any matters which are
legal in nature or require legal expertise or specialized
knowledge beyond that of a real estate appraiser. Title to the
Property is assumed to be good and marketable and the Property
is assumed to be free and clear of all liens unless otherwise
stated. No survey of the Property was undertaken.
2. The information contained in the Appraisal or upon which the
Appraisal is based has been gathered from sources the Appraiser
assumes to be reliable and accurate. Some of such information
may have been provided by the owner of the Property. Neither the
Appraiser nor C&W shall be responsible for the accuracy or
completeness of such information, including the correctness of
estimates, opinions, dimensions, sketches, exhibits and factual
matters.
3. The opinion of value is only as of the date stated in the
Appraisal. Changes since that date in external and market
factors or in the Property itself can significantly affect
property value.
4. The Appraisal is to be used in whole and not in part. No part of
the Appraisal shall be used in conjunction with any other
appraisal. Publication of the Appraisal or any portion thereof
without the prior written consent of C&W is prohibited. Except
as may be otherwise stated in the letter of engagement, the
Appraisal may not be used by any person other than the party to
whom it is addressed or for purposes other than that for which
it was prepared. No part of the Appraisal shall be conveyed to
the public through advertising, or used in any sales or
promotional material without C&W's prior written consent.
Reference to the Appraisal Institute or to the MAI designation
is prohibited.
5. Except as may be otherwise stated in the letter of engagement, the
Appraiser shall not be required to give testimony in any court
or administrative proceeding relating to the Property or the
Appraisal.
6. The Appraisal assumes (a) responsible ownership and competent
management of the Property; (b) there are no hidden or
unapparent conditions of the Property, subsoil or structures
that render the Property more or less valuable (no
responsibility is assumed for such conditions or for arranging
for engineering studies that may be required to discover them);
(c) full compliance with all applicable federal, state and local
zoning and environmental regulations and laws, unless
noncompliance is stated, defined and considered in the
Appraisal; and (d) all required licenses, certificates of
occupancy and other governmental consents have been or can be
obtained and renewed for any use on which the value estimate
contained in the Appraisal is based.
7. The physical condition of the improvements considered by the
Appraisal is based on visual inspection by the Appraiser or
other person identified in the Appraisal. C&W assumes no
responsibility for the soundness of structural members nor for
the condition of mechanical equipment, plumbing or electrical
components.
8. The forecasted potential gross income referred to in the Appraisal
may be based on lease summaries provided by the owner or third
parties. The Appraiser assumes no responsibility for the
authenticity or completeness of lease information provided by
others. C&W recommends that legal advice be obtained regarding
the interpre- tation of lease provisions and the contractual
rights of parties.
9. The forecasts of income and expenses are not predictions of the
future. Rather, they are the Appraiser's best estimates of
current market thinking on future income and expenses. The
Appraiser and C&W make no warranty or representation that these
forecasts will materialize. The real estate market is
constantly fluctuating and changing. It is not the Appraiser's
task to predict or in any way warrant the conditions of a future
real estate market; the Appraiser can only reflect what the
investment community, as of the date of the Appraisal, envisages
for the future in terms of rental rates, expenses, supply and
demand.
10. Unless otherwise stated in the Appraisal, the existence of
potentially hazardous or toxic materials which may have been
used in the construction or maintenance of the improvements or
may be located at or about the Property was not considered in
arriving at the opinion of value. These materials (such as
formaldehyde foam insulation, asbestos insulation and other
potentially hazardous materials) may adversely affect the value
of the Property. The Appraisers are not qualified to detect
such substances. C&W recommends that an environmental expert be
employed to determine the impact of these matters on the opinion
of value.
11. Unless otherwise stated in the Appraisal, compliance with the
requirements of the Americans With Disabilities Act of 1990 (ADA) has
not been considered in arriving at the opinion of value. Failure to
comply with the requirements of the ADA may adversely affect the
value of the Property. C&W recommends that an expert in this field
be employed.
12. If the Appraisal has been prepared for The Resolution Trust
Corporation ("RTC"), it may be distributed to parties requesting
a copy in accordance with RTC policy. However, as to such
parties, the Appraisal shall be deemed provided for
informational purposes only and such recipients shall not be
entitled to rely on the Appraisal for any purpose nor shall C&W
or the Appraisers have any liability to such recipients based
thereon.
CERTIFICATION OF APPRAISAL
We certify that, to the best of our knowledge and belief:
1. Jay F. Booth and Richard W. Latella, MAI inspected the property.
2. The statements of fact contained in this report are true and correct.
3. The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are our personal,
unbiased professional analyses, opinions, and conclusions.
4. We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
5. Our compensation is not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the
amount of the value estimate, the attainment of a stipulated result,
or the occurrence of a subsequent event. The appraisal assignment was
not based on a requested minimum valuation, a specific valuation or
the approval of a loan.
6. No one provided significant professional assistance to the persons
signing this report.
7. Our analyses, opinions, and conclusions were developed, and this report
has been prepared, in conformity with the Uniform Standards of
Professional Appraisal Practice of the Appraisal Foundation and the
Code of Professional Ethics and the Standards of Professional
Appraisal Practice of the Appraisal Institute.
8. The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
9. As of the date of this report, Richard W. Latella has completed the
requirements of the continuing education program of the Appraisal
Institute.
s/Richard w. Latella/ s/Jay F. Booth/
Richard W. Latella, MAI Jay F. Booth
Senior Director Valuation Advisory Services
Retail Valuation Group
ADDENDA INCLUDING:
1995 OPERATING EXPENSE BUDGET FOR LAUREL CENTRE
LAUREL CENTRE TENANT SALES REPORT - ACTUAL SALES AS OF NOVEMBER 1994
LAUREL CENTRE PROJECT LEASE ABSTRACT REPORT (1995 UPDATE)
LAUREL CENTRE PROJECT ASSUMPTIONS REPORT EXCLUDING TENANTS (1995 UPDATE)
LAUREL CENTRE PROJECT TENANT REGISTER REPORT (1995 UPDATE)
LAUREL CENTRE PROJECT LEASE EXPIRATION REPORT YEARS 1995 to 2006, ALL TENANTS,
INCLUDING OPTIONS, INCLUDING RENEWALS, EXCLUDING BASE LEASES AND PRIOR OPTIONS,
BASE RENTS INCLUDING CPI ADJUSTMENTS, INCLUDING PERCENTAGE RENTS
ENDS FULL DATA REPORT - DEMOGRAPHICS REPORT FOR LAUREL CENTRE TRADE AREA
(PRIMARY/TOTAL)
CUSHMAN & WAKEFIELD APPRAISAL SERVICES NATIONAL INVESTOR SURVEY -
FALL/WINTER 1994
- ----------------------------------------------
APPRAISERS' QUALIFICATIONS
QUALIFICATIONS OF RICHARD W. LATELLA
PROFESSIONAL AFFILIATIONS
Member, American Institute of Real Estate Appraisers (MAI Designation #8346)
New York State Certified General Real Estate Appraiser #46000003892
Pennsylvania State Certified General Real Estate Appraiser #GA-001053-R State
of Maryland Certified General Real Estate Appraiser #01462
New Jersey Real Estate Salesperson (License #NS-130101-A)
Certified Tax Assessor - State of New Jersey
Affiliate Member - International Council of Shopping Centers, ICSC
REAL ESTATE EXPERIENCE
Senior Director, National Retail Valuation Services, Cushman & Wakefield
Appraisal Division. Cushman & Wakefield is a national full service real
estate organization and a Rockefeller Group Company. While Mr. Latella's
experience has been in appraising a full array of property types, his
principal focus is in the appraisal and counseling for major retail
properties and specialty centers on a national basis. As Senior Director of
Cushman & Wakefield's Retail Group his responsibilities include the
coordination of the firm's national group of appraisers who specialize in the
appraisal of regional malls, department stores and other major retail
property types. He has personally appraised and consulted on in excess of
150 regional malls and specialty retail properties across the country.
Senior Appraiser, Valuation Counselors, Princeton, New Jersey, specializing
in the apprai- sal of commercial and industrial real estate, condemnation
analyses and feasibility studies for both corporate and institutional clients
from July 1980 to April 1983.
Supervisor, State of New Jersey, Division of Taxation, Local Property and
Public Utility Branch in Trenton, New Jersey, assisting and advising local
municipal and property tax as- sessors throughout the state from June 1977 to
July 1980.
Associate, Warren W. Orpen & Associates, Trenton, New Jersey, assisting in
the prepara- tion of appraisals of residential property and condemnation
analyses from July 1975 to April 1977.
FORMAL EDUCATION
Trenton State College, Trenton, New Jersey
Bachelor of Science, Business Administration - 1977
American Institute of Real Estate Appraisers, Chicago, Illinois
Basic Appraisal Principles, Methods and Techniques - 1980
Capitalization Theory and Techniques Part I - 1981
Capitalization Theory and Techniques Part III - 1981
Case Studies in Real Estate Valuation - 1982
Valuation Analysis and Report Writing - 1982
Investment Analysis - 1983
Capitalization Theory and Techniques Part II - 1986
Standards of Professional Practice - 1987
State of New Jersey, Rutgers University
Appraisal Principles - 1979
Property Tax Administration - 1979
QUALIFICATIONS OF JAY F. BOOTH
GENERAL EXPERIENCE
Jay F. Booth joined Cushman & Wakefield, Inc. New York Appraisal Services
in August 1993. As an associate appraiser, Mr. Booth is currently working
with Cushman & Wakefield's National Retail Valuation Services Group. Cushman
& Wakefield, Inc. is a national full service real estate organization.
Mr. Booth previously worked for two years at Appraisal Group, Inc. in
Portland, Oregon where he was an associate appraiser. He assisted in the
valuation of numerous properties, including office buildings, apartments,
industrials, retail centers, vacant land and special purpose properties.
ACADEMIC EDUCATION
Master of Science in Real Estate (MSRE) -- New York University (Candidate)
Major: Real Estate Valuation & Analysis New York, New York
Bachelor of Science (BS) -- Willamette University
(1991) Majors: Business-Economics, Art Salem, Oregon
Study Overseas (Fall 1988) -- Xiamen University, Xiamen, China;
Kookmin University, Seoul, South Korea;
Tokyo International, Tokyo, Japan
APPRAISAL EDUCATION
SPP Standards of Professional Practice, Parts A & B Appraisal Institute 1992
1BB Capitalization Theory & Techniques, Part B Appraisal Institute 1992
1BA Capitalization Theory & Techniques, Part A Appraisal Institute 1992
1A1 Real Estate Appraisal Principles Appraisal Institute 1991
901 Engineering Plan Development & Application Intl. Right of Way 1991
PROFESSIONAL AFFILIATION
Candidate MAI, Appraisal Institute No. M930181
Appraiser Assistant, State of New York No. 48000024088
PARTIAL CLIENT LIST
THE APPRAISAL DIVISION
NEW YORK REGION
CUSHMAN &
WAKEFIELD
PROFESSIONALS ARE JUDGED BY THE CLIENTS THEY SERVE
The APPRAISAL DIVISION enjoys a long record of service in a confidential
capacity to nationally prominent individuals and corporate clients,
investors, and government agencies. We have also served many of the nations
largest law firms. Following is a partial list of clients served by members
of the APPRAISAL DIVISION - NEW YORK REGION.
Air Products and Chemicals, Inc.
Aldrich, Eastman & Waltch, Inc.
Allegheny-Ludlam Industries
AMB Institutional Realty Advisors
America First Company
American Bakeries Company
American Brands, Inc.
American District Telegraph Company
American Express
American Home Products Corporation
American Savings Bank
Apple Bank
Archdiocese of New York
Associated Transport
AT&T
Avatar Holdings Inc.
Avon Products, Inc.
Bachner, Tally, Polevoy, Misher & Brinberg
Baer, Marks, & Upham
Balcor Inc.
BancAmerica
Banca Commerciale Italiana
Banco de Brasil, N.A.
Banco Santander Puerto Rico
Banque Paribas
Baker & Mackenzie
Bank of America
Bank of Baltimore
Bank of China
Bank of Montreal
Bank of New York
Bank of Nova Scotia
Bank of Tokyo Trust Company
Bank Leumi Le-Israel
Bankers Life and Casualty Company
Bankers Trust Company
Barclays Bank International, Ltd.
Baruch College
Battery Park City Authority
Battle, Fowler, Esqs.
Bear Stearns
Berkshire
Betawest Properties
Bethlehem Steel Corporation
Bloomingdale Properties
Borden, Inc.
Bowery Savings Bank
Bowest Corporation
Brandt Organization
Brooklyn Hospital
Burke and Burke, Esqs.
Burmah-Castrol
Cadillac Fairview
Cadwalader, Wickersham & Taft
Caisse National DeCredit
Campeau Corporation
Campustar
Canadian Imperial Bank of Commerce
Canyon Ranch
Capital Bank
Capital Cities-ABC, Inc.
Care Incorporated
Carter, Ledyard & Milburn
Chase Manhattan Bank, N.A.
Chemical Bank Corporation
Chrysler Corporation
C. Itoh & Company
Citibank, NA
Citicorp Real Estate
City University of New York
Clayton, Williams & Sherwood
Coca Cola, Inc.
Cohen Brothers
College of Pharmaceutical Sciences
Columbia University
Commonwealth of Pennsylvania
Consolidated Asset Recovery Company
Continental Realty Credit, Inc.
Copley Real Estate Advisors
Corning Glass Works
Coudert Brothers
Covenant House
Cozen and O'Connor
Credit Agricole
Credit Lyonnais
Credit Suisse
Crivello Properties
CrossLand Savings Bank
Dai-Ichi Kangyo Bank
Dai-Ichi Sempei Life Insurance
Daily News, Inc.
Daiwa Securities
Dart Group Corporation
David Beardon & Company
Davidoff & Malito, Esqs
Dean Witter Realty
DeMatteis Organization
Den Norske Bank
Deutsche Bank
DiLorenzo Organization
Dime Savings Bank
Dodge Trucks, Inc.
Dollar/Dry Dock Savings Bank
Donovan, Leisure, Newton & Irvine
Dreyer & Traub
Dun and Bradstreet, Inc.
Eastdil Realty Advisors
East New York Savings Bank
East River Savings Bank
East Rutherford Industrial Park
Eastman Kodak Company
Eaton Corporation
Eichner Properties, Inc.
Ellenburg Capital Corporation
Emigrant Savings Bank
Empire Mutual Insurance Company
Equitable Life Assurance Society of America
Equitable Real Estate
Famolare, Inc.
Farwest Savings & Loan Association
Federal Asset Disposition Authority
Federal Deposit Insurance Company
Federal Express Corporation
Federated Department Stores, Inc.
Feldman Organization
Findlandia Center
First Boston
First Chicago
First National Bank of Chicago
First New York Bank for Business
First Tier Bank
First Winthrop
Fisher Brothers
Fleet/Norstar Savings Bank
Flying J, Inc.
Foley and Lardner, Esqs.
Ford Bacon and Davis, Inc.
Ford Foundation
Ford Motor Company
Forest City Enterprises
Forum Group, Inc.
Franchise Finance Corporation of America
Fried, Frank, Harris, Shriver & Jacobson
Friendly's Ice Cream Corporation
Fruehauf Trailer Corporation
Fuji Bank
Fulbright & Jaworski
G.E. Capital Corporation
General Electric Credit Corporation
General Motors Corporation
Gerald D. Hines Organization
Gibson Dunn and Crutcher
Gilman Paper
Gladstone Equities
Glimcher Company
Glynwed, Ltd.
Goldman, Sachs & Co.
Greater New York Savings Bank
Greycoat Real Estate Corp.
Greyhound Lines Inc.
Grid Properties
GTE Realty
Gulf Oil
<PAGE>
HDC
HRO International
Hammerson Properties
Hartz Mountain Industries
Hawaiian Trust Company, Ltd.
Hertz Corporation
Home Federal
Home Savings of America
HongKong & Shanghai Banking Corporation
Horn & Hardart
Huntington National Bank
Hypo Bank
IDC Corporation
Ideal Corporation
ING Corporation
International Business Machines Corporation
International Business Machines Pension Fund
International Telephone and Telegraph Corporation
Investors Diversified Services, Inc.
Iona College
Irish Intercontinental Bank
Irish Life Assurance
Israel Taub
J & W Seligman & Company, Inc.
JMB Realty
J. B. Brown and Sons
J. C. Penney Company, Inc.
J. P. Morgan
Jamaica Hospital
James Wolfenson & Company
Jerome Greene, Esq.
Jewish Board of Family & Children's Services
Jones Lang Wootton
K-Mart Corporation
Kelly, Drye and Warren, Esqs.
Kennedy Associates
Kerr-McGee Corporation
Kidder Peabody Realty Corp.
Knickerbocker Realty
Koeppel & Koeppel
Krupp Realty
Kutak, Rock and Campbell, Esqs.
Ladenburg, Thalman & Co.
Lans, Feinberg and Cohen, Esqs.
Lands Division, Department of Justice
Lazard Realty
LeBoeuf,
Lefrak Organization
Lehman Brothers
Lennar Partners
Lepercq Capital Corporation
Lincoln Savings Bank
Lion Advisors
Lomas & Nettleton Investors
London & Leeds
Long Term Credit Bank of Japan, Ltd.
Lutheran Church of America
Lynton, PLC
Macluan Capital Corporation
Macy's
MacAndrews and Forbes
Mahony Troast Construction Company
Manhattan Capital Partners
Manhattan College
Manhattan Life Insurance
Manhattan Real Estate Company
Manufacturers Hanover Trust Company
Marine Midland Bank
Mason Tenders
Massachusetts Mutual Life Insurance Company
May Centers, Inc.
Mayer, Brown, Platt
McDonald's Corporation
McGinn, Smith and Company
McGrath Services Corporation
MCI Telecommunications
Mellon Bank
Mendik Company
Mercedes-Benz of North America
Meridian Bank
Meritor Savings Bank
Merrill Lynch Hubbard
Merchants Bank
Metropolis Group
Metropolitan Life Insurance Company
Metropolitan Petroleum Corporation
Meyers Brothers Parking System Inc.
Michigan National Corp.
Milbank, Tweed
Miller, Montgomery, Sogi and Brady, Esqs.
Mitsui Fudosan - New York Inc.
Mitsui Leasing, USA
Mitsubishi Bank
Mitsubishi Trust & Banking Corporation
Mobil Oil Corporation
Moody's Investors Service
Morgan Guaranty
Morgan Hotel Group
Morse Shoe, Inc.
Moses & Singer
Mudge Rose Guthrie Alexander & Ferdon, Esqs.
Mutual Benefit Life
Mutual Insurance Company of New York
National Can Company
National CSS
National Westminster Bank, Ltd.
Nelson Freightways
Nestle's Inc.
New York Bus Company
New York City Division of Real Property
New York City Economic Development Corporation
New York City Housing Development Authority
New York City School Construction Authority
New York Life Insurance Company
New York State Common Fund
New York State Employee Retirement System
New York State Parks Department
New York State Urban Development Corporation
New York Telephone Company
New York Urban Servicing Company
New York Waterfront
Niagara Asset Corporation
Norcross, Inc.
North Carolina Department of Insurance
NYNEX Properties Company
Olympia and York, Inc.
Orient Overseas Associates
Orix USA Corporation
Otis Elevator Company
Owens-Illinois Corporation
PaineWebber, Inc.
Pan American World Airways, Inc.
Paul, Weiss, Rifkind
Park Tower Associates
Parke-Davis and Company
Paul Weiss Rifkind, Esqs.
Penn Central Corporation
Penn Mutual Life Insurance Company
Pennsylvania Retirement Fund
Penthouse International
Pepsi-Cola Company
Peter Sharp & Company
Petro Stopping Center
Pfizer International, Inc.
Philip Morris Companies, Inc.
Philips International
Phoenix Home Life
Pittston Company
Polyclinic Medical School and Hospital
Port Authority of New York and New Jersey
Procida Organization
Proskauer Rose Goetz and Mandelsohn, Esqs.
Provident Bank
Prudential Securities
Pyramid Company
Rabobank Nederland
Ratner Group
RCA Corporation
Real Estate Recovery
Realty Income Corporation
Republic Venezuela Comptrollers Office
Revlon, Inc.
Rice University
Richard Ellis
Richards & O'Neil
Ritz Towers Hotel Corporation
River Bank America
Robert Bosch Corporation
Rockefeller Center, Inc.
Roman Catholic Diocese of Brooklyn
Roosevelt Hospital
Rosenman & Colin
RREEF
Rudin Management Co., Inc.
Saint Vincent's Medical Center of New York
Salomon Brothers Inc.
Salvation Army
Sanwa Bank
SaraKreek USA
Saxon Paper Corporation
Schroder Real Estate Associates
Schulman Realty Group
Schulte, Roth & Zabel
BDO Seidman
Seaman Furniture Company, Inc.
Security Pacific Bank
Semperit of America
Sentinel Realty Advisors
Service America Corp.
Shea & Gould, Esqs.
Shearman and Sterling, Esqs.
Shearson Lehman American Express
Shidler Group
Sidley & Austin
Silver Screen Management, Inc.
Silverstein Properties, Inc.
Simpson, Thacher and Bartlett, Esqs.
Skadden, Arps, Slate, Meagher & Flom
Smith Barney
Smith Corona Corporation
Sol Goldman
Solomon Equities
Sonnenblick-Goldman
Southtrust Bank of Alabama
Spitzer & Feldman, PC
Stahl Real Estate
Standard & Poors
State Teachers Retirement System of New York
State Teachers Retirement System of Ohio
Stauffer Chemical Corporation
Stephens College
Sterling Drug, Inc.
Stroheim and Roman, Inc.
Stroock and Stroock and Lavan, Esqs.
Sullivan and Cromwell, Esqs.
Sumitomo Life Realty
Sumitomo Mutual Life Insurance Company
Sumitomo Trust Bank
Sun Oil Company
Sutherland, Asbill & Brennan
Swiss Bank Corporation
Tenzer Greenblat, Esqs.
Textron Financial
The Shopco Group
Tobishima Associates
Tokyo Trust & Banking Corporation
Transworld Equities
Travelers Realty, Inc.
Triangle Industries
TriNet Corporation
<PAGE>
UBS Securities Inc.
UMB Bank & Trust Company
Union Bank of Switzerland
Union Carbide Corporation
Union Chelsea National Bank
United Bank of Kuwait
United Fire Fighters of New York
United Parcel Service
United Refrigerated
United States District Court, Southern District of New York
United States Life Insurance
United States Postal Service
United States Trust Company
Upward Fund, Inc.
US Cable Corp.
Vanity Fair Corporation
Verex Assurance, Inc.
Victor Palmieri and Company, Inc.
Village Bank
Vornado Realty Trust
W.P. Carey & Company, Inc.
Wachtell, Lipton, Rosen & Katz, Esqs.
Weil, Gotshal & Manges
Weiss, Peck & Greer
Wells Fargo & Co.
Westpac Banking Corporation
Western Electric Company
Western Union International
Westinghouse Electric Corporation
White & Case
Wilkie Farr and Gallagher, Esqs.
William Kaufman Organization
Windels, Marx, Davies & Ives
Winthrop Simston Putnam & Roberts
Wurlitzer Company
Yarmouth Group
Permanent Kiosks
Recent Lease Transactions
Size Annual Unit
Property/Location Total GLA Tenant (SF) Term Rent Rate
Raleigh Springs Mall
Memphis, TN 921,400SF Golden Chain Gang 120 2yrs $30,000 $250.00
Coventry Mall
N. Coventry, PA 638,000SF Gemstone 192 1yr $18,000 $93.75
R&R Crossing 200 2yrs Yr1/$21K $105.00
Yr2/$22K $110.00
The Pines Mall
Pine Bluff, AR 630,000SF Treasures 225 2yrs $19,800 $77.60
M-Ports 183 2yrs $14,400 $78.69
Charleston Town Center
Charleston, W. VA
900,500SF Ballcards Plus 148 2yrs $22,000 $148.65
Chocolate Sunday 169 3yrs $25,000 $147.93
Coopers Watch Wks 169 5yrs $27,000 $159.76
Piercing Pagoda 212 2yrs $28,000 $132.08
Silver&Gold Cnctn 212 2yrs $30,000 $141.51
Laurel Centre
Laurel, MD661,500 SF Earring Tree 180 5yrs Yr3/$27K $138.89
Yr4-5/$30K $152.78
Things Remembered 497 7yrs Yr1-3/$28K $166.67
Yr4-7/$30K $56.34
Pine Factory 594 6yrs $42,000 $60.36
Royal Jewelry 396 5yrs $37,000 70.71
Golden Valley 150 2yrs $25,000 $93.43
Yrs 1-2 @ $25,000
Walden Galleria
Buffalo, NY
1,600,000SF Piercing Pagoda 158 3yrs Yr1/$33.6K $213.08
Yr2/$34.6K $219.41
Yr3/$35.6K $225.93
Added Touch 158 5yrs Yr1/$48.3K $305.70
2/$50.7K $320.98
3/$53.2K $337.03
4/$55.9K $353.88
5/$58.7K $371.58
Coopers 158 5yrs Yr1/$32.5K $205.70
2/$32.6K $206.75
3/$33.6K $213.08
4/$34.5K $218.35
5/$5.7K $ 36.69
Common Area Maintenance Expense Comparables
1993/1994 Budgeted Data
Mall Unit
Property GLA(SF) CAM Budget Rate(SF) * Comments
Pavilions at Buckland Hills
Manchester, Connecticut 328,423 $2,210,400 $ 6.73 Suburban Hartford
location - 1994
Budget.
Fashion Show Mall
Las Vegas, Nevada 286,936 $2,622,000 $ 9.14 Downtown mall with
subterranean garage.
Department stores
contribute over
$700,000 so net cost
is approximately
$6.67 per square
foot.
Arden Fair Mall
Sacramento, California 435,448 $2,936,000 $ 6.74 Homart Mall - 1993
Budget.
Salmon Run Mall
Watertown, New York 208,932 $1,075,000 $ 5.14 Western New York
location - 1993
Forecast.
Meriden Square Mall
Meriden, Connecticut 292,000 $2,551,500 $ 8.71 1994 Budget for
three anchor mall.
Laurel Centre
Laurel, Maryland 244,694 $1,690,000 $ 6.90 Suburban Washington
D.C. two-level mall.
Property has parking
garage.
The Mall at Assembly Square
Somerville, Massachusetts 157,711 $1,350,000 $ 8.00 Department stores
contribute $86,000
so net cost to mall
shops is $8.00 per
square foot.
Freehold Raceway Mall
Freehold, New Jersey 525,741 $3,410,000 $ 6.48 1994 Budget data for
1.1 million square
foot super-regional
mall in Central New
Jersey.
Crabtree Valley Mall
Raleigh, North Carolina 401,875 $2,007,635 $ 5.00 Actual 1993 data
based on interior
mall GLA.
Galleria at White Plains
White Plains, New York 327,579 $3,140,000 $ 9.59 Four level urban
mall with attached
parking garage.
Manassas Mall
Manassas, Virginia 270,197 $1,450,000 $ 5.37 1994 Budget -
Suburban Washington
D.C. Mall.
Queens Center
Queens, New York 160,125 $3,950,000 $24.67 1993 expense for
urban mall in New
York City.
Bellevue Center
Nashville, Tennessee 372,900 $2,175,000 $ 5.83 1994 Budget -
Suburban two level
Nashville area mall
with only two
anchors.
The Mall at Greece Ridge Center
Greece, New York 597,959 $3,200,000 $ 5.35 1994 for combined
mall with new
"Connector" space.
Danbury Fair Mall
Danbury, Connecticut 449,900 $3,490,000 $ 6.98 1994 Budget for two
level super-regional
mall. Five anchors
with in-line shops
nearly 97% occupied.
* Before administrative fee and department store and other major tenant
contributions.
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