UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ x ] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (fee required)
For the fiscal year ended December 31, 1995
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (no fee required)
For the Transition period from to
Commission file number: 1-9419
SHOPCO LAUREL CENTRE, L.P.
Exact name of Registrant as specified in its charter
Shopco Laurel Centre, L.P.
is a Delaware limited partnership 13-3392074
State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization
3 World Financial Center,
29th Floor, New York, NY
Attn: Andre Anderson 10285-2900
Address of principal executive offices zip code
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.
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.
In conjunction with the October 15, 1996 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 to:
(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 (see Note 5 to the Notes to the Consolidated Financial
Statements);
(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 between the Owner
Partnership and the Property Manager. The Owner Partnership's business, as
owner and operator of the Mall, is seasonal since a portion of its revenue is
derived from a percentage of the retail sales of certain tenants at the Mall.
Generally such sales are higher in November and December 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
Laurel Centre is located on approximately 35.5 acres of land in Laurel,
Maryland. The Owner Partnership's property interest in Laurel Centre comprises
approximately 23.22 acres of the site. Laurel is located seven miles north of
the Washington, D.C. beltway and forms part of the economic and geographic area
known as the Baltimore-Washington corridor.
The Mall, which originally opened in 1979, consists of an enclosed shopping
mall containing a total of approximately 100 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 661,786 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 382,000 square feet of gross leasable area
of Laurel Centre, of which approximately 245,000 square feet is leasable to
retail mall space tenants and 136,864 square feet is leased to J.C. Penney.
Hecht's owns its store at Laurel Centre, which contains 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. Montgomery Ward leases
approximately 161,204 square feet of gross leasable 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
Leasable 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 245,364 - 245,364
382,228 279,558 661,786
(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 20.7% of the gross leasable building area, and is located at
the northern end of the Mall. 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. 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
contain s an operating covenant pursuant to which J.C. Penney was obligated to
operate a department store at the Mall 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. See "Operating Covenants" below.
Montgomery Ward leases its store, which is 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.
See "Operating Covenants" below.
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 initial term of the ground lease expires
on May 6, 2011. Thirteen five-year renewal options are available on the same
terms and conditions. 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 sub-metered. 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.
Operating Covenants
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, assign their lease or cease operations (but continue to
pay rent). 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 maintain the aesthetic
integrity and economic viability of 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:
1995 1994 1993 1992 1991
Base Rents
Mall Tenants $ 5,259,484 $ 4,687,584 $ 4,539,564 $ 3,967,502 $ 3,883,832
Anchor Tenants 495,448 495,448 495,448 495,448 495,448
Total Base
Rents 5,754,932 5,183,032 5,035,012 4,462,950 4,379,280
Percentage Rents
Mall Tenants 80,906 343,061 338,712 370,589 456,757
Total Rental
Income $ 5,835,838 $ 5,526,093 $ 5,373,724 $ 4,833,539 $ 4,836,037
Mall Tenants
As of December 31, 1995, the Mall had 100 mall tenants (excluding anchor
stores) occupying approximately 216,000 square feet of gross leasable area, and
was 88.1% occupied.
As of the filing date of this report, 5 tenants, or their parent corporations,
at the Mall have filed for protection under the U.S. Federal Bankruptcy Code.
These tenants currently occupy 20,616 square feet, or approximately 8.0% of the
Mall's leasable area (exclusive of anchor tenants), and at this point their
plans to remain at the Mall remain uncertain. Pursuant to the provisions of
the U.S. Federal Bankruptcy Code, these tenants may, with court approval,
choose to reject or accept the terms of their leases. Should any of these
tenants exercise the right to reject their leases, this could have an adverse
impact on cash flow generated by the Mall and revenues received by the
Partnership as well as an adverse effect on the Partnership's efforts to sell
or refinance the Mall (See Item 7).
Historical Occupancy
The following table shows the historical occupancy percentage at the Mall at
December 31 of the indicated years.
1995 1994 1993 1992 1991
Including
Anchor Stores 95.6% 97.9% 97.7% 98.1% 99.3%
Excluding
Anchor Stores 88.1% 93.4% 93.6% 95.1% 97.6%
Physical Improvements
During 1995, several interior and exterior improvement projects were completed
which were designed to maintain and enhance the appeal of Laurel Centre. The
most significant of these projects was the replacement of the Mall's HVAC
system, the majority of which was completed during 1995, at a cost of
approximately $1.3 million. Total capital improvements completed during 1995
amounted to $1,518,973.
Following an examination by an independent engineer, it was determined that the
Mall's roof may require extensive repairs or replacement to address age and
weather related deterioration. Currently, the General Partner estimates the
cost of such repairs or replacement, which would be funded by cash flow
generated by Laurel Centre, the Partnership's cash reserve or a combination of
the two, to be approximately $400,000. These and other improvements may be
necessary in order to maintain the physical integrity of the Mall and allow the
Mall to compete aggressively for renewals of existing tenants and for new
tenants. The timing and costs of such repairs are uncertain at this time,
however, they are expected to be funded from operating cash flow and
Partnership 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 anchor
tenants who can attract customers from the Mall's trade area, (iii) creating
and maintaining an attractive tenant mix and (iv) maintaining or upgrading the
mall's physical condition.
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 three large centers 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 smaller mall stores.
Laurel Shopping Center is an open-air shopping center immediately adjacent to
Laurel Centre. Please see Item 2 , paragraph 3 for a discussion of Laurel
Shopping Center.
Columbia Mall is located approximately 12 miles northwest of the Mall. It is
anchored by, Hecht's, Sears, and Woodward & 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, a 110,000 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, 1995.
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, 1994 to December 31, 1994 and January 1, 1995 to
December 31, 1995 were as follows:
High Low
1994
First Quarter $ 4.25 $ 3.31
Second Quarter 3.88 3.06
Third Quarter 3.31 2.88
Fourth Quarter 3.38 2.25
1995
First Quarter $ 3.13 $ 2.38
Second Quarter 3.00 2.31
Third Quarter 2.81 2.44
Fourth Quarter 2.63 1.69
(b) Holders
As of December 31, 1995, there were 3,099 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.
Pursuant to the Owner Partnership's Amended and Restated Limited Partnership
Agreement (the "Owner Partnership Agreement"), Net Cash Flow (as defined) of
the Owner Partnership from the operation of the Mall generally will be
distributed 98% to SLC and 2% to NAT.
In determining the amount of Net Cash Flow of the Owner Partnership and SLC to
be distributed, the General Partner, in its discretion, takes into account the
cash requirements of each, including operating expenses, contingencies and such
additional funding requirements for the Partnership, the Owner Partnership and
the Mall as deemed necessary.
In addition to distributions of Net Cash Flow, upon the occurrence of certain
events (e.g., a refinancing or sale of the Mall), "Net Proceeds" generally will
be distributed by the Owner Partnership, first, 99.5% to SLC and .5% to NAT
until SLC receives an amount equal to its "Preferred Return Arrearage" and
"Unrecovered Capital," and then 90% to SLC and 10% to NAT, as such terms are
defined in the Owner Partnership Agreement. "Net Proceeds" of SLC generally
will be distributed, first, 99.5% to the Unitholders and .5% to the General
Partner until each Unitholder receives an amount equal to his "Preferred Return
Arrearage" and "Unrecovered Capital," and then 89% to the Unitholders and 11%
to the General Partner, as such terms are defined in the SLC Partnership
Agreement. For additional details regarding distributions of Net Cash Flow and
Net Proceeds from SLC, reference is made to Section 5 of the SLC Partnership
Agreement, which is incorporated 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.
1995(1) 1994(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 1994 and 1995 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
prospectus pursuant to which the Units were initially offered 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
As of and for the years ended December 31,
1995 1994 1993 1992 1991
Total
Income $ 11,949,820 $ 11,122,199 $ 10,597,213 $ 9,845,067 $ 9,450,299
Net Loss $ 315,269 $ 457,345 $ 244,452 $ 486,291 $ 390,460
Net Loss
per Limited
Partnership
Unit * $ .07 $ .10 $ .05 $ .10 $ .08
Real Estate,
net of
accumulated
depreciation $ 55,933,856 $ 56,344,774 $ 57,760,189 $ 59,113,389 $ 60,651,179
Notes Payable
and Accrued
Interest $ 55,544,670 $ 50,476,031 $ 45,887,373 $ 41,733,243 $ 37,972,490
Total
Assets $ 70,772,712 $ 68,287,685 $ 66,688,829 $ 65,112,312 $ 64,256,412
Cash
Distributions
per
Limited
Partnership
Unit * $ .50 $ .50 $ .50 $ .50 $ .655
* 4,660,000 Units outstanding
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, 1995, the Partnership had cash and cash equivalents totalling
$13,427,085, compared with $10,431,820 at December 31, 1994. 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 1995, including a
fourth quarter cash distribution of $.125 per unit paid on February 9, 1996.
The level of future cash distributions will be reviewed by the General Partner
on a quarterly basis.
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. The
General Partner is pursuing two possible options to address the upcoming
maturities: (i) a sale of the Mall or (ii) an extension or refinancing of the
mortgages, in whole or in part. Either option is likely to be hindered by the
current limited availability of financing for real estate projects, and the
stringent underwriting criteria being applied when financing is available. The
ability of the Partnership to find a purchaser for the Mall or to obtain
refinancing for its current mortgages 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' operating covenants (see Item 2); and (iii)
the need for capital improvements. Furthermore, the cost, if necessary,
related t o positioning the Mall for sale or refinancing the mortgage debt,
could impact the level of Partnership cash reserves.
During 1993, Kemper sold its 76% participating interest in the first mortgage
loan and its entire interest in the second mortgage loan to CBA Associates,
Inc., which placed the loans into a pool of mortgages to be held by a real
estate mortgage investment conduit (the "Lender"). Although the terms of these
loans have not changed, this sale may affect the Partnership's ability to
refinance or restructure the loans with the Lender and CBA Associates, Inc. in
the event that refinancing is not available elsewhere.
As of December 31, 1995, the following tenants, or their parent corporations,
at the Mall have filed for protection under the U.S. Federal Bankruptcy Code.
Tenant Square Footage Leased
Merry Go 'Round 3,050
Royal Formalwear 2,198
Marianne & Marianne Plus 11,033
Time Out Amusement Center 1,635
J Riggings 2,700
These tenants occupy 20,616 square feet, or approximately 8.0% of the Mall's
leasable area (exclusive of anchor tenants), and at this point their plans to
remain at the Mall remain uncertain. Pursuant to the provisions of the U.S.
Bankruptcy Code, these tenants may, with court approval, choose to reject or
accept the terms of their leases. Should any of these tenants exercise the
right to reject their leases, this could have an adverse impact on cash flow
generated by the Mall and revenues received by the Partnership, as well as an
adverse effect on the Partnership's efforts to sell or refinance the Mall.
Merry Go 'Round closed its store in February 1996.
At December 31, 1995 real estate at cost increased to $70,034,355 from
$68,515,382 at December 31, 1994. The increase is primarily attributable to
the replacement of the Mall's HVAC system at a cost of approximately $1.3
million, of which $1 million had been paid as of December 31, 1995. Total
capital improvements completed during 1995 amounted to $1,518,973. Following
an examination by an independent engineer, it was determined that the Mall's
roof may require extensive repairs to address age and weather related
deterioration. These and other improvements may be necessary in order to
preserve the physical integrity of the Mall and to allow the Mall to compete
for renewals of existing tenants and for new tenants. The timing and costs of
such repairs are uncertain at this time, however, they are expected to be
funded from operating cash flow and Partnership cash reserves.
At December 31, 1995, the accounts receivable balance, net of allowance for
doubtful accounts, was $242,818 as compared to $528,845 at December 31, 1994.
The decrease reflects an increase in the allowance for doubtful accounts and
the timing of payments received from tenants for percentage rent and common
area maintenance charges.
Deferred rent receivable increased from $309,478 at December 31, 1994 to
$482,624 at December 31, 1995. The increase was primarily a result of accruing
rents that are not to be received until later periods due to scheduled rent
increases on a straight-line basis over the lease terms as required by
generally accepted accounting principles, and the addition of new tenants over
the past year.
Accounts payable and accrued expenses totalled $285,035 at December 31, 1995
compared to $179,794 at December 31, 1994. The increase is primarily due to an
increase in electricity expenses accrued at December 31, 1995.
The zero coupon first mortgage note payable increased $5,068,639 from December
31, 1994 to $53,525,503 at December 31, 1995, due to the accrual of interest on
the zero coupon first mortgage note.
The Partnership paid cash distributions to Limited Partners totaling
$2,330,000, or $.50 per Unit, for each of the years ended December 31, 1995 and
1994. Such distributions constitute returns of capital in both years.
Results of Operations
1995 versus 1994
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 $6,921,415 for
the year ended December 31, 1995, compared with $5,564,906 for the year ended
December 31, 1994. The increase is primarily attributable to a reduced net
loss in 1995 and the increase in accounts payable and accrued expenses.
For the year ended December 31, 1995, the Partnership reported a net loss of
$315,269 compared with a net loss of $457,345 for the year ended December 31,
1994. The lower net loss in 1995 is primarily the result of an increase in
rental and interest income in 1995 offset by increases in interest expense and
depreciation and amortization expense.
Rental income totalled $5,835,838 for the year ended December 31, 1995 compared
with $5,526,093 in 1994. The increase is primarily attributable to higher
lease rates for new tenants, lease renewals at higher rates and an increase in
temporary tenant income. Escalation income totalled $5,092,316 in 1995
compared with $5,004,831 in 1994. 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 higher recoverable property operating expenses in 1995.
Interest income totaled $567,284 for the year ended December 31, 1995 compared
with $274,960 in 1994. The increase is due to the Partnership's increased cash
balance and higher interest rates earned in 1995. Miscellaneous income totaled
$454,382 for the year ended December 31, 1995 compared with $316,315 in 1994,
up due to increased promotional expense billed back to tenants.
Total expenses for 1995 were $12,267,900 compared with $11,582,091 in 1994.
The increase is primarily due to higher interest expense and property operating
expense. Interest expense for 1995 increased from 1994, reflecting the
compounding of interest on the Zero Coupon Loan. Property operating expenses
also increased from 1994 due primarily to higher bad debt expense, an increase
in insurance premiums and management fees. Bad debt expense in 1995, totaling
$145,721 during 1995 as compared to $81,610 during 1994, relates primarily to
reserves established for tenants at the Mall, or their parent companies, which
have filed for bankruptcy.
Mall tenant sales (exclusive of anchor tenants) for the twelve months ended
December 31, 1995 and 1994 were $57,327,000 and $61,261,000, respectively.
Mature tenant sales for the twelve months ended December 31, 1995 and 1994 were
$45,011,000 and $49,224,000, respectively. A mature tenant is defined as a
tenant that has operated at the Mall for each of the last two years. The
declines in tenant sales reflect lower occupancy at the property as well as
continued weakness in apparel sales and strong competition from nearby discount
stores. At December 31, 1995 and 1994, the Mall was 88.1% and 93.4% occupied,
respectively, exclusive of anchor tenants.
1994 versus 1993
Net cash flow from operating activities totaled $5,564,906 for the year ended
December 31, 1994, largely 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 expense 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.
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 expense 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 $61,261,000 and $62,732,000, respectively.
Mature tenant sales for the twelve months ended December 31, 1994 and 1993 were
$49,224,000 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.
Property Appraisal
The appraised fair market value of the Mall at January 1, 1996, as determined
by Cushman & Wakefield, Inc., an independent, third-party appraisal firm, was
$77,000,000, compared with $81,000,000 at January 1, 1995. 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, including 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 Consolidated 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 General Partner. 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 U.S. 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, positions, offices held, and brief accounts of
the business experience of each Director and Executive Officer of the General
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 Centre Inc. as of December 31, 1995.
Name Office
Paul L. Abbott Director, President, and
Chief Executive Officer
Robert J. Hellman Director, Vice President,
and Chief Financial Officer
Kathleen Carey Director
Elizabeth L. Jarvis Director
Raymond C. Mikulich Director
Richard A. Morton Director
Joan B. Berkowitz Vice President
Elizabeth Rubin Vice President
Robert Sternlieb Vice President
Paul L. Abbott, 50, 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, 41, is a Senior Vice President of Lehman Brothers and is
responsible for investment management of retail, commercial and residential
real estate. Since joining Lehman Brothers in 1983, Mr. Hellman has been
involved in a wide range of activities involving real estate and direct
investments including origination of new investment products, restructurings,
asset management and the sale of commercial, retail and residential properties.
Prior to joining Lehman Brothers, Mr. Hellman worked in strategic planning for
Mobil Oil Corporation and was an associate with an international consulting
firm. Mr. Hellman received a bachelor's degree from Cornell University, a
master's degree from Columbia University, and a law degree from Fordham
University.
Kathleen B. Carey, 42, 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. Kathleen's practice has involved all facets of acquisitions, sales
and financing of commercial properties, including multifamily housing, office
buildings and shopping centers. She is admitted to practice in New York,
Connecticut and California and currently works as an independent commercial
real estate consultant.
Elizabeth L. Jarvis, 60, 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
shopping centers. From 1978 through 1983, 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, 43, 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, 43, is a principal in entities that own and manage eight
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, 36, 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, 29, is a Vice President of Lehman Brothers in the Diversified
Asset Group. Ms. Rubin joined Lehman Brothers in April 1992. Prior to joining
Lehman Brothers, she was employed from September 1988 to April 1992 by the
accounting firm of Kenneth Leventhal and Co. Ms. Rubin is a Certified Public
Accountant and received a B.S. degree from the State University of New York at
Binghamton in 1988.
Robert Sternlieb, 31, is an Assistant Vice President of Lehman Brothers and is
responsible for asset management within the Diversified Asset Group. Mr.
Sternlieb joined Lehman Brothers in April 1989 as an asset manager. From May
1986 to April 1989, he was a systems analyst at Drexel Burnham Lambert. Mr.
Sternlieb received a B.S. degree in Finance from Lehigh University in 1986.
Item 11. Executive Compensation
The Directors and Officers of the General Partner do not receive any salaries
or other compensation from the Partnership, except that Elizabeth Jarvis,
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 1995, Ms.
Jarvis and Mr. Morton each received $21,600, and Ms. Carey received $19,600
since she became a director on March 8, 1995.
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, 1995, 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, 1995 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 (9 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, 9 persons) 500
Item 13. Certain Relationships and Related Transactions
Certain Officers and Directors of the General Partner are employees of Lehman.
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, 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. First Data Investor
Services Group, formerly 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, 1995, and 1994, $3,226, and $4,266, respectively, was due to
affiliates for expenditures paid on behalf of the Partnership. For the years
ended December 31, 1995, 1994 and 1993, $92,519, $56,290 and $55,113,
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. The new agreement initially expired on
December 31, 1995, but allows for automatic renewal at one year intervals
thereafter. The new management agreement was renewed through December 31,
1996. For the years ended December 31, 1995, 1994, and 1993, management fee
expense amounted to $311,601, $276,795 and $296,618, respectively.
Explanatory Note
This Amendment No. 1 to Form 10-K amends and restates in its entirety Item 14
of the Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
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 Consolidated Financial Statements and Schedules
Page
Number
Independent Auditors' Report F-1
Consolidated Balance Sheets
At December 31, 1995 and 1994 F-2
Consolidated Statements of Operations
For the years ended December 31, 1995, 1994 and 1993 F-3
Consolidated Statements of Partners' Capital
For the years ended December 31, 1995, 1994 and 1993 F-3
Consolidated Statements of Cash Flows
For the years ended December 31, 1995, 1994 and 1993 F-4
Notes to the Consolidated Financial Statements F-5
Schedule II - Valuation and Qualifying Accounts F-10
Schedule III - Real Estate and Accumulated Depreciation F-11
(b) Exhibits.
Subject to Rule 12b-32 of the Securities and Exchange 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.
27 Financial Data Schedule (filed herewith)
99 Limited Appraisal of Real Property for Laurel Centre as of January 1,
1996, as prepared by Cushman & Wakefield, Inc. (filed herewith)
*Previously filed
(c) Reports on Form 8-K in the fourth quarter of fiscal 1995: None
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: May 1, 1996
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: May 1, 1996
BY: /s/ Paul L. Abbott
Paul L. Abbott
Director, President and
Chief Executive Officer
Date: May 1, 1996
BY: /s/ Elizabeth Jarvis
Elizabeth Jarvis
Director
Date: May 1, 1996
BY: /s/ Richard A. Morton
Richard A. Morton
Director
Date: May 1, 1996
BY: /s/ Robert J. Hellman
Robert J. Hellman
Director, Vice President and
Chief Financial Officer
Date: May 1, 1996
BY: /s/ Raymond Mikulich
Raymond Mikulich
Director
Date: May 1, 1996
BY: /s/ Joan Berkowitz
Joan Berkowitz
Vice President
Date: May 1, 1996
BY: /s/ Elizabeth Rubin
Elizabeth Rubin
Vice President
Date: May 1, 1996
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. (a Delaware limited partnership) and Consolidated Partnership as listed in
the accompanying index. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedules as
listed in the accompanying index. These consolidated financial statements and
financial statement schedules are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Shopco Laurel
Centre, L.P. and Consolidated Partnership as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995 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.
The accompanying consolidated financial statements and financial statement
schedules have been prepared assuming that the Partnership will continue as a
going concern. As discussed in Note 5 to the financial statements, the
Partnership's zero coupon mortgage note payable matures on October 15, 1996.
Currently, it is management's intent to either sell the Partnership's property
or obtain an extension or refinancing to satisfy the mortgage loan obligation.
However, market conditions may prevent the Partnership from obtaining
sufficient proceeds from a sale or refinancing to satisfy the mortgage
obligation. These conditions raise substantial doubt about the Partnership's
ability to continue as a going concern. The consolidated financial statements
and financial statement schedules do not include any adjustments that might
result from the outcome of this uncertainty.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
March 25, 1996
Consolidated Balance Sheets
December 31, 1995 and 1994
Assets 1995 1994
Real estate, at cost
(notes 3, 5 and 6):
Land $ 5,304,011 $ 5,304,011
Building 61,062,234 60,029,923
Improvements 3,668,110 3,181,448
70,034,355 68,515,382
Less accumulated depreciation
and amortization (14,100,499) (12,170,608)
55,933,856 56,344,774
Cash and cash equivalents 13,427,085 10,431,820
Accounts receivable,
net of allowance of $254,927
in 1995 and $131,759 in 1994 242,818 528,845
Deferred rent receivable 482,624 309,478
Deferred charges, net of
accumulated amortization
of $273,442 in 1995 and
$218,353 in 1994 133,295 142,322
Prepaid expenses 553,034 530,446
Total Assets $ 70,772,712 $ 68,287,685
Liabilities, Minority Interest and Partners' Capital
Liabilities:
Accounts payable and
accrued expenses $ 285,035 $ 179,794
Zero coupon first mortgage
note payable (note 5) 53,525,503 48,456,864
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) 8,851 9,891
Security deposits payable 14,633 14,633
Deferred income 804,171 766,727
Distribution payable (note 9) 588,384 588,384
Total Liabilities 57,245,744 52,035,460
Minority interest (583,239) (526,787)
Partners' Capital (notes 1, 4 and 10):
General Partner 917,755 944,444
Limited Partners (4,660,000 limited
partnership units authorized,
issued and outstanding) 13,192,452 15,834,568
Total Partners' Capital 14,110,207 16,779,012
Total Liabilities, Minority Interest
and Partners' Capital $ 70,772,712 $ 68,287,685
Consolidated Statements of Operations
For the years ended December 31, 1995, 1994 and 1993
Income 1995 1994 1993
Rental income (note 3) $ 5,835,838 $ 5,526,093 $ 5,373,724
Escalation income (note 3) 5,092,316 5,004,831 4,763,187
Interest income 567,284 274,960 170,185
Miscellaneous income 454,382 316,315 290,117
Total Income 11,949,820 11,122,199 10,597,213
Expenses
Interest expense 5,298,639 4,822,735 4,384,130
Property operating expenses 3,737,361 3,642,418 3,325,995
Depreciation and amortization 1,984,980 1,873,237 1,835,776
Real estate taxes 1,023,297 1,034,656 1,050,690
General and administrative 223,623 209,045 245,158
Total Expenses 12,267,900 11,582,091 10,841,749
Loss before minority interest (318,080) (459,892) (244,536)
Minority interest 2,811 2,547 84
Net Loss $ (315,269) $ (457,345) $ (244,452)
Net Loss Allocated:
To the General Partner $ (3,153) $ (4,573) $ (2,445)
To the Limited Partners (312,116) (452,772) (242,007)
$ (315,269) $ (457,345) $ (244,452)
Per limited partnership unit
(4,660,000 outstanding) $ (.07) $ (.10) $ (.05)
Consolidated Statements of Partners' Capital
For the years ended December 31, 1995, 1994 and 1993
Limited General
Partners Partner Total
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
Net loss (312,116) (3,153) (315,269)
Distributions (note 9) (2,330,000) (23,536) (2,353,536)
Balance at December 31, 1995 $ 13,192,452 $ 917,755 $ 14,110,207
Consolidated Statements of Cash Flows
For the years ended December 31, 1995, 1994 and 1993
Cash Flows from Operating Activities: 1995 1994 1993
Net loss $ (315,269) $ (457,345) $ (244,452)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Minority interest (2,811) (2,547) (84)
Depreciation and amortization 1,984,980 1,873,237 1,835,776
Increase in interest on zero
coupon mortgage payable 5,068,639 4,588,658 4,154,130
Increase (decrease) in cash
arising from changes in
operating assets and
liabilities:
Accounts receivable 286,027 (64,367) 2,830
Deferred rent receivable (173,146) (193,549) (99,629)
Deferred charges (46,062) (53,417) (26,334)
Prepaid expenses (22,588) (2,524) 7,249
Accounts payable and
accrued expenses 105,241 (103,767) 67,692
Due to affiliates (1,040) 66 2,400
Security deposits payable - 2,500 2,500
Deferred income 37,444 (22,039) (20)
Net cash provided by operating
activities 6,921,415 5,564,906 5,702,058
Cash Flows from Investing Activities:
Additions to real estate (1,518,973) (411,426) (441,885)
Cash-held in escrow - - 69,074
Net cash used for
investing activities (1,518,973) (411,426) (372,811)
Cash Flows from Financing Activities:
Cash distributions to partners (2,353,536) (2,353,536) (2,353,536)
Cash distributions - minority
interest (53,641) (53,134) (52,113)
Net cash used for
financing activities (2,407,177) (2,406,670) (2,405,649)
Net increase in cash and
cash equivalents 2,995,265 2,746,810 2,923,598
Cash and cash equivalents
at beginning of period 10,431,820 7,685,010 4,761,412
Cash and cash equivalents
at end of period $ 13,427,085 $ 10,431,820 $ 7,685,010
Supplemental Disclosure of Cash Flow Information:
Cash paid during the
period for interest $ 230,000 $ 234,077 $ 230,000
Notes to the Consolidated Financial Statements
December 31, 1995, 1994 and 1993
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 using the straight-line
method over an estimated useful life of 12 years. Amortization of tenant
leasehold improvements is computed using the straight-line method over the
lease term.
Accounting for Impairment
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121"),
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. FAS 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. The Partnership has adopted FAS 121 in
the fourth quarter of 1995. Based on current circumstances, the adoption had
no impact on the consolidated financial statements.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("FAS 107"), requires that the Partnership
disclose the estimated fair values of its financial instruments. Fair values
generally represent estimates of amounts at which a financial instrument could
be exchanged between willing parties in a current transaction other than in
forced liquidation.
Fair value estimates are subjective and are dependent on a number of
significant assumptions based on management's judgement regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. In addition, FAS 107 allows
a wide range of valuation techniques, therefore, comparisons between entities,
however similar, may be difficult.
Organization Costs and Deferred Charges
Costs and charges are amortized using the straight-line method over the
following periods:
Fee for negotiating the acquisition
of the ownership of the Mall 40 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 using the straight-line method 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.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid short-term investments with
maturities of three months or less from the date of issuance. The carrying
amount approximates fair value because of the short maturity of these
instruments.
Concentration of Credit Risk
Financial instruments which potentially subject the Partnership to a
concentration of credit risk principally consist of cash and cash equivalents
in excess of the financial institutions' insurance limits. The Partnership
invests available cash with high credit quality financial institutions.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. Real Estate
SLC's real estate, which was purchased on December 1, 1986, consists of an
enclosed regional shopping mall containing a total of 100 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 of land known as Laurel
Centre, located in Laurel, Maryland. The retail tenant portion of the Mall is
contained on two levels, and parking is provided at Laurel Centre for
approximately 3,400 cars.
J.C. Penney leases 136,864 square feet of the gross leasable building area
located at the northern end of the Mall. The lease with J.C. Penney contains
an operating covenant pursuant to which J.C. Penney was 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, 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. 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.
Hecht's leases a parcel of land pursuant to a ground lease on which it has
constructed a store. 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. 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.
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.
The following is a schedule of the remaining minimum lease payments as called
for under the lease agreements with Mall tenants:
Year Ending
December 31,
1996 $ 5,443,172
1997 5,298,609
1998 4,983,818
1999 4,751,416
2000 4,122,389
Thereafter 14,914,116
$ 39,513,520
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, 1995, 1994 and 1993, percentage
rents amounted to $80,906, $343,061 and $338,712, respectively, and are
included in rental income. For the years ended 1995, 1994 and 1993 temporary
tenant income amounted to $338,147, $307,035 and $272,589, respectively and are
included in rental income.
The appraised fair market value of the mall at January 1, 1996, as determined
by an independent, third-party appraisal firm, was $77,000,000, compared with
$81,000,000 at January 1, 1995.
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.
The mortgage agreement specifically provides for an annual covenant with which
the Owner Partnership must comply. The covenant provides that the accrued
value of the zero coupon loan at the end of each year shall not exceed 70% of
the most recent appraised value of the Mall. Based upon the appraised value of
the Property on January 1, 1996 of $77,000,000 this covenant was met at
December 31, 1995.
Currently, it is the General Partner's intent to either sell Laurel Centre or
to seek an extension or refinancing of the mortgage loan. If a sale of Laurel
Centre is not feasible, an extension or refinancing of the mortgage is the
other recourse. Should the Partnership request an extension of the mortgage,
such extension would ultimately be subject to the approval of the body of
investors which the REMIC Lender represents. Given this variable, the ability
to obtain an extension of the mortgage is highly uncertain. Although the
General Partners intend to bring about a timely resolution to the Partnership's
approaching loan maturity, there can be no assurance that either a sale of
Laurel Centre or a refinancing of the debt will be consummated prior to the
maturity of the mortgage loan.
Based on borrowing rates currently available to the Partnership for mortgage
loans with similar terms and average maturities and the current appraised value
of Laurel Centre, the fair value of long-term debt approximates its current
carrying value.
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.
Currently, it is the General Partner's intent to either sell Laurel Centre or
to seek an extension or refinancing of the second mortgage note. If a sale of
Laurel Centre is not feasible, an extension or refinancing of the second
mortgage is the other recourse. Although the General Partners intend to bring
about a timely resolution to the Partnership's approaching loan maturity, there
can be no assurance that either a sale of Laurel Centre or a refinancing of the
debt will be consummated prior to the maturity of the second mortgage note.
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, 1995 and 1994.
As of December 31, 1995 and 1994, $3,226 and $4,266, respectively, is due to
affiliates for expenditures paid on behalf of the Partnership. For the years
ended December 31, 1995, 1994, and 1993, $92,519, $56,290, and $55,113,
respectively, was earned by the affiliates.
Cash and Cash Equivalents Certain cash and cash equivalent amounts reflected on
the Partnership's consolidated balance sheet at December 31, 1995 and 1994 were
on deposit with an affiliate of the General Partner.
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. The new management agreement initially
expired on December 31, 1995, but allows for automatic renewal at one year
intervals thereafter. The management agreement has been renewed through
December 31, 1996. For the years ended December 31, 1995, 1994 and 1993,
management fee expense amounted to $311,601, $276,795 and $296,618,
respectively.
9. Distributions to Limited Partners
Distributions to limited partners for each of 1995, 1994 and 1993 were
$2,330,000 ($.50 per limited partnership unit). Cash distributions declared
payable to limited partners at December 31, 1995 and 1994 were $582,500 ($.125
per limited partnership unit).
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 at December
31, follow:
1995 1994 1993
Consolidated financial
statement net loss $ (315,269) $ (457,345) $ (244,452)
Tax basis depreciation over
financial statement
depreciation (156,364) (272,504) (279,294)
Tax basis rental income
under financial statement
rental income (134,345) (213,434) (114,790)
Tax basis minority
interest under financial
statement minority interest (9,190) (9,296) (9,271)
Other 1,636 10,612 5,263
Federal income tax
basis net loss $ (613,532) $ (941,967) $ (642,544)
1995 1994 1993
Financial statement basis
partners' capital $ 14,110,207 $ 16,779,012 $ 19,589,893
Current year financial
statement net loss over
federal income tax basis
net loss (298,263) (484,622) (398,092)
Cumulative financial
statement net income
over cumulative federal
income tax basis net loss (5,154,007) (4,669,385) (4,271,293)
Federal income tax
basis partners' capital $ 8,657,937 $ 11,625,005 $ 14,920,508
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, 1993: $ 92,704 $ 32,267 $ 3,250 $ 121,721
Year ended December 31, 1994: 121,721 81,610 71,572 131,759
Year ended December 31, 1995: $ 131,759 $ 147,608 $ 24,440 $ 254,927
SHOPCO LAUREL CENTRE, L.P. AND CONSOLIDATED PARTNERSHIP
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1995
Costs Capitalized
Initial Cost to Subsequent
Partnership (A) To Acquisition
Building and
Description Encumbrances Land Improvements Land
Shopping Center
Laurel, MD $ 55,525,503 $ 5,058,967 $ 56,039,671 $ 245,044
SHOPCO LAUREL CENTRE, L.P. AND CONSOLIDATED PARTNERSHIP
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1995
Gross Amount at Which Carried at Close of Period (B)
Building and Building and
Description Improvements Land Improvements Total
Shopping Center
Laurel, MD $ 8,690,673 $ 5,304,011 $ 64,730,344 $ 70,034,355
SHOPCO LAUREL CENTRE, L.P. AND CONSOLIDATED PARTNERSHIP
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1995
Life on Which
Depreciation
in Latest
Accumulated Date of Date Income Statements
Description Depreciation Construction Acquired is Computed
Shopping Center
Laurel, MD $14,100,499 1979 12/86 Building 40 years
Improvements 12 years
(A) The initial cost to the Partnership represents the original purchase price
of the property.
(B) For Federal income tax purposes, the cost basis of land, building and
improvements at December 31, 1995 is $70,006,517.
A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended December 31, 1995, 1994 and 1993 follows:
Real Estate Investments: 1995 1994 1993
Beginning of year $ 68,515,382 $ 68,106,262 $ 67,664,377
Additions 1,518,973 409,120 441,885
End of year $ 70,034,355 $ 68,515,382 $ 68,106,262
Accumulated Depreciation:
Beginning of year $ 12,170,608 $ 10,346,073 $ 8,550,988
Depreciation expense 1,929,891 1,824,535 1,795,085
End of year $ 14,100,499 $ 12,170,608 $ 10,346,073
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 13,427,085
<SECURITIES> 0
<RECEIVABLES> 980,369
<ALLOWANCES> (254,927)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 70,034,355
<DEPRECIATION> (14,100,499)
<TOTAL-ASSETS> 70,772,712
<CURRENT-LIABILITIES> 0
<BONDS> 55,525,503
<COMMON> 0
0
0
<OTHER-SE> 14,110,207
<TOTAL-LIABILITY-AND-EQUITY> 70,772,712
<SALES> 0
<TOTAL-REVENUES> 11,949,820
<CGS> 0
<TOTAL-COSTS> 4,760,658
<OTHER-EXPENSES> 2,208,603
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,298,639
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (315,269)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> 0
</TABLE>
COMPLETE 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, 1996
Laurel Owner Partners Limited Partnership
3 World Financial Center, 29th Floor
New York, New York 10285
Cushman & Wakefield, Inc.
Valuation Advisory Services
51 West 52nd Street, 9th Floor
New York, NY 10019
March 28, 1996
Laurel Owner Partners Limited Partnership
3 World Financial Center, 29th Floor
New York, New York 10285
Re: Complete 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 Summary Report estimating
the market value of the leased fee estate in the referenced real property.
As specified in the Letter of Engagement, the value opinion reported below is
qualified by certain assumptions, limiting conditions, certifications, and
definitions, which are set forth in the report.
This report has been prepared for 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 Jay F. Booth.
Brian J. Booth provided significant assistance in the preparation of the report
and cash flows but did not inspect the property. Richard W. Latella, MAI
inspected the property and has reviewed and approved the report.
This is a Complete Appraisal in a Summary Report which is intended to comply
with the reporting requirements set forth under Standards Rule 2-2(b) of the
Uniform Standards of Professional Appraisal Practice of the Appraisal
Foundation. The results of the appraisal are being conveyed in a Summary
Report according to our agreement. As such, the report presents only a summary
discussion of the data, reasoning, and analyses used in the appraisal process
at hand. Supporting documentation is retained in the appraisers' file. The
depth of discussion contained in this report is specific to the needs of the
Client and is intended for the use stated. The appraiser is not responsible
for unauthorized use of this report. We are providing this report as an update
to our last analysis which was prepared as of January 1, 1995. As such, we
have primarily reported only changes to the property and its environs over the
past year.
As a result of our analysis, we have formed an opinion that the market value of
the leased fee estate in the referenced property, subject to the assumptions,
limiting conditions, certifications, and definitions, as of January 1, 1996,
was:
SEVENTY SEVEN MILLION DOLLARS
$77,000,000
This letter is invalid as an opinion of value if detached from the report,
which contains the text, exhibits, and an Addenda.
Respectfully submitted,
CUSHMAN & WAKEFIELD, INC.
/s/ Jay F. Booth
Jay F. Booth
Retail Valuation Group
/s/ Brian J. Booth
Brian J. Booth
Valuation Advisory Services
/s/ Richard W. Latella
Richard W. Latella, MAI
Senior Director
Retail Valuation Group
Maryland Certified General
Real Estate Appraiser License No. 10462
JFB:BJB:RWL:emf
C&W File No. 96-9064-3
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, 1996
Date of Inspection: January 16, 1996; January 18, 1996
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
maximum 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 Stores 416,422+/- SF
Mall Shops 245,112+/- SF
Total GLA
(Occupancy Area) 661,534+/- SF
Total Owned GLA 381,976+/- SF
* Separately owned. The total
appraised GLA amounts to 381,976+/-
square feet and includes J.C. Penney
and the Mall Shops.
Condition: Good
Operating Data and Forecasts
Current Occupancy: 86.1% based on mall shop GLA,
(Inclusive of pre-committed tenants)
Forecasted Stabilized
Occupancy: 96.0%+/-
Forecasted Date of
Stabilized Occupancy: January, 1999
Operating Expenses
C&W Forecast (1996): $4,352,3967($17.76/SF of mall GLA)
Owner's Budget (1996): $4,722,704 ($19.27/SF of mall GLA)
Value Indicators
Sales Comparison Approach: $74,000,000 to $78,000,000
Income Approach
Direct Capitalization: $78,900,000
Discounted Cash Flow: $76,500,000
Investment Assumptions
Rent Growth Rate: Flat - 1997
+2.0% - 1998
+3.0% - 1999
+3.5% - 2000-2005
Expense Growth Rate: +3.0% - 1996-1998
+3.5% - 1999-2005
Tax Growth Rate: +4.0% - 1997-2005
Sales Growth Rate: Flat - 1996
+2.0% - 1997
+3.0% - 1998
+3.5% - 1999-2005
Other Income: +3.0% - 1997-2005
Tenant Improvements-New
Mall Tenants: $8.00/SF
Tenant Improvements-Renewing
Mall Tenants: $1.50/SF
Vacancy between Tenants: 6 months
Renewal Probability: 70.0%
Going-In Capitalization Rate: 7.75% - 8.25%
Terminal Capitalization Rate: 8.25% - 8.75%
Cost of Sale at Reversion: 2.0%
Discount Rate: 11.00% - 11.50%
Value Conclusion: $77,000,000
Exposure Time Implicit in Value
Conclusion: Not more than 12 months
Resulting Indicators
Going-In Overall Rate: 8.49%
Price per Square Foot of
Owned GLA: $200.27
Price per Square Foot of
Mall Shop GLA: $312.10
Special Risk Factors: The potential for future competition
has been an issue for the subject.
Please refer to our complete discussion
in the Trade Area Analysis.
Special Assumptions
1. Throughout this analysis we have relied on information provided by
ownership and management which we assume to be accurate. Negotiations are
currently underway with additional mall tenants and we are advised that a few
existing tenants will be leaving the mall as a result of parent company
bankruptcies. All tenant specific assumptions are identified within the body
of this report.
2. Our cash flow analysis and valuation has recognized that all signed as
well as any pending leases with a high probability of being consummated are
implemented according to the terms presented to us by Shopco. Such leases are
identified within the body of this report.
3. During 1990, the Americans With Disabilities Act (ADA) was passed by
Congress. This is Civil Rights legislation which, among other things, provides
for equal access to public placed for disabled persons. It applies to existing
structures as of January 1992 and new construction as of January 1993.
Virtually all landlords of commercial facilities and tenants engaged in
business that serve the public have compliance obligations under this law.
While we are not experts in this field, our understanding of the law is that it
is broad-based, and most existing commercial facilities are not in full
compliance because they were designed and built prior to enactment of the law.
During this assignment, we noticed no additional "readily achievable barrier
removal" problems, but we recommend a compliance study be performed by
qualified personnel to determine the extent of non-compliance and cost to cure.
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.
TABLE OF CONTENTS
Page
PHOTOGRAPHS OF SUBJECT PROPERTY 1
INTRODUCTION 3
Identification of Property 3
Property Ownership and Recent History 3
Purpose and Intended Use of the Appraisal 3
Extent of the Appraisal Process 3
Date of Value and Property Inspection 4
Property Rights Appraised 4
Definitions of Value, Interest Appraised, and Other Pertinent Terms 4
Legal Description 5
REGIONAL ANALYSIS 6
NEIGHBORHOOD ANALYSIS 38
RETAIL MARKET ANALYSIS 39
THE SUBJECT PROPERTY 50
REAL PROPERTY TAXES AND ASSESSMENTS 51
ZONING 52
HIGHEST AND BEST USE 53
VALUATION PROCESS 54
SALES COMPARISON APPROACH 55
INCOME APPROACH 71
RECONCILIATION AND FINAL VALUE ESTIMATE 105
ASSUMPTIONS AND LIMITING CONDITIONS 107
CERTIFICATION OF APPRAISAL 109
ADDENDA 110
PHOTOGRAPHS OF SUBJECT PROPERTY
View of Hecht's from parking deck.
JC Penney and upper level entrance from parking deck.
Montgomery Ward.
Montgomery Ward parking deck from Route 1.
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 (subject property) is a two level, modern
shopping complex with a total occupancy area of 661,534+/- 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 mall
is situated on a 21.84+/- acre site situated on the west side of U.S. Route 1
at Cherry Lane. Laurel Centre is the area's dominant retail center. It is
supported by an expanding population base with income levels above regional
averages. The immediate neighborhood continues to be the recipient of stable
commercial and residential growth.
Property Ownership and Recent History
Title to the subject is held by Laurel Owner Partners Limited
Partnership. It is currently 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 Intended Use of the Appraisal
The purpose of this Appraisal is to provide a market value estimate of
the leased fee estate in the subject property as of January 1, 1996. Our
analysis reflects conditions prevailing as of that date. Our last appraisal
was completed on January 1, 1995 and we have focused our analysis on changes to
the property and market conditions since that time. The function of this
appraisal is to provide an independent valuation analysis and to assist in
monitoring ownership's investment in the property.
Extent of the Appraisal Process
In the process of preparing this appraisal, we:
- Inspected the exterior of the building and the site
improvements and a representative sample of tenant spaces;
- Interviewed representatives of the property management company,
Shopco;
- Reviewed leasing policy, concessions, tenant build-out
allowances and history of recent rental rates and occupancy
with the mall manager;
- Reviewed a detailed history of income and expenses as well as a
budget forecast for 1996, including the budget for planned
capital expenditures and repairs;
- Conducted market research of occupancies, asking rents,
concessions and operating expenses at competing retail
properties, including interviews with on-site managers and a
review of our own data base from previous appraisal files;
- Prepared an estimate of stabilized income and expenses (for
capitalization purposes);
- Prepared a detailed discounted cash flow (DCF) analysis using
Pro-Ject +plus software for the purpose of discounting the
forecased net income stream into a present value of the leased
fee estate for the center;
- Conducted market inquiries into recent sales of similar
regional malls to ascertain sale prices per square foot, net
income multipliers, and capitalization rates. This process
involved telephone interviews with sellers, buyers and/or
participating brokers;
- Prepared Sales Comparison and Income Approaches to value;
- Reconciled the value indications and concluded a final value
estimate for the subject in its "as is" condition; and
- Prepared a Complete Appraisal of real property, with the
results conveyed in this Summary Report.
Date of Value and Property Inspection
On January 16, 1996 Jay F. Booth inspected the subject property and its
environs. Richard W. Latella, MAI also inspected the property on January 18,
1996. Our date of value is January 1, 1996.
Property Rights Appraised
Leased Fee Estate.
Definitions of Value, Interest Appraised, and Other Pertinent Terms
The definition of market value taken from the Uniform Standards of
Professional Appraisal Practice of the Appraisal Foundation, is as follows:
The most probable price which a property should bring in a competitive
and open market under all conditions requisite to a fair sale, the
buyer and seller, each acting prudently and knowledgeably, and assuming
the price is not affected by undue stimulus. Implicit in this
definition is the consummation of a sale as of a specified date and the
passing of title from seller to buyer under conditions whereby:
1. Buyer and seller are typically motivated;
2. Both parties are well informed or well advised, and acting in what
they consider their own best interests;
3. A reasonable time is allowed for exposure in the open market;
4. Payment is made in terms of cash in U.S. dollars or in terms of
financial arrangements comparable thereto; and
5. The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
Exposure Time
Under Paragraph 3 of the Definition of Market Value, the value estimate
presumes that "A reasonable time is allowed for exposure in the open
market". Exposure time is defined as the estimated length of time the
property interest being appraised would have been offered on the market
prior to the hypothetical consummation of a sale at the market value on
the effective date of the appraisal. Exposure time is presumed to
precede the effective date of the appraisal.
The following definitions of pertinent terms are taken from the
Dictionary of Real Estate Appraisal, Third Edition (1993), published by the
Appraisal Institute.
Leased Fee Estate
An ownership interest held by a landlord with the rights of use and
occupancy conveyed by lease to others. The rights of the lessor (the
leased fee owner) and the leased fee are specified by contract terms
contained within the lease.
Market Rent
The rental income that a property would most probably command on the
open market, indicated by the current rents paid and asked for
comparable space as of the date of appraisal.
Market Value As Is on Appraisal Date
The value of specific ownership rights to an identified parcel of real
estate as of the effective date of the appraisal; related to what
physically exists and is legally permissible and excludes all
assumptions concerning hypothetical market conditions or possible
rezoning.
Legal Description
A legal description is retained in our files.
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 the Baltimore, Maryland and
Washington, D.C. economies. 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 range of supply and demand
factors. As examples, the 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 had been dubbed a "recession proof"
city in that it was insulated, as some 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. However, as the recession of
the early 1990s took hold, affecting the entire east coast, this impression
faded significantly. Further, as will be discussed later, the latest
government downsizing demanded by the Republican controlled Congress is
expected to add further negative pressure to the area's statistics.
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.
Regional Map
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.
Infrastructure
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, the Washington region is bisected 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 achieve 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.
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 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 passengers,
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.
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 U.S. Air
Arena (basketball and hockey) in Landover, Maryland. Baseball is played at
Oriole Park at Camden Yard in Baltimore. A new downtown sports arena is under
construction with events expected to start in early 1997.
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 area 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.
Population
This section will examine the population size and age trends for the
metropolitan area. Employment, income, and household related demographics will
be reviewed separately.
According to Market Statistics' 1995 Demographics USA, the Washington,
D.C. MSA ranks fifth 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 1995 having increased at
an annual average of 1.2 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. The
District of Columbia was the big loser during this period with an average
annual decline of 0.5 percent. The annual rate of decline grew to 1.4 percent
by 1995.
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. The growth in
these areas has decreased in the 1990s to an annual growth rate of 1.7 and 1.3
percent, respectively.
The largest population increases occurred in the outer suburbs, the
areas beyond the first tier communities surrounding the District. The average
annual rate of increase in these areas was 4.4 percent between 1980 and 1990.
However, the rate of increase has fallen off since 1990 to 3.2 percent, a
phenomena concurrent with the slow down in the economy. 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
Jurisdiction Population (Thousands) Annual Average Growth Rate (%)
1980 1990 1995 1980-1990 1990-1995
District of Columbia 638.3 606.9 565.7 -0.4919 -1.3577
Arlington County 152.6 170.9 175.4 1.1992 0.5266
City of Alexandria 103.2 111.2 113.3 0.7752 0.3777
Central Jurisdictions 894.1 889 854.4 -0.0570 -0.7784
Fairfax County 596.9 818.6 889.2 3.7142 1.7249
City of Fairfax 19.4 19.6 20.6 0.1031 1.0204
City of Falls Church 9.5 9.6 9.6 0.1053 0.0000
Montgomery County 579.1 757.0 807.9 3.0720 1.3448
Prince George's County 665.1 729.3 768.2 0.9653 1.0668
Inner Suburban Area 1870 2334.1 2495.5 2.4818 1.3830
Loudoun County 57.4 86.1 111.7 5.0000 5.9466
Prince William County 144.7 215.7 242.2 4.9067 2.4571
Cities of Manassas/
Manassas Park 22 34.7 39.0 5.7727 2.4784
Frederick County 114.8 150.2 174.0 3.0836 3.1691
Calvert County 34.6 51.4 63.4 4.8555 4.6693
Charles County 72.7 101.2 110.2 3.9202 1.7787
Stafford County 40.5 61.2 78.0 5.1111 5.4902
Outer Suburban Area 486.7 700.5 811.6 4.3929 3.1720
METRO AREA TOTAL 3250.8 3923.6 4161.5 2.0696 1.2127
Source: U.S. Census Data and 1995 estimate Provided By Market Statistics 1995
Demographics USA
Note: The list of municipalities corresponds to the DC-VA-MD MSA prior to the
December 31, 1992 expansion.
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 are
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 following table
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 to 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.
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. The
increases in the elderly population were spread across all municipalities.
As of the 1990 Census, the population was distributed with 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.
Employment Characteristics
The following table shows the area's total employment as a percent of
total employment for each industry group for the past eight years.
Non-Agricultural Employment
Percent Share of Total
Employment
(%)
Annual
Growth
Industry 1988 1989 1990 1991 1992 1993 1994 1995 %
Manufacturing 4.1 4.0 3.9 3.8 3.6 4.0 3.9 4.9 2.4
Construction 6.6 6.6 6.0 4.8 4.4 4.4 4.8 4.0 -4.9
T.C.U. (1) 4.9 4.9 4.8 4.8 4.7 4.5 4.6 4.5 -1.0
Wholesale Trade 3.6 3.5 3.5 3.4 3.3 3.3 3.3 3.2 -1.4
Retail Trade 16.2 16.1 15.9 15.6 15.4 15.6 15.7 16.6 0.3
F.I.R.E. (2) 5.9 5.8 5.9 5.9 5.8 5.7 5.9 5.5 -0.8
Services 32.4 33.0 33.7 34.3 34.9 35.1 35.4 36.3 1.5
State
Government 3.7 3.6 3.6 3.6 3.6 3.7 3.6 3.4 -1.0
Local
Government 6.0 6.1 6.4 6.7 6.7 6.9 6.9 7.3 2.7
Federal
Government 16.6 16.4 16.3 17.1 17.5 16.8 15.9 14.4 -1.7
Total
Employment
(Thousands) 2,167.2 2,226.7 2,242.6 2,190.5 2,186.8 2,317.1 2,373.1 2,425.2 1.5
Yr-to-Yr
Growth (%) N/A +2.7 +0.7 -2.3 -0.2 +5.6 +2.4 +2.2 N/A
1 Transportation, Communications, Utilities
2 Finance, Insurance, Real Estate
Source: U.S. Department of Labor, Bureau of Labor Statistics, Wage and
Salary Employment, 1988-1995; Obtained From the District of Columbia
Department of Employment Services
The region enjoyed a period of unusual job expansion during the 1980s.
The peak year for growth was 1984, when growth reached 107,000 jobs. The
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 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. Since 1992, however, the area experienced positive
growth of 2.2 to 5.6 percent. This growth was found in the suburban areas as
opposed to the District of Columbia and was evenly distributed through all
industry types. The average growth rate for the 1988 to 1995 period reflects a
1.5 percent per year average, which is below the national average of about 2.5
percent per year.
Although the federal government has historically been the major
employer in the region, its share of employment has decreased slightly from
about 17 to 15 percent over the past two to three years. The aggregate federal
employment grew at an average annual rate of 1.4 percent between 1988 and 1992.
Since 1992, federal employment has decreased steadily from 17.5 percent to 14.4
percent and is expected to further decline in light of the downsizing issue.
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 has
grown to 36.3 percent by 1995. 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 fell dramatically in 1991. 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 4.0 percent in 1995. The average annual rate of decline over
the period was 4.9 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 Metro Area Employees
1 Inova Health Systems 9,500
2 Hechts 8,000
3 Medlantic Healthcare Group 6,000
4 Long & Foster Real Estate 5,300
5 Shoppers Food Warehouse 3,800
6 Booz Allen & Hamilton 3,100
7 Dyncorp 3,000
8 Holy Cross Hospital 2,300
9 Providence Hospital 2,000
10 Alexandria Hospital 1,742
Source:Washington Business Journal, November 17- 23, 1995
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 1993 recession, however, halted job growth in the area and
drove up unemployment rates. The related statistics are summarized below.
Unemployment Rates
Year 1988 1989 1990 1991 1992 1993 1994 1995
Washington MSA 2.9% 2.7% 3.4% 4.5% 5.0% 4.5% 4.1% 3.9%
United States 5.5% 5.3% 5.5% 6.7% 7.4% 6.8% 6.1% 5.3%
Source: Metropolitan Council of Governments: Economic Trends in Metropolitan
Washington, 1988-1991 (The unemployment rates are not seasonally adjusted.)
Updated figures including 1992 through 1995 obtained from the District of
Columbia Department of Employment Services.
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. Fortunately, as government jobs
(as a sector of the whole) has decreased, private sector job growth seems to be
picking up the slack. 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 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 Spending in the Washington, D.C. Area
(Millions)
Fiscal Year 1988 1989 1990 1991 1992 1993 1994
Percent Defense 33.9% 33.1% 31.2% 30.1% 29.9% 29.3% N/A
Percent
Non-Defense 66.1% 66.9% 68.8% 69.9% 70.1% 70.7% N/A
Total $37.6 $39.1 $42.6 $47.2 $49.6 $51.9 $56.1
Percent to DC 41.5% 42.1% 43.1% 41.6% 41.0% 39.9% 39.5%
Percent to MD 27.5% 28.1% 26.6% 26.4% 27.4% 27.2% 27.7%
Percent to VA 31.0% 29.8% 30.2% 32.0% 31.6% 32.9% 32.8%
Source: Greater Washington Research Center Federal Spending in Metropolitan
Washington, April 1995.
The bulk of the purchases are for services, constituting almost 67
percent of the dollar value of transactions in 1994. Also, important to note
is the fact that both products acquisitions and research and development
contracts remained relatively constant as a percentage of total spending over
the 1992 through 1994 period at 17 and 15 percent, respectively. 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 reported that growth in the
Washington area economy finally returned during the latter part of 1993 after
staggering through the previous six years. In early 1995 (April), most of the
nine indicators that the research group uses to track the health of the economy
and to predict its direction were up, the only exception being the employment
index which showed the number of jobs increasing at a pace somewhat slower than
the seasonal norm. On the positive side, however, the number of jobs increased
by the largest margin since mid-1993. Job gains in the private sector seem to
be leading those in the government.
The indicators utilized by the Research Center seem to suggest that the
economy is continuing to gain strength. However, the level of improvement
still falls short of generating the number of jobs the Washington area produced
during the boom of the 1980s. Although the number of jobs in the area
increased in 1995, the total number of jobs is still short of pre-recession
peak employment.
Job gains have been concentrated in the local government and service
sectors, with employment in retailing and construction still relatively
depressed. The new jobs numbers may be understated because they don't include
self-employment. In addition to employment, other guideposts to the state of
the region's economic health - airport boardings, classified advertising
lineage and the national consumer confidence index - have all improved.
Even though the recovery in the Washington area may be slow, the region
is strong economically. Christine Chmura, corporate economist for Crestar Bank
in Richmond, noted that the office vacancy rate in the Washington area is below
that in most metropolitan areas and that unemployment is lower than it is
nationally. The indicators that the Greater Washington Research Center uses to
forecast economic growth six to nine months from now were up as well, albeit
less strongly.
Increases in the sales of durable goods, in the number of business
telephone lines installed, in housing sales, in the Johnston, Lemon Index of
local stocks and in the national leading index, produced a modest gain of 0.09
percent in March.
Overall, the region's 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. For 1995, we witnessed further
employment gains for the region and a strengthening economy, as the recovery
broadened and deepened.
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 1.1 percent per year for 1990 through 1995, and is projected to remain
relatively constant at 1.1 percent for the next five years. As with the
population figures presented earlier, household formation has become negative
in the District of Columbia. However, the inner suburbs have showed continued
growth with the strongest counties being Fairfax and Montgomery. The outer
suburbs had the strongest 1980s and early 1990s growth rates, but are projected
to slow to an average annual rate of 3.0 percent.
Household Changes
1990 Census Estimates
Versus 1980 Census
Jurisdiction Households (Thousands) Annual Average-Growth Rate (%)
1980 1990 1995 2000 Fcst 1980-1990 1990-1995 1995-2000
Fcst
District of
Columbia 253.1 249.6 232.4 218.4 -0.1 -1.4 -1.2
Arlington County 71.6 78.5 79.5 81.8 1.0 0.3 0.6
City of Alexandria 49.0 53.3 54.0 53.6 0.9 0.3 -0.2
Central
Jurisdictions 373.7 381.4 365.9 353.8 0.2 -0.8 -0.7
Fairfax County 205.2 292.3 314.8 337.5 4.3 1.5 1.4
City of Fairfax 6.9 7.4 7.6 7.6 0.7 0.5 0.0
City of Falls
Church 4.3 4.2 4.2 4.2 -0.2 0.0 0.0
Montgomery County 207.2 282.2 300.6 320.9 3.6 1.3 1.4
Prince George's
Cnty 224.8 258.0 269.7 280.7 1.5 0.9 0.8
Inner Suburban
Area 648.4 844.1 896.9 950.9 3.0 1.3 1.2
Loudoun County 18.7 30.5 39.5 49.1 6.3 5.9 4.9
Prince William
Cnty 43.8 69.7 77.9 86.8 5.9 2.4 2.3
Cities of Manassas/
Manassas Park 6.9 11.7 12.9 14.1 7.0 2.1 1.9
Frederick County 37.5 52.6 61.3 71.7 4.0 3.3 3.4
Calvert County 10.7 17.0 20.9 24.7 5.9 4.6 3.6
Charles County 21.4 32.9 36.1 39.4 5.4 1.9 1.8
Stafford County 12.2 19.4 24.7 29.1 5.9 5.5 3.6
Outer Suburban
Area 151.2 233.8 273.3 314.9 5.5 3.4 3.0
REGION TOTAL 1173.31459.31536.11619.6 2.4 1.1 1.1
Source: U.S. Census Data Provided By National Decision Systems, Inc. and
Market Statistics 1995 Demographics USA
Note: The list of municipalities corresponds to the DC-VA-MD MSA prior to the
December 31, 1992 expansion.
The key items relating to Household (HH) Income and Statistics relating
to persons per dwelling unit (DU) are summarized below.
Selected Household Demographics for the Metropolitan Area
Category 1990 1995 2000 % Change % Change
Forecast 1990-1995 1990-1995
Average HH Income $55,693 $67,747 $89,806 21.6% 32.6%
Median HH Income $46,196 $55,684 $68,889 20.5% 23.7%
Population by HH
Type (1990) % Family 81.1% % Non-Family 16.4%
HH HH
No. Of Persons One Two Three Four Five or More
Persons Per DU
(% of Total) 24.9% 30.8% 18.5% 15.3% 10.5%
Characteristics: Single Single Married Other Family Non-Family
Male Female Couple Head Head
HH Type
(% of Total) 10.5% 14.4% 51.7% 15.4% 8.0%
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 following table shows the percent distribution of income
within the different jurisdictions.
1995 Percent Distribution of Household Income
Jurisdiction Less Than $25.0- $50.0- $75.0- Over No. of Household
$25K 49.9K 74.9K 99.9K $100K (Thousands)
District of
Columbia 31.2 30.8 18.3 9.4 10.3 232.4
Arlington County 17.8 31.1 25.1 13.5 12.5 79.5
City of Alexandria 15.3 32.3 26.7 12.7 13.0 54.0
Fairfax County 7.4 18.5 25.9 21.6 26.6 314.8
City of Fairfax 15.3 33.2 31.5 13.8 6.2 7.6
City of Falls Church 13.4 22.6 27.5 17.0 19.5 4.2
Montgomery County 12.6 25.8 27.2 16.6 17.8 300.6
Prince George's
County 17.4 35.0 28.8 12.6 6.2 269.7
Loudoun County 11.9 27.6 33.8 16.3 10.4 39.5
Prince William
County 10.8 31.9 34.9 15.1 7.3 77.9
Cities of Manassas/
Manassas Park 11.5 33.3 33.2 14.0 8.0 12.9
Frederick County 21.4 36.9 28.2 9.0 4.5 61.3
Calvert County 13.6 23.3 28.1 20.9 14.1 20.9
Charles County 17.8 32.8 31.4 12.8 5.2 36.1
Stafford County 16.1 35.7 31.0 11.9 5.3 24.7
Washington MSA 16.8 29.0 26.4 14.4 13.4 1536.1
Source: Market Statistics 1995 Demographics USA.
The metropolitan area as a whole shows a heavy distribution of
households with incomes on the high end of the range. Approximately 55 percent
of the households have an annual income over $50,000 per year, with 26+/-
percent in the $50,000 to $75,000 per year range and 28+/- percent in the
$75,000+ range.
This relationship is not true of the inner suburban areas, which have
an overwhelming percentage of households (60 percent) in the under $25,000 and
$25,000 to $50,000+/- per year categories.
Retail Sales
Retail sales and sales growth are also indicators which impact the
overall economy. Also, this is an indicator that retailers watch closely.
Retail sales provide important insight into regional economic trends and the
relative health of surrounding areas. The following table charts historic
retail sales trends within the subject's region.
Retail Sales Trends (000)
State of State of
Year Maryland Baltimore MSA Virginia Washington D.C. MSA
1985 $28,863,392 $13,681,848 $33,723,860 $25,219,988
1990 $36,836,986 $17,489,333 $44,840,180 $32,925,657
1993 $40,363,984 $19,610,884 $58,250,982 $39,205,140
1994 $44,183,971 $20,720,649 $62,293,006 $43,632,568
CAGR: 85-94 4.84% 4.72% 6.33% 6.28%
CAGR: 90-94 4.65% 4.33% 6.80% 7.29%
Source: Sales & Marketing Management "Survey of Buying Power" (1986-1995)
From the survey, it is evident that retail sales within the Washington
D.C. MSA have outpaced retail sales in the State of Maryland and the Baltimore
MSA. Also, sales in the D.C. MSA have been stronger over the past five years
than the State of Virginia. This trend in retail sales bodes well for the
regional economy, particularly in the Washington D.C. MSA.
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 recent
recession. Total employment in the region declined during the recent
recession. 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 1996 will be a period of 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 other regions of the country. Many
local economists and developers are signaling their belief that the real estate
market is strengthening.
Real estate values are volatile in this climate, with some property
values on the increase while other areas remain stable. For the short-term, we
expect that real estate values will show improvement 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 benefited 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 % % %
Nos. of Total Nos. 0 of Total Nos. 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% 8.0 19%
Totals 629.0 100% 859.9 100% 1,095.1 100%
__________________________
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 contractors,
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.
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 County 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,1 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 totaled 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 supported 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.
NEIGHBORHOOD ANALYSIS
General
The subject property is located in the City of Laurel in Prince
George's County, Maryland. 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
A discussion of area market activity is contained in the Retail Market
Analysis section of this report.
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, although also drawing away sales from the subject over the past year. The
residential back-up is expanding and houses a population with mean income
levels above national standards. Overall, access to the area is good. Based
on our analysis, it is our opinion that the prospects for real appreciation in
area real estate values remains relatively 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
Trade Area Analysis
Overview
A retail center's trade area contains people who are likely to
patronize that particular property. These customers are drawn by a given class
of goods and services provided by a particular tenant mix. The fundamental
drawing power comes from the strength of anchor tenants at the center, as well
as the national, regional, and local tenants which complement and support the
anchors. A successful combination of these elements creates a destination for
customers seeking a variety of goods and services, as well as comfort and
convenience of an integrated shopping environment.
In order to define and analyze the market potential for a property such
as the subject, it is important to first establish boundaries of the trade area
from which the subject will draw its customers. In some cases, defining the
trade area may be complicated by the existence of other retail facilities on
main thoroughfares within trade areas that are not clearly defined, or whose
trade areas overlap with that of the subject. Therefore, transportation and
access, location of competition, and geographical boundaries tend to set
barriers for the subject's potential trade area.
Scope of Trade Area
Traditionally, a retail center's sales are principally generated from
within its primary trade area, which is typically within reasonably close
geographic proximity to the property itself. Generally, between 55.0 and 65.0
percent of a center's sales are generated from within its primary trade area.
The secondary trade area generally refers to more outlying areas which provide
less frequent customers. Residents within the secondary trade area would be
more likely to shop closer to home due to time and travel constraints. An
additional 20.0 to 25.0 percent of a center's sales will be generated from
secondary areas. Finally, tertiary or peripheral trade areas refer to more
distant locations from which occasional customers reside. These residents may
be drawn to the center by a particular service or store which is not found
locally. Industry experience shows that between 10.0 and 15.0 percent of a
center's sales are derived from customers residing outside the trade area. This
potential is commonly referred to as inflow.
Trade Area Definition
A complete discussion of the subject's potential trade area is beyond
the scope of this assignment. Our Original Appraisal provided a detailed
analysis of the potential boundaries for the subject's potential draw, along
with complete discussions of area competition. The analysis concluded that
Laurel Centre's primary and secondary trade areas most closely resemble those
zip codes presented in a study by Hollander Cohen & McBride (1994) and
Stillerman & Jones (1992). This trade area has been identified as containing a
total of 26 zip codes, plus an additional 37 zip codes from tertiary regions.
TABLE ILLUSTRATING DEMOGRAPHIC STATISTICS FOR
LAUREL CENTRE (LAUREL, MARYLAND)
The Primary Market segment, which generally falls within a 10-mile
radius of the center, includes the major zip code communities of Laurel,
Beltsville, College Park, and Severn, as well as parts of Silver Spring (west),
Bowie (south), and Columbia (north). In the 1993 Stillerman survey, it was
estimated that approximately 68.0 percent of the subject's shoppers reside
within the Primary Market area. The latest 1994 Hollander survey estimates
that 50.0 percent of Laurel's customer base live in the Primary Market area.
Laurel Centre's Primary Market zip codes are as follows:
Primary Trade Area
Zip Code City/Location
20707 Laurel
20708 Laurel
20723 Laurel
20724 Laurel
20770 Greenbelt
20705 Beltsville
Source: Hollander Cohen & McBride
The Secondary Market is divided into two parts. The South Secondary
segment includes Upper Marlboro, Bowie, Lanham-Seabrook, Greenbelt, and four
major Hyattsville zip codes. Approximately 13.0 percent of Laurel's shoppers
live in the South Secondary Market. 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. About 6.0 percent of customers reside in these
areas. The remaining 13.0 percent of Laurel's shoppers are from outside the
defined trade area; otherwise known as Inflow. The following chart lists
Secondary Market zip codes:
Secondary Trade Area
Zip Code Zip Code Zip Code
20706 20782 21045
20715 20783 21113
20716 20784 21114
20737 20794 21144
20740 20866 20002
20755 20904 20772
20905
Source: Hollander Cohen & McBride
We have utilized this zip code-based survey in order to analyze the
subject's trade area. To lend additional perspective, we have separated the
trade area into the Primary and Secondary segments. The table on the Facing
Page presents an overview of the subject's Primary and Secondary trade areas as
reported by Equifax National Decision Systems. A complete report is included
in the Addenda to this appraisal.
Population
Over the course of the past five years, population within the Primary
Trade Area has been growing at a compound annual rate of 0.92 percent per year.
Current estimates show a Primary Market population of 117,233. Through 2000,
population is projected to grow at an annual rate of 1.10 percent per year.
Population within the Secondary Market is estimated at 506,680 and has been
growing at a rate of 0.76 percent per annum since 1990. Secondary Market
population growth is forecasted to grow by 0.63 percent per year through 2000.
The graphic on the following page presents forecasted population growth
within the subject's Primary and Secondary trade areas over the next five
years. As can be seen, areas to the north in Laurel and Jessup are projected
to see the highest growth. The majority of the trade area is expected to see
only moderate growth through 2000. Nonetheless, it is important to recognize
that this total trade area contains nearly 625,000 people with significant
aggregate purchasing power and few destination retail establishments of Laurel
Centre's caliber.
Household Trends
Household formation within the subject's Primary Trade Area has been
growing at a faster pace than population growth. This is a national phenomenon
generally brought on by higher divorce rates, younger individuals postponing
marriage, and population living longer on average. Between 1990 and 1995, the
Primary Trade Area added 4,416 households, a 10.0 percent increase or 1.92
percent per year. Over the next five years, household formation is projected
to increase at an annual rate of 1.39 percent per year.
Household formation is an important statistic for retailers in that
household units provide the demand necessary for the purchase of goods and
services. With household persons per household is declining. Accordingly,
household size is forecasted to continue to decrease from its present figure of
2.41 persons per unit, to 2.37 persons per household in 2000.
Trade Area Income
Another significant statistic for retailers is the income potential
within the Primary Trade Area. The subject's Primary Market shows an average
household income of about $59,165, with median income of $51,263 and per capita
income of $24,909. The Secondary Market has an average household income of
$61,567. By comparison, the United States has an average household income of
about $46,791.
Provided on a following page is a graphic presentation of average
household income within the Primary and Secondary trade areas of the subject's
market. As can be seen, areas to the west and other secondary areas have the
highest levels of income.
MAP DEPICTING PERCENTAGE POPULATION GROWTH IN LAUREL CENTER'S TOTAL
TRADE AREA FROM 1995 TO 2000
MAP DEPICTING ESTIMATED AVERAGE 1995 HOUSEHOLD INCOME IN
LAUREL CENTER'S TOTAL TRADE AREA
Retail Sales
Retail sales and sales growth are also indicators which retailers watch
closely. Retail sales provide important insight into regional economic trends
and the relative health of surrounding areas. The following table charts
historic retail sales trends within the subject's region.
Retail Sales Trends (000)
Prince George's State of Washington
Year City Baltimore MSA Maryland D.C. MSA
1985 $5,175,984 $13,681,848 $28,863,392 $25,219,988
1990 $6,260,391 $17,489,333 $36,836,986 $32,925,657
1993 $6,538,594 $19,610,884 $40,363,984 $39,205,140
1994 $6,747,561 $20,720,649 $44,183,971 $43,632,568
CAGR: 85-94 2.99% 4.72% 4.84% 6.28%
CAGR: 90-94 1.89% 4.33% 4.65% 7.29%
Source: Sales & Marketing Management "Survey of Buying Power"
From the survey, it is evident that retail sales within Prince George's
County have been growing at a compound annual rate of 1.89 percent since 1990,
significantly lower than the Baltimore MSA and Washington D.C.
Subject Property Sales
While retail sales trends within the MSA and region lend insight into
the underlying economic aspects of the market, it is the subject's sales
history that is most germane to our analysis.
Mall Shop Sales
Sales reported for mall shops at the subject property can be broken
down into various components, including total shop sales, comparable or
same-store sales (mature sales), and new store sales. Total mall shop sales
include new tenants, mature tenants, and those tenants which are terminated
during the year. The following table tracks sales at the subject property based
upon total mall shop GLA.
Subject Mall Shop Sales
Total Sales Applicable Sales Per
Year (000) % Change GLA Sq. Ft. % Change
1986 $45,600 -- 216,030 $211.08 --
1987 $49,440 8.42% 226,450 $218.34 3.44%
1988 $53,479 8.17% 217,174 $246.25 12.78%
1989 $58,939 10.21% 218,595 $269.63 9.49%
1990 $61,328 4.05% 236,746 $259.05 -3.92%
1991 $57,554 -6.15% 236,746 $243.10 -6.16%
1992 $61,737 7.27% 250,292 $246.66 1.46%
1993 $62,732 1.61% 249,321 $251.61 2.01%
1994 $61,261 -2.34% 248,767 $246.26 -2.13%
1995 $57,326 -6.42% 248,767 $230.44 -6.42%
CAGR: 86-95 -- 2.58% -- -- 0.98%
CAGR: 90-95 -- -1.34% -- -- -2.31%
Includes all mall shop sales; does not reflect mature or same-store sales.
Aggregate mall shop sales have increased at a compound annual rate of
2.58 percent per year since 1986. In this regard, sales increased from
approximately $45.6 million in 1986 to $57.3 million in 1995. Abstracting a
unit rate for each year based upon total reporting GLA, sales in 1995
reportedly declined to $230.44 per square foot. This figure is skewed,
however, due to the inclusion of partial year tenants, both new and terminating
stores.
A better gauge of mall shop sales can be measured by same-store or
"Mature Sales" as reported by Shopco. These comparable store sales reflect
annual performance for stores open and reporting sales for the full prior year
period. The following chart shows "Mature Sales" for the subject property.
Mature Store Sales
Year Sales Per Sq. Ft. % Change
1991 $284.60 --
1992 $283.70 -0.32%
1993 $286.30 0.92%
1994 $281.20 -1.78%
1995 $257.20 -8.53%
Includes mature store sales only; excludes new tenants & terminated tenants.
From the data, it is clear that same-store sales at the subject
property have been eroding over the past two years, declining to approximately
$257.20 per square foot in 1995. This is an 8.53 percent drop from 1994 mature
sales of $281.20 per square foot. Some of the decline can be attributable to
changes in occupancy levels and tenant changes within the mall, as well as the
overall decrease in sales over 1994.
Department Store Sales
Department store sales at the subject property reportedly reached $70.8
million in 1995, reflecting a -4.2 percent decrease over 1994 figures. The
indicated overall sales average per square foot is $170. The following chart
shows a history of anchor store sales for the subject.
Subject Anchor Sales (000)
Year Montgomery Ward JCPenney Hecht's (Estimate) Total
1987 $19,300 $18,391 $21,100 $58,791
1988 $20,645 $18,319 $23,000 $61,964
1989 $21,591 $19,720 $24,840 $66,151
1990 $23,564 $20,057 $25,586 $69,207
1991 $25,962 $17,980 $24,759 $68,701
1992 $26,176 $20,383 $24,702 $71,261
1993 $27,159 $21,027 $25,029 $73,215
1994 $26,645 $21,989 $25,236 $73,870
1995 $24,000 $20,541 $26,245 $70,786
CAGR: 87-95 2.76% 1.39% 2.77% 2.35%
CAGR: 90-95 0.37% 0.48% 0.51% 0.45%
As can be seen, department store sales have grown at a compound annual
rate of about 2.35 percent per year since 1987. Montgomery Ward has shown the
strongest overall growth at 2.76 percent, while JCPenney has had growth of 1.39
percent per annum. Hecht's sales are yearly estimates by management. JCPenney
is the only anchor included in this appraisal. Both Montgomery Ward and
Hecht's are separately owned and not a part of this valuation.
Primary Competition
As further discussion of the subject's position in the market, it is
necessary that we briefly review the nature of area competition. The subject
property competes most directly with The Mall in Columbia and Annapolis Mall.
The Mall in Columbia is a Rouse development that opened in 1971;
renovated in 1981. It serves as the retail hub of the planned community of
Columbia, Maryland which is located approximately 10+/- miles north of the
subject at Routes 29 and 175. The property contains approximately 876,000+/-
square feet and includes 190+/- specialty shops and three anchor stores:
Hecht's (152,100 SF), Sears (121,000 SF), and JCPenney who will occupy the
former Woodward & Lothrop store (164,700 SF) as of August 1996. The mall is
very successful and its market has good growth potential given its position in
the Baltimore-Washington Corridor. Rouse has been planning a fashion-oriented
redevelopment here, with Nordstrom, Macy's, and Lord & Taylor as potential
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 some renovation work, it
is a strong performing property. Recent discussions suggested that Nordstrom
was the likely candidate for addition to the property. However, a recent
article quoted Rouse as saying that expansion plans were on hold and that they
were pursuing other "big box" opportunities in the area. This property clearly
provides a barrier to the subject's potential draw of customers from north of
Laurel.
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 and four anchors:
Hecht's (156,029 SF), JCPenney (83,695 SF), Montgomery Ward (127,296 SF), and
Nordstrom (152,766 SF). Annapolis Mall completed an expansion and renovation
program in 1994 which included the addition of Nordstrom, a new food court, and
about 103,000+/- square feet of mall shop GLA. Total GLA is now 964,900+/-
square feet, with estimated sales of over $350 per square foot, up from $300
per foot in 1992. The property is situated about 15+/- miles southeast of the
subject site and is considered to be one of the dominant malls in the region.
The Annapolis Mall is the primary barrier to the east and southeast of the
subject's potential trade area.
These two properties compete most directly with Laurel Centre and
create formidable boundaries to the subject's potential trade area; Annapolis
Mall to the south and east; The Mall in Columbia to the north. Other regional
malls within the region include Wheaton Plaza (15+/- miles west), Montgomery
Mall in Bethesda (17+/- miles southwest), and Lakeforest Mall in Gaithersburg
(19+/- miles west). These centers, as well as those found closer-in to
Washington D.C. form the southern and western boundaries of the subject's trade
area.
Proposed Competition
There have been two projects under planning which would compete
directly with the subject property if built. Konterra is a highly speculative
project located south of Laurel along Interstate 95. Bowie Town Center is a
proposed mall to be sited at Interstate 595 and Route 301 near Mitchellville
Road. These projects have been in the planning stages for several years now and
continue to be speculative.
The Konterra project is a long-term development proposed to evolve over
a 25 to 30 year period. This "mini-city" development is located south of
Laurel on a 2,000+/- acre site which straddles Interstate 95. According to the
conceptual plan, the project provides for the following scenario: Office
Development (10.0+/- million square feet on 475 acres); Light Industrial/R&D
Park (5.0+/- million square feet on 350 acres); Residential Areas (6,000+/-
dwelling units); and Retail (2.0+/- million square feet). In addition, nearly
310+/- acres are reserved for special use development. Phase I of the project
is the Business Campus section on 45+/- acres which is 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 completion of the Inter-County Connector which
has been proposed to traverse the site. This part of the project has been
bogged down in environmental review and the State Highway Department
continually revises the proposed route. Funding of the roadway has still not
been appropriated and it is reported that no state funding can be given at this
time. The City of Laurel planning office has stated that this entire project,
if it is ever to be built, is probably 10 to 15 years away. The mall portion
of the development would be developed by Taubman Companies and encompass 1.5+/-
million square feet on 200+/- acres. Visibility and access would be gained via
Interstate 95 and the proposed Inter-County Connector. The major obstacle to
this development is the continued debate and opposition to the Connector.
The other proposed project is Bowie Town Center, a large-scale
mixed-use development which is being built by a number of developers. Upon
full build-out, Bowie will include 11+/- office buildings with 1.3-1.4+/-
million square feet of space, 1,340+/- residential units, 250+/- hotel rooms,
and a 1.5+/- million square foot, 5-anchor super-regional mall. Four office
buildings are already completed and some of the residential units have been
completed.
In December 1990, the DeBartolo Corp. purchased the mall site from the
Mark Vogel Company. While DeBartolo has announced plans for a 1.2-1.5+/-
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
proposed. 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.
Bowie Town Center will be located at Interstate 595 and Route 301, near
Mitchellville Road in Bowie, approximately 10+/- miles southeast of the subject
property. If this project should come to fruition, it will have a direct
impact on Laurel Centre's draw from areas to the south and east. The Bowie
Planning Department has suggested that DeBartolo has yet to get commitments
from any major anchor tenants and that no plans will be submitted until they
do. Even if approvals are obtained in 1996, the city planning department does
not believe this project will be completed before 1998. With uncertainty
surrounding the retail industry and DeBartolo having problems anchoring the
project with department store commitments, we believe this project to be at
least four years away from being developed. As suggested, DeBartolo is also
pursuing other possible uses for the site.
Finally, a joint venture between Simon Properties and Triple Five Group
(Canada) have announced that plans are going forward to develop their mega-mall
in Silver Spring, Maryland (Montgomery County). The mall will incorporate
existing retail development in downtown Silver Spring and add various
entertainment components much like the Mall of America and West Edmonton Mall
in Alberta. Unlike the Kontera project, this development has enjoyed strong
community support and is likely to come to fruition. Although the mega-mall is
not considered to be a direct threat to the subject, it could have some
influence. The progress of this development should alleviate the threat of
Kontera ever being built due to Kontera's heavy reliance on Montgomery County
shoppers.
Secondary Competition
The subject property is also influenced to some degree by secondary
competition within the Washington-Baltimore Corridor and surrounding areas.
Wal-Mart/Sam's Club opened (2.5+/- miles from the subject) in October 1994 and
has had some impact on sales. Wal-Mart is competitive on price and service and
carries a variety of products. This center is situated at Route 198 and the
B.W. Parkway.
Laurel Lakes Centre at Route 1 and Cypress is a power center which was
built in 1985 and contains about 465,509+/- square feet. Anchors include
Kmart, Hechinger, Safeway, Theatres, Evan's, Kids R Us, and T.J.Maxx. This
property, while competitive to the subject, also acts as an additional draw to
the Laurel area and helps to fill out the balance of retail development along
Route 1.
Finally, the Beltway Plaza is a power center located on Greenbelt Road
between Route 1 and Kenilworth Avenue in Greenbelt, approximately 6+/- miles
southwest of the subject near I-495. This center was originally built in 1961
and expanded and renovated between 1993-94. Beltway Plaza is anchored by
Caldor, Best Products, Burlington Coat Factory, Giant Food, Sports Authority,
Frank's, and Marshalls. Although not directly competitive, this center has
reportedly had an impact on sales at the subject property since its renovation
and expansion in 1994.
Conclusion
We have analyzed the retail trade area for the subject property, along
with profiles of the Washington/Baltimore MSA and Prince George's County. This
type of analysis is necessary in order to make reasonable assumptions regarding
the continued performance of the subject property. Our trade area profile has
been based upon a zip code-based survey of shoppers frequenting the property.
The following points summarize our key conclusions regarding the subject
property and its trade area:
- - The subject is the primary regional mall for Laurel, Maryland. Laurel
is situated on Route 1, between the Baltimore-Washington Parkway (Route
295) and Interstate 95 in the Baltimore-Washington Corridor. Access to
the mall is considered to be good, although Route 1 tends to be
congested during high traffic hours.
- - Regional economic trends are generally favorable. Although relying
heavily on government sectors of employment, the region has a
relatively stable and diverse employment base.
- - Population growth within the Baltimore-Washington Corridor has been
strong in recent years. This stable growth bodes well for the subject
property.
- - Laurel Centre faces the potential of future competition within the
southern portion of its trade area due to the proposed development of
Bowie Town Center. This mall would have a significant impact on the
subject's draw of customers and negatively impact sales. As discussed,
this speculative project is still four years out and may not come to
fruition. While neither Bowie T.C. nor Kontera have started
development, each must be continually reviewed so that the subject's
merchandising and marketing strategy is properly focused.
On balance, it is our opinion that, with competent management and
aggressive marketing, the subject property should remain a viable retail entity
into the foreseeable future. Our outlook for the subject's region continues to
be positive, with above average prospects for growth.
THE SUBJECT PROPERTY
The Laurel Centre Mall contains a gross occupancy area of 661,534+/-
square feet, including three anchor tenants. Specifically, this appraisal
addresses a gross leasable area of 381,976+/- square feet (owned). 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 or who have vacated the mall. 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. Projects for 1996
include common area projects for roof repatching, parking deck ramp repairs,
skylight replacement, interior service door replacement, security computer
upgrades, sidewalk and stock marble tile repairs, and customer service
uniforms. Other capital projects which are on hold include roof restoration,
structural repairs to parking decks, telephone system upgrades, and additional
food court renovations. In total, approved capital projects amount to about
$130,000, excluding roof restoration ($250,000), structural repairs to the
parking deck ($55,000), food court renovations ($100,000), and several other
items.
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. The tax rate in the City of
Laurel is $1.414 per $100 of assessment (1994/95). 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 $1,022,657 for 1996, comparable to the $1,022,391
budgeted for 1995. 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 if
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.
VALUATION PROCESS
Appraisers typically use three approaches in valuing real property:
The Cost Approach, the Income Approach and the Sales Comparison Approach. The
type and age of the property and the quantity and quality of data effect the
applicability in a specific appraisal situation.
The Cost Approach renders an estimate of value based upon the price of
obtaining a site and constructing improvements, both with equal desirability
and utility as the subject property. Historically, investors have not
emphasized cost analysis in purchasing investment grade properties such as
regional malls. The estimation of obsolescence for functional and economic
conditions as well as depreciation on improvements makes this approach
difficult at best. Furthermore, the Cost Approach fails to consider the value
of department store commitments to regional shopping centers and the difficulty
of site assemblage for such properties. As such, the Cost Approach will not be
employed in this analysis due to the fact that the marketplace does not rigidly
trade leased shopping centers on a cost/value basis.
The Sales Comparison Approach is based on an estimate of value derived
from the comparison of similar type properties which have recently been sold.
Through an analysis of these sales, efforts are made to discern the actions of
buyers and sellers active in the marketplace, as well as establish relative
unit values upon which to base comparisons with regard to the mall. This
approach has a direct application to the subject property. Furthermore, this
approach has been used to develop investment indices and parameters from which
to judge the reasonableness of our principal approach, the Income Approach.
By definition, the subject property is considered an income/ investment
property. Properties of this type are historically bought and sold on the
ability to produce economic benefits, typically in the form of a yield to the
purchaser on investment capital. Therefore, the analysis of income
capabilities are particularly germane to this property since a prudent and
knowledgeable investor would follow this procedure in analyzing its investment
qualities. Therefore, the Income Approach has been emphasized as our primary
methodology for this valuation. This valuation concludes with a final estimate
of the subject's market value based upon the total analysis as presented
herein.
SALES COMPARISON APPROACH
Methodology
The Sales Comparison Approach provides an estimate of market value by
comparing recent sales of similar properties in the surrounding or competing
area to the subject property. Inherent in this approach is the principle of
substitution, which holds that, when a property is replaceable in the market,
its value tends to be set at the cost of acquiring an equally desirable
substitute property, assuming that no costly delay is encountered in making the
substitution.
By analyzing sales that qualify as arms-length transactions between
willing and knowledgeable buyers and sellers, market value and price trends can
be identified. Comparability in physical, locational, and economic
characteristics is an important criterion when comparing sales to the subject
property. The basic steps involved in the application of this approach are as
follows:
1. Research recent, relevant property sales and current offerings
throughout the competitive marketplace;
2. Select and analyze properties considered most similar to the subject,
giving consideration to the time of sale, change in economic conditions
which may have occurred since date of sale, and other physical,
functional, or locational factors;
3. Identify sales which include favorable financing and calculate the cash
equivalent price; and
4. Reduce the sale prices to a common unit of comparison, such as price
per square foot of gross leasable area sold;
5. Make appropriate adjustments between the comparable properties and the
property appraised;
6. Interpret the adjusted sales data and draw a logical value conclusion.
The most widely-used, market-oriented units of comparison for
properties such as the subject are the sale price per square foot of gross
leasable area (GLA) purchased, and the overall capitalization rate extracted
from the sale. This latter measure will be addressed in the Income Approach
which follows this methodology. An analysis of the inherent sales multiple
also lends additional support to the Sales Comparison Approach.
Market Overview
The typical purchaser of properties of the subject's caliber includes
both foreign and domestic insurance companies, large retail developers, pension
funds, and real estate investment trusts (REIT's). The large capital
requirements necessary to participate in this market and the expertise demanded
to successfully operate an investment of this type, both limit the number of
active participants and, at the same time, expand the geographic boundaries of
the marketplace to include the international arena. Due to the relatively
small number of market participants and the moderate amount of quality product
available in the current marketplace, strong demand exists for the nation's
quality retail developments.
Most institutional grade retail properties are existing, seasoned
centers with good inflation protection. These centers offer stability in
income and are strongly positioned to the extent that they are formidable
barriers to new competition. They tend to be characterized as having three to
five department store anchors, most of which are dominant in the market. Mall
shop sales are at least $300 per square foot and the trade area offers good
growth potential in terms of population and income levels. Equally important
are centers which offer good upside potential after face-lifting, renovations,
or expansion. With new construction down substantially, owners have accelerated
their renovation and remerchandising programs. Little competition from
over-building is likely in most mature markets within which these centers are
located. Environmental concerns and "no-growth" mentalities in communities
continue to be serious impediments to new retail developments.
Over the past 18+\- months, we have seen real estate investment return
to favor as an important part of many institutional investors' diversified
portfolios. Banks are aggressively competing for business, trying to regain
market share lost to Wall Street, while the more secure life insurance
companies are also reentering the market. The re-emergence of real estate
investment trusts (REITs) has helped to provide liquidity within the real
estate market, pushing demand for well-tenanted, quality property, particularly
regional malls. Currently, REITs are one of the most active segments of the
industry and are particularly attractive to institutional investors due to
their liquidity.
The market for dominant Class A institutional quality malls is tight,
as characterized by the limited amount of good quality product available. It
is the consensus that Class A property would trade in the 7.0 to 8.0 percent
capitalization rate range. Conversely, there are many second tier and lower
quality malls offered on the market at this time. With limited demand from a
much thinner market, cap rates for this class of malls are felt to be in the
much broader 8.5 to 15.0 percent range. Reportedly, there are 50+/- malls on
the market currently. Pessimism about the long term viability of many of these
lower quality malls has been fueled by the recent turmoil in the retail
industry. It is felt that the subject resides on the better quality end of
this latter category.
To better understand where investors stand in today's marketplace, we
have surveyed active participants in the retail investment market. Based upon
our survey, the following points summarize some of the more important "hot
buttons" concerning investors:
1. Occupancy Costs - This " health ratio " measure is of fundamental concern
today. Investors like to see ratios under 13.0 percent and become quite
concerned when they exceed 15.0 percent. This appears to be by far the most
important issue to an investor today. Investors are looking for long term
growth in cash flow and want to realize this growth through real rent
increases. High occupancy costs limit the amount of upside through lease
rollovers.
2. Market Dominance - The mall should truly be the dominant mall in the
market, affording it a strong barrier to entry. Some respondents feel this
is more important than the size of the trade area itself.
3. Strong Anchor Alignment - Having at least three department stores, two of
which are dominant in that market. The importance of the traditional
department store as an anchor tenant has returned to favor after several
years of weak performance and confusion as to the direction of the industry.
As a general rule, most institutional investors would not be attracted to a
two-anchor mall.
4. Dense Marketplace - Several of the institutional investors favor markets of
300,000 to 500,000 people (at least 150,000 households) or greater within a
5 to 7 mile radius. Population growth in the trade area is also very
important. One advisor likes to see growth 50.0 percent better than the U.S.
average. Another investor cited that they will look at trade areas of
200,000+\- but that if there is no population growth forecasted in the
market, a 50+\- basis point adjustment to the cap rate at the minimum is
warranted.
5. Income Levels - Household incomes of $50,000+ which tends to be limited in
many cases to top 50 MSA locations.
6. Good Access - Interstate access with good visibility and a location within
or proximate to the growth path of the community.
7. Tenant Mix - A complimentary tenant mix is important. Mall shop ratios of
35+\- percent of total GLA are considered average with 75.0 to 80.0 percent
allocated to national tenants. Mall shop sales of at least $250 per square
foot with a demonstrated positive trend in sales is also considered to be
important.
8. Physical Condition - Malls that have good sight lines, an updated interior
appearance, and a physical plant in good shape are looked upon more
favorably. While several developers are interested in turn-around
situations, the risk associated with large capital infusions can add at
least 200 to 300 basis points onto a cap rate.
9. Environmental Issues - The impact of environmental problems cannot be
understated. There are several investors who won't even look at a deal if
there are any potential environmental issues no matter how seemingly
insignificant.
10. Operating Covenants - Some buyers indicated that they would not be
interested in buying a mall if the anchor store operating covenants were to
expire over the initial holding period. Others weigh each situation on its
own merit. If it is a dominant center with little likelihood of someone
coming into the market with a new mall, they are not as concerned about the
prospects of loosing a department store. If there is a chance of loosing
an anchor, the cost of keeping them must be weighed against the benefit. In
many of their malls they are finding that traditional department stores are
not always the optimum tenant but that a category killer or other big box
use would be a more logical choice.
In the following section we will discuss trends which have become
apparent over the past several years involving sales of regional malls.
Regional Mall Property Sales
Evidence has shown that mall property sales which include anchor stores
have lowered the square foot unit prices for some comparables, and have
affected investor perceptions. In our discussions with major shopping center
owners and investors, we learned that capitalization rates and underwriting
criteria have become more sensitive to the contemporary issues affecting
department store anchors. Traditionally, department stores have been an
integral component of a successful shopping center and, therefore, of similar
investment quality if they were performing satisfactorily.
During the 1980's a number of acquisitions, hostile take-overs and
restructurings occurred in the department store industry which changed the
playing field forever. Weighted down by intolerable debt, combined with a
slumping economy and a shift in shopping patterns, the end of the decade was
marked by a number of bankruptcy filings unsurpassed in the industry's history.
Evidence of further weakening continued into 1991-1992 with filings by such
major firms as Carter Hawley Hale, P.A. Bergner & Company, and Macy's. In
early 1994, Woodward & Lothrop announced their bankruptcy involving two
department store divisions that dominate the Philadelphia and Washington D.C.
markets. Recently, most of the stores were acquired by the May Department
Stores Company, effectively ending the existence of the 134 year old Wanamaker
name, the nation's oldest department store company. More recently, however,
department stores have been reporting a return to profitability resulting from
increased operating economies and higher sales volumes. Sears, once marked by
many for extinction, has more recently won the praise of analysts. Federated
Department Stores has also been acclaimed as a text book example on how to
successfully emerge from bankruptcy. They have merged with Macy's and more
recently acquired the Broadway chain to form one of the nation's largest
department store companies.
With all this in mind, investors are looking more closely at the
strength of the anchors when evaluating an acquisition. Most of our survey
respondents were of the opinion that they were indifferent to acquiring a
center that included the anchors versus stores that were independently owned if
they were good performers. However, where an acquisition includes anchor
stores, the resulting cash flow is typically segregated with the income
attributed to anchors (base plus percentage rent) analyzed at a higher cap rate
then that produced by the mall shops.
However, more recent data suggests that investors are becoming more
troubled by the creditworthiness of the mall shops. With an increase in
bankruptcies, store closures and consolidations, we see investors looking more
closely at the strength and vulnerabilities of the in-line shops. As a result,
there has been a marked trend of increasing capitalization rates.
Cushman & Wakefield has extensively tracked regional mall transaction
activity for several years. In this analysis we will show sales trends since
1991. Summary charts for the older sales (1991-1993) are provided in the
Addenda. The more recent sales (1994/1995) are provided herein. These sales
are inclusive of good quality Class A or B+\- properties that are dominant in
their market. Also included are weaker properties in second tier cities that
have a narrower investment appeal. As such, the mall sales presented in this
analysis show a wide variety of prices on a per unit basis, ranging from $59
per square foot up to $556 per square foot of total GLA purchased. When
expressed on the basis of mall shop GLA acquired, the range is more broadly
seen to be $93 to $647 per square foot. Alternatively, the overall
capitalization rates that can be extracted from each transaction range from
5.60 percent to rates in excess of 11.0 percent.
TABLE ILLUSTRATING REGIONAL MALL SALES - 1995 TRANSACTION CHART
TABLE ILLUSTRATING REGIONAL MALL SALES - 1994 TRANSACTION CHART
One obvious explanation for the wide unit variation is the inclusion
(or exclusion) of anchor store square footage which has the tendency to distort
unit prices for some comparables. Other sales include only mall shop area
where small space tenants have higher rents and higher retail sales per square
foot. A shopping center sale without anchors, therefore, gains all the
benefits of anchor/small space synergy without the purchase of the anchor
square footage. This drives up unit prices to over $250 per square foot, with
most sales over $300 per square foot of salable area. A brief discussion of
historical trends in mall transactions follows.
- - The fourteen sales included for 1991 show a mean average price per square
foot sold of $282. On the basis of mall shop GLA sold, these sales present a
mean of $357. Sales multiples range from .74 to 1.53 with a mean of 1.17.
Capitalization rates range from 5.60 to 7.82 percent with an overall mean of
6.44 percent. The mean terminal capitalization rate is approximately 100
basis points higher, or 7.33 percent. Yield rates range between 10.75 and
13.00 percent, with a mean of 11.52 percent for those sales reporting IRR
expectancies.
- - In 1992, the eleven transactions display prices ranging from $136 to $511 per
square foot of GLA sold, with a mean of $259 per square foot. For mall shop
area sold, the 1992 sales suggest a mean price of $320 per square foot.
Sales multiples range from .87 to 1.60 with a mean of 1.07. Capitalization
rates range between 6.00 and 7.97 percent with the mean cap rate calculated
at 7.31 percent for 1992. For sales reporting a going-out cap rate, the mean
is shown to be 7.75 percent. Yield rates range from 10.75 to around 12.00
percent with a mean of 11.56 percent.
- - For 1993, a total of sixteen transactions have been tracked. These sales
show an overall average sale price of $242 per square foot based upon total
GLA sold and $363 per square foot based solely upon mall GLA sold. Sales
multiples range from .65 to 1.82 and average 1.15. Capitalization rates
continued to rise in 1993, showing a range between 7.00 and 10.10 percent.
The overall mean has been calculated to be 7.92 percent. For sales reporting
estimated terminal cap rates, the mean is also equal to 7.92 percent. Yield
rates for 1993 sales range from 10.75 to 12.50 percent with a mean of 11.53
percent for those sales reporting IRR expectancies. On balance, the year was
notable for the number of dominant Class A malls which transferred.
- - Sales data for 1994 shows fourteen confirmed transactions with an average
unit price per square foot of $197 per square foot of total GLA sold and $288
per square foot of mall shop GLA. Sales multiples range from .57 to 1.43 and
average .96. The mean going-in capitalization rate is shown to be 8.37
percent. The residual capitalization rates average 8.13 percent. Yield
rates range from 10.70 to 11.50 percent and average 11.17 percent. During
1994, many of the closed transactions involved second and third tier malls.
This accounted for the significant drop in unit rates and corresponding
increase in cap rates. Probably the most significant sale involved the
Riverchase Galleria, a 1.2 million square foot center in Hoover, Alabama.
LaSalle Partners purchased the mall of behalf of the Pennsylvania Public
School Employment Retirement System for $175.0 million. The reported cap
rate was approximately 7.4 percent.
- - Cushman & Wakefield has researched 14 mall transactions for 1995. With the
exception of Sale No. 95-1 (Natick Mall) and 95-2 (Smith Haven Mall), by and
large the quality of malls sold are lower than what has been shown for prior
years. For example, the average transaction price has been slipping. In
1993, the peak year, the average deal was nearly $133.8 million. Currently,
it is shown to be $90.7 million which is even skewed upward by Sale Nos. 95-1
and 95-2. The average price per square foot of total GLA is calculated to be
$152 per square foot. The range in values of mall GLA sold are $93 to $607
with an average of $275 per square foot. Characteristic of these lesser
quality malls would be higher initial capitalization rates. The range for
these transactions is 7.47 to 11.1 percent with a mean of 9.14 percent, the
highest average over the past five years. Most market participants feel that
continued turmoil in the retail industry will force cap rates to move higher
over the ensuing year.
While these unit prices implicitly contain both the physical and
economic factors affecting the real estate, the statistics do not explicitly
convey many of the details surrounding a specific property. Thus, this single
index to the valuation of the subject property has limited direct application.
The price per square foot of mall shop GLA acquired yields one common form of
comparison. However, this can be distorted if anchor and/or other major tenants
generate a significant amount of income. The following chart summarizes the
range and mean for this unit of comparison by year of sale.
Price / SF
Transaction Year Unit Rate Range* Price/SF Mean Sales Multiple
1991 $203 - $556 $357 1.17
1992 $226 - $511 $320 1.07
1993 $173 - $647 $363 1.15
1994 $129 - $502 $288 .96
1995 $ 93 - $607 $264 .98
* Includes all sales by each respective year.
As discussed, one of the factors which may influence the unit rate is
whether or not anchor stores are included in the total GLA which is
transferred. Thus, a further refinement can be made between those malls which
have transferred with anchor space and those which have included only mall GLA.
Chart A, shown below makes this distinction.
CHART A
Regional Mall Sales
Involving Mall Shop Space Only
1991 1992 1993 1994
Sale Unit NOI Sale Unit NOI Sale Unit NOI Sale Unit NOI
No. Rate Per SF No. Rate Per SF No. Rate Per SF No. Rate Per SF
91-1 $257 $15.93 92-2 $348 $25.27 93-1* $355 $23.42 94-1 $136 $11.70
91-2 $232 $17.65 92-9 $511 $33.96 93-4 $471 $32.95 94-3 $324 $22.61
91-5 $203 $15.89 92-11 $283 $19.79 93-5 $396 $28.88 94-12 $136 $14.00
91-6 $399 $24.23 93-7 $265 $20.55 94-14 $241 $18.16
91-7 $395 $24.28 93-14 $268 $19.18
91-8 $320 $19.51
91-10 $556 $32.22
Mean $337 $21.39 Mean $381 $26.34 Mean $351 $25.00 Mean $209 $16.62
* Sale included peripheral GLA.
From the above we see that the mean unit rate for sales involving mall
shop GLA only has ranged from approximately $209 to $381 per square foot. We
recognized that these averages may be skewed somewhat by the size of the
sample. To date, there have been no 1995 transactions involving only mall shop
GLA.
Alternately, where anchor store GLA has been included in the sale, the
unit rate is shown to range widely from $53 to $410 per square foot of salable
area, indicating a mean of $227 per square foot in 1991, $213 per square foot
in 1992, $196 per square foot in 1993, $193 per square foot in 1994 and $145
per square foot in 1995. Chart B following depicts this data.
CHART B
Regional Mall Sales
Involving Mall Shops and Anchor GLA
1991 1992 1993
Sale Unit NOI Sale Unit NOI Sale Unit NOI
No. Rate Per SF No. Rate Per SF No. Rate Per SF
91-3 $156 $11.30 92-1 $258 $20.24 93-2 $225 $17.15
91-4 $228 $16.50 92-3 $197 $14.17 93-3 $135 $11.14
91-9 $193 $12.33 92-4 $385 $29.43 93-6 $224 $16.39
91-11 $234 $13.36 92-5 $182 $14.22 93-7 $ 73 $ 7.32
91-12 $287 $17.83 92-6 $203 $16.19 93-9 $279 $20.66
91-13 $242 $13.56 92-7 $181 $13.60 93-10 $ 97 $ 9.13
91-14 $248 $14.87 92-8 $136 $ 8.18 93-11 $289 $24.64
92-10 $161 $12.07 93-12 $194 $13.77
93-13 $108 $ 9.75
93-14 $322 $24.10
93-15 $214 $16.57
Mean $227 $14.25 Mean $213 $16.01 Mean $196 $15.51
CHART B
Regional Mall Sales
Involving Mall Shops and Anchor GLA
1994 1995
Sale No. Unit Rate NOI Per SF Sale No. Unit Rate NOI Per SF
94-2 $296 $23.12 95-1 $410 $32.95
94-4 $133 $11.69 95-2 $272 $20.28
94-5 $248 $18.57 95-3 $ 91 $ 8.64
94-6 $112 $ 9.89 95-4 $105 $ 9.43
94-7 $166 $13.86 95-5 $ 95 $ 8.80
94-8 $ 83 $ 7.63 95-6 $ 53 $ 5.89
94-9 $ 95 $ 8.57 95-7 $ 79 $ 8.42
94-10 $155 $13.92 95-8 $ 72 $ 7.16
94-11 $262 $20.17 95-9 $ 96 $ 9.14
94-13 $378 $28.74 95-10 $212 $17.63
95-11 $ 56 $ 5.34
95-12 $ 59 $ 5.87
95-13 $143 $11.11
95-14 $287 $22.24
Mean $193 $15.62 Mean $145 $12.35
* Sale included peripheral GLA.
Analysis of Sales
Within Chart B, we have presented a summary of recent transactions
(1991-1995) involving regional and super-regional-sized retail shopping malls
from which price trends may be identified for the extraction of value
parameters. These transactions have been segregated by year of acquisition so
as to lend additional perspective on our analysis. Comparability in both
physical and economic characteristics are the most important criteria for
analyzing sales in relation to the subject property. However, it is also
important to recognize the fact that regional shopping malls are distinct
entities by virtue of age and design, visibility and accessibility, the market
segmentation created by anchor stores and tenant mix, the size and purchasing
power of the particular trade area, and competency of management. Thus, the
"Sales Comparison Approach", when applied to a property such as the subject
can, at best, only outline the parameters in which the typical investor
operates. The majority of th se sales transferred either on an all cash (100
percent equity) basis or its equivalent utilizing market-based financing.
Where necessary, we have adjusted the purchase price to its cash equivalent
basis for the purpose of comparison.
As suggested, sales which include anchors typically have lower square
foot unit prices. In our discussions with major shopping center owners and
investors, we learned that capitalization rates and underwriting criteria have
become more sensitive to the contemporary issues dealing with the department
store anchors. As such, investors are looking more closely than ever at the
strength of the anchors when evaluating an acquisition.
As the reader shall see, we have attempted to make comparisons of the
transactions to the subject primarily along economic lines. For the most part,
the transactions have involved dominant or strong Class A centers in top 50 MSA
locations which generally have solid, expanding trade areas and good income
profiles. Some of the other transactions are in decidedly inferior second tier
locations with limited growth potential and near term vacancy problems. These
sales tend to reflect lower unit rates and higher capitalization rates.
"As Is" Valuation of Subject
Because the subject is theoretically selling both mall shop GLA and
owned department stores, we will look at the recent sales involving both types
in Chart B more closely. As a basis for comparison, we will analyze the
subject based upon projected NOI. The first year NOI has been projected to be
$17.00 per square foot (CY 1996), based upon 381,976+/- square feet of owned
GLA. Derivation of the subject's projected net operating income is presented in
the "Income Approach" section of this report as calculated by the Pro-Ject
model. With projected NOI of $17.00 per square foot, the subject falls toward
the middle of the range exhibited by the comparable sales.
Since the income that an asset will produce has direct bearing on the
price that a purchaser is willing to pay, it is obvious that a unit price which
falls toward the middle of the range indicated by the comparables would be
applicable to the subject. The subject's anticipated net income can be
initially compared to the composite mean of the annual transactions in order to
place the subject in a frame of reference. This is shown on the following
chart.
Sales Year Mean NOI Subject Forecast Subject Ratio
1991 $14.25 $17.00 119.3%
1992 $16.01 $17.00 106.2%
1993 $15.51 $17.00 109.6%
1994 $15.62 $17.00 108.8%
1995 $12.35 $17.00 137.7%
With first year NOI forecasted at approximately 106.2 to 137.7 percent
of the mean of these sales in each year, the unit price which the subject
property would command should be expected to fall within a relative range.
Net Income Multiplier Method
Many of the comparables were bought on expected income, not gross
leasable area, making unit prices a somewhat subjective reflection of
investment behavior regarding regional malls. In order to quantify the
appropriate adjustments to the indicated per square foot unit values, we have
compared the subject's first year pro forma net operating income to the pro
forma income of the individual sale properties. In our opinion, a buyer's
criteria for the purchase of a retail property is predicated primarily on the
property's income characteristics. Thus, we have identified a relationship
between the net operating income and the sales price of the property.
Typically, a higher net operating income per square foot corresponds to a
higher sales price per square foot. Therefore, this adjustment incorporates
factors such as location, tenant mix, rent levels, operating characteristics,
and building quality.
Provided below, we have extracted the net income multiplier from each
of the improved sales. We have included only the recent sales data (1995). The
equation for the net income multiplier (NIM), which is the inverse of the
equation for the capitalization rate (OAR), is calculated as follows:
NIM = Sales Price/Net Operating Income
Net Income Multiplier Calculation
Sale No. NOI/SF Price/SF Net Income Multiplier
95-1 $32.95 $410 12.44
95-2 $20.28 $272 13.41
95-3 $ 8.64 $ 91 10.53
95-4 $ 9.43 $105 11.13
95-5 $ 8.80 $ 95 10.80
95-6 $ 5.89 $ 53 9.00
95-7 $ 8.42 $ 79 9.38
95-8 $ 7.16 $ 72 10.06
95-9 $ 9.14 $ 96 10.50
95-10 $17.63 $212 12.02
95-11 $ 5.34 $ 56 10.49
95-12 $ 5.87 $ 59 10.05
95-13 $11.11 $143 12.87
95-14 $22.24 $287 12.90
Mean $12.35 $145 11.11
Valuation of the subject property utilizing the net income multipliers
(NIMs) from the comparable properties accounts for the disparity of the net
operating incomes ($NOI's) per square foot between the comparables and the
subject. Within this technique, each of the adjusted NIM's are multiplied by
the $NOI per square foot of the subject, which produces an adjusted value
indication for the subject. The net operating income per square foot for the
subject property is calculated as the first year of the holding period, as
detailed in the Income Approach section of this report.
Adjusted Unit Rate Summary
Sale No. Subject NOI/SF Net Income Multiplier Indicated Price $/SF
95-1 $17.00 12.44 $211
95-2 $17.00 13.41 $228
95-3 $17.00 10.53 $179
95-4 $17.00 11.13 $189
95-5 $17.00 10.80 $184
95-6 $17.00 9.00 $153
95-7 $17.00 9.38 $159
95-8 $17.00 10.06 $171
95-9 $17.00 10.50 $189
95-10 $17.00 12.02 $204
95-11 $17.00 10.49 $178
95-12 $17.00 10.05 $171
95-13 $17.00 12.87 $219
95-14 $17.00 12.90 $219
Mean $17.00 11.11 $189
From the process above, we see that the indicated net income
multipliers range from 9.00 to 13.41 with a mean of 11.11. The adjusted unit
rates range from $153 to $228 per square foot of owned GLA with a mean of $189
per square foot. The comparables with $NOIs/SF comparable to the subject show
multipliers between 12.02 and 13.41, resulting in adjusted unit rates for the
subject from $204 to $228 per square foot.
We recognize that the sale price per square foot of gross leasable
area, including land, implicitly contains both the physical and economic
factors of the value of a shopping center. Such statistics by themselves,
however, do not explicitly convey many of the details surrounding a specific
income producing property like the subject. Nonetheless, the process we have
undertaken here is an attempt to quantify the unit price based upon the
subject's income producing potential.
Considering the above average characteristics of the subject relative
to the above, we believe that a unit rate range of $195 to $205 per square foot
is appropriate. Applying this unit rate range to 381,976+/- square feet of
owned GLA results in a value of approximately $74.5 million to $78.3 million
for the subject as shown:
381,976 SF 381,976 SF
x 195 x $205
$74,485,320 $78,305,080
Rounded Value Estimate - Market Sales Unit Rate Comparison
$74,500,000 to $78,300,000
Sales Multiple Method
Arguably, it is the mall shop GLA sold and its intrinsic economic
profile that is of principal concern in the investment decision process. A
myriad of factors influence this rate, perhaps none of which is more important
than the sales performance of the mall shop tenants. Accordingly, the
abstraction of a sales multiple from each transaction lends additional
perspective to this analysis.
The sales multiple measure is often used as a relative indicator of the
reasonableness of the acquisition price. As a rule of thumb, investors will
look at a sales multiple of 1.0 as a benchmark, and will look to keep it within
a range of .75 to 1.25 times mall shop sales performance unless there are
compelling reasons why a particular property should deviate.
The sales multiple is defined as the sales price per square foot of
mall GLA divided by average mall shop sales per square foot. As this
reasonableness test is predicated upon the economics of the mall shops,
technically, any income (and hence value) attributed to anchors that are
acquired with the mall as tenants should be segregated from the transaction. As
an income (or sales) multiple has an inverse relationship with a capitalization
rate, it is consistent that, if a relatively low capitalization rate is
selected for a property, it follows that a correspondingly above-average sales
(or income) multiple be applied. In most instances, we are not privy to the
anchor's contributions to net income. As such, the sales multiples reported
may be slightly distorted to the extent that the imputed value of the anchor's
contribution to the purchase price has not been segregated.
Sales Multiple Summary
Sale No. Going-In OAR Sales Multiple
95-1 8.04% 1.46
95-2 7.47% 1.04
95-3 9.50% 1.02
95-4 9.00% 1.09
95-5 9.23% 0.83
95-6 11.10% 0.60
95-7 10.70% 1.31
95-8 10.00% .61
95-9 9.53% .89
95-10 8.31% 1.57
95-11 9.50% 0.39
95-12 10.03% 0.62
95-13 7.79% 1.06
95-14 7.76% 1.23
Mean 9.14% 0.98
The sales that are being compared to the subject show sales multiples
that range from 0.39 to 1.57 with a mean of about 0.98. As is evidenced, the
more productive malls with higher sales volumes on a per square foot basis tend
to have higher sales multiples. Furthermore, the higher multiples tend to be
in evidence where an anchor(s) is included in the sale.
Based upon forecasted 1996 performance, as well as anticipated changes
to the market area, the subject is projected to produce comparable sales of
$257 per square foot for all reporting tenants.
In the case of the subject, the overall capitalization rate being
utilized for this analysis is considered to be in the mid- to low-range of
those rates exhibited by the comparable sales. As such, we would be inclined
to utilize a multiple above the mean indicated by the sales. As such, we will
utilize a higher sales multiple to apply to just the mall shop space. Applying
a ratio of say, 105.0 to 115.0 percent to the forecasted sales of $257 per
square foot, the following range in value is indicated.
Unit Sales Volume (Mall Shops) $257 $257
Sales Multiple x 1.05 x 1.15
Adjusted Unit Rate $269.85 $295.55
Mall Shop GLA x 245,112 x 245,112
Value Indication $66,140,000 $72,440,000
The analysis shows an adjusted value range of approximately $66.14 to
$72.44 million. Inherent in this exercise are mall shop sales which are
projections based on our investigation into the market which might not fully
measure investor's expectations. It is clearly difficult to project with any
certainty what the mall shops might achieve in the future, particularly as the
lease-up is achieved and the property brought to stabilization. While we may
minimize the weight we place on this analysis, it does, nonetheless, offer a
reasonableness check against the other methodologies. We have also considered
in this analysis the fact that the owned anchors are forecasted to contribute
approximately $495,448 in revenues in 1996 (base rent obligations and overage).
If we were to capitalize this revenue separately at a 10.5 percent rate, the
resultant effect on value is approximately $4,720,000.
Arguably, department stores have qualities that add certain increments
of risk over and above regional malls, wherein risk is mitigated by the
diversity of the store types. A recent Cushman & Wakefield survey of
free-standing retail building sales consisting of net leased discount
department stores, membership warehouse clubs, and home improvement centers,
displayed a range in overall capitalization rates between 8.8 and 10.9 percent
with a mean of approximately 9.6 percent. All of the sales occurred with
credit worthy national tenants in place. The buildings ranged from 86,479 to
170,000 square feet and were located in high volume destination retail areas.
Trends indicate that investors have shown a shift in preference to
initial return and, as will be discussed in a subsequent section, overall
capitalization rates have been showing increases over the past several years.
Moreover, when the acquisition of a shopping mall includes anchor department
stores, investors will typically segregate income attributable to the anchors
and analyze these revenues with higher capitalization rates than those revenues
produced by the mall shops. Therefore, based upon the preceding discussion, it
is our opinion that overall capitalization rates for department stores are
reasonably reflected by a range of 9.5 to 11.0 percent. We have chosen the mid
point of the range due to the locational attributes of the subject's trade area
and characteristics of the subject property.
Therefore, adding the anchor income's implied contribution to value of
$4.72 million, the resultant range is shown to be approximately $70.86 to
$77.16 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 $70,860,000 to $77,160,000
Conclusion "As Is"
We have considered all of the above relative to the physical and
economic characteristics of the subject. It is difficult to relate the subject
to comparables that are in such widely divergent markets with different cash
flow characteristics. The subject has average/ comparable sales levels
compared to its peers, with a typical anchor alignment and fair representation
of national tenants.
We also recognize that an investor may view the subject's position as
being vulnerable to competition.
After considering all of the available market data in conjunction with
the characteristics of the subject property, the indices of investment that
generated our value ranges are as follows:
Unit Price Per Square Foot
Salable SF: 381,976+\-
Price Per SF of Salable Area: $195 to $205
Indicated Value Range: $74,500,000 to $78,300,000
Sales Multiple Analysis
Indicated Value Range $70,860,000 to $77,160,000
The parameters above show a value range of approximately $70.9 to $78.3
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 $74.0 to $78.0
million for the subject as of January 1, 1996.
INCOME APPROACH
Introduction
The Income Approach is based upon the economic principle that the value
of a property capable of producing income is the present worth of anticipated
future net benefits. The net income projected is translated into a present
value indication using the capitalization process. There are various methods
of capitalization that are based on inherent assumptions concerning the
quality, durability and pattern of the income projection.
Where the pattern of income is irregular due to existing leases that
will terminate at staggered, future dates, or to an absorption or stabilization
requirement on a newer development, discounted cash flow analysis is the most
accurate.
Discounted Cash Flow Analysis (DCF) is a method of estimating the
present worth of future cash flow expectancies by individually discounting each
anticipated collection at an appropriate discount rate. The indicated market
value by this approach is the accumulation of the present worth of future
projected years' net income (before income taxes and depreciation) and the
present worth of the reversion (the estimated property value at the end of the
projection period). The estimated value of the reversion at the end of the
projection period is based upon capitalization of the next year's projected net
operating income. This is the more appropriate method to use in this
assignment, given the step up in lease rates and the long term tenure of retail
tenants.
A second method of valuation, using the Income Approach, is to directly
capitalize a stabilized net income based on rates extracted from the market or
built up through mortgage equity analysis. This is a valid method of
estimating the market value of the property as of the achievement of stabilized
operations. In the case of the subject, operations are considered to be
slightly below stabilization. Nonetheless, we have utilized the direct
capitalization method to help support our valuation process.
Discounted Cash Flow Analysis
The Discounted Cash Flow (DCF) produces an estimate of value through an
economic analysis of the subject property in which the net income generated by
the asset is converted into a capital sum at an appropriate rate. First, the
revenues which a fully informed investor can expect the subject to produce over
a specified time horizon are established through an analysis of the current
rent roll, as well as the rental market for similar properties. Second, the
projected expenses incurred in generating these gross revenues are deducted.
Finally, the residual net income is discounted into a capital sum at an
appropriate rate which is then indicative of the subject property's current
value in the marketplace.
In this Income Approach to the valuation of the subject, we have
utilized a 10 year holding period for the investment with the cash flow
analysis commencing on January 1, 1996. Although an asset such as the subject
has a much longer useful life, investment analysis becomes more meaningful if
limited to a time period considerably less than the real estate's economic
life, but of sufficient length for an investor. A 10-year holding period for
this investment is long enough to model the asset's performance and benefit
from its continued lease-up and performance, but short enough to reasonably
estimate the expected income and expenses of the real estate.
TABLE ILLUSTRATING PROJECTED ANNUAL CASH FLOW FOR LAUREL
CENTRE (LAUREL, MARYLAND) 1996-2006
The revenues and expenses which an informed investor may expect to
incur from the subject property will vary, without a doubt, over the holding
period. Major investors active in the market for this type of real estate
establish certain parameters in the computation of these cash flows and
criteria for decision making which this valuation analysis must include if it
is to be truly market-oriented. These current computational parameters are
dependent upon market conditions in the area of the subject property as well as
the market parameters for this type of real estate which we view as being
national in scale.
By forecasting the anticipated income stream and discounting future
value at reversion into a current value, the capitalization process may be
applied to derive a value that an investor would pay to receive that particular
income stream. Typical investors price real estate on their expectations of
the magnitude of these benefits and their judgment of the risks involved. Our
valuation endeavors to reflect the most likely actions of typical buyers and
sellers of property interest similar to the subject. In this regard, we see
the subject as a long term investment opportunity for a competent
owner/developer.
An analytical real estate computer model that simulates the behavioral
aspects of property and examines the results mathematically is employed for the
discounted cash flow analysis. In this instance, it is the PRO-JECT Plus+
computer model. Since investors are the basis of the marketplace in which the
subject property will be bought and sold, this type of analysis is particularly
germane to the appraisal problem at hand. On the Facing Page is a summary of
the expected annual cash flows from the operation of the subject over the
stated investment holding period.
A general outline summary of the major steps involved may be listed as
follows:
1. Analysis of the income stream: establishment of an economic (market) rent
for tenant space; projection of future revenues annually based upon existing
and pending leases; probable renewals at market rentals; and expected
vacancy experience;
2. Estimation of a reasonable period of time to achieve stabilized occupancy of
the existing property and make all necessary improvements for marketability;
3. Analysis of projected escalation recovery income based upon an analysis of
the property's history as well as the experiences of reasonably similar
properties;
4. Derivation of the most probable net operating income and pre-tax cash flow
(net income less reserves, tenant improvements, leasing commissions and any
extraordinary expenses to be generated by the property) by subtracting all
property expenses from the effective gross income; and
5. Estimation of a reversionary sale price based upon capitalization of the net
operating income (before reserves, tenant improvements and leasing
commissions or other capital items) at the end of the projection period.
Following is a detailed discussion of the components which form the
basis of this analysis.
Potential Gross Revenues
The total potential gross revenues generated by the subject property
are composed of a number of distinct elements: minimum rent determined by lease
agreement; additional overage rent based upon a percentage of retail sales;
reimbursement of certain expenses incurred in the ownership and operation of
the real estate; and other miscellaneous revenues.
The minimum base rent represents a legal contract establishing a return
to investors in the real estate, while the passing of certain expenses onto
tenants serves to maintain this return in an era of continually rising costs of
operation. Additional rent based upon a percentage of retail sales experienced
at the subject property serves to preserve the purchasing power of the residual
income to an equity investor over time. Finally, miscellaneous income adds an
additional source of revenue in the complete operation of the subject property.
In the initial year of the investment, 1996, it is projected that the subject
property will generate approximately $11,095,239 in potential gross revenues,
equivalent to $29.05 per square foot of total appraised (owned) GLA of 381,976
square feet. These forecasted revenues may be allocated to the following
components:
Revenue Summary
Initial Year of Investment - 1996
Revenue Component Amount Unit Rate* Income Ratio
Minimum Rent $ 5,374,336 $14.07 48.44%
Overage Rent $ 136,050 $ 0.36 1.23%
Expense Recoveries $ 3,564,853 $ 9.33 32.13%
Miscellaneous Income $ 2,020,000 $ 5.28 18.21%
Total $ 11,095,239 $29.05 100.0%
* Reflects total owned GLA of 381,976 SF
Minimum Rental Income
Minimum rent produced by the subject property is derived from that paid
by the various tenant types. The projection utilized in this analysis is based
upon the actual rent roll and our projected leasing schedule in place as of the
date of appraisal, together with our assumptions as to the absorption of the
vacant space, market rent growth, and renewal/turnover probability. We have
also made specific assumptions regarding the re-tenanting of the mall based
upon deals that are in progress and have a strong likelihood of coming to
fruition. In this regard, we have worked with Shopco management and leasing
personnel to analyze each pending deal on a case by case basis. We have
incorporated all executed leases in our analysis. For those pending leases
that are substantially along in the negotiating process and are believed to
have a reasonable likelihood of being completed, we have reflected those terms
in our cash flow. These transactions represent a reasonable and prudent
assumption from an investor's standpoint.
The rental income which an asset such as the subject property will
generate for an investor is analyzed as to its quality, quantity and
durability. The quality and probable duration of income will affect the amount
of risk which an informed investor may expect over the property's useful life.
Segregation of the income stream along these lines allows us to control the
variables related to the center's forecasted performance with greater accuracy.
Each tenant type lends itself to a specific weighting of these variables as the
risk associated with each varies.
The minimum rents forecasted at the subject property are essentially
derived from various tenant categories: major tenant revenue consisting of base
rent obligations of owned department stores and mall tenant revenues consisting
of all in-line mall shops. As a sub-category of in-line shop rents, we have
separated food court rents and kiosk revenues.
In our investigation and analysis of the marketplace, we have surveyed,
and ascertained where possible, rent levels being commanded by competing
centers. However, it should be recognized that large retail shopping malls are
generally considered to be separate entities by virtue of age and design,
accessibility, visibility, tenant mix, and the size and purchasing power of its
trade area. Consequently, the best measure of minimum rental income is its
actual rent roll leasing schedule.
As such, our a analysis of recently negotiated leases for new and
relocation tenants at the subject provides important insight into perceived
market rent levels for the mall. Insomuch as a tenant's ability to pay rent is
based upon expected sales achievement, the level of negotiated rents is
directly related to the individual tenant's perception of their expected
performance at the mall. This is particularly true for the subject where sales
levels have fallen over the past year.
Mall Shops
Rent from all interior mall tenants comprise the majority of minimum
rent. Aggregate rent from these tenants is forecasted to be $4,878,888, or
$19.90 per square foot. Minimum rent may be allocated to the following
components:
Minimum Rent Allocation
Interior Mall Shops
1996 Revenue Applicable GLA* Unit Rate (SF)
Mall Shops $4,258,335 235,283 SF $18.10
Kiosks $ 222,167 2,446 SF $90.83
Food Court $ 398,386 7,383 SF $53.96
Total $4,878,888 245,112 SF $19.90
*Represents leasable area as opposed to actual leased or occupied area;
exclusive of anchor space.
In-Line Shops
Our analysis of market rent levels for in-line shops has resolved
itself to a variety of influencing factors. Although it is typical that larger
tenant spaces are leased at lower per square foot rates and lower percentages,
the type of tenant as well as the variable of location within the mall can
often distort this size/rate relationship.
The following chart presents an analysis of in-line shop rents based
upon existing leases on an annualized basis for 1996:
1996 Leases In-Place*
Size Category Annualized Rent Applicable GLA Rent/SF
< 750 $ 144,160 2,842 $50.72
751 - 1,200 $ 622,634 14,529 $42.85
1,201 - 2,000 $ 1,010,261 32,748 $30.85
2,001 - 3,500 $ 1,062,725 51,414 $20.67
3,501 - 5,000 $ 945,589 46,870 $20.17
5,001 - 10,000 $ 297,090 24,478 $12.14
> 10,000 $ 306,360 33,038 $ 9.27
Total $4,388,819 205,919 $21.31
* Includes existing leases for calendar year 1996. Partial year tenants have
been annualized to reflect the full 12 months
As can be seen, lease rates generally have an inverse relationship with
suite size and show an overall average rent of $21.31 per square foot.
New Tenant Activity
New tenants to the mall and/or proposed leases can be summarized in the
following bullet points:
- - Northern Reflections will replace Going To The Game (2,010 SF) in July 1996.
Northern will pay $21.00 per square foot, escalating to $23.00 in year four
and $25.00 in year eight.
- - Carlton Cards opened in November 1995 on a ten year lease beginning at $20.74
per square foot with periodic escalations in $1.00 increments.
- - Key Jewelers leased 1,048 square feet in mid-1995 at an initial rent of
$46.05 per square foot. Their lease increases to $51.38 in 2000.
- - Garden Botanika has agreed to lease 1,500 square feet (Suites K-1 and K-2).
This lease will not begin until Tinderbox can be relocated, most likely to
B-2, currently occupied by Glamour Shots. Garden Botanika will pay an
initial rent of $22.00 per square foot.
- - Smalls Formal will lease 1,271 square feet in April 1996. Their initial rent
is $15.74 per square foot with two steps over the lease term.
- - Piercing Pagoda has leased a 180 square foot kiosk. The lease began in
December 1995 at $28,000, increasing to $30,000 after three years.
- - Cooper's Watchworks opened a kiosk in September 1995 on a five year lease at
$25,000.
We are also advised that there are several negotiations underway for
other spaces in the mall, including Shoe Show who is interested in Suites L-6
and L-7 (5,225 square feet) at an initial rent of $14.00. These deals are
still speculative, however, and have not been reflected in this analysis.
Vacating Tenants
The following is a list of tenants who have vacated Laurel Centre over
the past year or who are planning to leave at lease expiration.
- - Going To The Game (2,010 SF); to be replaced by Northern Reflections
- - Waldenbooks (2,980 SF)
- - Father & Son Shoes (1,048 SF); month-to-month tenant replaced by Kay Jewelers
- - Expressly Yours (2,439 SF)
- - Merry-Go-Round (3,050 SF); parent company bankruptcy
- - Sears Portrait (952 SF); will vacate at lease expiration in June
- - Federal Bank (1,271 SF); month-to-month tenant; bank acquired; Smalls Formal
replacing
- - Hahn Shoe (4,671 SF); month-to-month tenant
- - Paul Harris (3,740 SF); new lease which did not come to fruition
- - First Union Bank (2,052 SF); month-to-month tenant; bank acquired
- - Earring Tree (180 SF); replaced by Piercing Pagoda
- - Royal Formal (2,198 SF); to be vacating in April
It is also reported that Boardwalk Fries would like to vacate due to
poor sales. Friendly's has also indicated their wish to close due to poor
performance.
Recent Leasing By Size
Since existing rents can be skewed by older leases within the mall, an
analysis of recent leasing activity can provide a better understanding of
current rental rates. The chart on the Facing Page presents an overview of
recent in-line shop leasing for the subject property.
TABLE ILLUSTRATING RECENT LEASING ACTIVITY - MALL SHOP
TENANTS BY SIZE - LAUREL CENTRE (LAUREL, MARYLAND)
As shown, twenty-nine leases reflect an overall average rent of $20.84
per square foot. The highest rent is attained from Group 1 (Tenants < 750 SF)
with an average of $49.87 per square foot. The averages generally decline by
size category to $10.63 for Group 7 (Tenants > 10,000 SF).
Market Comparisons - Occupancy Cost Ratios
In further support of developing a forecast for market rent levels, we
have undertaken a comparison of minimum rent to projected sales and total
occupancy costs to sales ratios. Generally, our research and experience with
other regional malls shows that the ratio of minimum rent to sales falls within
the 7.0 to 10.0 percent range in the initial year of the lease, with 7.5
percent to 8.5 percent being most typical. By adding additional costs to the
tenant, such as real estate tax and common area maintenance recoveries, a total
occupancy cost may be derived. Expense recoveries and other tenant charges can
add up to 100 percent of minimum rent and comprise the balance of total tenant
costs.
The typical range for total occupancy cost-to-sales ratios falls
between 11.0 and 15.0 percent. As a general rule, where sales exceed $250 to
$275 per square foot, 14.0 to 15.0 percent would be a reasonable cost of
occupancy. Experience and research show that most tenants will resist total
occupancy costs that exceed 15.0 to 18.0 percent of sales. However, ratios of
upwards to 20.0 percent are not uncommon. Obviously, this comparison will vary
from tenant to tenant and property to property.
In higher end markets where tenants are able to generate sales above
industry averages, tenants can generally pay rents which fall toward the upper
end of the ratio range. Moreover, if tenants perceive that their sales will be
increasing at real rates that are in excess of inflation, they will typically
be more inclined to pay higher initial base rents. Obviously, the opposite
would be true for poorer performing centers in that tenants would be squeezed
by the thin margins related to below average sales. With fixed expenses
accounting for a significant portion of the tenants contractual obligation,
there would be little room left for base rent.
In this context, we have provided an occupancy cost analysis for
several regional malls with which we have had direct insight over the past
year. This information is provided on the Following Page. On average, these
ratio comparisons provide a realistic check against projected market rental
rate assumptions.
Occupancy Cost Analysis/Comparison - TABLE COMPARING OCCUPANCY COSTS FOR
VARIOUS MSAs AROUND THE UNITED STATES
AVERAGE MALL SHOP RENT CALCULATION
Laurel Centre (Laurel, Maryland)
Cushman & Wakefield, Inc.
Suite Size Applicable Pro-Rata Initial Weighted
Category Sq./Ft. Share Market Rent Average
In-Line Mall Shops
Under - 750 SF 2,842 SF 1.20% $46.00 $0.55
751 - 1200 SF 14,529 SF 6.16% $36.00 $2.22
1201 - 2000 SF 37,476 SF 15.89% $26.00 $4.13
2001 - 3500 SF 63,982 SF 27.12% $20.00 $5.42
3501 - 5000 SF 59,554 SF 25.25% $16.00 $4.04
5001 - 10000 SF 24,478 SF 10.38% $14.00 $1.45
Over 10000 SF 33,038 SF 14.01% $10.00 $1.40
Mall Shop Average
Rent: 235,899 SF 100.00% $19.22
From this analysis we see that the ratio of base rent to sales ranges
from 7.1 to 10.6 percent, while the total occupancy cost ratios vary from 9.6
to 17.3 percent when all recoverable expenses are included. The surveyed mean
for the malls and industry standards analyzed is 8.3 percent and 13.4 percent,
respectively. Some of the higher ratios are found in older malls situated in
urban areas that have higher operating structures due to less efficient layout
and designs, older physical plants, and higher security costs, which in some
malls can add upwards of $2.00 per square foot to common area maintenance.
These relative measures can be compared with two well known
publications, The Score (1996) by the International Council of Shopping Centers
and Dollars & Cents of Shopping Centers (1995) by the Urban Land Institute. The
most recent publications indicate base rent-to-sales ratios of approximately
7.0 to 8.0 percent and total occupancy cost ratios of 10.1 and 12.3 percent,
respectively.
In general, while the rental ranges and ratio of base rent to sales
vary substantially from mall to mall and tenant to tenant, they do provide
general support for the rental ranges and ratio which is projected for the
subject property.
Conclusion - Market Rent Estimate for In-Line Shops
Previously, in the Retail Market Analysis section of the appraisal, we
discussed the subject's sales potential. Comparable mall sales in calendar
year 1995 reportedly dropped 8.5 percent to $257 per square foot. In light of
the mall's performance, we are forecasting sales to remain flat in 1996. Based
upon a ratio of 7.0 to 8.0 percent, an average rent for the subject between
$18.00 and $20.50 is indicated.
The following chart presents a comparison of existing leases with
recent leasing and our projected market rental rate for each property.
In-Line Rent Comparisons and Conclusions
Size Category Leases In-Place Recent Leasing C&W Conclusion
< 750 $50.72 $49.87 $46.00
751 - 1,200 $42.85 $43.98 $36.00
1,201 - 2,000 $30.85 $30.49 $26.00
2,001 - 3,500 $20.67 $19.63 $20.00
3,501 - 5,000 $20.17 $20.00 $16.00
5,001 - 10,000 $12.14 $16.52 $14.00
> 10,000 $ 9.27 $10.63 $10.00
Average/Total $21.31 $20.84 $19.22
After considering all of the above, we have developed a weighted
average rental rate of approximately $19.22 per square foot based upon a
relative weighting of tenant space by size. The average rent is a weighted
average rent for all in-line mall tenants only. This average market rent has
been allocated to space as shown on the Facing Page.
TABLE ILLUSTRATING RENT AND SALES PRODUCTIVITY FOR
LAUREL CENTRE'S FOOD COURT TENANTS
Occupancy Cost - Test of Reasonableness
Our weighted average rent of $19.22 can next be tested against total
occupancy costs in the mall based upon the standard recoveries for new mall
tenants. Our total occupancy cost analyses can be found on the following
chart.
Total Occupancy Cost Analysis - 1996
Tenant Cost Estimated Expenses/SF
Economic Base Rent $ 19.22
(Weighted Average)
Occupancy Costs (A)
Common Area Maintenance (1) $ 11.64
Real Estate Taxes (2) $ 4.08
Other Expenses (3) $ 4.05
Total Tenant Costs $ 38.99
Projected Average Sales (1995) $257.00
Rent to Sales Ratio 7.48%
Cost of Occupancy Ratio 15.17%
(A) Costs that are occupancy sensitive will decrease for new tenants on a
unit rate basis as lease-up occurs and the property stabilizes. Average
occupied area for mall tenant reimbursement varies relative to each
major recovery type.
(1) CAM expense is based on average occupied area (GLOA). Generally, the
standard lease clause provides for a 15 percent administrative factor
less certain exclusions including anchor contributions. The standard
denominator is based on occupied (leased) versus leasable area. A
complete discussion of the standard recovery formula is presented later
in this report.
(2) Tax estimate is based upon an average occupied area (GLOA) which is the
recovery basis for taxes. It is exclusive of majors contributions
(department stores and tenants over 10,000 SF)
(3) Other expenses include tenant contributions for Mall HVAC ($1.35) and
Premises HVAC ($2.70).
Total costs, on average, are shown to be 15.2 percent of projected
average 1996 retail sales which we feel is high but moderately manageable. This
is due primarily to the fact that occupancy has dipped from typically 94.0 to
96.0 percent, to 85.0 percent.
Food Court
The food court has seen several recent leases at Laurel but has
struggled over the past year due to increased restaurant competition along
Route 1. In total, eleven food court tenants occupy an average of 605 square
feet. The average rent is currently $55.72 per square foot, with average sales
of $482. Due to increased competition and reduced sales, we have ascribed a
rental rate of $46.00 per square foot for food court tenants. Food court
tenants pay additional recoveries for common seating charges.
TABLE ILLUSTRATING LEASE-UP/ABSORPTION PROJECTIONS
FOR LAUREL CENTRE
Kiosks
We have also segregated permanent kiosks within our analysis since they
typically pay a much higher unit rent. Piercing Pagoda is the most recent
kiosk lease at $28,000 ($155.56 per square foot). The average kiosk lease is
about $31,700 or $108 per square foot. Based on the above, we have ascribed an
initial market rent of $30,000 per annum for a permanent kiosk.
Concessions
Free rent is an inducement offered by developers to entice a tenant to
locate in their project over a competitor's. This marketing tool has become
popular in the leasing of office space, particularly in view of the
over-building which has occurred in many markets. As a rule, most major retail
developers have been successful in negotiating leases without including free
rent. Our experience with regional malls shows that free rent is generally
limited to new projects in marginal locations without strong anchor tenants
that are having trouble leasing, as well as older centers that are losing
tenants to new malls in their trade area. Management reports that free rent
has been a relative non-issue with new retail tenants. A review of the most
recent leasing confirms this observation. It has generally been limited to one
or two months to prepare a suite for occupancy when it has been given.
Accordingly, we do not believe that it will be necessary to offer free
rent to retail tenants at the subject. It is noted that, while we have not
ascribed any free rent to the retail tenants, we have, however, made rather
liberal allowances for tenant workletters which acts as a form of inducement to
convince a tenant to locate at the subject. These allowances are liberal to
the extent that ownership has been relatively successful in leasing space "as
is" to tenants. We have made allowances of $8.00 per square foot to new
tenants (currently vacant) and for future turnover space. We have also
ascribed a rate of $1.50 per square foot to rollover space. This assumption
offers further support for the attainment of the rent levels previously cited.
Absorption
Finally, our analysis concludes that the current vacant retail space
will be absorbed over a three year period through January 1999. We have
identified 34,053 square feet of vacant space, net of newly executed leases and
pending deals which have good likelihood of coming to fruition. This is
equivalent to 13.9 percent of mall GLA. It is noted that vacancy has increased
substantially over the past year. As of January 1, 1995, there were only
15,644 square feet vacant.
The chart on the Facing Page details our projected absorption schedule.
The absorption of the in-line space over a three year period is equal to 2,838
square feet per quarter. We have assumed that the space will all lease at 1996
base date market rent estimates as previously referenced. Effectively, this
assumes no rent inflation for absorption space.
Based on this lease-up assumption, the following chart tracks occupancy
through 1999, the first full year of fully stabilized occupancy.
Annual Average Occupancy (Mall GLA)
1996 85.3%
1997 89.5%
1998 95.4%
1999 99.6%
Anchor Tenants
The final category of minimum rent is related to anchor tenants. JC
Penney is the only owned department store at the subject. JC Penney pays
$495,448 per annum ($3.62 per square foot) as well as 1.5 percent of sales over
a $24.8 million breakpoint. In total, JC Penney pays about 9.2 percent of
total minimum rent at the subject during 1996.
Rent Growth Rates
Market rent will, over the life of a prescribed holding period, quite
obviously follow an erratic pattern. A review of investor's expectations
regarding income growth shows that projections generally range between 3.0 and
4.0 percent for retail centers. Cushman & Wakefield's Winter 1995 survey of
pension funds, REITs, bank and insurance companies, and institutional advisors
reveals that current income forecasts are utilizing average annual growth rates
between zero and 5.0 percent. The low and high mean is shown to be 2.8 and 3.9
percent, respectively. (see Addenda for survey results). The Peter F. Korpacz
Investor Survey (Fourth Quarter 1995) shows slightly more conservative results
with average annual rent growth of 3.16 percent.
It is not unusual in the current environment to see investors
structuring no growth or even negative growth in the short term. The
Washington/Baltimore metropolitan area in general has been negatively impacted
by the last recession and cuts in government jobs. Sales at many retail
establishments have been down this past year. The subject has also been
severely impacted by the global problems of many of its retailers who have
closed their units. The tenants' ability to pay rent is closely tied to its
increases in sales. However, rent growth can be more impacted by competition
and management's desire to attract and keep certain tenants that increase the
mall's synergy and appeal. As such, we have been conservative in our rent
growth forecast.
Market Rent Growth Rate Forecast
Period Annual Growth Rate *
1996-1998 Flat
1999 +2.0%
2000 +3.0%
Thereafter +3.5%
* Indicated growth rate over the previous year's rent
Releasing Assumption
The typical lease term for new in-line retail leases in centers such as
the subject generally ranges from five to twelve years. Market practice
dictates that it is not uncommon to get rent bumps throughout the lease terms
either in the form of fixed dollar amounts or a percentage increase based upon
changes in some index, usually the Consumer Price Index (CPI). Often the CPI
clause will carry a minimum annual increase and be capped at a higher maximum
amount.
For new leases in the regional malls, ten year terms are most typical.
Essentially, the developer will deliver a "vanilla" suite with mechanical
services roughed in and minimal interior finish. This allows the retailer to
finish the suite in accordance with their individual specifications. Because
of the up-front costs incurred by the tenants, they require a ten year lease
term to adequately amortize these costs. In certain instances, the developer
will offer some contribution to the cost of finishing out a space over and
above a standard allowance.
Upon lease expiration, it is our best estimate that there is a 70.0
percent probability that an existing tenant will renew their lease while the
remaining 30.0 percent will vacate their space at this time. While the 30.0
percent may be slightly high by some historic measures, we think that it is a
prudent assumption in light of what has happened over the past year.
Furthermore, the on-going targeted remerchandising will result in early
terminations and relocations that will likely result in some expenditures by
ownership. An exception to this assumption exists with respect to existing
tenants who, at the expiration of their lease, have sales that are
substantially below the mall average and have no chance to ever achieve
percentage rent. In these instances, it is our assumption that there is a 100
percent probability that the tenant will vacate the property. This is
consistent with ownership's philosophy of carefully and selectively weeding out
under-performers.
As stated above, it is not uncommon to get increases in base rent over
the life of a lease. Our global market assumptions for non-anchor tenants may
be summarized as shown on the following page.
Renewal Assumptions
Free Tenant Lease
Tenant Type Lease Term Rent Steps Rent Alterations Commissions
Mall Shops 10 yrs. 10% in 4th & 8th years No Yes Yes
Kiosks 5 yrs. 10% in 4th year No No Yes
Food Court 10 yrs 10% in 4th & 8th years No Yes Yes
The rent step schedule upon lease expiration applies in most instances.
However, there is one exception to this assumption with respect to tenants who
are forecasted to be in a percentage rent situation during the onset renewal
period. This could occur due to the fact that a tenant's sales were well above
its breakpoint at the expiration of the base lease. In these instances, we
have assumed a flat rent during the ensuing lease term. This conservative
assumption presumes that ownership will not achieve rent steps from a tenant
who is also paying overage rent from day one of the renewal term. Nonetheless,
we do note that ownership has shown some modest success in some instances in
achieving rent steps when a tenant's sales place him in a percentage rent
situation from the onset of a new lease.
Upon lease rollover/turnover, space is forecasted to be released at the
higher of the last effective rent (defined as minimum rent plus overage rent if
any) and the ascribed market rent as detailed previously increasing by our
market rent growth rate assumption.
Conclusion - Minimum Rent
In the initial full year of the investment (CY 1996), it is projected
that the subject property will produce approximately $5,374,336 in minimum
rental income. This estimate of base rental income is equivalent to $14.07 per
square foot of total owned GLA. Alternatively, minimum rental income accounts
for 49.5 percent of all potential gross revenues. Further analysis shows that
over the holding period (CY 1996-2005), minimum rent advances at an average
compound annual rate of 2.9 percent. This increase is a synthesis of the
mall's lease-up, fixed rental increases, as well as market rents from rollover
or turnover of space.
Overage Rent
In addition to minimum base rent, many tenants at the subject property
have contracted to pay a percentage of their gross annual sales over a
pre-established base amount as overage rent. Many leases have a natural
breakpoint although a number have stipulated breakpoints. The average overage
percentage for small space retail tenants is in a range of 5.0 to 6.0 percent,
with food court and kiosk tenants generally at 8.0 to 10.0 percent. Anchor
tenants typically have the lowest percentage clauses with ranges of 1.5 to 3.0
percent being common.
Traditionally, it takes a number of years for a retail center to mature
and gain acceptance before generating any sizeable percentage income. As a
center matures, the level of overage rents typically becomes a larger
percentage of total revenue. It is a major ingredient protecting the equity
investor against inflation.
In the Retail Market Analysis section of this report, we discussed the
historic and forecasted sales levels for the mall tenants. Because the mall
has seen some decline in sales over the past year, it is difficult to predict
with accuracy what sales will be on an individual tenant level. As such, we
have employed the following methodology:
- - For existing tenants who report sales, we have forecasted that sales will
continue at our projected sales growth rate as discussed herein.
- - For tenants who do not report sales or who do not have percentage clauses, we
have assumed that a non-reporting tenant will always occupy that particular
space.
- - For new tenants, we have projected sales at the forecasted average for the
center at the start of the lease. In 1996 this would be approximately $257
per square foot.
Thus, in the initial full year of the investment holding period,
overage revenues are estimated to amount to $136,050 (net of any recaptures)
equivalent to $0.36 per square foot of total GLA and 1.3 percent of potential
gross revenues. On balance, our forecasts for overage rent are deemed to be
reasonable and never exceed 1.3 percent of gross revenues.
Sales Growth Rates
In the Retail Market Analysis section of this report, we discussed that
retail specialty store sales at the subject property have declined over the
past year.
Retail sales in the Washington DC MSA have been increasing at a
compound annual rate of 6.3 percent per annum since 1985, according to Sales
and Marketing Management, while sales in the Baltimore MSA have been growing by
4.7 percent per year. According to both the Cushman & Wakefield and Korpacz
surveys, major investors are looking at a range of growth rates of 0 percent
initially to a high of 5 percent in their computational parameters. Most
typically, growth rates of 3 percent to 4 percent are seen in these surveys.
Nationally, total retail sales have been increasing at a compound
annual rate of 6.2 percent since 1980 and 4.9 percent per annum since 1990.
Between 1990 and 1994, GAFO sales have grown at a compound annual rate of 5.83
percent per year. Through 2000, total retail sales are forecasted to increase
by 4.12 percent per year nationally, while GAFO sales are projected to grow by
5.04 percent annually.
After considering all of the above, combined with the potential for
increased competition in the subject market, we have forecasted that sales for
existing tenants will remain flat through 1997. Subsequently, we have
forecasted an increase of 2.0 percent in 1998, 3.0 percent in 1999, and 3.5
percent thereafter.
Sales Growth Rate Forecast
Period Annual Growth Rate
1996-1997 Flat
1998 2.0%
1999 3.0%
Thereafter 3.5%
In all, we believe we have been conservative in our sales forecast for
new and turnover tenants upon the expiration of an initial lease. At lease
expiration, we have forecasted a 30.0 percent probability that a tenant will
vacate.
For new tenants, sales are established based upon the mall's average
sales level. Generally, for existing tenants, we have assumed that sales
continue subsequent to lease expiration at their previous level unless they are
under-performers that prompt a 100 percent turnover probability; then sales are
reset to the corresponding mall overage.
In most instances, no overage rent is generated from new tenants due to
our forecasted rent steps which serve to change the breakpoint.
Expense Reimbursement and Miscellaneous Income
By lease agreement, tenants are required to reimburse the lessor for
certain operating expenses. Included among these operating items are real
estate taxes, common area maintenance (CAM) and a common seating charge for
food court tenants. Miscellaneous income is essentially derived from specialty
leasing for temporary tenants, Christmas kiosks and other charges, including
special pass-throughs. We also account for utility income under miscellaneous
revenues. In the first full year of the investment, it is projected that the
subject property will generate approximately $3,564,853 in reimbursements for
these operating expenses, $1,580,000 in utility income, and $440,000 in other
miscellaneous income.
Common area maintenance and real estate tax recoveries are generally
based upon the tenants pro-rata share of the expense item. Because it is an
older center, there exists numerous variations to the calculation procedure of
each. We have relied upon ownership's calculation for the various recovery
formula's for taxes and CAM. At rollover, all of the tenants are assumed to be
subject to the standard lease form described herein. The standard lease
provides for the recovery of CAM expenses plus a 15.0 percent administrative
fee.
Common Area Maintenance
Under the standard lease, mall tenants pay their pro-rata share of the
balance of the CAM expense after anchor contributions are deducted and an
administrative charge of 15.0 percent is added. Provided below is a summary of
the standard clause that exists for a new tenant at the mall.
Common Area Maintenance Recovery Calculation
CAM Expense Actual hard cost for year exclusive of interest and
depreciation
Add 15% Administration fee
Add Interest and depreciation inclusive of allocated portion of
renovation expense
Less Contributions from department stores and mall tenants over
15,000+\- square feet
Equals: Net pro-ratable CAM billable to mall tenants on the basis of
gross leasable occupied area (GLOA).
We note that management has the ability to recover both interest and
depreciation expenses as well as the cost of the renovation.
All department stores pay nominal amounts for CAM. Their contributions
are collectively detailed under Anchor Pool on the cash flow. CAM billings for
the anchors can be detailed as follows:
Store Size Contribution 1996 Budget
JC Penney 136,864 SF Yrs 1-10 @ $ .30/SF $54,746
+ $.05/SF every 5 yrs thereafter
Montgomery Ward 161,204 SF Yrs 1-10 @ $.10/SF $32,241
+ $.05/SF every 5 yrs thereafter
Hecht's 118,354 SF Fixed @ $.10/SF $11,835
No increases
Real Estate Taxes
Mall tenants pay real estate tax recoveries based upon a pro-rata share
of the expense after anchor and major tenant contributions are deducted (major
tenants over 10,000 SF). JC Penney pays taxes based on a formula calculating
increases over the 1982/83 base year, while Montgomery Ward is assessed
separately. Hecht's taxes are included in the total billing of the mall and
billed by management for their estimated share. The new standard billing for
tenants also excludes tenants in excess of 10,000 square feet: Herman's,
Marianne Plus, and Limited Express.
Other Recoveries
Other recoveries consist of insurance income, common seating charges,
utility charges, temporary leasing, and miscellaneous income. Insurance
billings are generally relegated to older leases within the mall. The newer
lease structure covers the cost of insurance within the CAM charge.
Common seating charges are assessed to food court tenants for operation
of the food court area. This charge is in addition to the regular mall common
area maintenance.
The final revenue categories consist of utility income, temporary
leasing of in-line space, revenue from temporary kiosks at Christmas time, and
miscellaneous income. Utility income consists of HVAC income which is a charge
many tenants pay as a contribution toward the maintenance of the HVAC plant;
electricity income which results in a profit to the mall owner; and water
billings which are essentially pass throughs of the actual cost.
Temporary leasing is related to temporary tenants that occupy vacant
in-line space. Shopco has been relatively successful with this procedure at
many of their malls. Other sources of miscellaneous revenues include temporary
seasonal kiosk rentals, forfeited security deposits, phone revenues, and
interest income. Our forecast of $440,000 for these additional revenues is net
of a provision for vacancy and credit loss. Overall, it is our assumption that
these other revenues will increase by 3.0 percent per annum over the holding
period.
Allowance for Vacancy and Credit Loss
The investor of an income producing property is primarily interested
in the cash revenues that an income-producing property is likely to produce
annually over a specified period of time rather than what it could produce if
it were always 100 percent occupied with all tenants paying rent in full and on
time. It is normally a prudent practice to expect some income loss, either in
the form of actual vacancy or in the form of turnover, non-payment or slow
payment by tenants. We have reflected a 4.0 percent stabilized contingency for
both stabilized and unforeseen vacancy and credit loss. Please note that this
vacancy and credit loss provision is applied to all mall tenants equally and is
exclusive of all revenues generated by anchor stores.
We have phased in the 4.0 percent factor as the mall leases up based
upon the following schedule.
1996 3.0%
1997 3.0%
1998 3.5%
Thereafter 4.0%
In this analysis we have also forecasted that there is a 70.0 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 space back on line.
Thus, minimum rent as well as overage rent and certain other income has been
reduced by this forecasted probability.
We have calculated the effect of the total provision of vacancy and
credit loss on the in-line shops. Through the 10 years of this cash flow
analysis, the total allowance for vacancy and credit loss, including provisions
for downtime, ranges from a low of 4.4 percent (1999) of total potential gross
revenues to a high of 17.7 percent (1996). On average, the total allowance for
vacancy and credit loss over the 10 year projection period averages 8.2 percent
of these revenues.
Total Rent Loss Forecast *
Year Loss Provision
1996 17.7%
1997 13.5%
1998 8.1%
1999 4.4%
2000 8.2%
2001 4.7%
2002 6.1%
2003 5.5%
2004 6.1%
2005 8.0%
Avg. 8.2%
* Includes phased global vacancy provision for unseen
vacancy and credit loss as well as weighted downtime
provision of lease turnover.
As discussed, if an existing mall tenant is a consistent
under-performer with sales substantially below the mall average, then the
turnover probability applied is 100 percent. This assumption, while adding a
degree of conservatism to our analysis, reflects the reality that management
will continually strive to replace under performers. On balance, the aggregate
deductions of all gross revenues reflected in this analysis are based upon
overall long-term market occupancy levels and are considered what a prudent
investor would allow for credit loss. The remaining sum is effective gross
income which an informed investor may anticipate the subject property to
produce. We believe this is reasonable in light of overall vacancy in this
subject's market area as well as the current leasing structure at the subject.
Effective Gross Income
In the initial full year of the investment, CY 1996, effective gross
revenues ("Total Income" line on cash flow) are forecasted to amount to
approximately $10,846,650, equivalent to $28.40 per square foot of total owned
GLA.
Effective Gross Revenue Summary
Initial Year of Investment - 1996
Aggregate Sum Unit Rate Income Ratio
Potential Gross Income $11,093,239 $29.04 100.0%
Less: Vacancy and Credit Loss ($ 248,589) ($ 0.65) 2.3%
Effective Gross Income $10,846,650 $28.40 97.7%
Expenses
Total expenses incurred in the production of income from the subject
property are divided into two categories: reimbursable and non-reimbursable
items. The major expenses which are reimbursable include real estate taxes,
common area maintenance, common seating charges, and utility/HVAC expenses. The
non-reimbursable expenses associated with the subject property include certain
general and administrative expenses, ownership's contribution to the merchants
association/marketing fund, management charges, and miscellaneous expenses.
Other expenses include a reserve for the replacement of short-lived capital
components, alteration costs associated with bringing space up to occupancy
standards, leasing commissions, and a provision for capital expenditures.
The various expenses incurred in the operation of the subject property
have been estimated from information provided by a number of sources. We have
reviewed the subject's component operating history for prior years as well as
the 1996 Budget for these expense items. This information is provided in the
Addenda. We have compared this information to published data which are
available, as well as comparable expense information. Finally, this
information has been tempered by our experience with other regional shopping
centers.
Expense Growth Rates
Expense growth rates are generally forecasted to be more consistent
with inflationary trends than necessarily with competitive market forces. The
Winter 1995 Cushman & Wakefield survey of regional malls found the low and high
mean from each respondent to be 3.75 percent. The Fourth Quarter 1995 Korpacz
survey reports that the range in expense growth rates runs from 3.0 percent to
5.0 percent with an average of 3.98 percent, down 13 basis points from one year
ago. Expenses at the subject have been high over the past several years.
Management has realized this and is reportedly researching was to cut expenses.
In recognition of their efforts, expenses are forecasted to grow at the bottom
end of the range at 3.0 percent per annum between 1996 and 1998. Expenses are
forecasted to grow by 3.5 percent per annum over the remainder of the holding
period.
TABLE COMPARING COMMON AREA MAINTENANCE EXPENSE FOR
VARIOUS MSAs AROUND THE UNITED STATES
Reimbursable Operating Expenses
We have analyzed each item of expense individually and attempted to
project what the typical investor in a property like the subject would consider
reasonable, based upon informed opinion, judgment and experience. The
following is a detailed summary and discussion of the reimbursable operating
expenses incurred in the operation of the subject property during the initial
year of the investment holding period.
Common Area Maintenance - This expense category includes the annual
cost of miscellaneous building maintenance contracts, recoverable labor
and benefits, security, insurance, landscaping, snow removal, cleaning
and janitorial, exterminating, supplies, trash removal, exterior
lighting, common area energy, gas and fuel, equipment rental, interest
and depreciation, and other miscellaneous charges. In addition,
ownership can generally recoup the cost of certain extraordinary
capital items from the tenants. Typically, this is limited to certain
miscellaneous capital expenditures. In malls where the CAM budget is
high, discretion must be exercised in not trying to pass along every
charge as tenants will resist. As discussed, the standard lease
agreement allows management to pass along the CAM expense to tenants on
the basis of occupied gross leasable area. Furthermore, the interest
and depreciation expense is a non-operating item that serves to
increase the basis of reimbursement from mall tenants. Mall renovation
costs may also be passed along. Most tenants are subject to a 15.0
percent administrative surcharge although some are assessed 25.0
percent. Historically, the annual CAM expense (before anchor
contributions) can be summarized as follows:
Historical CAM Expense
Year Budget Amount
1993 $1,610,000
1994 $1,690,000
1995 $1,880,000
1996 Budget $1,800,000
The 1996 CAM budget is shown to be $1,800,000. An allocation of this
budget by line item provided in the Addenda. We have utilized an
expense of $1,800,000 for 1996 which is equivalent to $7.34 per square
foot of mall shop area.
Real Estate Taxes - The projected taxes to be incurred in 1996 are
equal to $1,025,000. As discussed, the standard recovery for this
expense is charged on the basis of average occupied area of non-major
mall tenant GLA. Taxes are charged to the mall tenants after first
deducting department store contributions. We have grown this expense
at a higher rate of 4.0 percent per year.
Food Court CAM (Common Seating) - The cost of maintaining the food
court is estimated at $205,000 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 $27.77 per square foot. As articulated, food
court tenants are assessed a separate charge for this expense which
typically carries a 15.0 or 25.0 percent administrative charge.
TABLE ILLUSTRATING OPERATING EXPENSE STATISTICS FOR REGIONAL
AND SUPER-REGIONAL MALLS IN THE EAST
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 $815,000 in 1996. Management purchases
electricity at wholesale rates from the local utility then charges 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 80.0 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. For
1996, reimbursement income of $1.58 million results in a spread of over
90.0 percent.
Non-Reimbursable Expenses
Total non-reimbursable expenses at the subject property are projected
from accepted practices and industry standards. Again, we have analyzed each
item of expenditure in an attempt to project what the typical investor in a
property similar to the subject would consider reasonable, based upon actual
operations, informed opinion, and experience. The following is a detailed
summary and discussion of non-reimbursable expenses incurred in the operation
of the subject property for the initial year. Expenses are forecasted to
increase 3.0 percent per annum between 1996 and 1998, and 3.5 percent per annum
through the remainder of the holding period.
General and Administrative - Expenses related to the administrative
aspects of the mall include costs particular to operation of the mall,
including salaries, travel and entertainment, and dues and
subscriptions. A provision is also made for professional services
(legal and accounting fees and other professional consulting services).
In 1996, we reflect general and administrative expenses of $100,000.
Marketing - These costs include expenses related to the temporary
tenant program, including payroll for the promotional and leasing
staff. It also contains ownership's contribution to the merchant
association which is net of tenant contributions. In order to assist
in the lease-up of vacant suites, in the initial year marketing cost is
forecasted to amount to $110,000. This ammount is decreased to
$100,000 in 1997, and then grown by our expense growth rate.
Miscellaneous - This catch-all category is provided for various
miscellaneous and sundry expenses that ownership will typically incur.
Such items as unrecovered repair costs, preparation of suites for
temporary tenants, certain non-recurring expenses, expenses associated
with maintaining vacant space, and bad debts in excess of our credit
loss provision would be included here. In the initial year, these
miscellaneous items are forecasted to amount to approximately $50,000.
Management - The annual cost of managing the subject property is
projected to be 4.5 percent of minimum and percentage rent. In the
initial year of our analysis, this amount is shown to be $247,967.
Alternatively, this amount is equivalent to approximately 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. Since we have reflected a structure where ownership
separately charges leasing commissions, we have used the mid-point of
the range as providing for compensation for these services.
Alterations - The principal component of this expense is ownership's
estimated cost to prepare a vacant suite for tenant use. At the
expiration of a lease, we have made a provision for the likely
expenditure of some monies on ownership's part for tenant improvement
allowances. In this regard, we have forecasted a cost of $8.00 per
square foot for turnover space (initial cost growing at expense growth
rate) weighted by our turnover probability of 30.0 percent. We have
forecasted a rate of $1.50 per square foot for renewal (rollover)
tenants, based on a renewal probability of 70.0 percent. The blended
rate based on our 70/30 turnover probability is therefore $3.45 per
square foot. It is noted that ownership has been moderately successful
in releasing space in its "as is" condition. Evidence of this is seen
in our previously presented summary of recent leasing activity at the
mall. The provisions made here for tenant work lends additional
conservatism our analysis. These costs are forecasted to increase at
our implied expense growth rate.
Leasing Commissions - Ownership has recently been charging leasing
commissions internally. A typical structure is $3.50 per square foot
for new tenants and $1.50 per square foot for renewal tenants. These
rates are increased by $0.50 and $0.25 per square foot, respectively,
every five years. This structure implies a payout up front at the
start of a lease. The cost is weighted by our 70/30 percent
renewal/turnover probability. Thus, upon lease expiration, a leasing
commission charge of $2.10 per square foot would be incurred.
Capital Expenditures - Ownership has budgeted for certain capital
expenditures which represent items outside of the normal repairs and
maintenance budget. As of this writing, the capital expenditure budget
has not been fully approved but we can make some provisions with
reasonable certainty for certain repairs. It is our opinion that a
prudent investor would make some provision for necessary repairs and
upgrades. To this end, we have reflected expenditures of $200,000 in
1996, $100,000 in 1997, and $50,000 in 1998.
Replacement Reserves - It is customary and prudent to set aside an
amount annually for the replacement of short-lived capital items such
as the roof, parking lot and certain mechanical items. The repairs and
maintenance expense category has historically included some capital
items which have been passed through to the tenants. This appears to
be a fairly common practice among most malls. However, we feel that
over a holding period some repairs or replacements will be needed that
will not be passed on to the tenants. Due to the inclusion of many of
the capital items in the maintenance expense category, the reserves for
replacement classification need not be sizeable. This becomes a more
focused issue when the CAM expense starts to get out of reach and
tenants begin to complain. For purposes of this report, we have
estimated an expense of approximately $0.15 per square foot of owned
GLA during the first year ($60,000), thereafter increasing by our
expense growth rate.
Net Income/Net Cash Flow
The total expenses of the subject property, including alterations,
commissions, capital expenditures, and reserves, are annually deducted from
total income, thereby leaving a residual net operating income or net cash flow
to the investors in each year of the holding period before debt service. In
the initial year of investment, the net operating income is forecasted to be
equal to approximately $6.5 million which is equivalent to 59.9 percent of
effective gross income. Deducting other expenses including capital items
results in a net cash flow before debt service of approximately $6.1 million.
Operating Summary
Initial Year of Investment - 1996
Aggregate Sum Unit Rate* Operating Ratio
Effective Gross Income $10,846,650 $28.40 100.0%
Operating Expenses $ 4,352,967 $11.40 42.9%
Net Operating Income $ 6,493,683 $17.00 59.9%
Other Expenses $ 379,649 $ 0.99 3.5%
Cash Flow $ 6,114,034 $16.00 56.4%
* Based on total owned GLA of 381,967 square feet.
Our cash flow model has forecasted the following compound annual growth rates
over the ten year holding period 1996-2005.
Net Operating Income: 2.75%
Cash Flow: 2.76%
Growth rates are shown to be 2.75 and 2.76 percent, respectively. We
note that this annual growth is a result of lease-up, rent steps, and turnover
in the property. We believe these rates are reasonable forecasts for a
property of the subject's calibre.
Investment Parameters
After projecting the income and expense components of the subject
property, investment parameters must be set in order to forecast property
performance over the holding period. These parameters include the selection of
capitalization rates (both initial and terminal) and application of the
appropriate discount or yield rate, also referred to as the internal rate of
return (IRR).
Selection of Capitalization Rates
Overall Capitalization Rate
The overall capitalization rate bears a direct relationship between net
operating income generated by the real estate in the initial year of investment
(or initial stabilized year) and the value of the asset in the marketplace.
Overall rates are also affected by the existing leasing schedule of the
property, the strength or weakness of the local rental market, the property's
position relative to competing properties, and the risk/return characteristics
associated with competitive investments.
The trend has been for rising capitalization rates. We feel that much
of this has to do with the quality of the product that has been selling.
Sellers of the better performing dominant Class A malls have been unwilling to
waver on their pricing. Many of the malls which have sold over the past 18 to
24 months are found in less desirable second or third tier locations or
represent turnaround situations with properties that are posed for expansion or
remerchandising. With fewer buyers for the top performing assets, sales have
been somewhat limited.
Overall Capitalization Rates
Regional Mall Sales
Year Range Mean Basis Point Change
1988 5.00% - 8.00% 6.16% -
1989 4.58% - 7.26% 6.05% -11
1990 5.06% - 9.11% 6.33% +28
1991 5.60% - 7.82% 6.44% +11
1992 6.00% - 7.97% 7.31% +87
1993 7.00% - 10.10% 7.92% +61
1994 6.98% - 10.29% 8.37% +45
1995 7.47% - 11.10% 9.14% +79
The data above shows that, with the exception of 1989, the average cap rate has
shown a rising trend each year. Between 1988 and 1989, the average rate
declined by 11 basis points. This was partly a result of dramatically fewer
transactions in 1989 as well as the sale of Woodfield Mall at a reported cap
rate of 4.58 percent. In 1990, the average cap rate jumped 28 basis points to
6.33 percent. Among the 16 transactions we surveyed that year, there was a
marked shift of investment criteria upward, with additional basis point risk
added due to the deteriorating economic climate for commercial real estate.
Furthermore, the problems with department store anchors to the perceived
investment risk.
1992 saw owners become more realistic in their pricing as some looked
to move product because of other financial pressures. The 87 basis point rise
to 7.31 percent reflected the reality that, in many markets, malls were not
performing as strongly as expected. A continuation of this trend was seen in
1993 as the average rate increased by 61 basis points. The trend in deals over
the past two year period shows a respective rise in average cap rates of 45 and
59 basis points. For the year, 1994 transactions were a mix of quality,
ranging from premier, institutional grade centers (Biltmore Fashion Park,
Riverchase Galleria), to B-centers such as Corte Madera Town Center and
Crossroads Mall. The continuation of this trend into 1995 is in evidence as
owners of the better quality malls are either aggressively pricing them or
keeping them off of the market until it improves further. Also, the beating
that REIT stocks experienced has forced up their yields, thereby putting
pressure on the pricing levels they can justify.
Much of the buying over the past 18 to 24 months has been opportunistic
acquisitions involving properties selling near or below replacement cost. Many
of these properties have languished due to lack of management focus or
expertise, as well as a limited ability to make the necessary capital
commitments for growth. As these opportunities become harder to find, we
believe that investors will again begin to focus on the stable returns of the
dominant Class A product.
The Cushman & Wakefield's Winter 1995 survey reveals that going-in cap
rates for regional shopping centers range between 7.0 and 9.0 percent with a
low average of 7.47 and high average of 8.25 percent, respectively; a spread of
78 basis points. Generally, the change in average capitalization rates over
the Spring 1995 survey shows that the low average decreased by 3 basis points,
while the upper average increased by 15 points. Terminal, or going-out rates
are now averaging 8.17 and 8.83 percent, representing a decrease of 22 basis
points and 23 basis points, from Spring 1995 averages.
Cushman & Wakefield Valuation Advisory Services
National Investor Survey - Regional Malls (%)
Investment Winter 1994 Spring 1995 Winter 1995
Parameters Low High Low High Low High
OAR/Going-In 6.50-9.50 7.50-9.50 7.00-8.50 7.50-8.50 7.00-8.00 7.50-9.00
7.6 8.4 7.5 8.1 7.47 8.25
OAR/Terminal 7.00-9.50 7.50-10.50 7.50-8.75 8.00-9.25 7.00-9.00 8.00-10.00
8.0 8.8 7.95 8.6 8.17 8.83
IRR 10.0-11.5 10.0-13.0 10.0-11.5 11.0-12.0 10.0-11.5 10.5-12.0
10.5 11.5 10.7 11.4 10.72 11.33
The Fourth Quarter 1995 Peter F. Korpacz survey finds that cap rates
have remained relatively stable. They recognize that there is extreme
competition for the few premier malls that are offered for sale which should
exert downward pressure on rates. However, most of the available product is B
or C quality which are not attractive to most institutional investors. The
survey did, however, note a dramatic change for the top tier investment
category of 20 to 30 true "trophy" assets in that investors think it is
unrealistic to assume that cap rates could fall below 7.0 percent.
NATIONAL REGIONAL MALL MARKET
FOURTH QUARTER 1995
KEY INDICATORS CURRENT LAST
Free & Clear Equity IRR QUARTER QUARTER YEAR AGO
RANGE 10.00%-14.00% 10.00%-14.00% 10.00%-14.00%
AVERAGE 11.55% 11.55% 11.60%
CHANGE (Basis Points) - 0 - 5
Free & Clear Going-In Cap Rate
RANGE 6.25%-11.00% 6.25%-11.00% 6.25%-11.00%
AVERAGE 7.86% 7.84% 7.73%
CHANGE (Basis Points) - + 2 +13
Residual Cap Rate
RANGE 7.00%-11.00% 7.00%-11.00% 7.00%-11.00%
AVERAGE 8.45% 8.45% 8.30%
CHANGE (Basis Points) - 0 +15
Source: Peter Korpacz Associates, Inc. - Real Estate Investor Survey Fourth
Quarter - 1995
As can be seen from the above, the average IRR has decreased by 5 basis
points to 11.55 percent from one year ago. However, it is noted that this
measure has been relatively stable over the past three months. The quarter's
average initial free and clear equity cap rate rose 13 basis points to 7.86
percent from a year earlier, while the residual cap rate increased 15 basis
points to 8.45 percent.
Most retail properties that are considered institutional grade are
existing, seasoned centers with good inflation protection that offer stability
in income and are strongly positioned to the extent that they are formidable
barriers to new competition. Equally important are centers which offer good
upside potential after face-lifting, renovations, or expansion. With new
construction down substantially, owners have accelerated renovation and
re-merchandising programs. Little competition from over-building is likely in
most mature markets within which these centers are located. Environmental
concerns and "no-growth" mentalities in communities are now serious impediments
to new retail development.
Finally, investors have recognized that the retail landscape has been
fundamentally altered by consumer lifestyles changes, industry consolidations
and bankruptcies. This trend was strongly in evidence as the economy enters
1996 in view of the wave of retail chains whose troublesome earnings are
forcing major restructures or even liquidations. (The reader is referred to
the National Retail Overview in the Addenda of this report). Trends toward
more casual dress at work and consumers growing pre-occupation with their
leisure and home lives have created the need for refocused leasing efforts to
bring those tenants to the mall that help differentiate them from the
competition. As such, entertainment, a loosely defined concept, is one of the
most common directions malls have taken. A trend toward bringing in larger
specialty and category tenants to the mall is also in evidence. The risk from
an owners standpoint is finding that mix which works the best.
Nonetheless, the cumulative effect of these changes has been a rise in
rates as investors find it necessary to adjust their risk premiums in their
underwriting.
Based upon this discussion, we are inclined to group and characterize
regional malls into the general categories following:
Cap Rate Range Category
7.0% to 7.5% Top 20 to 25+/- malls in the country.
7.5% to 8.5% Dominant Class A investment grade property, high sales
levels, relatively good health ratios, excellent
demographics (top 50 markets), and considered to
present a significant barrier to entry within its trade
area.
8.5% to 10.5% Somewhat broad characterization of investment quality
properties ranging from primary MSAs to second tier
cities. Properties at the higher end of the scale are
probably somewhat vulnerable to new competition in
their market.
10.5% to 12.0% Remaining product which has limited appeal or
significant risk which will attract only a smaller,
select group of investors.
Conclusion - Initial Capitalization Rate
Laurel Centre is still one of the dominant malls in its region, despite
a dip in sales during 1995. It has three relatively strong anchor stores and
has historically experienced high occupancy rates. The trade area is
relatively affluent, with above average growth projected for the near-term. The
following points summarize some of our perceptions regarding Laurel Centre:
- - Laurel Centre has experienced increased competition from discount stores and
community centers in the immediate area. This competition has hurt sales and
impacted certain merchandising points such as electronics, records and tapes,
and apparel. Food and restaurant tenants have also been affected by numerous
establishments along Route 1.
- - There is a clear investment risk in the property due to potential future
competition. Although these projects remain speculative, they pose a
potential threat to the subject. Part of this risk should be reflected in
the terminal capitalization rate.
- - Occupancy costs are moderately high at the property. Although we have
reduced market rent assumptions to help mitigate total costs, absorption of
vacant space is also required to moderate pass-through charges.
On balance, we believe that a property with the sought after
characteristics of the subject would potentially trade at an overall rate
between 7.75 and 8.25 percent based on first year income if it were operating
on a stabilized basis.
Terminal Capitalization Rate
The residual cash flows generated annually by the subject property
comprise only the first part of the return which an investor will receive. The
second component of this investment return is the pre-tax cash proceeds from
the resale of the property at the end of a projected investment holding period.
Typically, investors will structure a provision in their analyses in the form
of a rate differential over a going-in capitalization rate in projecting a
future disposition price. The view is that the improvement is then older and
the future is harder to visualize; hence a slightly higher rate is warranted
for added risks in forecasting. On average, our rate survey shows a 38 basis
point differential.
Therefore, to the range of stabilized overall capitalization rates, we
have added 50 basis points to arrive at a projected terminal capitalization
rate ranging from 8.25 to 8.75 percent. This provision is made for the risk of
lease-up and maintaining a certain level of occupancy in the center, its level
of revenue collection, the prospects of future competition, as well as the
uncertainty of maintaining the forecasted growth rates over such a holding
period. In our opinion, this range of terminal rates would be appropriate for
the subject. Thus, this range of rates is applied to the following year's net
operating income before reserves, capital expenditures, leasing commissions and
alterations as it would be the first received by a new purchaser of the subject
property. Applying a rate of say 8.50 percent for disposition, a current
investor would dispose of the subject property at the end of the investment
holding period for an amount of approximately $101.5 million based on 2006 net
income of approximately $8.6 million.
From the projected reversionary value to an investor in the subject
property, we have made a deduction to account for the various transaction costs
associated with the sale of an asset of this type. These costs consist of 2.0
percent of the total disposition price of the subject property as an allowance
for transfer taxes, professional fees, and other miscellaneous expenses
including an allowance for alteration costs that the seller pays at final
closing. Deducting these transaction costs from the computed reversion renders
pre-tax the net proceeds of sale to be received by an investor in the subject
property at the end of the holding period.
Net Proceeds at Reversion
Less Costs of Sale and
Net Income 2006 Gross Sale Price Miscellaneous Expenses @ 2.0% Net Proceeds
$8,625,738 $101,479,271 $2,029,585 $99,449,686
Selection of Discount Rate
The discounted cash flow analysis makes several assumptions which
reflect typical investor requirements for yield on real property. These
assumptions are difficult to directly extract from any given market sale or by
comparison to other investment vehicles. Instead, investor surveys of major
real estate investment funds and trends in bond yield rates are often cited to
support such analysis.
A yield or discount rate differs from an income rate, such as
cash-on-cash (equity dividend rate), in that it takes into consideration all
equity benefits, including the equity reversion at the time of resale and
annual cash flow from the property. The internal rate of return is the
single-yield rate that is used to discount all future equity benefits (cash
flow and reversion) into the initial equity investment. Thus, a current
estimate of the subject's present value may be derived by discounting the
projected income stream and reversion year sale at the property's yield rate.
Yield rates on long term real estate investments range widely between
property types. As cited in Cushman & Wakefield's Winter 1995 survey,
investors in regional malls are currently looking at broad rates of return
between 10.0 and 12.00 percent, down slightly from our last two surveys. The
indicated low and high means are 10.72 and 11.33 percent, respectively. Peter
F. Korpacz reports an average internal rate of return of 11.55 percent for the
Fourth Quarter 1995, down 5 basis points from the year ago level.
The yield rate on a long term real estate investment can also be
compared with yield rates offered by alternative financial investments since
real estate must compete in the open market for capital. In developing an
appropriate risk rate for the subject, consideration has been given to a number
of different investment opportunities. The following is a list of rates
offered by other types of securities.
Market Rates and Bond Yields (%) February, 1996
Reserve Bank Discount Rate 5.00
Prime Rate (Monthly Average) 8.25
3-Month Treasury Bills 4.86
U.S. 10-Year Notes 6.06
U.S. 30-Year Bonds 6.47
Telephone Bonds 7.70
Municipal Bonds 5.68
Source: New York Times
This compilation of yield rates from alternative investments reflects
varying degrees of risk as perceived by the market. Therefore, a riskless
level of investment might be seen in a three month treasury bill at 4.86
percent. A more risky investment, such as telephone bonds, would currently
yield a much higher rate of 7.70 percent. The prime rate is currently 8.25
percent, while the discount rate is 5.00 percent. Ten year treasury notes are
currently yielding around 5.06 percent, while 30-year bonds are at 6.47
percent.
Real estate investment typically requires a higher rate of return
(yield) and is much influenced by the relative health of financial markets. A
retail center investment tends to incorporate a blend of risk and credit based
on the tenant mix, the anchors that are included (or excluded) in the
transaction, and the assumptions of growth incorporated within the cash flow
analysis. An appropriate discount rate selected for a retail center thus
attempts to consider the underlying credit and security of the income stream,
and includes an appropriate premium for liquidity issues relating to the asset.
There has historically been a consistent relationship between the
spread in rates of return for real estate and the "safe" rate available through
long-term treasuries or high-grade corporate bonds. A wider gap between return
requirements for real estate and alternative investments has been created in
recent years due to illiquidity issues, the absence of third party financing,
and the decline in property values.
Investors have suggested that the regional mall market has become
increasingly "tiered" over the past two years. The country's premier malls are
considered to have the strongest trade areas, excellent anchor alignments, and
significant barriers of entry to future competitive supply. These and other
"dominant" malls will have average mall shop sales above $300 per square foot
and be attractive investment vehicles in the current market. It is our opinion
that the subject would attract high interest from institutional investors if
offered for sale in the current marketplace. There is not an abundance of
regional mall assets of comparable quality currently available, and many
regional malls have been included within REITs, rather than offered on an
individual property basis. However, we must further temper our analysis due to
the fact that there remains some risk that the inherent assumptions employed in
our model come to full fruition.
Finally, application of these rate parameters to the subject should
entail some sensitivity to the rate at which leases will be expiring over the
projection period. Provided below is a summary of the forecasted lease
expiration schedule for the subject. A complete expiration report is included
in the Addenda.
Lease Expiration Schedule *
Calendar Year No. of Leases GLA (SF) Cumulative %
1996 2 3,150 1.3%
1997 9 15,946 7.8%
1998 14 16,966 14.7%
1999 5 8,646 18.2%
2000 18 39,105 34.2%
2001 4 6,476 36.8%
2002 8 24,206 46.7%
2003 9 17,075 53.7%
2004 9 29,248 65.6%
2005 21 48,092 85.2%
* Includes mall shops, kiosks and food court.
From the above, we see that a moderate to large percentage (34.2
percent) of the GLA will expire by 2000. The largest expiration year is 2004
when leases totaling 48,092 square feet of the center will expire. Over the
total projection period, the mall will turnover about 85.2 percent of mall shop
space. Overall, consideration is given to this in our selection of an
appropriate risk rate. We would also note that much of the risk factored into
such an analysis is reflected in the assumptions employed within the cash flow
model, including rent and sales growth, turnover, reserves, and vacancy
provisions.
We have briefly discussed the investment risks associated with the
subject. On balance, it is our opinion that an investor in the subject
property would require an internal rate of return between 11.00 and 11.50
percent.
Present Value Analysis
Analysis by the discounted cash flow method is examined over a holding
period that allows the investment to mature, the investor to recognize a return
commensurate with the risk taken, and a recapture of the original investment.
Typical holding periods usually range from 10 to 20 years and are sufficient
for the majority of institutional grade real estate such as the subject to meet
the criteria noted above. In the instance of the subject, we have analyzed the
cash flows anticipated over a ten year period commencing on January 1, 1996.
A sale or reversion is deemed to occur at the end of the 10th year
(December 31, 2005), based upon capitalization of the following year's net
operating income. This is based upon the premise that a purchaser in the 10th
year is buying the following year's net income. Therefore, our analysis
reflects this situation by capitalizing the first year of the next holding
period.
The present value is formulated by discounting the property cash flows
at various yield rates. The yield rate utilized to discount the projected cash
flow and eventual property reversion has been based on an analysis of
anticipated yield rates of investors dealing in similar investments. The rates
reflect acceptable expectations of yield to be achieved by investors currently
in the marketplace shown in their current investment criteria and as extracted
from comparable property sales.
Cash Flow Assumptions
Our cash flows forecasted for the mall have been presented. To reiterate, the
formulation of these cash flows incorporate the following general assumptions
in our computer model:
1. The pro forma is presented on a calendar year basis commencing
on January 1, 1996. The present value analysis is based on a
10 year holding period commencing from January 1, 1996. This
period reflects 10 years of operations and follows an adequate
time for the property to proceed through an orderly lease-up
and continue to benefit from any remerchandising. In this
regard, we have projected that the investment will be sold at
the year ending December 31, 2005.
2. Existing lease terms and conditions remain unmodified until
their expiration. At expiration, it has been assumed that
there is an 70.0 percent probability that existing retail
tenants will renew their lease. Executed and high probability
pending leases have been assumed to be signed in accordance
with negotiated terms as of the date of valuation.
3. 1996 base date market rental rates for existing tenants have
been established according to tenant size with consideration
given to location within the mall, the specific merchandise
category, as well as the tenants sales history. Lease terms
throughout the total complex vary but for new in-line mall
tenants are generally 5 to 12 years. While some have been flat,
others have one or two step-ups over the course of the term.
Upon renewal, it is assumed that new leases are written for an
average of 10 years with a rent step of 10.0 percent in years 4
and 8. An exception exists in the instance where a tenant is
determined to be paying base rent which is above market, or
where percentage rent is being generated in the base lease and
is forecasted to continue over the ensuing period. In these
instances, we have assumed that a flat lease will be written.
Kiosk leases are written for 5 year terms with a 10.0 percent
rent increase after 36 months.
4. Market rents have been established for 1996 based upon an
overall average of about $19.22 per square foot for in-line
mall shop space. Subsequently, it is our assumption that
market rental rates for mall tenants will remain flat through
1998, increasing by 2.0 percent in 1999, 3.0 percent in 2000,
and 3.5 percent per year thereafter.
5. Most tenants have percentage rental clauses providing for the
payment of overage rent. We have relied upon average sales
data as provided by management. In our analysis, we have
forecasted that sales will remain flat and then grow by 2.0
percent in 1998, 3.0 percent in 1999, and 3.5 percent per year
throughout the balance of the holding period.
6. Expense recoveries are based upon terms specified in the
various lease contracts. The standard lease contract for real
estate taxes and common area maintenance billings for interior
mall tenants is based upon a tenants pro rata share with the
latter carrying an administrative surcharge of 15.0 percent.
Pro-rata share is generally calculated on leased (occupied)
area as opposed to leasable area. Department store
contributions are deducted before pass through to the mall
shops. HVAC charges are for mall HVAC.
7. Income lost due to vacancy and non-payment of obligations has
been based upon our turnover probability assumption as well as
a global provision for credit loss. Upon the expiration of a
lease, there is 30.0 percent probability that the retail tenant
will vacate the suite. At this time we have forecasted that
rent loss equivalent to 6 months rent would be incurred to
account for the time associated with bringing the space back
on-line. In addition, we have forecasted an annual global
vacancy and credit loss of gross rental income which we have
stepped-up to a stabilized level of 4.0 percent. This global
provision is applied to all tenants excluding anchor department
stores.
8. Specialty leasing and miscellaneous income consists of several
categories. Specialty leasing is generated by the mall's
successful temporary in-line tenant program which fill in
during periods of downtime between permanent in-line tenants.
Miscellaneous income is generated by chargebacks for tenant
work, forfeited security deposits, stroller rentals,
telephones, etc. We have grown all miscellaneous revenues by
3.0 percent per annum.
9. Operating expenses have been developed from management's budget
from which we have recast certain expense items. Expenses have
also been compared to industry standards as well as our general
experience in appraising regional malls throughout the
northeast. Operating expenses are forecasted to increase by
3.0 from 1996-1998, then increase by 3.5 percent per year
except for management which is based upon 4.5 percent of
minimum and percentage rent annually. Taxes are forecasted to
grow at 4.0 percent per year. Alteration costs are assumed to
escalate at our forecasted expense inflation rate.
10. A provision for initial capital reserves of approximately
$60,000 equal to approximately $0.15 per square foot of total
owned GLA has been reflected. An alteration charge of $8.00
per square foot has been utilized for new mall tenants. Renewal
tenants have been given an allowance of $1.50 per square foot.
Leasing commissions reflect a rate structure of $3.50 per
square foot for new leases and $1.50 per square foot for
renewal leases. A contingency provision for other capital
expenditures has been made for the first three years.
For a property such as the subject, it is our opinion that an investor
would require an all cash discount rate in the range of 11.00 to 11.50 percent.
Accordingly, we have discounted the projected future pre-tax cash flows to be
received by an equity investor in the subject property to a present value so as
to yield 11.00 to 11.50 percent at 25 basis point intervals on equity capital
over the holding period. This range of rates reflects the risks associated
with the investment. Discounting these cash flows over the range of yield and
terminal rates now being required by participants in the market for this type
of real estate places additional perspective upon our analysis. A valuation
matrix for the subject appears on the following table:
Valuation Matrix (000)
Terminal Cap Rate Discount Rate
11.00% 11.25% 11.50%
8.25% $78,800 $77,738 $76,738
8.50% $77,531 $76,493 $75,514
8.75% $76,289 $75,274 $74,317
Through such a sensitivity analysis, it can be seen that the present
value of the subject property varies from approximately $74.3 to $78.8 million.
Giving consideration to all of the characteristics of the subject previously
discussed, we feel that a prudent investor would require a yield which falls
near the middle of the range outlined above for this property. Accordingly, we
believe that based upon all of the assumptions inherent in our cash flow
analysis, an investor would look toward as IRR around 11.25 percent and a
terminal rate around 8.50 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 $76.5 million for the
subject property as of January 1, 1996. The indices of investment generated
through this indicated value conclusion are shown on the Facing Page.
DISCOUNTED CASH FLOW ANALYSIS
Laurel Centre (Laurel, Maryland)
Cushman & Wakefield, Inc.
Year Net Discount Present Value Composition Annual Cash
No. Year Cash Flow Factor 11.25% of Cash Flows of Yield on Cash Returns
1 1996 $6,114,034 x 0.8988764 = $5,495,761 7.18% 7.99%
2 1997 $6,527,488 x 0.8079788 = $5,274,072 6.89% 8.53%
3 1998 $7,057,244 x 0.7262731 = $5,125,486 6.70% 9.23%
4 1999 $7,654,502 x 0.6528297 = $4,997,086 6.53% 10.01%
5 2000 $7,308,927 x 0.5868132 = $4,288,975 5.61% 9.55%
6 2001 $7,887,199 x 0.5274726 = $4,160,281 5.44% 10.31%
7 2002 $7,837,252 x 0.4741326 = $3,715,897 4.86% 10.24%
8 2003 $7,997,985 x 0.4261867 = $3,408,634 4.46% 10.45%
9 2004 $8,069,970 x 0.3830891 = $3,091,518 4.04% 10.55%
10 2005 $7,811,943 x 0.3443498 = $2,690,041 3.52% 10.21%
Total Present Value of Cash Flows: $42,247,752 55.23% 9.71%
Total Avg.
Reversion Year NOI/Income / Terminal OAR = Reversion
11 2006 $8,625,738 8.50% = $101,479,271
Less: Cost of Sale 2.00% ($2,029,585)
Less: Tls & Commissions $0
Net Reversion $ 99,449,685
x Discount Factor 0.3443498
Total Present Value of Reversion $ 34,245,477 44.77%
Total Present Value of Cash Flows & Reversion $ 76,493,228 100.00%
Rounded Value via Discounted Cash Flow: $ 76,500,000
Owned Net Rentable Area: 381,976
Value per Square Foot (Owned GLA): $200.27
Owned Mall Shop Area: 245,112
Value Per Square Foot (Shop GLA): $312.10
Year One NOI (12 months): $6,493,683
Implicit Going-In Capitalization Rate: 8.49%
Compound Annual Growth Rate
Concluded Value to Reversion Value: 3.19%
Compound Annual Growth Rate
Net Cash Flow: 2.76%
We note that the computed equity yield is not necessarily the true rate
of return on equity capital. This analysis has been performed on a pre-tax
basis. The tax benefits created by real estate investment will serve to attract
investors to a pre-tax yield which is not the full measure of the return on
capital.
Direct Capitalization
To further support our value conclusion at stabilization derived via
the discounted cash flow, we have also utilized the direct capitalization
method. In direct capitalization, an overall rate is applied to the net
operating income of the subject property. In this case, we will again consider
the indicated overall rates from the comparable sales in the Sales Comparison
Approach as well as those rates established in our Investor Survey.
In view of our total analysis, we would anticipate that at the subject
would trade at an overall rate of approximately 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 expenses for the subject of $6,493,383
results in a value of approximately $78,700,000 to $83,800,000. From this
range we would be inclined to conclude at a value of $80,000,000 by direct
capitalization which is indicative of an overall rate of 8.12 percent.
However, it is our opinion that a prudent investor in the property
would consider the capital expenditures and leasing costs through 1998 in the
final value estimate. By discounting commissions, alterations, and capital
expenditures at 11.50 percent through 1998, a deduction of about $1,088,000 is
indicated. Applying this to $80.0 million results in a value estimate of
roughly $78.9 million. Thus, the indicated value via direct capitalization as
of January 1, 1996, was $78,900,000.
RECONCILIATION AND FINAL VALUE ESTIMATE
Application of the Sales Comparison and Income Approaches used in the valuation
of the subject property has produced results which fall within a reasonably
acceptable range. Restated, these are:
Methodology Market Value Conclusion
Sales Comparison Approach $74,000,000 - $78,000,000
Income Approach
Discounted Cash Flow $76,500,000
Direct Capitalization $78,900,000
This is considered a narrow range in possible value given the magnitude
of the value estimates. Both approaches are well supported by data extracted
from the market. There are, however, strengths and weaknesses in each of these
two approaches which require reconciliation before a final conclusion of value
can be rendered.
Sales Comparison Approach
The Sales Comparison Approach arrived at a value indicted for the
property by analyzing historical arms-length transaction, reducing the gathered
information to common units of comparison, adjusting the sale data for
differences with the subject and interpreting the results to yield a meaningful
value conclusion. The basis of these conclusions was the cash-on-cash return
based on net income and the adjusted price per square foot of gross leasable
area sold. An analysis of the subject on the basis of its implicit sales
multiple was also utilized.
The process of comparing historical sales data to assess what
purchasers have been paying for similar type properties is weak in estimating
future expectations. Although the unit sale price yields comparable
conclusions, it is not the primary tool by which the investor market for a
property like the subject operates. In addition, no two properties are alike
with respect to quality of construction, location, market segmentation and
income profile. As such, subjective judgment necessarily become a part of the
comparative process. The usefulness of this approach is that it interprets
specific investor parameters established in their analysis and ultimate
purchase of a property. In light of the above, the writers are of the opinion
that this methodology is best suited as support for the conclusions of the
Income Approach. It does provide useful market extracted rates of return such
as overall rates to simulate investor behavior in the Income Approach.
Income Approach
Discounted Cash Flow Analysis
The subject property is highly suited to analysis by the discounted
cash flow method as it will be bought and sold in investment circles. The
focus on property value in relation to anticipated income is well founded since
the basis for investment is profit in the form of return or yield on invested
capital. The subject property, as an investment vehicle, is sensitive to all
changes in the economic climate and the economic expectations of investors. The
discounted cash flow analysis may easily reflect changes in the economic
climate of investor expectations by adjusting the variables used to qualify the
model. In the case of the subject property, the Income Approach can analyze
existing leases, the probabilities of future rollovers and turnovers and
reflect the expectations of overage rents. Essentially, the Income Approach
can model many of the dynamics of a complex shopping center. The writers have
considered the results of the discounted cash flow analysis because of the
applicability of this method in accounting for the particular characteristics
of the property, as well as being the tool used by many purchasers.
Capitalization
Direct capitalization has its basis in capitalization theory and uses
the premise that the relationship between income and sales price may be
expressed as a rate or its reciprocal, a multiplier. This process selects
rates derived from the marketplace, in much the same fashion as the Sales
Comparison Approach, and applies this to a projected net operating income to
derive a sale price. The weakness here is the idea of using one year of cash
flow as the basis for calculating a sale price. This is simplistic in its view
of expectations and may sometimes be misleading. If the year chosen for the
analysis of the sale price contains an income stream that is over or
understated, this error is compounded by the capitalization process.
Nonetheless, real estate of the subject's calibre is commonly purchased on a
net capitalization basis. Overall, this methodology was given important
consideration in our total analysis.
Conclusions
We have briefly discussed the applicability of each of the methods
presented. Because of certain vulnerable characteristics in the Sales
Comparison Approach, it has been used as supporting evidence and as a final
check on the value conclusion indicated by the Income Approach methodology. The
value exhibited by the Income Approach is consistent with the leasing profile
of the mall. Overall, it indicates complimentary results with the Sales
Comparison Approach, the conclusions being supportive of each method employed,
and neither range being extremely high or low in terms of the other.
As a result of our analysis, we have formed an opinion that the market
value of the leased fee estate in the referenced property, subject to the
assumptions, limiting conditions, certifications, and definitions, as of
January 1, 1996, was:
SEVENTY SEVEN MILLION DOLLARS
$77,000,000
ASSUMPTIONS AND LIMITING CONDITIONS
"Appraisal" means the appraisal report and opinion of value stated therein; or
the letter opinion of value, to which these Assumptions and Limiting Conditions
are annexed.
"Property" means the subject of the Appraisal.
"C&W" means Cushman & Wakefield, Inc. or its subsidiary which issued the
Appraisal.
"Appraiser(s)" means the employee(s) of C&W who prepared and signed the
Appraisal.
This appraisal is made subject to the following assumptions and limiting
conditions:
1. This is a Summary Appraisal Report which is intended to comply with the
reporting requirements set forth under Standards Rule 2-2)b) of the
Uniform Standards of Professional Appraisal Practice for a Summary
Appraisal Report. As such, it presents only summary discussions of the
data, reasoning, and analyses that were used in the appraisal process
to develop the appraiser's opinion of value. Supporting documentation
concerning the data, reasoning, and analyses is retained in the
appraiser's file. The depth of discussion contained in this report is
specific to the needs of the client and for the intended use stated
below. The appraiser is not responsible for unauthorized use of this
report. We are providing this report as an update to our last analysis
which was prepared as of January 1, 1995. As such, we have primarily
reported only changes to the property and its environs over the past
year.
2. No opinion is intended to be expressed and no responsibility is assumed
for the legal description or for any matters which are legal in nature
or require legal expertise or specialized knowledge beyond that of a
real estate appraiser. Title to the Property is assumed to be good and
marketable and the Property is assumed to be free and clear of all
liens unless otherwise stated. No survey of the Property was
undertaken.
3. The information contained in the Appraisal or upon which the Appraisal
is based has been gathered from sources the Appraiser assumes to be
reliable and accurate. Some of such information may have been provided
by the owner of the Property. Neither the Appraiser nor C&W shall be
responsible for the accuracy or completeness of such information,
including the correctness of estimates, opinions, dimensions, sketches,
exhibits and factual matters.
4. The opinion of value is only as of the date stated in the Appraisal.
Changes since that date in external and market factors or in the
Property itself can significantly affect property value.
5. The Appraisal is to be used in whole and not in part. No part of the
Appraisal shall be used in conjunction with any other appraisal.
Publication of the Appraisal or any portion thereof without the prior
written consent of C&W is prohibited. Except as may be otherwise
stated in the letter of engagement, the Appraisal may not be used by
any person other than the party to whom it is addressed or for purposes
other than that for which it was prepared. No part of the Appraisal
shall be conveyed to the public through advertising, or used in any
sales or promotional material without C&W's prior written consent.
Reference to the Appraisal Institute or to the MAI designation is
prohibited.
6. Except as may be otherwise stated in the letter of engagement, the
Appraiser shall not be required to give testimony in any court or
administrative proceeding relating to the Property or the Appraisal.
7. The Appraisal assumes (a) responsible ownership and competent
management of the Property; (b) there are no hidden or unapparent
conditions of the Property, subsoil or structures that render the
Property more or less valuable (no responsibility is assumed for such
conditions or for arranging for engineering studies that may be
required to discover them); (c) full compliance with all applicable
federal, state and local zoning and environmental regulations and laws,
unless noncompliance is stated, defined and considered in the
Appraisal; and (d) all required licenses, certificates of occupancy and
other governmental consents have been or can be obtained and renewed
for any use on which the value estimate contained in the Appraisal is
based.
8. The forecasted potential gross income referred to in the Appraisal may
be based on lease summaries provided by the owner or third parties.
The Appraiser assumes no responsibility for the authenticity or
completeness of lease information provided by others. C&W recommends
that legal advice be obtained regarding the interpretation of lease
provisions and the contractual rights of parties.
9. The forecasts of income and expenses are not predictions of the future.
Rather, they are the Appraiser's best estimates of current market
thinking on future income and expenses. The Appraiser and C&W make no
warranty or representation that these forecasts will materialize. The
real estate market is constantly fluctuating and changing. It is not
the Appraiser's task to predict or in any way warrant the conditions of
a future real estate market; the Appraiser can only reflect what the
investment community, as of the date of the Appraisal, envisages for
the future in terms of rental rates, expenses, supply and demand.
10. Unless otherwise stated in the Appraisal, the existence of potentially
hazardous or toxic materials which may have been used in the
construction or maintenance of the improvements or may be located at or
about the Property was not considered in arriving at the opinion of
value. These materials (such as formaldehyde foam insulation, asbestos
insulation and other potentially hazardous materials) may adversely
affect the value of the Property. The Appraisers are not qualified to
detect such substances. C&W recommends that an environmental expert be
employed to determine the impact of these matters on the opinion of
value.
11. Unless otherwise stated in the Appraisal, compliance with the
requirements of the Americans With Disabilities Act of 1990 (ADA) has
not been considered in arriving at the opinion of value. Failure to
comply with the requirements of the ADA may adversely affect the value
of the property. C&W recommends that an expert in this field be
employed.
CERTIFICATION OF APPRAISAL
We certify that, to the best of our knowledge and belief:
1. Richard W. Latella, MAI and Jay F. Booth inspected the property. Brian
J. Booth did not inspect the property but has contributed to the
underlying analysis.
2. The statements of fact contained in this report are true and correct.
3. The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions, and are our personal,
unbiased professional analyses, opinions, and conclusions.
4. We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
5. Our compensation is not contingent upon the reporting of a
predetermined value or direction in value that favors the cause of the
client, the amount of the value estimate, the attainment of a
stipulated result, or the occurrence of a subsequent event. The
appraisal assignment was not based on a requested minimum valuation, a
specific valuation or the approval of a loan.
6. No one provided significant professional assistance to the persons
signing this report.
7. Our analyses, opinions, and conclusions were developed, and this report
has been prepared, in conformity with the Uniform Standards of
Professional Appraisal Practice of the Appraisal Foundation and the
Code of Professional Ethics and the Standards of Professional Appraisal
Practice of the Appraisal Institute.
8. The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
9. As of the date of this report, Richard W. Latella has completed the
requirements of the continuing education program of the Appraisal
Institute.
/s/ Jay F. Booth /s/ Brian J. Booth
Jay F. Booth Brian J. Booth
Retail Valuation Group Valuation Advisory Services
/s/ Richard W. Latella
Richard W. Latella, MAI
Senior Director
Retail Valuation Group
Maryland Certified General
Real Estate Appraiser License No. 10462
ADDENDA
NATIONAL RETAIL OVERVIEW
OPERATING EXPENSE BUDGET (1996)
TENANT SALES REPORT (1995)
PRO-JECT LEASE ABSTRACT REPORT
PRO-JECT PROLOGUE ASSUMPTIONS REPORT
PRO-JECT TENANT REGISTER REPORT
PRO-JECT LEASE EXPIRATION REPORT
ENDS FULL DATA REPORT FOR PRIMARY AND TOTAL TRADE AREA
REGIONAL MALL SALES (1991-1993)
CUSHMAN & WAKEFIELD INVESTOR SURVEY
APPRAISERS' QUALIFICATIONS
PARTIAL CLIENT LIST
CUSHMAN & WAKEFIELD, INC.
NATIONAL RETAIL OVERVIEW
Prepared by: Richard W. Latella, MAI
NATIONAL RETAIL MARKET OVERVIEW
Introduction
Shopping centers constitute the major form of retail activity in the United
States today. Approximately 55 percent of all non- automotive retail sales
occur in shopping centers. It is estimated that consumer spending
accounts for about two-thirds of all economic activity in the United States.
As such, retail sales patterns have become an important indicator of
the country's economic health.
During the period 1980 through 1995, total retail sales in the United
States increased at a compound annual rate of 6.16 percent. Data for the
period 1990 through 1995 shows that sales growth has slowed to an annual
average of 4.93 percent. This information is summarized on the following
chart. The Commerce Department reports that total retail sales fell
three-tenths of a percent in January 1996.
Total U.S. Retail Sales(1)
Year Amount Annual Change
(Billions)
1980 $ 957,400 N/A
1985 $1,375,027 N/A
1990 $1,844,611 N/A
1991 $1,855,937 .61%
1992 $1,951,589 5.15%
1993 $2,074,499 6.30%
1994 $2,236,966 7.83%
1995 $2,346,577 4.90%
Compound Annual
Growth Rate +6.16%
1980-1995
CAGR: 1990 - 1995 +4.93%
(1)1985 - 1995 data reflects recent revisions by the U.S. Department of
Commerce: Combined Annual and Revised Monthly Retail Trade.
Source: Monthly Retail Trade Reports Business Division, Current Business
Reports, Bureau of the Census, U.S. Department of Commerce.
The early part of the 1990s was a time of economic stagnation and
uncertainty in the country. The gradual recovery, which began as the
nation crept out of the last recession, has shown some signs of weakness as
corporate downsizing has accelerated. But as the recovery period reaches into
its fifth year and the retail environment remains volatile, speculation
regarding the nation's economic future remains. It is this uncertainty which
has shaped recent consumer spending patterns.
Personal Income and Consumer Spending
Americans' personal income advanced by six-tenths of a percent in
December, which helped raise income for all of 1995 by 6.1 percent, the
highest gain since 6.7 percent in 1990. This growth far outpaced the 2.5
percent in 1994 and 4.7 percent in 1993. Reports for February 1996 however,
reported that income grew at an annual rate of eight-tenths of a percent,
the biggest gain in thirteen months, and substantially above January's anemic
growth rate of one-tenth of a percent.
Consumer spending is another closely watched indicator of economic
activity. The importance of consumer spending is that it represents
two-thirds of the nation's economic activity. Total consumer spending rose
by 4.8 percent in 1995, slightly off of the 5.5 percent rise in 1994 and 5.8
percent in 1993. These increases followed a significant lowering on
unemployment and bolstered consumer confidence. The Commerce Department
reported that Americans spent at an annual rate of $5.01 trillion in January
1996, a drop of five-tenths of a percent. It was the third drop in five
months.
Unemployment Trends
The Clinton Administration touts that its economic policy has dramatically
increased the number of citizens who have jobs. Correspondingly, the
nation's unemployment rate continues to decrease from its recent peak in
1992. Selected statistics released by the Bureau of Labor Statistics are
summarized as follows:
Selected Employment Statistics
Civilian Labor Force Employed
Total Workers Total Workers Unemployment
Year(1) (000) % Change (000) % Change Rate
1990 124,787 .7 117,914 .5 5.5
1991 125,303 .4 116,877 -.9 6.7
1992 126,982 1.3 117,598 .6 7.4
1993 128,040 .8 119,306 1.5 6.8
1994 131,056 2.4 123,060 3.1 6.1
1995 132,337 .98 124,926 1.5 5.6
CAGR 1.18 1.16
1990-1995
(1)Year ending December 31
Source: Bureau of Labor Statistics U.S. Department of Labor
During 1995, the labor force increased by 1,281,000 or approximately
1.0 percent. Correspondingly, the level of employment increased by
1,866,000 or 1.5 percent. As such, the year end unemployment rate dropped by
five-tenths of a percent to 5.6 percent. For 1995, monthly job growth averaged
144,000. On balance, over 8.0 million jobs have been created since the
recovery began.
Housing Trends
Housing starts enjoyed a good year in 1994 with a total of 1.53 million
starts; this up 13.0 percent from 1.45 million in 1993. Multi-family was up
60.0 percent in 1994 with 257,00 starts. However, the National Asociation of
Homebuilders forsees a downshift in activity throughout 1995 resulting from the
laggard effect of the Federal Reserves's policy of raising interest rates. The
.50 percent increase in the federal funds rate on February 1, 1995 was the
seventh increase over the past thirteen months, bringing it to its highest
level since 1991. Sensing a retreat in the threat of inflation, the Fed
reduced the Federal Funds rate by 25 basis points in July 1995 to 5.75 percent.
Total housing starts rose by 6.0 percent to a seasonally adjusted annual
rate of 1.42 million units. Since family housing starts in November were at
1,102,00 units while multi-family jumped by 77,000 at an annual rate.
Applications for building permits rose by 3.2 percent to a rate of 1.28
million. The median new home price of new homes sold in the first nine months
of 1995 was $132,000. The median was $130,000 for all of 1994. The Commerce
Department reported that construction spending rose 2.9 percent in October to
an annual rate of $207.7 billion, compared to $217.9 billion in all of 1994.
The home ownership rate seems to be rising, after remaining stagnant over
the last decade. For the third quarter of 1995, the share of households that
own their homes was 65 percent, compared to 64.1 percent for a year earlier.
Lower mortgage rates are cited as a factor.
Gross Domestic Product
The report on the gross domestic product (GDP) showed that output for
goods and services expanded at an annual rate of just .9 percent in the
fourth quarter of 1995. Overall, the economy gained 2.1 percent in 1995, the
weakest showing in four years since the 1991 recession. The .9 percent
rise in the fourth quarter was much slower than the 1.7 percent expected
by most analysts. The Fed sees the U.S. economy expanding at a 2.0 to 2.25
percent pace during 1996 which is in-line with White House forecasts.
The following chart cites the annual change in real GDP since 1990.
Real GDP
Year % Change
1990 1.2
1991 - .6
1992 2.3
1993 3.1
1994 4.1
1995 * 2.1
* Reflects new chain weighted system of measurement. Comparable
1994 measure would be 3.5%
Source: Bureau of Economic Analysis
Consumer Prices
The Bureau of Labor Statistics has reported that consumer prices rose
by only 2.5 percent in 1995, the fifth consecutive year in which inflation
was under 3.0 percent. This was the lowest rate in nearly a decade when
the overall rate was 1.1 percent in 1986. All sectors were down
substantially in 1995 including the volatile health care segment which
recorded inflation of only 3.9 percent, the lowest rate in 23 years.
The following chart tracks the annual change in the CPI since 1990.
Consumer Price Index(1)
Year CPI % Change
1990 133.8 6.1
1991 137.9 3.0
1992 141.9 2.9
1993 145.8 2.7
1994 149.7 2.7
1995 153.5 2.5
(1) All Urban Workers
Source: Dept. of Labor, Bureau of Labor Statistics
Other Indicators
The government's main economic forecasting gauge, the Index of Leading
Economic Indicators shows that the vibrant 1994 economy continues to cool off.
The index is intended to project econoic growth over the next six months. The
Conference Board, an independent business group, reported that the index
rose two-tenths of a percent in December 1995, breaking a string of three
straight declines. It has become apparent that the Federal Reserve's
conservative monetary policy has had an effect on the economy and some
economists are calling for a further reduction in short term interest rates.
The Conference Board also reported that consumer confidence rebounded in
February 1996, following reports suggesting lower inflation. The board's
index of consumer confidence rose 9 points to 97 over January when
consumers worried about the government shutdown, the stalemate over the
Federal budget and the recent flurry of layoff announcements by big
corporations.
In another sign of increasingly pinched household budgets, consumers
sharply curtailed new installment debt in September 1995, when installment
credit rose $5.4 billion, barely half as much as August. Credit card
balances increased by $2.8 billion, the slimmest rise of the year. For the
twelve months through September 1995, outstanding credit debt rose 13.9
percent, down from a peak of 15.3 percent in May. Still, installment debt
edged to a record 18.8 percent of disposable income, indicating that
consumers may be reaching a point of discomfort with new debt.
The employment cost index is a measure of overall compensation
including wages, salaries and benefits. In 1995 the index rose by only 2.9
percent, the smallest increase since 1980. This was barely ahead of
inflation and is a sign of tighter consumer spending over the coming
year.
Economic Outlook
The WEFA Group, an economic consulting company, opines that the current
state of the economy is a "central bankers" dream, with growth headed
toward the Fed's 2.5 percent target, accompanied by stable if not
falling inflation. They project that inflation will remain in the 2.5 to
3.0 percent range into the foreseeable future. This will have a direct
influence on consumption (consumer expenditures) and overall inflation rates
(CPI).
Potential GDP provides an indication of the expansion of output, real
incomes, real expenditures, and the general standard of living of the
population. WEFA estimates that real U.S. GDP will grow at an average annual
rate between 2.0 and 2.5 percent over the next year and at 2.3 percent
through 2003 as the output gap is reduced between real GDP and potential GDP.
After 2003, annual real GDP growth will moderate, tapering to 2.2 percent per
annum.
Consumption expenditures are primarily predicated on the growth of
real permanent income, demographic influences, and changes in relative
prices over the long term. Changes in these key variables explain much of
the consumer spending patterns of the 1970s and mid-1980s, a period during
which baby boomers were reaching the asset acquisition stages of their lives;
purchasing automobiles and other consumer and household durables. Increases in
real disposable income supported this spending spurt with an average annual
increase of 2.9 percent per year over the past twenty years. Real
consumption expenditures increased at an average annual rate of 3.1 percent
during the 1970s and by an average of 4.0 percent from 1983 to 1988. WEFA
projects that consumption expenditure growth will slow to 2.0 percent per year
by 2006 as a result of slower population growth and aging. It is also
projected that the share of personal consumption expenditures
relative to GDP will decline over the next decade. Consumer spending as a
share of GDP peaked in 1986 at 67.4 percent after averaging about 63.0
percent over much of the post- war period. WEFA estimates that consumption's
share of aggregate output will decline to 64.5 percent by 2003 and 62.7
percent by 2018.
Retail Sales
In their publication, NRB/Shopping Centers Today 1994 Shopping
Center Census, the National Research Bureau reports that overall retail
conditions continued to improve for the third consecutive year in 1994.
Total shopping center sales increased 5.5 percent to $851.3 billion in 1994,
up from $806.6 billion in 1993. The comparable 1993 increase was 5.0
percent. Retail sales in shopping centers (excluding automotive and
gasoline service station sales) now account for about 55.0 percent of
total retail sales in the United States.
Total retail sales per square foot have shown positive increases
over the past three years, rising by 8.7 percent from approximately $161 per
square foot in 1990, to $175 per square foot in 1994. It is noted that the
increase in productivity has exceeded the increase in inventory which bodes
well for the industry in general. This data is summarized on the following
table.
Selected Shopping Center Statistics
1990-1994
% Compound
1990 1991 1992 1993 1994 Change Annual
1990-93 Growth
Retail Sales in
Shopping Centers * $706.40 $716.90 $768.20 $806.60 $851.30 20.5% 4.8%
Total Leasable
Area** 4.4 4.6 4.7 4.8 4.9 11.4% 2.7%
Unit Rate $160.89 $157.09 $164.20 $169.08 $175.13 8.7% 2.1%
*Billions of Dollars
** Billions of Square Feet
Source: National Research Bureau
To put retail sales patterns into perspective, the following
discussion highlights key trends over the past few years.
- As a whole, 1993 was a good year for most of the nation's major
retailers. Sales for the month of December were up for most,
however, the increase ranged dramatically from 1.1 percent at
Kmart to 13.3 percent at Sears for stores open at least a year.
It is noted that the Sears turnaround after years of slippage
was unpredicted by most forecasters.
- With the reporting of December 1994 results, most retailers
posted same store gains between 2.0 and 6.0 percent. The
Goldman Sachs Retail Composite Comparable Store Sales Index, a
weighted average of monthly same store sales of 52 national
retail companies rose 4.5 percent in December. The weakest
sales were seen in women's apparel, with the strongest sales
reported for items such as jewelry and hard goods. Most
department store companies reported moderate increases in same
store sales, though largely as a result of aggressive
markdowns. Thus, profits were negatively impacted for many
companies.
- For 1994, specialty apparel sales were lackluster at best, with
only .4 percent comparable sales growth. This is of concern to
investors since approximately 30.0 percent of a mall's small
shop space is typically devoted to apparel tenants. Traditional
department stores experienced 3.4 percent same store growth in
1994, led by Dillard's 5.0 percent increase. Mass merchants'
year-to-year sales increased by 6.7 percent in 1994, driven by
Sears' 7.9 percent increase. Mass merchants account for 35.0 to
55.0 percent of the anchors of regional malls and their
resurgence bodes well for increased traffic at these centers.
- Sales at the nation's largest retailer chains rose tepidity in
January, following the worst December sales figures since the
1990-91 recession in 1995. Same store sales were generally
weak in almost all sectors, with apparel retailers being
particularly hard hit. Some chains were able to report
increases in sales but this generally came about through
substantial discounting. As such, profits are going to suffer
and with many retailers being squeezed for cash, 1996 is
expected to be a period of continued consolidations and
bankruptcy. The Goldman Sachs composite index of same store
sales grew by 1.1 percent in January 1996, compared to a 4.7
percent for January 1995.
Provided on the following chart is a summary of overall and same store
sales growth for selected national merchants for the most recent period.
Same Store Sales for the Month of January 1996
% Change From Previous Year
Name of Retailer Overall Same Store Basis
Wal-Mart +16.0% + 2.6%
Kmart + 4.0% + 7.7%
Sears, Roebuck & Company + 4.0% + 0.6%
J.C. Penney - 3.0% - 4.3%
Dayton Hudson Corporation + 8.0% + 2.0%
May Department Stores + 7.0% + 0.7%
Federated Department Stores + 3.0% + 5.1%
The Limited Inc. + 6.0% - 2.0%
Gap Inc. +48.0% + 6.0%
Ann Taylor - 1.0% - 17.0%
Source: New York Times
According to the Goldman sachs index, department store sales fell by 1.1
percent during January, discount stores rose by 4.5 percent, and specialty hard
goods retailers fell by 4.7 percent.
The outlook for retail sales growth is one of cautious optimism.
Some analysts point to the fact that consumer confidence has resulted
in increases in personal debt which may be troublesome in the long run.
Consumer loans by banks rose 13.9 percent in the twelve months that ended
on September 30, 1995. But data gathered by the Federal Reserve on
monthly payments suggest that debt payments are not taking as big a bite out
of income as in the late 1980s, largely because of the record refinancings at
lower interest rates in recent years and the efforts by many Americans to
repay debts.
GAFO and Shopping Center Inclined Sales
In a true understanding of shopping center dynamics, it is important to
focus on both GAFO sales or the broader category of Shopping Center Inclined
Sales. These types of goods comprise the overwhelming bulk of goods and
products carried in shopping centers and department stores and consist of
the following categories:
- General merchandise stores including department and other stores;
- Apparel and accessory stores;
- Furniture and home furnishing stores; and
- Other miscellaneous shoppers goods stores.
Shopping Center Inclined Sales are somewhat broader and include such
classifications as home improvement and grocery stores.
Total retail sales grew by 7.8 percent in the United States in 1994 to
$2.237 trillion, an increase of $162 billion over 1993. This followed an
increase of $125 billion over 1992. Automobile dealers captured $69+/-
billion of total retail sales growth last year, while Shopping Center
Inclined Sales accounted for nearly 40.0 percent of the increase ($64
billion). GAFO sales increased by $38.6 billion. This group was led
by department stores which posted an $18.0 billion increase in sales. The
following chart summarizes the performance for this most recent comparison
period.
Retail Sales by Major Store Type
1993-1994 ($MIL.)
1993-1994
Store Type 1994 1993 % Change
GAFO:
General Merchandise $282,541 $264,617 6.8%
Apparel & Accessories 109,603 107,184 2.3%
Furniture & Furnishings 119,626 105,728 13.1%
Other GAFO 80,533 76,118 5.8%
GAFO Subtotal $592,303 $553,647 7.0%
Convenience Stores:
Grocery $376,330 $365,725 2.9%
Other 21,470 19,661 9.2%
Subtotal $397,800 $385,386 3.2%
Drug 81,538 79,645 2.4%
Convenience Subtotal $479,338 $465,031 3.1%
Other:
Home Improvement &
Building Supplies Stores $122,533 $109,604 11.8%
Shopping Center-Inclined 1,194,174 1,128,282 5.8%
Subtotal 526,319 456,890 15.2%
Automobile Dealers 142,193 138,299 2.8%
Gas Stations 228,351 213,663 6.9%
Eating and Drinking Places 145,929* 137,365* 6.2%
All Other
Total Retail Sales $2,236,966 $2,074,499 7.8%
* Estimated sales
Source: U.S. Department of Commerce and Dougal M. Casey: Retail Sales and
Shopping Center Development Through The Year 2000 (ICSC White Paper)
GAFO sales grew by 7.0 percent in 1994 to $592.3 billion, led by furniture
and furnishings which grew by 13.1 percent. From the above it can be
calculated that GAFO sales accounted for 26.5 percent of total retail sales
and nearly 50.0 percent of all shopping center-inclined sales.
The International Council of Shopping Centers (ICSC) publishes a Monthly Mall
Merchandise Index which tracks sales by store type for more than 400 regional
shopping centers. The index shows that sales per square foot rose by 1.8
percent to $256 per square foot in 1994. The following chart identified the
most recent year-end results.
Index Sales per Square Foot
1993-1994 Percent Change
Store Type 1994 1993 ICSC Index
GAFO:
Apparel & Accessories:
Women's Ready-To-Wear $189 $196 - 3.8%
Women's Accessories and 295 283 + 4.2%
Specialties 231 239 - 3.3%
Men's and Boy's Apparel 348 310 +12.2%
Children's Apparel 294 292 + 0.4%
Family Apparel 284 275 + 3.3%
Women's Shoes 330 318 + 3.8%
Men's Shoes 257 252 + 1.9%
Family Shoes 340 348 - 2.2%
Shoes (Misc.) $238 $238 - 0.2%
SUBTOTAL
Furniture & Furnishings:
Furniture & Furnishings $267 $255 + 4.5%
Home Entertainment &
Electronics 330 337 - 2.0%
Miscellaneous 291 282 + 3.3%
SUBTOTAL $309 $310 - 0.3%
Other GAFO:
Jewelry $581 $541 + 7.4%
Other 258 246 + 4.9%
SUBTOTAL $317 $301 + 5.3%
TOTAL GAFO $265 $261 + 1.6%
NON-GAFO
FOOD:
Fast Food $365 $358 + 2.0%
Restaurants 250 245 + 2.2%
Other 300 301 - 0.4%
SUBTOTAL $304 $298 + 1.9%
OTHER NON-GAFO:
Supermarkets $236 $291 -18.9%
Drug/HBA 254 230 +10.3%
Personal Services 264 253 + 4.1%
Automotive 149 133 +12.2%
Home Improvement 133 127 + 4.8%
Mall Entertainment 79 77 + 3.2%
Other Non-GAFO Misc. 296 280 + 5.7%
SUBTOTAL $192 $188 + 2.4%
TOTAL NON-GAFO $233 $228 + 2.5%
TOTAL $256 $252 + 1.8%
Note: Sales per square foot numbers are rounded to whole dollars. Three
categories illustrated here have limited representation in the ICSC sample:
Automotive, +12.2%; Home Improvement, +4.8%; and Supermarkets, -18.9%.
Source: U.S. Department of Commerce and Dougal M. Casey.
GAFO sales have risen relative to household income. In 1990 these sales
represented 13.9 percent of average household income. By 1994 they rose to 14.4
percent. Projections through 2000 show a continuation of this trend to 14.7
percent. On average, total sales were equal to nearly 55.0 percent of
household income in 1994.
Determinants of Retail Sales Growth and U.S. Retail Sales by Key
Store Type 1990 1994 2000(P)
Determinants
Population 248,700,000 260,000,000 276,200,000
Households 91,900,000 95,700,000 103,700,000
Average Household Income $37,400 $42,600 $51,600
Total Census Money Income $3.4 Tril. $4.1 Tril. $5.4 Tril.
% Allocations of Income to Sales
GAFO Stores 13.9% 14.4% 14.7%
Convenience Stores 12.9% 11.7% 10.7%
Home Improvement Stores 2.8% 3.0% 3.3%
Total Shopping Center-
Inclined Stores 29.6% 29.1% 28.8%
Total Retail Stores 54.3% 54.6% 52.8%
Sales ($Billion)
GAFO Stores $472 $592 $795
Convenience Stores 439 479 580
Home Improvement Stores 95 123 180
Total Shopping Center-
Inclined Stores $1,005 $1,194 $1,555
TOTAL RETAIL SALES $1,845 $2,237 $2,850
Note: Sales and income figures are for the full year; population
and household figures are as of April 1 in each respective year.
P = Projected.
Source: U.S. Census of Population, 1990; U.S. Bureau of the Census Current
Population Reports: Consumer Income P6-168, 174, 180, 184 and 188; Berna Miller
with Linda Jacobsen, "Household Futures", American Demographics, March 1995;
Retail Trade sources already cited; and Dougal M. Casey: ICSC White Paper
GAFO sales have risen at a compound annual rate of approximately
6.8 percent since 1991 based on the following annual change in sales.
1990/91 2.9%
1991/92 7.0%
1992/93 6.6%
1993/94 7.0%
According to a recent study by the ICSC, GAFO sales are expected to
grow by 5.0 percent per annum through the year 2000, which is well above the
4.1 percent growth for all retail sales. This information is presented in the
following chart.
Retail Sales in the United States, by Major Store Type
1994 2000(P) Percent Change
Compound
Store Type ($ Billions) ($ Billions) Total Annual
GAFO:
General Merchandise $ 283 $ 370 30.7% 4.6%
Apparel & Accessories 110 135 22.7% 3.5%
Furniture/Home Furnishings 120 180 50.0% 7.0%
Other Shoppers Goods 81 110 35.8% 5.2%
GAFO Subtotal $ 592 $ 795 34.3% 5.0%
CONVENIENCE GOODS:
Food Stores $ 398 $ 480 20.6% 3.2%
Drugstores 82 100 22.0% 3.4%
Convenience Subtotal $ 479 $ 580 21.1% 3.2%
Home Improvement 123 180 46.3% 6.6%
Shopping Center-
Inclined Subtotal $1,194 $1,555 30.2% 4.5%
All Other 1,043 1,295 24.2% 3.7%
Total $2,237 $2,850 27.4% 4.1%
Note: P = Projected. Some figures rounded.
Source: U.S. Department of Commerce, Bureau of the Census and Dougal M. Casey.
In considering the six-year period January 1995 through December
2000, it may help to look at the six-year period extending from January
1989 through December 1994 and then compare the two time spans.
Between January 1989 and December 1994, shopping center- inclined
sales in the United States increased by $297 billion, a compound growth rate
of 4.9 percent. These shopping center- inclined sales are projected to
increase by $361 billion between January 1995 and December 2000, a compound
annual growth rate of 4.5 percent. GAFO sales, however, are forecasted to
increase by 34.3 percent or 5.0 percent per annum.
Industry Trends
According to the National Research Bureau, there were a total of 40,368
shopping centers in the United States at the end of 1994. During this year,
735 new centers opened, an 10.0 percent increase over the 667 that opened in
1993. The upturn marked the first time since 1989 that the number of openings
increased. The greatest growth came in the small center category (less than
100,000 square feet) where 457 centers were constructed. In terms of GLA
added, new construction in 1994 resulted in an addition of 90.16 million
square feet of GLA from approximately 4.77 billion to 4.86 billion square
feet. The following chart highlights trends over the period 1987 through
1995.
Census Data: 8-Year Trends
No. of Total Total Average Average % Change New % Increase
Year Centers GLA Sales GLA per Sales in Sales Cen- in Total
(Billions) Center per SF per SF ters Centers
- ---- ------ ------------- ------------ ------- ------- ------- ----- ----------
1987 30,641 3,722,957,095 $602,294,426 121,502 $161.78 2.41% 2,145 7.53%
1988 32,563 3,947,025,194 $641,096,793 121,212 $162.43 0.40% 1,922 6.27%
1989 34,683 4,213,931,734 $682,752,628 121,498 $162.02 -0.25% 2,120 6.51%
1990 36,515 4,390,371,537 $706,380,618 120,235 $160.89 -0.70% 1,832 5.28%
1991 37,975 4,563,791,215 $716,913,157 120,179 $157.09 -2.37% 1,460 4.00%
1992 38,966 4,678,527,428 $768,220,248 120,067 $164.20 4.53% 991 2.61%
1993 39,633 4,770,760,559 $806,645,004 120,373 $169.08 2.97% 667 1.71%
1994 40,368 4,860,920,056 $851,282,088 120,415 $175.13 3.58% 735 1.85%
Compound
Annual +4.01% +3.88% +5.07% -.13% +1.14% N/A N/A N/A
Growth
Source: National Research Bureau Shopping Center Database and Statistical Model
From the chart we see that both total GLA and total number of centers have
increased at a compound annual rate of approximately 4.0 percent since 1987.
New construction was up 1.85 percent in 1994, a slight increase over 1993 but
still well below the peak year 1987 when new construction increased by
7.5 percent. Industry analysts point toward increased liquidity among
shopping center owners, due in part to the influx of capital from securitized
debt financiang and the return of lending by banks and insurance companies.
REITs have also been a source of capital and their appetite for new product has
provided a convenient take out vehicle.
Among the 40,368 centers in 1994, the following breakdown by
size can be shown.
U.S. Shopping Center Inventory, January 1995
Square Feet
Number of Centers (Millions)
----------------- ---------------
Size Range (SF) Amount Percent Amount Percent
--------------- ------ ------- ------ -------
Under 100,000 25,450 63% 1,266 25%
100,000-400,000 13,035 32% 2,200 45%
400,000-800,000 1,210 3% 675 15%
Over 800,000 673 2% 750 15%
Total 40,368 100% 4,865 100%
Source: National Research Bureau (some numbers slightly rounded).
According to the National Research Bureau, total sales in shopping
centers have grown at a compound rate of 5.07 percent since 1987. With
sales growth outpacing new construction, average sales per square foot
have been showing positive increases since the last recession. Aggregate
sales were up 5.5 percent nationwide from $806.6 billion (1993) to $851.3
billion (1994). In 1994, average sales were $175.13 per square foot, up
nearly 3.6 percent over 1993 and 1.14 percent on average over the past seven
years. The biggest gain came in the super- regional category (more than 1
million square feet) where sales were up 5.05 percent to $193.13 per square
foot.
The following chart tracks the change in average sales per square foot
by size category between 1993 and 1994.
Sales Trends by Size Category
1993-1994
Average Sales Per Square Foot
Category 1993 1994 % Change
Less than 100,000 SF $193.10 $199.70 +3.4%
100,001 to 200,000 SF $156.18 $161.52 +3.4%
200,001 to 400,000 SF $147.57 $151.27 +2.5%
400,001 to 800,000 SF $157.04 $163.43 +4.1%
800,001 to 1,000,000 SF $194.06 $203.20 +4.7%
More than 1,000,000 SF $183.90 $193.13 +5.0%
Total $169.08 $175.13 +3.6%
Source: National Research Bureau
Empirical data shows that the average GLA per capita is increasing.
In 1994, the average for the nation was 18.7. This was up 17 percent from
16.1 in 1988 and more recently, 18.5 square feet per capita in 1993. Among
states, Florida has the highest GLA per capita with 28.1 square feet and South
Dakota has the lowest at 9.40 square feet. The estimate for 1995 is for an
increase to 19.1 per square foot per capita. Per capita GLA for regional malls
(defined as all centers in excess of 400,000 square feet) has also been rising.
This information is presented on the following chart.
GLA per
Capita All Regional
Year Centers Malls
1988 16.1 5.0
1989 17.0 5.2
1990 17.7 5.3
1991 18.1 5.3
1992 18.3 5.5
1993 18.5 5.5
1994 18.7 5.4
Source: International Council of Shopping Center: The Scope of The Shopping
Center Industry and National Research Bureau
The Urban Land Institute, in the 1995 edition of Dollars and Cents of
Shopping Centers, reports that vacancy rates range from a low of 2.0 percent
in neighborhood centers to 14.0 percent for regional malls. Super-regional
malls reported a vacancy rate of 7.0 percent and community centers were 4.0
percent based upon their latest survey.
The retail industry's importance to the national economy can also be seen
in the level of direct employment. According to F.W. Dodge, the construction
information division of McGraw-Hill, new projects in 1994 generated $2.6
billion in construction contract awards and supported 41,600 jobs in
construction trade and related industries. This is nearly half of the
construction employment level of 95,360 for new shopping center development in
1990. It is estimated that 10.18 million people are now employed in shopping
centers, equal to about one of every nine non-farm workers in the country.
This is up 2.9 percent over 1991.
Market Shifts - Contemporary Trends in the Retail Industry
During the 1980s, the department store and specialty apparel store
industries competed in a tug of war for consumer dollars. Specialty stores
emerged largely victorious as department store sales steadily declined as a
percentage of total GAFO sales during the decade, slipping from 47.0
percent in 1979 to 44.0 percent in 1989. During this period, many
anchor tenants teetered from high debt levels incurred during
speculative takeovers and leveraged buyouts of the 1980s. Bankruptcies and
restructuring, however, have forced major chains to refocus on their
customer and shed unproductive stores and product lines. At year end 1994,
department store sales, as a percentage of GAFO sales, were approximately 37.5
percent.
The continued strengthening of some of the major department store chains,
including Sears, Federated/Macy's, May and Dayton Hudson, is in direct
contrast to the dire predictions made by analysts about the demise of the
traditional department store industry. This has undoubtedly been brought
about by the heightened level of merger and acquisition activity in the 1980s
which produced a burdensome debt structure among many of these entities.
When coupled with reduced sales and cash flow brought on by the recession,
department stores were unable to meet their debt service requirements.
Following a round of bankruptcies and restructurings, the industry has
responded with aggressive cost-cutting measures and a focused merchandising
program that is decidedly more responsive to consumer buying patterns. The
importance of department stores to mall properties is tantamount to a
successful project since the department store is still the principal
attraction that brings patrons to the center.
On balance, 1994/95 was a continued period of transition for the retail
industry. Major retailers achieved varying degrees of success in meeting the
demands of increasingly value conscious shoppers. Since the onset of the
national economic recession in mid-1990, the retail market has been
characterized by intense price competition and continued pressure on profit
margins. Many national and regional retail chains have consolidated
operations, closed underperforming stores, and/or scaled back on expansion
plans due to the uncertain spending patterns of consumers.
Consolidations and mergers have produced a more limited number of retail
operators, which have responded to changing spending patterns by
aggressively repositioning themselves within this evolving market. Much of
the recent retail construction activity has involved the conversion of existing
older retail centers into power center formats, either by retenanting or
through expansion. An additional area of growth in the retail sector is in
the "supercenter" category, which consists of the combined grocery and
department stores being developed by such companies as Wal- Mart and Kmart.
These formats require approximately 150,000 to 180,000 square feet in order
to carry the depth of merchandise necessary for such economies of scale and
market penetration.
Some of the important developments in the industry over the past year can
be summarized as follows:
- The discount department store industry emerged as arguably
the most volatile retail sector, lead by regional chains in the
northeast. Jamesway, Caldor and Bradlees each filed for Chapter
11 within six months and Hills Stores is on the block. Jamesway
is now in the process of liquidating all of its stores. Filene's
Basement was granted relief from some covenant restrictions and
its stock price plummeted. Ames, based in Rocky Hill,
Connecticut, will close 17 of its 307 stores. Kmart continues to
be of serious concern. Its debt has been downgraded to junk bond
status. Even Wal-Mart, accustomed to double digit sales growth,
has seen some meager comparable sales increases. These trends
are particularly troubling for strips since these tenants are
typical anchors.
- The attraction of regional malls as an investment has
diminished in view of the wave of consolidations and bankruptcies
affecting in-line tenants. Some of the larger restructurings
include Melville with plans to close up to 330 stores, sell
Marshalls to TJX Companies, split into three publicly traded
companies, and sell Wilsons and This End Up; Petrie Retail, which
operates such chains as M.J. Carroll, G&G, Jean Nicole, Marianne
and Stuarts, has filed for bankruptcy protection; Edison Brothers
(Jeans West, J. Riggins, Oak Tree, 5-7-9 Shops, etc.) announced
plans to close up to 500 stores while in Chapter 11; J. Baker
intends to liquidate Fayva Shoe division (357 low-price family
footwear stores); The Limited announced a major restructuring,
including the sale of partial interests in certain divisions;
Charming Shoppes will close 290 Fashion Bug and Fashion Bug Plus
stores; Trans World Entertainment (Record Town) has closed 115 of
its 600 mall shop locations. Other chains having trouble include
Rickel Home Centers which filed Chapter 11; Today's Man, a 35
store Philadelphia based discount menswear chain has filed; nine
subsidiaries of Fretta, including Dixon's, U.S. Holdings and
Silo, filed Chapter 11; and Clothestime, also in bankruptcy will
close up to 140 of its 540 stores. Merry-Go-Round, a chain that
operates 560 stores under the names Merry-Go-Round, Dejaiz and
Cignal is giving up since having filed in January 1994 and will
liquidate its assets. Toys "R" Us has announced a global
reorganization that will close 25 stores and cut the number of
items it carries to 11,000 from 15,000. Handy Andy, a 50 year
old chain of 74 home improvement centers which had been in
Chapter 11, has decided to liquidate, laying off 2,500 people.
- Overall, analysts estimate that 4,000 stores closed in 1995 and as many
as 7,000 more will close in 1996. Mom-and-Pop stores, where 75 percent
of U.S. retailers employ fewer than 10 people have been declining for
the past decade. Dun and Bradstreet reports that retail failures are up
1.4 percent over Last year - most of them small stores who don't have
the financial flexibility to renegotiate payment schedule.
- With sales down, occupancy costs continue to be a major
issue facing many tenants. As such, expansion oriented retailers
like The Limited, Ann Taylor and The Gap, are increasingly
shunning mall locations for strip centers. This has put further
pressure on mall operators to be aggressive with their rent
forecasts or in finding replacement tenants.
- While the full service department store industry led by Sears has seen
a profound turnaround, further consolidation and restructuring
continues. Woodward & Lothrop was acquired by The May Department
Stores Company and JC Penney; Broadway Stores was acquired by
Federated Department Stores; Elder Beerman has filed Chapter 11 and
will close 102 stores; Steinbach Stores will be acquired by Crowley,
Milner & Co.; Younkers will merge with Proffitts; and Strawbridge and
Clothier has hired a financial advisor to explore strategic
alternatives for this Philadelphia based chain.
- Aside from the changes in the department store arena, the most notable
transaction in 1995 involved General Growth Properties' acquisition of
the Homart Development Company in a $1.85 billion year-end deal.
Included were 25 regional malls, two current projects and several
development sites. In November, General Growth arranged for the sale
of the community center division to Developers Diversified for
approximately $505 million. Another notable deal involved Rite Aid
Corporation's announcement that it will acquire Revco Drug Stores in a
$1.8 billion merger to form the nation's largest drug store company
with sales of $11 billion and 4,500+/- stores.
- As of January 1, 1995 there were 311 outlet centers with 44.4 million
square feet of space. Outlet GLA has grown at a compound annual rate
of 18.1 percent since 1989. Concerns of over-building, tenant
bankruptcies, and consolidations have now negatively impacted this
industry as evidenced by the hit the outlet REIT stocks have taken.
Outlet tenants have not been immune to the global troubles impacting
retail sales as comparable store sales were down 3.1 percent through
November 1995.
- Category Killers and discount retailers have continued to drive the
demand for additional space. In 1995, new contracts were awarded for
the construction or renovation of 260 million square feet of stores
and shopping centers, up from 173 million square feet in 1991
according to F.W. Dodge, matching the highest levels over the past two
decades. It is estimated that between 1992 and 1994, approximately
55.0 percent of new retail square footage was built by big box
retailers. In 1994, it is estimated that they accounted for 80.0
percent of all new stores. Most experts agree that the country is
over-stored. Ultimately, it will lead to higher vacancy rates and
place severe pressure on aging, capital intensive centers. Many
analysts predict that consolidation will occur soon in the office
products superstores category where three companies are battling for
market share - OfficeMax, Office Depot and Staples.
- Entertainment is clearly the new operational requisite for property
owners and developers who are incorporating some form of entertainment
into their designs. With a myriad of concepts available, ranging from
mini-amusement parks to multiplex theater and restaurant themes, to
interactive high-tech applications, choosing the right formula is a
difficult task.
Investment Criteria and Institutional Investment Performance
Investment criteria for mall properties range widely. Many firms and
organizations survey individuals active in this industry segment in
order to gauge their current investment criteria. These criteria can be
measured against traditional units of comparison such as price (or value)
per square foot of GLA and overall capitalization rates.
The price that an investor is willing to pay represents the current or
present value of all the benefits of ownership. Of fundamental importance is
their expectation of increases in cash flow and the appreciation of the
investment. Investors have shown a shift in preference to initial return,
placing probably less emphasis on the discounted cash flow analysis (DCF). A
DCF is defined as a set of procedures in which the quantity,
variability, timing, and duration of periodic income, as well as the quantity
and timing of reversions, are specified and discounted to a present
value at a specified yield rate. Understandably, market thinking has
evolved after a few hard years of reality where optimistic cash flow
projections did not materialize. The DCF is still, in our opinion, a valid
valuation technique that when properly supported, can present a realistic
forecast of a property's performance and its current value in the marketplace.
Equitable Real Estate Investment Management, Inc. reports in their
Emerging Trends in Real Estate - 1996 that their respondents give
retail investments generally poor performance forecasts in their latest
survey due to the protracted merchant shakeout which will continue into 1996.
While dominant, Class A malls are still considered to be one of the best
real estate investments anywhere, only 13.0 percent of the respondents
recommended buying malls. Rents and values are expected to remain flat
(in real terms) and no one disputes their contention that 15 to 20 percent of
the existing malls nationwide will be out of business by the end of the
decade. For those centers that will continue to reposition themselves,
entertainment will be an increasingly important part of their mix.
Investors do cite that, after having been written off, department
stores have emerged from the shake-out period as powerful as ever. The
larger chains such as Federated, May and Dillard's, continue to acquire the
troubled regional chains who find it increasingly difficult to compete
against the category killers. Many of the nations largest chains are
reporting impressive profit levels, part of which has come about from their
ability to halt the double digit sales growth of the national discount
chains. Mall department stores are aggressively reacting to power and
outlet centers to protect their market share. Department stores are
frequently meeting discounters on price.
While power centers are considered one retail property type currently in
a growth mode, most respondents feel that the country is over-stored and
value gains with these types of centers will lag other property types,
including malls, over five and ten year time frames.
The following chart summarizes the results of their current survey.
Retail Property Rankings and Forecasts
Invest Potential
Investment Potential 1996 Predicted Value Gains
Property -------------------- Rent ---------------------
Type Rating1 Ranking2 Increase 1 Yr. 5Yrs. 10Yrs.
Regional Malls 4.9 8th 2.0% 2% 20% 40%
Power Centers 5.3 6th 2.3% 1% 17% 32%
Community Centers 5.4 5th 2.4% 2% 17% 33%
1 Scale of 1 to 10
2 Based on 9 property types
The NCREIF Property Index represents data collected from the Voting
Members of the National Council of Real Estate Investment Fiduciaries. As
shown in the following table, data through the third quarter of 1995 shows
that the retail index posted a positive 1.23 percent increase in total
return. Increased competition in the retail sector from new and expanding
formats and changing locational references has caused the retail index to trail
all other property types. As such, the -2.01 percent decline in value
reported by the retail subindex for the year were in line with investors'
expectations.
Retail Property Returns
NCREIF Index
Third Quarter 1995 (%)
Period Income Appreciation Total Change in CPI
3rd Qtr. 1995 1.95 - .72 1.23 .46
One Year 8.05 -2.01 5.92 2.55
Three Years 7.54 -3.02 4.35 2.73
Five Years 7.09 -4.61 2.23 2.92
Ten Years 6.95 .54 7.52 3.53
Source: Real Estate Performance Report
National Council of Real Estate Investment Fiduciaries
It is noted that the positive total return continues to be affected by
the capital return component which has been negative for the last five years.
However, as compared to the CPI, the total index has performed relatively
well.
Real Estate Investment Trust Market (REITs)
To date, the impact of REITs on the retail investment market has been
significant, although the majority of Initial Property Offerings (IPOs)
involving regional malls, shopping centers, and outlet centers did not enter
the market until the latter part of 1993 and early 1994. It is noted that
REITs have dominated the investment market for apartment properties and have
evolved into a major role for retail properties as well.
As of November 30, 1995, there were 297 REITs in the United States, about
79.0 percent (236) which are publicly traded. The advantages provided by
REITs, in comparison to more traditional real estate investment opportunities,
include the diversification of property types and location, increased liquidity
due to shares being traded on major exchanges, and the exemption from corporate
taxes when 95.0 percent of taxable income is distributed.
There are essentially three kinds of REITs which can either be
"open-ended", or Finite-life (FREITs) which have specified liquidation
dates, typically ranging from eight to fifteen years.
- Equity REITs center around the ownership of properties where
ownership interests (shareholders)receive the benefit of returns
from the operating income as well as the anticipated appreciation
of property value. Equity REITs typically provide lower yields
than other types of REITs, although this lower yield is
theoretically offset by property appreciation.
- Mortgage REITs invest in real estate through loans. The return to
shareholders is related to the interest rate for mortgages placed by
the REIT.
- Hybrid REITs combine the investment strategies of both the equity and
mortgage REITs in order to diversify risk.
The influx of capital into REITs has provided property owners with an
significant alternative marketplace of investment capital and resulted in a
considerably more liquid market for real estate. A number of
"non-traditional" REIT buyers, such as utility funds and equity/income
funds, established a major presence in the market during 1993/94.
1995 was not viewed as a great year for REITs relative to the advances seen
in the broader market. Through the end of November, equity REITs
posted a 9.3 percent total return according to the National Association
of Real Estate Investment Trusts (NAREIT). The best performer among equity
REITs was the office sector with a 29.4 percent total return. This was
followed by self-storage (27.3%), hotels (26.7%), triple-net lease
(20.6%), and health care (18.8%). Two equity REIT sectors were in the red -
outlet centers and regional malls.
Retail REITs
As of November 30, 1995, there were a total of 47 REITs specializing
in retail, making up approximately 16 percent of the securities in the REIT
market. Depending upon the property type in which they specialize, retail
REITs are divided into three categories: shopping centers, regional
malls, and outlet centers. The REIT performance indices chart shown as
Table A on the following page, shows a two-year summary of the total retail
REIT market as well as the performance of the three composite categories.
Table A - REIT Performance Indicies
Y-T-D Total Dividend No. of REIT Market
Return Yield Securities Capitalization*
----------- ----------- -------------- ----------------
As of November 30, 1995
----------------------------------------------------------
Total Retail 0.49% 8.36% 47 $14,389.1
Strip Centers 2.87% 8.14% 29 $ 8,083.3
Regional Malls -2.47% 9.06% 11 $ 4,886.1
Outlet Centers -2.53% 9.24% 6 $ 1,108.7
-------------------------------------------------------
As of November 30, 1994
-------------------------------------------------------
Total Retail -3.29% 8.35% 46 $12,913.1
Strip Center -4.36% 7.98% 28 $ 7,402.7
Regional Malls 2.84% 8.86% 11 $ 4,459.1
Outlet Centers -16.58% 8.74% 7 $ 1,051.4
* Number reported in thousands
Source: Realty Stock Review
As can be seen, the 47 REIT securities have a market
capitalization of approximately $14.4 billion, up 11.5 percent from the
previous year. Total returns were positive through November 1995,
reversing the negative return for the comparable period 12 months earlier. It
is noted that the positive return was the result of the strength of the
shopping center REITs which constitute nearly 60 percent of the market
capitalization. Total retail REITs dividend yields have remained constant over
the last year at approximately 8.36 percent. Regional mall and shopping
center REITs dominate the total market, making up approximately 85 percent of
the 47 retail REITs.
While many of the country's best quality malls and shopping centers have
recently been offered in the public market, this heavily capitalized
marketplace has provided sellers with an attractive alternative to the more
traditional market for large retail properties.
Regional Mall REITs
The accompanying exhibit Table B summarizes the basic
characteristics of eight REITs and one publicly traded real estate
operating company (Rouse Company) comprised exclusively or predominantly of
regional mall properties. Excluding the Rouse Company (ROUS), the IPOs have
all been completed since November 1992. The nine public offerings with
available information have a total of 281 regional or super regional malls
with a combined leasable area of approximately 229 million square feet. This
figure represents more than 14.0 percent of the total national supply of
this product type.
The nine companies are among the largest and best capitalized domestic real
estate equity securities, and are considerably more liquid than more
traditional real estate related investments. Excluding the Rouse Company,
however, these companies have been publicly traded for only a short period,
and there is not an established track record. General Growth was the star
performer in 1995 with a 15 percent increase in its stock price following the
acquisition of the Homart retail portfolio from Sears for $1.85 billion -
the biggest real estate acquisition of the decade.
Table B Regional Mall REIT analysis
Cushman & Wakefield, Inc.
REIT Portfolio CBL CWN EJD GGP MAC ROUS SPG TCO URB
- --------------------------------------------------------------------------------
Company Overview
- --------------------------------------------------------------------------------
Total Retail Cen. 95 23 51 40 16 67 56 19 12
-Super Reg.* 5 1 28 14 4 27 21 16 7
-Regional 11 22 23 25 10 27 35 3 2
-Community 79 - 11 1 2 13 55 - 3
-Other - - - - - - 3 - -
Tot. Mall GLA** 17,129 12,686 44,460 28,881 10,620 44,922 39,329 22,031 8,895
Tot.Mall Shop GLA**6,500 4,895 15,300 12,111 - 19,829 15,731 9,088 2,356
Avg. Total GLA/Cen.**180 552 872 722 664 670 702 1,160 741
Avg. Shop GLA/Cen.** 68 213 300 303 - 296 281 478 196
- --------------------------------------------------------------------------------
Mall Operations
- --------------------------------------------------------------------------------
Reporting year 1994 1994 1994 1994 1994 1994 1994 1994 1994
Avg. Sales PSF
of Mall GLA $226 $204 $260 $245 $262 $285 $259 $335 $348
Minimum Rent/Sales
ratio 8.6% 7.1% 8.3% - - - 6.8% 10.2% 8.1%
Total Occupancy
Cost/Sales ratio 12.2% 10.0% 12.4% - 11.2% - 10.2% 14.8% 11.7%
Mall Shop
Occupancy Level 88.7% 84.0% 85.0% 87.0% 92.9% - 86.2% 86.6% 93.3%
- --------------------------------------------------------------------------------
Share Price
- --------------------------------------------------------------------------------
IPO Date 10/27/93 8/9/93 6/30/94 4/8/93 3/9/94 1996 12/26/93 11/18/92 10/6/93
IPO Price $19.50 $17.25 $14.75 $22.00 $19.00 - $22.25 $11.00 $23.50
Current Price
(12/15/95) $21.63 $ 7.38 $13.00 $19.13 $19.75 $19.63 $25.13 $ 9.75 $21.75
52-Week High $22.00 $14.13 $15.13 $22.63 $21.88 $22.63 $26.00 $10.38 $22.50
52-Week Low $17.38 $ 6.50 $12.00 $18.13 $19.25 $17.50 $22.50 $ 8.88 $18.75
- --------------------------------------------------------------------------------
Capitalization and Yields
- --------------------------------------------------------------------------------
Outstanding
Shares*** 30.20 36.85 89.60 43.37 31.45 47.87 95.64 125.85 21.19
Market Cap.*** $653 $272 $1,165 $830 $621 $940 $2,403 $1,227 $461
Annual Dividend $1.59 $0.80 $1.26 $1.72 $1.68 $0.80 $1.97 $0.88 $1.94
Dividend Yield
(12/15/95) 7.35% 10.84% 9.69% 8.99% 8.51% 4.08% 7.84% 9.03% 8.92%
FFO 1995**** $1.85 $1.50 $1.53 $1.96 $1.92 $1.92 $2.28 $0.91 $2.17
FFO Yield
(12/15/95) 8.55% 20.33% 11.77% 10.25% 9.72% 9.78% 9.07% 9.33% 9.98%
- --------------------------------------------------------------------------------
Source: Salomon Brothers and Realty Stock Review; Annual Reports
* Super Regional Centers (>=800,000 Sq. Ft)
** Numbers in thousands (000) includes mall only
*** Numbers in millions
**** Funds From Operations is defined as net income (loss) before depreciation,
amoritizatoin, other non-cash items, extrodinary items, gains or losses of
assets and before minority interests in the Operating Partnership.
CBL - CBL & Associates
CWN - Crown American
EJD - Edward Debartolo
GGP - General Growth
MAC - Macerich Company
ROUS - Rouse Company
SPG - Simon Property
TCO - Taubman Centers
URB - Urban Shopping
Shopping Center REITs
Shopping center REITs comprise the largest sector of the retail REIT
market accounting for 29 out of the total 47 securities. General
characteristics of eight of the largest shopping center REITs are
summarized on Table C. The public equity market capitalization of the eight
companies totaled $6.1 billion as of December 15, 1995. The two largest,
Kimco Realty Corp. and New Plan Realty Trust have a market capitalization
equal to approximately 34.5 percent of the group total.
While the regional mall and outlet center REIT markets struggled
through 1995, shopping center REITs showed a positive November 30, 1995
year-to-date return of 2.87%. Through 1995, transaction activity in the
national shopping center market has been moderate. Most of the action in
this market is in the power center segment. As an investment, power
centers appeal to investors and REITs because of the high current cash
returns and long-term leases. However, with their popularity, the potential
for overbuilding is high. Also creating skepticism within this market is the
stability of several large discount retailers such as Kmart, and other
discount department stores which typically anchor power centers. Shopping
center REITs which hold numerous properties where struggling retailers are
located are currently keeping close watch over these centers in the event
of these anchor tenants vacating their space.
Similar to the regional mall REITs, shopping center REITs have been
publicly traded for only a short period and do not have a defined track
record. While the REITs have been in existence for a relatively short
period, the growth requirements of the companies should place upward pressure
on values due to continued demand for new product.
Table C Shopping Center REIT analysis
Cushman & Wakefield, Inc.
REIT Portfolio DDR FRT GRT JPR KIM NPR VNO WRI
- --------------------------------------------------------------------------------
Company Overview
- --------------------------------------------------------------------------------
Tot. Properties 111 53 84 46 193 123 65 161
Tot. Retail Centers 104 53 84 40 193 102 56 141
Tot. Retail GLA* 23,600 11,200 12,300 6,895 26,001 14,500 9,501 13,293
Avg. Shop GLA/Cen.* 227 211 146 172 135 142 170 94
- --------------------------------------------------------------------------------
Mall Operations
- --------------------------------------------------------------------------------
Reporting year - - 1994 - 1994 - - 1994
Total Rental Income - - $71,101 -$125,272 - -$112,223
Average Rent/SF $6.04 - $5.78 - $4.82 - - $8.44
Total Oper. Expenses - - $45,746 - $80,563 - - $76.771
Oper. Expenses/SF - - $3.72 - $3.10 - - $5.78
Oper. Expenses Ratio - - 64.3% - 64.3% - - 68.4%
Total Occupancy Level 96.6% 95.1% 96.3% 94.0% 94.7% 95.4% 94.0% 92.0%
- --------------------------------------------------------------------------------
Share Price
- --------------------------------------------------------------------------------
IPO Date 1992 1993 1994 1994 1991 1973 1993 1985
IPO Price $19.50 $17.25 $14.75 $22.00 $19.00 - $22.25 -
Current Price
(12/15/95) $29.88 $23.38 $17.75 $20.63 $42.25 $21.63 $36.13 $36.13
52-Week High $32.00 $23.75 $22.38 $21.38 $42.25 $23.00 $38.13 $38.13
52-Week Low $26.13 $19.75 $16.63 $17.38 $35.00 $18.75 $32.75 $32.75
- --------------------------------------------------------------------------------
Capitalization and Yields
- --------------------------------------------------------------------------------
Outstanding Shares** 19.86 32.22 24.48 19.72 22.43 53.26 24.20 26.53
Market Cap.*** $ 567 $ 753 $ 435 $ 407 $ 948 $1,152 $ 872 $ 959
Annual Dividend $2.40 $1.64 $1.92 $1.68 $2.16 $1.39 $2.24 $2.40
Dividend Yield
(12/15/95) 8.03% 7.01% 10.82% 8.14% 5.11% 6.43% 6.20% 6.64%
FFO 1995**** $2.65 $1.78 $2.25 $1.83 $3.15 $1.44 $2.67 $2.80
FFO Yield
(12/15/95) 8.87% 7.61% 12.68% 8.87% 7.46% 6.66% 7.39% 7.75%
- --------------------------------------------------------------------------------
Source: Salomon Brothers and Realty Stock Review; Annual Reports
* Numbers in thousands (000) includes mall only
** Numbers in millions
*** Funds From Operations is defined as net income (loss) before depreciation,
amoritizatoin, other non-cash items, extrodinary items, gains or losses of
assets and before minority interests in the Operating Partnership.
Outlook
A review of various data sources reveals the intensity of the development
community's efforts to serve a U.S. retail market that is still growing,
shifting and evolving. It is estimated 25- 30 power centers appear to be
capable of opening annually, generating more than 12 million square feet
of new space per year. That activity is fueled by the locational needs of
key power center tenants, 27 of which indicated in recent year-end reports
to shareholders an appetite for 900 new stores annually, an average of 30 new
stores per firm.
With a per capita GLA figure of 19 square feet, most analysts are in
agreement that the country is already over-stored. As such, new centers
will become feasible through the following demand generators:
- The gradual obsolescence of some existing retail locations
and retail facilities;
- The evolution of the locational needs and format preferences
of various anchor tenants; and
- Rising retail sales generated by increasing population and
household levels.
By the year 2000, total retail sales are projected to rise from $2.237
trillion in 1994 to almost $2.9 trillion; shopping center-inclined sales are
projected to rise by $361 billion, from $1.194 trillion in 1994 to nearly $1.6
trillion in the year 2000. Those increases reflect annual compound growth
rates of 4.1 percent and 4.5 percent, respectively, for the six-year period.
On balance, we conclude that the outlook for the retail industry is
one of cautious optimism. Because of the importance of consumer spending to
the economy, the retail industry is one of the most studied and analyzed
segments of the economy. One obvious benefactor of the aggressive expansion
and promotional pricing which has characterized the industry is the
consumer. There will continue to be an increasing focus on choosing the
right format and merchandising mix to differentiate the product from the
competition and meet the needs of the consumer. Quite obviously, many of the
nations' existing retail developments will find it difficult if not
impossible to compete. Tantamount to the success of these older centers must
be a proper merchandising or repositioning strategy that adequately
considers the feasibility of the capital intensive needs of such an
undertaking. Coincident with all of the change which will continue to
influence the industry is a general softening of investor bullishness. This
will lead to a realization that the collective interaction of the fundamentals
of risk and reward now require higher capitalization rates and long term
yield expectations in order to attract investment capital.
APPRAISER QUALIFICATIONS
QUALIFICATIONS OF RICHARD W. LATELLA
Professional Affiliations
Member, American Institute of Real Estate Appraisers
(MAI Designation #8346)
New York State Certified General Real Estate Appraiser #46000003892
Pennsylvania State Certified General Real Estate Appraiser #GA-001053-R
State of Maryland Certified General Real Estate Appraiser #01462
Minnesota Certified General Real Estate Appraiser #20026517
Commonwealth of Virginia Certified General Real Estate Appraiser #4001-003348
State of Michigan Certified General Real Estate Appraiser #1201005216
New Jersey Real Estate Salesperson (License #NS-130101-A)
Certified Tax Assessor - State of New Jersey
Affiliate Member - International Council of Shopping Centers, ICSC
Real Estate Experience
Senior Director, Retail Valuation Group, Cushman & Wakefield Valuation Advisory
Services. Cushman & Wakefield is a national full service real estate
organization and a Rockefeller Group Company. While Mr. Latella's experience
has been in appraising a full array of property types, his principal focus is
in the appraisal and counseling for major retail properties and specialty
centers on a national basis. As Senior Director of Cushman & Wakefield's
Retail Group his responsibilities include the coordination of the firm's
national group of appraisers who specialize in the appraisal of regional malls,
department stores and other major retail property types. He has personally
appraised and consulted on in excess of 200 regional malls and specialty retail
properties across the country.
Senior Appraiser, Valuation Counselors, Princeton, New Jersey, specializing in
the appraisal of commercial and industrial real estate, condemnation analyses
and feasibility studies for both corporate and institutional clients from July
1980 to April 1983.
Supervisor, State of New Jersey, Division of Taxation, Local Property and
Public Utility Branch in Trenton, New Jersey, assisting and advising local
municipal and property tax assessors throughout the state from June 1977 to
July 1980.
Associate, Warren W. Orpen & Associates, Trenton, New Jersey, assisting in the
preparation of appraisals of residential property and condemnation analyses
from July 1975 to April 1977.
Formal Education
Trenton State College, Trenton, New Jersey
Bachelor of Science, Business Administration - 1977
As of the date of this report, Richard W. Latella, MAI, has completed the
requirements under the continuing education program of the Appraisal Institute.
QUALIFICATIONS OF BRIAN J. BOOTH
General Experience
Brian J. Booth joined Cushman & Wakefield Valuation Advisory Services in 1995.
Cushman & Wakefield is a national full service real estate organization.
Mr. Booth previously worked for two years at C. Spencer Powell & Associates in
Portland, Oregon, where he was an associate appraiser. He worked on the
analysis and valuation of numerous properties including, office buildings,
apartments, industrials, retail centers, vacant land, and special purpose
properties.
Academic Education
Bachelor of Science (BS) Willamette University (1993)
Major: Business-Economics Salem, Oregon
Study Overseas (Spring 1992) London University
London, England
Appraisal Education
110 Appraisal Principles Appraisal Institute 1993
120 Appraisal Procedures Appraisal Institute 1994
310 Income Capitalization Appraisal Institute 1994
320 General Applications Appraisal Institute 1994
410 Standards of Professional Practice A Appraisal Institute 1993
420 Standards of Professional Practice B Appraisal Institute 1993
Professional Affiliation
Candidate MAI, Appraisal Institute
QUALIFICATIONS OF JAY F. BOOTH
General Experience
Jay F. Booth joined Cushman & Wakefield Valuation Advisory Services in August
1993. As an associate appraiser, Mr. Booth is currently working with Cushman &
Wakefield's Retail Valuation Group, specializing in regional shopping malls and
all types of retail product. Cushman & Wakefield, Inc. is a national full
service real estate organization.
Mr. Booth previously worked at Appraisal Group, Inc. in Portland, Oregon where
he was an associate appraiser. At AGI, he assisted in the valuation of
numerous property types, including office buildings, apartments, industrials,
retail centers, vacant land, and special purpose properties.
Academic Education
Master of Science in Real Estate (MSRE) -- New York University (1995)
Major: Real Estate Valuation & Analysis New York, New York
Bachelor of Science (BS) -- Willamette University (1991)
Majors: Business-Economics, Art Salem, Oregon
Study Overseas (Fall 1988) -- Xiamen University, Xiamen, China;
Kookmin University, Seoul, South
Korea;
Tokyo International, Tokyo, Japan
Appraisal Education
As of the date of this report, Jay F. Booth has successfully completed all of
the continuing education requirements of the Appraisal Institute.
Professional Affiliation
Certified General Appraiser, State of New York No. 46000026796
Candidate MAI, Appraisal Institute No. M930181
YAC, Young Advisory Council, Appraisal Institute
PARTIAL CLIENT LIST
VALUATION ADVISORY SERVICES
CUSHMAN & WAKEFIELD, INC.
NEW YORK
PROFESSIONALS ARE JUDGED BY THE CLIENTS THEY SERVE
VALUATION ADVISORY SERVICES enjoys a long record of service in a confidential
capacity to nationally prominent institutional and corporate clients,
investors, government agencies and many of the nations largest law firms.
Following is a partial list of clients served by members of VALUATION ADVISORY
SERVICES - NEW YORK OFFICE.
Aetna
Air Products and Chemicals, Inc.
Aldrich, Eastman & Waltch, Inc.
Allegheny-Ludlam Industries
AMB Institutional Realty Advisors
America First Company
American Bakeries Company
American Brands, Inc.
American District Telegraph Company
American Express
American Home Products Corporation
American Savings Bank
Apple Bank
Apple South
Archdiocese of New York
Associated Transport
Atlantic Bank of New York
AT&T
Avatar Holdings Inc.
Avon Products, Inc.
Bachner, Tally, Polevoy, Misher & Brinberg
Baer, Marks, & Upham
Balcor Inc.
BancAmerica
Banca Commerciale Italiana
Banco de Brasil, N.A.
Banco Santander Puerto Rico
Banque Paribas
Baker & Mackenzie
Bank of America
Bank of Baltimore
Bank of China
Bank of Montreal
Bank of New York
Bank of Nova Scotia
Bank of Seoul
Bank of Tokyo Trust Company
Bank Leumi Le-Israel
Bankers Life and Casualty Company
Bankers Trust Company
Banque Indosuez
Barclays Bank International, Ltd.
Baruch College
Battery Park City Authority
Battle, Fowler, Esqs.
Bayerische Landesbank
Bear Stearns
Berkshire
Bertlesman Property, Inc.
Betawest Properties
Bethlehem Steel Corporation
Bloomingdale Properties
Borden, Inc.
Bowery Savings Bank
Bowest Corporation
Brandt Organization
Brooklyn Hospital
BRT Realty Trust
Burke and Burke, Esqs.
Burmah-Castrol
Cadillac Fairview
Cadwalader, Wickersham & Taft
Caisse National DeCredit
Campeau Corporation
Campustar
Canadian Imperial Bank of Commerce
Canyon Ranch
Capital Bank
Capital Cities-ABC, Inc.
Care Incorporated
Carter, Ledyard & Milburn
Chase Manhattan Bank, N.A.
Chemical Bank Corporation
Chrysler Corporation
C. Itoh & Company
Citibank, NA
Citicorp Real Estate
City University of New York
Clayton, Williams & Sherwood
Coca Cola, Inc.
Cohen Brothers
College of Pharmaceutical Sciences
Collegiate Church Corporation
Columbia University
Commonwealth of Pennsylvania
Consolidated Asset Recovery Company
Consolidated Edison Company of New York, Inc.
Continental Realty Credit, Inc.
Copley Real Estate Advisors
Corning Glass Works
Coudert Brothers
Covenant House
Cozen and O'Connor
Credit Agricole
Credit Lyonnais
Credit Suisse
Crivello Properties
CrossLand Savings Bank
CSX
Dai-Ichi Kangyo Bank
Dai-Ichi Sempei Life Insurance
Daily News, Inc.
Daiwa Securities
Dart Group Corporation
David Beardon & Company
Davidoff & Malito, Esqs
Dean Witter Realty
Debevoise & Plimpton
DeMatteis Organization
Den Norske Bank
Deutsche Bank
DiLorenzo Organization
Dime Savings Bank
Dodge Trucks, Inc.
Dollar/Dry Dock Savings Bank
Donovan, Leisure, Newton & Irvine
Dreyer & Traub
Dun and Bradstreet, Inc.
Eastdil Realty Advisors
East New York Savings Bank
East River Savings Bank
East Rutherford Industrial Park
Eastman Kodak Company
Eaton Corporation
Eichner Properties, Inc.
Ellenburg Capital Corporation
Emigrant Savings Bank
Empire Mutual Insurance Company
Endowment Realty Investors
Enzo Biochem, Inc.
Equitable Life Assurance Society of America
Equitable Real Estate
European American Bank
F.S. Partners
Famolare, Inc.
Farwest Savings & Loan Association
Federal Asset Disposition Authority
Federal Deposit Insurance Company
Federal Express Corporation
Federated Department Stores, Inc.
Feldman Organization
Fidelity Bond & Mortgage Company
Findlandia Center
First Bank
First Boston
First Chicago
First National Bank of Chicago
First Nationwide Bank
First New York Bank for Business
First Tier Bank
First Winthrop
Fisher Brothers
Fleet Bank
Flying J, Inc.
Foley and Lardner, Esqs.
Ford Bacon and Davis, Inc.
Ford Foundation
Ford Motor Company
Forest City Enterprises
Forest City Ratner
Forum Group, Inc.
Franchise Finance Corporation of America
Fried, Frank, Harris, Shriver & Jacobson
Friendly's Ice Cream Corporation
Fruehauf Trailer Corporation
Fuji Bank
Fulbright & Jaworski
G.E. Capital Corporation
General Electric Credit Corporation
General Motors Corporation
Gerald D. Hines Organization
Gibson Dunn and Crutcher
Gilman Paper
Gladstone Equities
Glimcher Company
Glynwed, Ltd.
Goldman, Sachs & Co.
Greater New York Savings Bank
Greycoat Real Estate Corp.
Greyhound Lines Inc.
Grid Properties
GTE Realty
Gulf Coast Restaurants
Gulf Oil
HDC
HRO International
Hammerson Properties
Hanover Joint Ventures, Inc.
Hartz Mountain Industries
Hawaiian Trust Company, Ltd.
Hertz Corporation
Home Federal
Home Savings of America
HongKong & Shanghai Banking Corporation
Horn & Hardart
Huntington National Bank
Hypo Bank
IDC Corporation
Ideal Corporation
ING Corporation
Integon Insurance
International Business Machines Corporation
International Business Machines Pension Fund
International Telephone and Telegraph Corporation
Investors Diversified Services, Inc.
Iona College
Irish Intercontinental Bank
Irish Life Assurance
Israel Taub
Isetan of America, Inc.
J & W Seligman & Company, Inc.
JMB Realty
J. B. Brown and Sons
J. C. Penney Company, Inc.
J. P. Morgan
Jamaica Hospital
James Wolfenson & Company
Jerome Greene, Esq.
Jewish Board of Family & Children's Services
Jones Lang Wootton
K-Mart Corporation
Kelly, Drye and Warren, Esqs.
Kennedy Associates
Key Bank of New York
Kerr-McGee Corporation
Kidder Peabody Realty Corp.
Kitano Arms Corporation
Knickerbocker Realty
Koeppel & Koeppel
Kronish, Lieb, Weiner & Hellman
Krupp Realty
Kutak, Rock and Campbell, Esqs.
Ladenburg, Thalman & Co.
Lans, Feinberg and Cohen, Esqs.
Lands Division, Department of Justice
Lazard Freres
LeBoeuf, Lamb, Greene & MacRae
Lefrak Organization
Lehman Brothers
Lennar Partners
Lepercq Capital Corporation
Lexington Corporate Properties
Lexington Hotel Corporation
Lincoln Savings Bank
Lion Advisors
Lomas & Nettleton Investors
London & Leeds
Long Term Credit Bank of Japan, Ltd.
Lutheran Church of America
Lynton, PLC
Macluan Capital Corporation
Macy's
MacAndrews and Forbes
Mahony Troast Construction Company
Manhattan Capital Partners
Manhattan College
Manhattan Life Insurance
Manhattan Real Estate Company
Manufacturers Hanover Trust Company
Marine Midland Bank
Mason Tenders
Massachusetts Mutual Life Insurance Company
May Centers, Inc.
Mayer, Brown, Platt
McDonald's Corporation
McGinn, Smith and Company
McGrath Services Corporation
MCI Telecommunications
Mellon Bank
Memorial Sloan-Kettering Cancer Center
Mendik Company
Mercedes-Benz of North America
Meridian Bank
Meritor Savings Bank
Merrill Lynch Hubbard
Merchants Bank
Metropolis Group
Metropolitan Life Insurance Company
Metropolitan Petroleum Corporation
Meyers Brothers Parking System Inc.
Michigan National Corp.
Milbank, Tweed
Millennium Partners
Miller, Montgomery, Sogi and Brady, Esqs.
Mitsui Fudosan - New York Inc.
Mitsui Leasing, USA
Mitsubishi Bank
Mitsubishi Trust & Banking Corporation
Mobil Oil Corporation
Moody's Investors Service
Moran Towing Corporation
Morgan Guaranty
Morgan Hotel Group
Morse Shoe, Inc.
Moses & Singer
Mountain Manor Inn
Mudge Rose Guthrie Alexander & Ferdon, Esqs.
Mutual Benefit Life
Mutual Insurance Company of New York
National Audubon Society, Inc.
National Bank of Kuwait
National Can Company
National CSS
National Westminster Bank, Ltd.
Nelson Freightways
Nestle's Inc.
New York Bus Company
New York City Division of Real Property
New York City Economic Development Corporation
New York City Housing Development Authority
New York City School Construction Authority
New York Life Insurance Company
New York State Common Fund
New York State Employee Retirement System
New York State Parks Department
New York State Teachers
New York State Urban Development Corporation
New York Telephone Company
New York Urban Servicing Company
New York Waterfront
Niagara Asset Corporation
Nippon Credit Bank, Inc.
Nomura Securities
Norcross, Inc.
North Carolina Department of Insurance
NYNEX Properties Company
Olympia and York, Inc.
Orient Overseas Associates
Orix USA Corporation
Otis Elevator Company
Owens-Illinois Corporation
PaineWebber, Inc.
Pan American World Airways, Inc.
Paul, Weiss, Rifkind
Park Tower Associates
Parke-Davis and Company
Paul Weiss Rifkind, Esqs.
Penn Central Corporation
Penn Mutual Life Insurance Company
Pennsylvania Retirement Fund
Penthouse International
Pepsi-Cola Company
Peter Sharp & Company
Petro Stopping Center
Pfizer International, Inc.
Philip Morris Companies, Inc.
Philips International
Phoenix Home Life
Pittston Company
Polyclinic Medical School and Hospital
Port Authority of New York and New Jersey
Postel Investment Management
Prentiss Properties Realty Advisors
Procida Organization
Proskauer Rose Goetz and Mandelsohn, Esqs.
Provident Bank
Prudential Securities
Pyramid Company
Rabobank Nederland
Ratner Group
RCA Corporation
Real Estate Recovery
Realty Income Corporation
Remson Partners
Republic Venezuela Comptrollers Office
Revlon, Inc.
Rice University
Richard Ellis
Richards & O'Neil
Ritz Towers Hotel Corporation
River Bank America
Robert Bosch Corporation
Robinson Silverman Pearce Aron
Rockefeller Center, Inc.
Rockefeller Center Properties
Roman Catholic Diocese of Brooklyn
Roosevelt Hospital
Rosenman & Colin
Royal Bank of Scotland
RREEF
Rudin Management Co., Inc.
Saint Vincent's Medical Center of New York
Saks Fifth Avenue
Salomon Brothers Inc.
Salvation Army
Sanwa Bank
SaraKreek USA
Saxon Paper Corporation
Schroder Real Estate Associates
Schulman Realty Group
Schulte, Roth & Zabel
BDO Seidman
Seaman Furniture Company, Inc.
Security Pacific Bank
Semperit of America
Sentinel Realty Advisors
Service America Corp.
Shea & Gould, Esqs.
Shearman and Sterling, Esqs.
Shearson Lehman American Express
Shidler Group
Sidley & Austin
Silver Screen Management, Inc.
Silverstein Properties, Inc.
Simpson, Thacher and Bartlett, Esqs.
Skadden, Arps, Slate, Meagher & Flom
Smith Barney
Smith Corona Corporation
Sol Goldman
Solomon Equities
Sonnenblick-Goldman
Southtrust Bank of Alabama
Spitzer & Feldman, PC
Stahl Real Estate
Standard & Poors
State Teachers Retirement System of New York
State Teachers Retirement System of Ohio
Stauffer Chemical Corporation
Stephens College
Sterling Drug, Inc.
Stroheim and Roman, Inc.
Stroock and Stroock and Lavan, Esqs.
Sullivan and Cromwell, Esqs.
Sumitomo Life Realty
Sumitomo Mutual Life Insurance Company
Sumitomo Trust Bank
Sun Oil Company
Sutherland, Asbill & Brennan
Swiss Bank Corporation
Tenzer Greenblat, Esqs.
Textron Financial
Thatcher, Proffitt, Wood
The Shopco Group
Thomson Information/Publishing
Thurcon Properties, Ltd.
Tobishima Associates
Tokyo Trust & Banking Corporation
Transworld Equities
Travelers Realty, Inc.
Triangle Industries
TriNet Corporation
UBS Securities Inc.
UMB Bank & Trust Company
Unibank
Union Bank of Switzerland
Union Carbide Corporation
Union Chelsea National Bank
United Bank of Kuwait
United Fire Fighters of New York
United Parcel Service
United Refrigerated
United States District Court, Southern District of New York
United States Life Insurance
United States Postal Service
United States Trust Company
Upward Fund, Inc.
US Cable Corp.
Vanity Fair Corporation
Verex Assurance, Inc.
Victor Palmieri and Company, Inc.
Village Bank
Vornado Realty Trust
W.P. Carey & Company, Inc.
Wachtell, Lipton, Rosen & Katz, Esqs.
Waterfront New York Realty Corporation
Weil, Gotshal & Manges
Weiss, Peck & Greer
Wells Fargo & Co.
Westpac Banking Corporation
Western Electric Company
Western Union International
Westinghouse Electric Corporation
White & Case
Wilkie Farr and Gallagher, Esqs.
William Kaufman Organization
Windels, Marx, Davies & Ives
Winthrop Financial Associates
Winthrop Simston Putnam & Roberts
Witco Corporation
Wurlitzer Company
Yarmouth Group
