United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended March 31, 1996
or
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition period from ______ to ______
Commission File Number: 33-20614
SHOPCO REGIONAL MALLS, L.P.
Exact Name of Registrant as Specified in its Charter
Delaware 13-3217028
State or Other Jurisdiction of I.R.S. Employer Identification No.
Incorporation or Organization
3 World Financial Center, 29th Floor,
New York, NY Attn: Andre Anderson 10285
Address of Principal Executive Offices Zip Code
(212) 526-3237
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
Consolidated Balance Sheets At March 31, At December 31,
1996 1995
Assets
Real estate, at cost:
Land $ 11,329,547 $ 11,329,547
Building 69,261,581 69,255,697
Improvements 2,717,613 2,706,206
83,308,741 83,291,450
Less accumulated depreciation
and amortization (10,661,004) (10,129,658)
72,647,737 73,161,792
Cash and cash equivalents 6,708,756 6,315,688
Construction escrows 423,068 416,568
Accounts receivable, net of
allowance of $900,329 in 1996 and
$797,783 in 1995 616,456 708,687
Deferred rent receivable 240,692 193,387
Deferred charges, net of
accumulated amortization of $146,228
in 1996 and $122,757 in 1995 386,142 404,321
Prepaid expenses 264,275 454,533
Total Assets $ 81,287,126 $ 81,654,976
Liabilities, Minority Interest and Partners' Capital
Liabilities:
Accounts payable and accrued
expenses $ 404,461 $ 198,949
Mortgages payable 55,106,635 55,323,013
Accrued interest payable -- 172,111
Due to affiliates 23,354 17,007
Security deposits payable 13,771 13,771
Deferred income 308,319 454,667
Distributions payable 10,644 265,603
Total Liabilities 55,867,184 56,445,121
Minority interest (404,439) (397,677)
Partners' Capital (Deficit):
General Partner (227,050) (218,681)
Limited Partners (70,250 limited
partnership units authorized
issued and outstanding) 26,051,431 25,826,213
Total Partners' Capital 25,824,381 25,607,532
Total Liabilities, Minority
Interest and Partners'
Capital $ 81,287,126 $ 81,654,976
Consolidated Statement of Partners' Capital (Deficit)
For the three months ended March 31, 1996
Limited General
Partners Partner Total
Balance at December 31, 1995 $ 25,826,213 $ (218,681) $ 25,607,532
Net income 225,218 2,275 227,493
Distributions -- (10,644) (10,644)
Balance at March 31, 1996 $ 26,051,431 $ (227,050) $ 25,824,381
Consolidated Statements of Operations
For the three months ended March 31, 1996 1995
Income
Rental income $ 2,046,702 $ 2,058,439
Escalation income 1,340,393 1,432,183
Interest income 96,108 87,260
Miscellaneous income 31,723 48,258
Total Income 3,514,926 3,626,140
Expenses
Interest expense 1,076,375 1,089,743
Property operating expenses 1,211,237 1,197,612
Depreciation and amortization 554,817 636,930
Real estate taxes 372,790 372,586
General and administrative 67,433 52,800
Total Expenses 3,282,652 3,349,671
Income before minority interest 232,274 276,469
Minority interest (4,781) (3,297)
Net Income $ 227,493 $ 273,172
Net Income Allocated:
To the General Partner $ 2,275 $ 2,732
To the Limited Partners 225,218 270,440
$ 227,493 $ 273,172
Per limited partnership unit
(70,250 outstanding) $ 3.21 $ 3.85
Consolidated Statements of Cash Flows
For the three months ended March 31, 1996 1995
Cash Flows From Operating Activities:
Net income $ 227,493 $ 273,172
Adjustments to reconcile net
income to net cash provided by
operating activities:
Minority interest 4,781 3,297
Depreciation and amortization 554,817 636,930
Increase (decrease) in cash arising
from changes in operating assets and
liabilities:
Accounts receivable 92,231 67,167
Deferred rent receivable (47,305) (20,962)
Deferred charges (5,292) --
Prepaid expenses 190,258 150,748
Accounts payable and accrued expenses 205,512 178,538
Accrued interest payable (172,111) --
Due to affiliates 6,347 (13,772)
Deferred income (146,348) (160,115)
Net cash provided by operating activities 910,383 1,115,003
Cash Flows From Investing Activities:
Additions to real estate (17,291) (78,429)
Construction escrows (6,500) --
Net cash used for investing activities (23,791) (78,429)
Cash Flows From Financing Activities:
Payment of mortgage principal (216,378) (149,629)
Distributions paid - minority interest (11,543) (2,040)
Distributions paid - limited partners (265,603) --
Net cash used for financing activities (493,524) (151,669)
Net increase in cash and cash equivalents 393,068 884,905
Cash and cash equivalents,
beginning of period 6,315,688 5,514,426
Cash and cash equivalents,
end of period $ 6,708,756 $ 6,399,331
Supplemental Disclosure of Cash
Flow Information:
Cash paid during the period for interest $ 1,248,486 $ 1,089,743
Notes to the Consolidated Financial Statements
The unaudited interim consolidated financial statements should be read in
conjunction with the Partnership's annual 1995 consolidated financial
statements within Form 10-K.
The unaudited consolidated financial statements include all adjustments which
are, in the opinion of management, necessary to present a fair statement of
financial position as of March 31, 1996 and the results of operations and cash
flows for the three months ended March 31, 1996 and 1995 and the statement of
partner's capital (deficit) for the three months ended March 31, 1996. Results
of operations for the period are not necessarily indicative of the results to
be expected for the full year.
No significant events have occurred subsequent to fiscal year 1995, which
requires disclosure in this interim report per Regulation S-X, Rule 10-01,
Paragraph (a)(5).
Part 1, Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
At March 31, 1996, the Partnership had cash and cash equivalents totaling
$6,708,756, compared with $6,315,688 at December 31, 1995. The increase is
primarily due to net cash provided by operating activities exceeding net cash
used for investing activities and principal payments made on the Assembly
mortgage note.
Accounts receivable decreased from $708,687 at December 31, 1995 to $616,456 at
March 31, 1996 primarily due to the collection of prior-year receivables from
tenants at both Assembly Square and Cranberry Mall and increases in the
allowance for doubtful accounts with respect to several tenants at Assembly
Square.
Prepaid expenses decreased from $454,533 at December 31, 1995 to $264,275 at
March 31, 1996. The decrease is primarily due to recognition of 1996 first
quarter real estate taxes for Cranberry Mall prepaid at December 31, 1995.
Accounts payable and accrued expenses increased from $198,949 at December 31,
1995 to $404,461 at March 31, 1996 primarily due to the accrual for 1996 first
quarter real estate taxes for Assembly Square.
Accrued interest payable decreased from $172,111 at December 31, 1995 to $0 at
March 31, 1996 due to the payment of the December 1995 Assembly Square mortgage
payment in January 1996.
Deferred income decreased from $454,667 at December 31, 1995 to $308,319 at
March 31, 1996 primarily due to the recognition of previously billed amounts to
tenants for real estate taxes.
Distributions payable decreased from $265,603 at December 31, 1995, which
represents an accrual for the Partnership's 1995 fourth quarter cash
distribution which was paid on February 9, 1996 in the amount of $3.78 per
Limited Partnership Unit, to $10,644 at March 31, 1996, which represents an
accrual for the 1995 distribution payable to the General Partner. As of May 1,
1996, cash flow from Assembly Square was not sufficient to meet all of the
property's obligations and only a partial payment of real estate taxes due was
made, thereby constituting a default under the mortgage encumbering the
property. Based on current estimates of future cash flow from Assembly Square,
it is considered likely that other obligations under the mortgage loan
agreement, including payments of interest and principal, will not be met in
full. In addition to pursuing a variety of possible leasing alternatives to
increase cash flow at Assembly Square, the General Partner has requested a
meeting with the mortgage lender to discuss a modification of debt service
payments. There can be no assurances that such discussions will result in an
agreement which would improve the property's cash flow position. Therefore,
the General Partner has suspended cash distributions to the limited partners
beginning with the first quarter of 1996 in order to facilitate payment of the
Partnership's debt and other property obligations.
As of the filing date of this report, the following tenants, or their parent
corporations, at Assembly Square have filed for protection under the U.S.
Bankruptcy Code.
Tenant Square Footage Leased Open/Closed
All For A Dollar 3,464 Open
Marianne 6,630 Open
Marianne Plus 6,375 Open
G & G 1,474 Open
Bakers 2,214 Open
Jeans West 1,620 Open
Wild Pair 1,620 Open
Coda 2,139 Open
These tenants occupy 25,536 square feet, or approximately 16% of Assembly
Square's leasable area (exclusive of anchor tenants), and at this point their
plans to remain at Assembly Square 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 Assembly Square and revenues received
by the Partnership. Certain of these tenants have requested rent relief.
On September 18, 1995, Caldor, an anchor tenant at Cranberry Mall, filed for
protection under the U.S. Federal Bankruptcy Code. Caldor has been current
with its rental payments to the Partnership since the bankruptcy filing.
Pursuant to the provisions of the Federal Bankruptcy Code, Caldor may, with
court approval, choose to reject or accept the terms of its lease. Should
Caldor exercise its right to reject the lease, this would have an adverse
impact on cash flow generated by Cranberry Mall and revenues received by the
Partnership. Until Caldor files a plan of reorganization, it is uncertain what
effect this situation will have on the Caldor department store located at
Cranberry Mall or on Cranberry Mall itself, although Caldor could affirm or
reject its lease prior to filing a plan. Caldor has requested that the
Partnership grant it rent relief, which is under negotiation. As of March 31,
1996, no other tenants at Cranberry Mall have filed for bankruptcy protection.
Results of Operations
For the three months ended March 31, 1996, the Partnership generated net income
of $227,493 compared to $273,172 for the corresponding period in 1995. The
decrease in net income is primarily due to an increase in general and
administrative expense as well as a decrease in escalation income.
Rental income for the three months ended March 31, 1996 totaled $2,046,702,
virtually unchanged in comparison to $2,058,439 for the same period during
1995. Escalation income, which represents billings to tenants for their
proportional share of common area maintenance, operating and real estate tax
expenses, totaled $1,340,393 for the period ended March 31, 1996 compared to
$1,432,183 during the same period in 1995. The decrease in escalation income
is primarily due to a decrease in common area maintenance expense at Assembly
Square in 1996.
Depreciation and amortization for the three months ended March 31, 1996 totaled
$554,817 compared to $636,930 during the same period in 1995. The decrease is
primarily due to the write-down of the carrying value of Assembly Square to its
estimated fair market value at December 31, 1995.
Property operating expenses for the three months ended March 31, 1996 totaled
$1,211,237 compared to $1,197,612 for the same period in 1995. The increase in
property operating expenses is primarily due to increased legal expense related
to the proposed Stop&Shop development adjacent to Assembly Square, which could
result in increased competition and impact auto traffic flows for Assembly
Square, and increased utilities and maintenance expense at Cranberry Mall.
Partially offsetting these increases was a decline in security and maintenance
expenses at Assembly Square.
General and administrative expenses totaled $67,433 for the period ended March
31, 1996 compared to $52,800 for the same period in 1995. The increase is
primarily due to an increase in consulting fees related to Assembly Square.
Assembly Square - Mall tenant sales (exclusive of anchor tenants) for the two
months ended February 29, 1996 and February 28, 1995 totaled $2,588,000 and
$2,962,000, respectively, representing a 13% decrease. Mature tenant sales
(exclusive on anchor tenants) for the two months ended February 29, 1996 and
February 28, 1995 totaled $2,409,000 and $2,463,000, respectively, representing
a 2% decrease. 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 in sales to a decline in consumer
spending on softgoods, particularly apparel, a trend experienced by retailers
across the country, especially in the Northeast region, and increased
competition in the trade area. In addition, sales results reflect lower
occupancy at the property. As of March 31, 1996, Assembly Square was 76%
occupied (exclusive of anchor tenants) compared with a 94% occupancy rate at
March 31, 1995.
Cranberry Mall - Mall tenant sales (exclusive of anchor tenants) for the two
months ended February 29, 1996 and February 28, 1995 totaled $4,329,000 and
$4,241,000, respectively, representing a 2% increase. Mature tenant sales
(exclusive of anchor tenants) for the two months ended February 29, 1996 and
February 28, 1995 totaled $3,899,000 and $4,007,000, respectively, representing
a 3% decrease. As of March 31, 1996 and 1995, Cranberry was 83% and 78%
occupied, respectively (exclusive of anchor and outparcel tenants).
Part II Other Information
Items 1-5 Not applicable.
Item 6 Exhibits and reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule
(99) Limited Appraisal of Real Property for
Cranberry Mall as of January 1, 1996, as prepared
by Cushman & Wakefield, Inc.
(99) Limited Appraisal of Real Property for
Assembly Square as of January 1, 1996, as prepared
by Cushman & Wakefield, Inc.
(b) Reports on Form 8-K - No reports on Form 8-K were
filed during the quarter ended March 31, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SHOPCO REGIONAL MALLS, L.P.
BY: REGIONAL MALLS, INC.
General Partner
Date: May 15, 1996 BY: /s/ Paul L. Abbott
Director, President, Chief
Operating Officer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Mar-31-1996
<CASH> 7,131,824
<SECURITIES> 000
<RECEIVABLES> 1,516,785
<ALLOWANCES> 900,329
<INVENTORY> 000
<CURRENT-ASSETS> 891,109
<PP&E> 83,308,741
<DEPRECIATION> 10,661,004
<TOTAL-ASSETS> 81,287,126
<CURRENT-LIABILITIES> 760,549
<BONDS> 55,106,635
<COMMON> 000
000
000
<OTHER-SE> 25,824,381
<TOTAL-LIABILITY-AND-EQUITY> 81,287,126
<SALES> 2,046,702
<TOTAL-REVENUES> 3,514,926
<CGS> 000
<TOTAL-COSTS> 1,211,237
<OTHER-EXPENSES> 995,040
<LOSS-PROVISION> 000
<INTEREST-EXPENSE> 1,076,375
<INCOME-PRETAX> 227,493
<INCOME-TAX> 000
<INCOME-CONTINUING> 000
<DISCONTINUED> 000
<EXTRAORDINARY> 000
<CHANGES> 000
<NET-INCOME> 227,493
<EPS-PRIMARY> 3.21
<EPS-DILUTED> 3.21
</TABLE>
COMPLETE APPRAISAL OF
REAL PROPERTY
Cranberry Mall
Routes 27 and 140
City of Westminster
Carroll County, Maryland
IN A SUMMARY REPORT
As of January 1996
Shopco Regional Malls Limited Partnership
Three 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 14, 1996
Shopco Regional Partners Limited Partnership
Three World Financial Center
29th Floor
New York, New York 10285
Re: Complete Appraisal of Real Property
Cranberry Mall
Routes 27 and 140
City of Westminster
Carroll 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 was prepared for the 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 and
Richard W. Latella, MAI.
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 for a
Summary Appraisal Report. As such, it presents only summary discussions of
the data, reasoning, and analyses that were used in the appraisal process to
develop the appraiser's opinion of value. Supporting documentation
concerning the data, reasoning, and analyses is retained in the
appraiser's file. The depth of discussion contained in this report is
specific to the needs of the client and for the intended use stated below.
The appraiser is not responsible for unauthorized use of this report.
We are providing this report as an update to our last analysis which was
prepared as of January 1, 1995. As such, we have primarily reported only
changes to the property and its environs over the past year.
As a result of our analysis, we have formed an opinion that the market value
of the leased estate in the referenced property, subject to the assumptions,
limiting conditions, certifications, and definitions, as of January 1, 1996,
was:
FORTY FOUR MILLION DOLLARS
$44,000,000
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/ Richard W. Latella
Richard W. Latella, MAI
Senior Director
Retail Valuation Group
Maryland Certified General
Real Estate Appraiser
License No. 10462
JFB:RWL:emf
C&W File No. 96-9064-4
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
Property Name: Cranberry Mall
Location: Routes 27 and 140
City of Westminster
Carroll County, Maryland
Interest Appraised: Leased fee
Date of Value: January 1, 1996
Dates of Inspection: January 18, 1996
January 20, 1996
Ownership: Shopco Regional Malls Limited
Partnership
Land Area: 57.745+/- acres
Zoning: P-RSC, Planned Regional 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: Single level regional mall
Year Built: 1987; Montgomery Ward added in 1990;
Cinema expanded in 1994.
GLA:
Caldor 81,224 SF
Leggett 65,282 SF
Sears 70,060 SF
Montgomery Ward* 89,260 SF
Total Anchor Stores 305,826 SF
Cinema 25,605 SF
Mall Stores 193,125 SF
Total GLA 524,556 SF
Outpads ** 5,600 SF
* Includes 6,400 SF Auto Express
** Ground lease terms
Mall Shop Ratio: 36.8%
Condition: Good
Operating Data and Forecasts
Current Vacant Space: 37,662 square feet
Current Occupancy: 80.5% based on Mall Shop GLA,
(Inclusive of pre-committed tenants)
Forecasted Stabilized
Occupancy: 93.0% (exclusive of downtime
provisions)
Forecasted Date of
Stabilized Occupancy: January 1, 1999
1996 Operating Expenses
(Budget*): $2,835,016 ($14.68/SF of mall GLA)
(Appraiser's Forecast): $2,892,061 ($14.98/SF of mall GLA)
* Net of Association Dues
Investment Assumptions
Rent Growth Rate: Flat - 1996-1997
+2.0% - 1998
+3.0% - Thereafter
Expense Growth Rate: +3.5%
Sales Growth Rate: Flat - 1996
+2.0% - 1997
+2.5% - 1998
+3.0% - Thereafter
Other Income: +3.0%
Tenant Improvements
New Tenants: $ 8.00/SF
Renewing Mall Tenants: $ 1.00/SF
Raw Space: $25.00/SF
Vacancy between
Tenants: 6 months
Renewal Probability: 60%
Terminal Capitalization
Rate: 10.0%
Cost of Sale at
Reversion: 2.0%
Discount Rate: 12.50%
Value Indicators
Sales Comparison Approach: $42,500,000 - $44,500,000
Income Approach
Discounted Cash Flow: $45,000,000
Value Conclusion: $44,000,000
Resulting Indicators
CY 1996 Net Operating Income: $4,432,922
Implicit Overall
Capitalization Rate: 10.08
Price per Square Foot of
Owned GLA: $83.88
Price per Square Foot of Mall
Shop GLA: $227.83
Exposure Time Implicit in Value
Conclusion: Not more than 12 months
Special Risk Factors: None
Special Assumptions:
1. Throughout this analysis we have relied on information
provided by ownership and management which we assume to be
accurate. We have been provided with summary information
only for new leases in the form of a rent roll or lease
abstracts. We have not been provided with actual lease
documents. There has been some change to the tenant mix
and leasing status since our last appraisal report. All
tenant specific assumptions are identified within the body
of this report.
2. During 1990, the Americans With Disabilities Act (ADA) was
passed by Congress. This is Civil Rights legislation which,
among other things, provides for equal access to public
placed for disabled persons. It applied to existing
structures as of January 1992 and new construction as of
January 1993. Virtually all landlords of commercial
facilities and tenants engaged in business that serve the
public have compliance obligations under this law. While we
are not experts in this field, our understanding of the law
is that it is broad-based, and most existing commercial
facilities are not in full compliance because they were
designed and built prior to enactment of the law. We
noticed no additional "readily achievable barrier removal"
problems but we recommend a compliance study be performed by
qualified personnel to determine the extent of non-
compliance and cost to cure.
We understand that, for an existing structure like the
subject, compliance can be accomplished in stages as all or
portions of the building are periodically renovated. The
maximum required cost associated with compliance-related
changes is 20 percent of total renovation cost. A prudent
owner would likely include compliance-related charges in
periodic future common area and tenant area retrofit. We
consider this in our future projections of capital
expenditures and retrofit allowance costs to the landlord.
3. 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.
4. 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
LOCATION ANALYSIS 14
RETAIL MARKET ANALYSIS 15
THE SUBJECT PROPERTY 22
HIGHEST AND BEST USE 23
VALUATION PROCESS 24
SALES COMPARISON APPROACH 25
INCOME APPROACH 41
RECONCILIATION AND FINAL VALUE ESTIMATE 77
ASSUMPTIONS AND LIMITING CONDITIONS 79
CERTIFICATION OF APPRAISAL 81
ADDENDA 82
PHOTOGRAPHS OF SUBJECT PROPERTY
Photograh showing exterior view of Leggett store.
Photograph showing exterior view of Sears store.
Photograph showing exterior view of Caldor.
Photograph showing exterior view of Montgomery Ward.
INTRODUCTION
Identification of Property
The subject property is the Cranberry Mall, a single level
enclosed mall with a gross leasable area (GLA) of 524,556 square
feet. This amount represents the most recent estimate of the
subject's area based upon a compilation of recent leasing
activity. Developed by the Shopco Group, the mall opened in
March 1987. It is located on a 57.745 acre site at the
intersection of Routes 27 and 140, the premier retail location in
the City of Westminster. Westminster is the county seat of
Carroll County, one of the fastest growing counties in Maryland.
The Cranberry Mall is anchored by Caldor (81,224 square
feet), Leggett (65,282 square feet), Sears (70,060 square feet),
and Montgomery Ward (89,260 square feet). This latter store
opened in October 1990 and includes a free standing 6,400 square
foot Auto Express. All four department stores are owned by the
partnership. Altogether, anchor stores occupy a total of 305,802
square feet or, 58.3 percent of the center's GLA. Mall stores
occupy a total of 193,125 square feet. There are also two
outparcels which are currently improved.
Since its opening, Cranberry Mall has maintained a 75 to 80
percent occupancy but has not been able to breach this level for
any extended period of time. Comparable mall shop sales for
stores in operation twelve months or more declined slightly,
falling by 1.7 percent in 1995.
Property Ownership and Recent History
Title to the subject is held by Shopco Regional Malls Limited
Partnership. This title was acquired on October 11, 1988 from
the Cranberry Limited Partnership. The total consideration paid
was $53,847,500 in 1990 as recorded in Deed Book 1100, Page 530.
The subject property was developed by The Shopco Group and was
essentially completed in 1987 with Ward's opening in 1990.
Purpose and Intended Use of the Appraisal
The purpose of this appraisal is to estimate the Market Value
of the leased fee interest in the subject property, as of January
1, 1996. Our analysis reflects conditions prevailing as of that
date. On January 18, 1996 Jay F. Booth inspected the subject
property and its environs, Richard W. Latella also inspected the
property on January 20, 1996. 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 expense and a budget
forecast for 1996 including the budget for planned capital
expenditures and repairs.
- Reviewed a current independent market study and demographics prepared
by Equifax National Decision Systems.
- Conducted market research of occupancies, asking rents, concessions
and operating expenses at competing retail properties including
interviews with on-site managers and a review of our own data base
from previous appraisal files.
- Prepared a detailed discounted cash flow analysis for the purpose of
discounting a forecasted net income stream to a present value.
- Conducted market inquiries into recent sales of similar regional malls
to ascertain sales price per square foot, net income multipliers and
capitalization rates. This process involved telephone interviews with
sellers, buyers and/or participating brokers.
- Prepared Sales Comparison and Income Approaches to value with a
reconciliation of each approach and a final value conclusion
presented.
Date of Value and Property Inspection
On January 13, 1995 Jay F. Booth inspected the subject
property and its environs. On January 20, 1996 Richard W.
Latella, MAI inspected the property. Our date of value is
January 1, 1996.
Property Rights Appraised
We have appraised a 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.
The following definitions are taken from various sources:
Market Value As Is on Appraisal Date
Value of the property appraised in the condition observed
upon inspection and as it physically and legally exists
without hypothetical conditions, assumptions, or
qualifications on the effective date of appraisal.
Legal Description
A legal description is retained in our files.
Map showing the Washington and Baltimore areas and Subject property's location
in relation to each city.
REGIONAL ANALYSIS
Baltimore Metropolitan Area
The subject property is located in Carroll County, which lies
approximately 25 miles northwest of the city of Baltimore. It is
part of a much larger area known as the Baltimore Standard
Metropolitan Area. The Baltimore Standard Metropolitan Area
(MSA) is defined by the U.S. Department of Commerce, Bureau of
the Census, to include Baltimore City and the counties of
Baltimore, Howard and Anne Arundel, Harford, Carroll and Queen
Anne's. Queen Anne's County was added to the Baltimore MSA in
1983. In total, the Baltimore MSA encompasses 2,618 square
miles.
Population Base
A significant indicator of change within a regional economy
is the rate of growth of decline in an area's population base.
This has a direct and obvious effect on real estate values.
Since the supply of land is fixed, the demand for real property
will be affected by an increase or decrease in the population
base. The pattern, in turn, is reflected in values for the whole
spectrum of property types within the region.
In addition to the more obvious relationship changes in
population and property values, there are a variety of other
factors which should also be considered. Accordingly, the
specific location of the subject property relative to the trends
within the population base must be closely examined. For
example, a city with a declining population base may be
experiencing a rise in property values due to its growing
importance as an employment center. Also, the average household
size within an area, when considered along with population
trends, gives a good indication of potential demand for housing
as well as goods and services within the area. The chart below
illustrates the continuing movement from the city into the
outlying counties. Carroll County demonstrated an overall rate
of growth of 45.0 percent in the 1980-1995 period, equivalent to
a 2.50 percent compound annual rate of growth. The Baltimore MSA
had a modest 12.5 percent increase in population growth since
1980.
Population Changes
Baltimore MSA
1995 1980 Percent
Baltimore MSA 2,475,052 2,199,497 12.5
Anne Arundel 463,733 370,775 25.1
Baltimore 715,986 655,615 9.2
County
Baltimore City 693,249 786,741 (11.9)
Carroll 139,691 96,356 45.0
Harford 206,517 145,930 41.5
Howard 219,313 118,572 85.0
Queen Ann's 36,563 25,508 43.3
Source: CACI: The Sourcebook of County Demographics
It is anticipated that this growth trend will continue into
the foreseeable future. According to the CACI, the Baltimore MSA
is anticipated to increase its population by 4.5 percent to
2,587,057. The more rural counties such as Carroll, Harford and
Howard will continue to see the largest percentage increases.
Employment Characteristics
Until 1960, the majority of Baltimore's workforce was
employed by the manufacturing industries. Centered around the
Port of Baltimore, shipping and steel manufacturing were among
the major economic activities in the region. With the
redirection of the national economy, many firms such as Bethlehem
Steel, General Motors and Maryland Dry Dock began to suffer and
consequently laid off several thousand workers or ceased
operations all together.
Baltimore has been slowly restructuring its economy and this
has created new jobs to fill the void left by the deterioration
of the smoke-stack industries. The following chart illustrates
the shifting of employment from the manufacturing sector to the
service sector during the past three decades.
Employment Trends
Baltimore MSA
1960 1990 1995 *
% of % of % of
Nos. Total Nos. Total Nos. Total
Construction 37.5 6.0 73.5 6.3 130.3 10.9
Manufacturing 199.0 31.6 126.9 10.9 103.9 8.7
Util./Transp. 55.4 8.8 56.3 4.9 55.8 4.7
/Post.
Retail/Wholes 126.7 20.1 274.9 23.7 264.2 22.1
ale
Finance/Insur 32.8 5.2 75.8 6.5 70.7 5.9
ance
Service 82.8 13.2 333.6 28.7 357.4 30.0
Government 94.8 15.1 219.4 18.9 211.0 17.7
Total 629,000 100.0 1,160,4 100.0 1,193,3 100.0
* Preliminary data through November
Source: U.S. Department of Labor, Bureau of Labor Statistics
Over the period 1990-1995 (Nov), the metropolitan area added
only 32,800 jobs, an increase of 2.8 percent or .70 percent per
annum. Compared to gains in other comparably sized metropolitan
areas, this growth could be characterized as anemic.
According to WEFA, a recognized economic consulting firm,
Metropolitan Baltimore has been faring worse than the state as a
whole and appears to be losing jobs in 1995. What is different
about this year's performance is that the suburbs appear to be
losing jobs while the city is apparently showing its first job
increase in six years. Nevertheless, the metro area is now one
of the weakest in the nation. Manufacturing continues to shed
jobs and non-manufacturing has not been able to offset the
weakness in manufacturing in 1995. Since April the MSA has lost
11,000 jobs and year-over-year job growth was negative by August.
Tourism has kept retail trade activity in the positive column,
but there is no sector of its economy generating sufficient
stimulus to pull it forward.
In the past, the traditional sources of job growth in the
Baltimore economy were manufacturing and transportation.
Manufacturing employment in Baltimore has been in decline for the
past fifteen years and that trend does not appear to be changing.
In fact, the Baltimore manufacturing sector has surrendered
23,000 jobs since 1990, and while the rate of decline is expected
to slow, the erosion of manufacturing jobs from the local economy
is expected to continue. While transportation, another important
industry to Baltimore's economy, is not in decline, it is not
creating jobs. Efforts to stabilize the Port of Baltimore have
met with some success and railway operations are still a
significant component of the local transportation sector. But
the realty is that the transportation industry nationally is not
expected to grow significantly and among older port cities,
Baltimore still has a cost disadvantage. As of November 1995,
the unemployment rate for Baltimore was 5.0 percent versus 4.5
percent for Maryland.
Baltimore's private sector economy is now more broad based
than five years ago with services, manufacturing and technology
related businesses represented. This economic diversity
manifests itself in the varied type of industries based in the
region. The manufacturing industry still maintains a presence,
along with high-tech contractors, educational institutions,
retailers and financial institutions.
Top Ten Private Employers
Baltimore MSA
Company Name No. of
Employees
The John Hopkins University & 21,000
Hospital
Westinghouse Electric Company 15,900
MNC Financial 9,500
Bethlehem Steel Company 8,000
Baltimore Gas & Electric Company 7,900
Giant Food, Inc. 6,400
C&P Telephone Company 5,300
University of Maryland Medical 4,500
System
Blue Cross & Blue Shield of 4,500
Maryland
University of Maryland at 4,500
Baltimore
Source: Baltimore Business Journal Books of Lists
Currently, the State of Maryland ranks third in total number
of U.S. biotech firms. Specific areas of concentration include
agriculture, pharmaceuticals, biotech supplies and medical
supply, service and device companies. Collectively, the
Baltimore/Washington area has more scientists and engineers than
any other region of the country.
The Baltimore region is a major center for life science
research, business and commerce. Acting as a catalyst in this
evolutionary movement is Johns Hopkins University, the largest
federally supported research university in the United States and
along with its world renowned medical institutions, the region's
top employer. Other institutions participating and expanding
into life science research include the University of Maryland
Baltimore, Morgan State University, the Maryland Biotechnology
Institute and the National Institute of Health (NIH). The NIH
has awarded more federal funds to the Baltimore-Washington Common
Market for biomedical research and development than any other
CMSA in the nation. The following chart outlines the amount and
geographic distribution of these federal research and
developmental funds.
Total R & D National
Institution Funds Rank
(000's)
Johns Hopkins $648,385 1
University*
MIT $287,157 2
Cornell University $286,733 3
Stanford $295,994 4
University
University of $285,982 5
Wisconsin
University of MD, $159,510 26
College Park
University of MD, $ 75,000 65
Baltimore
* Figures include the Applied Physics Laboratory
Not surprising, these large amount of funds have attracted
the private sector involved in biotechnology research. As
mentioned, the state ranks third in the nation in the percent
concentration of biotech firms. Such companies as Nova
Pharmaceuticals, Martek, Crop Genetics and major divisions of
Becton Dickinson and W.R. Grace operate within the Baltimore
region.
Income
The long term ability of the population within an area to
satisfy its material desires for goods and services directly
affects the price levels of real estate and can be measured
indirectly through retail sales. One measure of the relative
wealth of an area is average household disposable income which is
available for the purchase of food, shelter, and durable goods.
In order to present a reliable comparison of the relative wealth
of the component jurisdictions in the Baltimore MSA, we have
examined the effective buying power income of the region as
reported by Sales & Marketing Management's Survey of Buying
Power. Effective buying income is essentially income after all
taxes or disposable income.
According to the Survey of Buying Power - 1995, the Baltimore
MSA had a median household Effective Buying Income (EBI) of
$41,802, ranking it as the 48th highest metropolitan area in the
country. Among components, the median household EBI varied from
a low of $28,596 in the City of Baltimore to a household high of
$58,786 in Howard County.
Effective Buying Income
Baltimore MSA
(000's) Median
Total EBI Household
EBI
BALTIMORE MSA $ 44,323,057 $41,802
Anne Arundel $ 9,031,127 $49,671
Baltimore $ 14,065,979 $42,930
County
Baltimore $ 9,445,953 $28,596
City
Carroll $ 2,474,685 $47,894
Harford $ 3,581,952 $45,731
Howard $ 5,113,691 $58,786
Queen Anne's $ 609,670 $39,088
Source: Sales & Marketing Management, 1995 Survey of Buying Power
An additional measure of the area's economic vitality can be
found in income level distribution. Approximately 39.2 percent
of all households have effective buying income in excess of
$50,000. This ranges from a high of 61.4 percent in Howard
County to a low of 23.1 percent in the City of Baltimore,
mirroring median household EBI. This would rank the area as
18th in the country in this income category. Other east coast
metropolitan areas are ranked as indicated: New York (1),
Washington (4), Philadelphia (5), Boston (6), Nassau/Suffolk (8),
with Chicago being second.
A region's effective buying income is a significant statistic
because it conveys the effective wealth of the consumer. This
figure alone can be misleading, however, if the consumer does not
spend money. Coupling Baltimore's EBI with the area's
significant retail sales and strong buying power index, it is
clear that residents do spend their money in the retail
marketplace. The Baltimore MSA ranks 19th in retail sales, 19th
in effective buying income and 19th in buying power. These
statistics place the Baltimore MSA in the top 5 percent in the
country.
Retail Sales
Retail sales in the Baltimore Metropolitan Area are currently
estimated to exceed $20 billion annually. As previously stated,
Baltimore ranked nineteenth nationally in total retail sales for
1994, the last year for which statistics are currently available.
Retail sales in this metropolitan area have increased at a
compound annual rate of 4.15 percent since 1989.
Retail Sales
Baltimore Metropolitan Area
(In Thousands)
Metropolitan
Year Baltimore % Change
1989 $16,905,854 ---
1990 $17,489,333 +3.45%
1991 $17,484,100 -0.03%
1992 $18,446,721 +5.51%
1993 $19,610,884 +6.31%
1994 $20,720,649 +5.66%
Compound Annual
Change +4.15%
Source: Sales and Marketing Management 1990-1994
Transportation
Baltimore is centrally located in the Mid-Atlantic Region and
has convenient access to both east coast and midwest markets.
The area is served by an extensive transportation network which
consists of highway, rail lines, airports, seaports, and public
transportation.
The Baltimore MSA is traversed by a series of multi-lane
highways. Interstate 95 runs north-south connecting the
Northeast corridor with Florida and, along with the Baltimore-
Washington Expressway, provides a link between the Baltimore and
Washington beltways. Interstate 83 provides access to New York
and Canadian markets. Interstate 70 connects the Port of
Baltimore with Pittsburgh and the Midwest. Finally, all major
materials are accessible from Interstate 695, Baltimore's five
lane beltway. The following chart illustrates Baltimore's close
proximity to the east coast and midwest markets.
Highway Distance from Baltimore
Boston 392
Chicago 668
New York 196
Philadelphia 96
Pittsburgh 218
Richmond 143
Washington, D.C. 37
Source: Department of Economic & Community Development
The Baltimore region is served by five major and three
shortline railroads including AMTRAK, Chessie System Railroads,
ConRail, and Norfolk Southern Railroad. Nearly 610 railroad
route miles traverse the region. AMTRAK service, originating out
of Pennsylvania Station, provides access to the Northeast
corridor, including Washington, Philadelphia, New York and
Boston. Frequent commuter service between Washington, D.C. and
Baltimore is provided by Maryland rail commuter (MARC), which
operates between Baltimore, Camden, and Pennsylvania Stations and
Washington Union Station, making intermediate stops at, among
others, Baltimore/Washington International Airport (BWI). These
stations are linked to their respective center cities by metro-
rail and metro-bus systems.
Baltimore's buses connect nearly 80 miles of the city and
provide access to Annapolis, Maryland's state capital. The newly
completed subway system links Baltimore's downtown region with
the northwesterly suburbs, traveling 14 miles, originating at the
Inner Harbor and terminating at Owings Mill. A multi-million
dollar addition has been approved that will extend the existing
subway from the Inner Harbor to Johns Hopkins Hospital. Proposed
is a 27 mile long light rail system which will connect Hunt
Valley to the north with Glen Burnie to the south, plus a spur to
BWI Airport. This rail line will be a state-of-the-art, above
ground rail system, electrically powered by overhead wires. The
new line will run through downtown Baltimore and the Inner Harbor
and will share a common station with the existing subway line at
Charles Center.
The Baltimore/Washington Airport (BWI) is located in the
southerly portion of the Baltimore SMA in Anne Arundel County,
ten miles from downtown Baltimore. The modern airport hosts 18
passenger airlines that provide direct air service to 135 cities
in the United States and Canada. U.S. Air is the major carrier
at BWI, having 45 gates with over 170 flights a day in and out of
BWI. BWI also provides service to air freight carriers with its
100,000 square foot Air Cargo Complex. When compared with Dulles
and Washington National Airport, BWI services 28.6 percent of
commercial passengers, 38.1 percent of commercial operations, and
57.3 percent of freight customers. BWI has spawned the
development of 15 new business parks and several hotels, has
created nearly 10,000 jobs, and has generated a statewide
economic impact of $1.7 billion in the form of business sales
made, goods and services purchased, and wages and taxes paid.
Baltimore's water port stretches over 45 miles of developed
waterfront and reaches a depth of 42 feet. With its six million
square feet of warehouse and five million square feet of cold
storage, the port receives 4,000 vessels yearly. These extensive
facilities can accommodate general, container, bulk and break
bulk cargoes; it is the second busiest containerized cargo port
in the Mid-Atlantic and Gulf-Coast regions. Additionally, the
port is the second largest importer and exporter of cars and
trucks in the United States. The Port of Baltimore is closer to
the midwest than any other east coast port and within an
overnight drive of one-third of the nation's population. These
are some of the reasons that the port has become a preferred
destination for Pacific rim countries.
Conclusions
The overall outlook for the Metropolitan Baltimore Area is
cautiously optimistic. The economic trends of the past 20 years
have profoundly impacted the development of the Baltimore MSA.
The service sector has filled the void left by the demise of the
heavy industries albeit with lower paying jobs. The
manufacturing industries, after a long decline, have begun to
stabilize. With resources being directed into urban industrial
parks and enterprise zones, basic industry will continue to play
an integral role in the region's economy. However, the future is
in the high-tech/bio-tech industries. Funds have been allocated
by the government to join private institutions, such as Johns
Hopkins and private sector technical firms, in order to make
Baltimore a national center for research and development.
A healthy economy is the key ingredient to a healthy real
estate market. Over the past several years, growth in the
Baltimore-Washington real estate market has been considered
strong, with rapid escalation in the values of both land and
buildings. On as national and international level, the Baltimore-
Washington market is recognized as one of the stronger real
estate markets. However, within the past 30 months, the real
estate market has slowed considerably. Most real estate analysts
anticipate a two to three year period of slow to moderate growth
before the current market is back in balance.
From a real estate perspective, increasing consumer
confidence can have only positive effects on housing and those
who manufacture and distribute consumer goods. Thus, residential
real estate, manufacturing plants, distribution facilities and
retail complexes serve to benefit. Low interest rates are a
bonus to the real estate market through lending criteria remain
selective. Chronic lagging job growth, particularly among office
workers, continues to adversely affect the office rental market.
Baltimore's housing activity declined by more than the
statewide average since the mid-1980s as manufacturing job losses
were concentrated in the metro area. This devastated employment
in the construction sector. There was a modest recovery in
housing starts from the recession trough of 11.7 million units in
1991, but they only reached 13.8 million in 1993. Job losses
since April 1995 have depressed housing activity as housing
permits are down by 14.3 percent year-to-date. Non-residential
construction is providing some support to the overall
construction sector due to the work on several large projects.
Non-residential permit values are up 85 percent through August
from 1994 levels.
Thus, over a long term, the Baltimore region benefits from a
diversified economic base which should protect the region from
the effects of wide swings in the economy. The region's
strategic location along the eastern seaboard and its reputation
as a major business center should further enhance the area's long
term outlook. Thus, while the current short term economic
outlook may cause real estate values to remain stable, a more
optimistic long term outlook should have positive influences upon
real estate values.
Summary
- Baltimore is the nineteenth largest metropolitan area in the country.
Just by sheer size, the region represents a broad marketplace for all
commodities including real estate.
- The region's economy is diversified with the service industries now the
largest single sector; manufacturing has stabilized after three decades
of decline. The outlook for continued expansion and investment in the
biotechnology field is excellent led by the renowned John Hopkins
University.
- Regional economic trends point toward an era of modest growth which,
over time, should eventually alleviate the current imbalance between
supply and demand for some types of real property. However, only those
with a desirable location and functional design will outperform
inflation in the general economy.
LOCATION ANALYSIS
Cranberry Mall is located in Westminster, Maryland in the
northern portion of Carroll County. Westminster is the largest
of six regional planning districts in the county, with a
population of approximately 28,517. The mall is situated at the
crossroads of two highways, Route 140 and Route 27. Route 140
runs between Pennsylvania, Westminster, and Baltimore, while
Route 27 extends from Manchester to Mount Airy. The mall is also
accessible from Route 97 which extends from Montgomery County,
Maryland to Gettysburg, Pennsylvania.
Carroll County resides in the Piedmont region of north
central Maryland between Baltimore and Frederick counties. It is
Maryland's third fastest growing county, primarily due to the
migration of the city residents into the suburbs. Baltimore is
approximately 25+/- miles from the Westminster area (35+/- minute
drive) and 20+/- miles from Frederick, Pennsylvania (30+/- minute
drive).
Cranberry Mall anchors Carroll County's primary commercial
hub along Route 140. This strip is developed with neighborhood
strip centers, fast food restaurants, service establishments, and
other commercial uses.
There has been little change to the area since our last
appraisal although some new development has occurred or is on-
going. Most notably, Dayton Hudson is building a Target store on
a site situated at Routes 97S and 140. A July 1996 opening is
scheduled. There has also been an increase in new home
construction as evidenced by the increase in building permits
from 109 to 146 within the City of Westminster. We are advised
that Carroll County planning officials are considering a growth
moratorium in view of the burden being imposed on the existing
infrastructure, particularly the utility systems.
During 1995, there were two relatively significant employment
announcements in the Westminster area. Unigen, a pharmaceutical
manufacturer will build a new plant in 1996/97. Mirada, an auto
parts manufacturer will expand their plant during the year.
Proposed commercial development includes an expansion of
Cranberry Square (possible pet supply store) and a Red Lobster
restaurant at Gorsuch Road and Route 140.
RETAIL MARKET ANALYSIS
Trade Area Analysis
Overview
A retail center's trade area contains people who are likely
to patronize that particular center. These customers are drawn
by a given class of goods and services from a particular tenant
mix. A center's fundamental drawing power comes from the
strength of the anchor tenants as well as the regional and local
tenants which complement and support the anchors. A successful
combination of these elements creates a destination for customers
seeking a variety of goods and services while enjoying the
comfort and convenience of an integrated shopping environment.
In order to define and analyze Cranberry Mall's market
potential, it is important to first establish the boundaries of
the primary and secondary trade areas from which the subject will
draw its customers. In some cases, defining the trade areas 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.
This is true to some extent with the subject which competes with
the North Hanover Mall, the Mall at Owings Mills, and to a lesser
degree, the Francis Scott Key Mall in Frederick.
Once the trade area is defined, the area's demographics and
economic profile can be analyzed. This will provide key insight
into the area's dynamics as it relates to Cranberry Mall. The
sources of economic and demographic data for the trade area
analysis are as follows: Equifax Marketing Decision Systems
(ENDS), Sales and Marketing Management's Survey of Buying Power
1985-1995, The Urban Land Institute's Dollars and Cents of
Shopping Centers (1995), CACI, The Sourcebook of County
Demographics, The Census of Retail Trade, and demographic reports
prepared by Mas Marketing, Inc.
Scope of Trade Area
Traditionally, a retail center's sales are primarily
generated from within its primary trade area, which is typically
within reasonably close geographic proximity to the center
itself. Generally, between 55 and 65 percent of a center's sales
are generated within its primary trade area. The secondary trade
area generally refers to more outlying areas which provide less
frequent customers to the center. Residents within the secondary
trade area are more likely to shop closer to home due to time and
travel constraints. Typically, an additional 20 to 25 percent of
a center's sales will be generated from within the secondary
area. The tertiary trade area refers to more distant areas in
which occasional customers to the mall reside. These residents
may be drawn to the center by a particular service or store which
is not found locally. Industry experience shows that between 10
and 15 percent of a center's sales are derived from customers
residing outside of the trade area.
Trade Area Definition
According to the most recent consumer survey, Cranberry Mall
draws from an expansive trade area that comprises a 15 zip-code
region roughly bounded on the south by I-70; on the north by
Littlestown, Pennsylvania; on the east by I-83; and on the west
by Highway 15. This area includes an irregular configuration
which generally imposes limits of 10 to 15 miles from the mall.
The survey indicates that approximately 75 percent of the mall's
customer base reside within the closer communities of
Westminster, Manchester, Skyesville, Finksburg, Hampstead, New
Windsor and Taneytown. The secondary trade area includes
quadrants to the northwest (Littlestown, PA), small pockets to
the northeast, and a more expansive area to the west/southwest.
These communities use the mall less frequently as they are more
impacted by travel considerations due to the absence of good
highway facilities or alternative shopping centers.
These reports are very useful and help establish a basis for
our independent analysis of the mall's trade area. Based on area
traffic patterns, accessibility, geographical constraints,
surrounding residential development and competing commercial
establishments, we believe that the Cranberry Mall's total trade
area extends for a radius of approximately 15 miles from the
mall, similar to the customer survey provided.
Although the report is somewhat dated, there have been no
significant competitive, demographic or locational changes which
would cause us to change this zip code distribution in this 1996
update.
Accordingly, we have elected to analyze the subject's trade
area based upon the zip codes provided. The following is a
listing of zip codes in the subject's primary trade area.
Cranberry Mall
Primary Trade Area
21048 Finksburg 21074 Hempstead
21102 Manchester 21157 Westminster
21158 Westminster 21764 Linwood
21176 New Windsor 21784 Elderburg/Skysville
21787 Taneytown
Zip codes comprising the subject's secondary trade area are
as follows:
Cranberry Mall
Secondary Trade Area
27340 Littlestown, PA 21088 Lineboro
21107 Millers 21155 Upperco
21771 Mount Airy 21797 Woodbine
Demographic statistics produced by ENDS, based on these zip
codes are provided on the facing page. Comparisons are provided
with the Baltimore MSA and State of Maryland. We will refer to
this area as the subject's total trade area.
TABLE ILLUSTRATING DEMOGRAPHIC STATISTICS IN CRANBERRY MALL'S
TRADE AREA, BALTIMORE MSA, STATE OF MARYLAND AND UNITED STATES
Population
Once the market area has been established, the focus of our
analysis centers on the trade area's population. ENDS provides
historic, current and forecasted population estimates for the
total trade area. Patterns of development density and migration
are reflected in the current levels of population estimates.
Between 1980 and 1995, ENDS reports that the population
within the total trade area increased by 29.7 percent to 317,040.
This is equivalent to an average compound annual increase of 1.75
percent which, while lagging the Carroll County composite growth
rate, is nonetheless well in excess of the growth seen by both
the region and the state. Within the primary area, closer-in
communities are growing at a slightly faster rate than the total
trade area. This is significant, as residents are more likely to
shop close to home. Currently (1995) this component of the total
trade area contains 124,212 residents or 39 percent of the total.
Through 2000, population within the total trade area is forecast
to increase by an additional 5.7 percent to 335,178.
Provided on the following page is a graphic representation of
the projected population growth for the trade area through 2000.
The fastest growing communities (8 to 9 percent) are shown to be
immediately proximate to the mall site.
Households
A household consists of all the people occupying a single
housing unit. While individual members of a household purchase
goods and services, these purchases actually reflect household
needs and decisions. Thus, the household is a critical unit to
be considered when reviewing market data and forming conclusions
about the trade area as it impacts the retail center.
National trends indicate that the number of households are
increasing at a faster rate than the growth of the population.
Several noticeable changes in the way households are being formed
have caused acceleration in this growth, specifically:
- The population is generally living longer on average. This results
in an increase of single and two person households.
- The divorce rate has increased dramatically over the past two
decades, again resulting in an increase in single person households.
- Many individuals have postponed marriage, thus also resulting in more
single person households usually occupied by young professionals.
Between 1980 and 1995, the total trade area added 35,245
households, increasing by 43.3 percent to 116,612 units. This
rate continues to be in excess of the growth rate for the metro
area. Moreover, household formation within the primary area has
expanded at a faster rate (61.7 percent) to 44,264 units which
comprises 38 percent of the trade area total.
Through 2000, a continuation of this trend is forecast
through both components of the trade area. Accordingly, the
household size in the total trade area is forecast to decrease
from its present 28 persons (1995) to 2.76 persons per household
in 2000. Such a relationship generally fits the observation that
smaller households with fewer children and higher incidences of
single occupancy, especially among young professionals, generally
correlates with greater disposable income.
Graphic representation of the projected population growth for
the primary trade area through 2000
Trade Area Income
A significant statistic for retailers is the income potential
of the surrounding trade area. Within the total trade area, ENDS
reports that average household income was $55,642 in 1995.
Through 2000 it is forecasted to increase by 5.4 percent per
annum to $72,330.
The Baltimore MSA has some of the highest average household
income areas in the state of Maryland. A comparison of the trade
area with the Baltimore MSA and State of Maryland is shown below.
Average Household Income - 1995
Area Income
Primary Trade Area $55,611
Total Trade Area $55,642
Baltimore MSA $52,158
State of Maryland $56,574
Provided on the following page is a graphic representation of
the areas current income levels. Note the concentration of
relative wealth adjacent to the subject south and southeast of
the City of Westminster.
Retail Sales
Another important statistic for retailers is the amount of
retail sales expended by the population. The table following
summarizes historic retail sales for the State of Maryland, the
Baltimore MSA, and Carroll County since 1985.
Retail Sales
(000)
Baltimore Carroll State of
Year MSA County Maryland
1985 $13,681,848 $491,554 $28,863,392
1990 $17,489,333 $699,121 $36,836,986
1991 $17,484,100 $705,040 $36,385,417
1992 $18,446,721 $767,460 $38,204,984
1993 $19,610,884 $830,622 $40,363,984
1994 $20,720,649 $1,227,308 $44,183,971
Compound
Annual +4.72% +10.70% +4.84%
Growth Rate
1985-1994
Source:
Sales and Marketing Management Survey of Buying Power
Empirical data shows that retail sales within Carroll County
have grown at a compound annual rate of 10.7 percent since 1985.
This rate of increase has been well in excess of that shown by
the state and MSA as a whole. Much of this annual change was
driven by the sizable increase in retail sales in 1994.
Graphic representation of the area's current income levels.
Mall Shop Sales
While retail sales trends within the MSA and region lend
insight into the underlying economic aspects of the market, it is
the subject's sales history that is most germane to our analysis.
Sales reported for mall shop tenants have been segregated on the
following table.
Cranberry Mall
Mall Shop Sales
Total Mall % Mature Mall Unit Rate %
Shop Sales Change Shop Sales Per Sq. Ft.* Change
1989 $28,151,000 -- -- -- --
1990 $29,175,000 +3.64% -- -- --
1991 $29,942,000 +2.63% $28,391,000 $218.02 --
1992 $31,961,000 +6.74% $28,476,000 $221.94 +1.80%
1993 $33,056,000 +3.43% $29,076,000 $224.50 +1.20%
1994 $33,870,000 +2.46% $31,774,000 $229.70 +2.32%
1995 $33,171,000 (-2.10%) $31,220,000 $225.70 (-1.7%)
Compound
Annual +2.7% +0.87%
Growth
*Based upon applicable reporting GLA for that particular year.
As can be seen from the above, aggregate mall shop sales have
increased at an average compound annual rate of 2.7 percent since
1989. The total sales of $33.17 million were equal to $196.70
per square foot in 1995, the first decrease since the mall
opened. It should be pointed out that these amounts are property
totals and include sales from tenants who were terminated during
the year. Furthermore, it should be emphasized that the sales
reflect the aggregate change in sales and not an indication of
comparable store sales.
Comparable store sales (also known as same store or
comparable sales) reflect the annual performance of stores in
existence and reporting sales for the prior one year period. In
management's year end sales report, they detail comparable store
sales under the category "Mature Sales". The report shows mature
stores decreased by 1.7 percent to $225.70 per square foot.
Since 1991 when data for comparable sales was available, unit
sales have grown by only .87 percent per annum which has lagged
inflation. A complete sales report is contained in the Addenda.
Department Store Sales
Department store sales at the subject property are shown on
the following chart. As can be seen, each store saw an increase
in sales in 1995 led by Sears with a 7.5 percent increase.
Aggregate sales of $51.5 million were equal to $168.00 per square
foot.
Cranberry Mall
Department Store Sales ($000)
Montgomery
Year Caldor Sears Leggett Ward Total Unit Rate*
1989 $10,217 $ 9,596 $8,088 -- $27,901 $129
1990 $10,683 $10,017 $8,700 -- $29,400 $136
1991 $11,198 $ 9,948 $9,265 $15,190 $45,601 $149
1992 $11,049 $10,654 $8,236 $14,258 $44,197 $145
1993 $11,752 $11,612 $8,697 $14,905 $46,966 $154
1994 $11,219 $13,275 $8,737 $15,612 $48,843 $160
1995 $11,882 $14,272 $9,183 $16,149 $51,486 $168
Compound
Annual +2.5% +6.8% +2.2% +1.5% +4.5%
Growth
* Based on applicable GLA reporting.
The highest grossing store at Cranberry Mall was Montgomery
Ward in 1995 with sales of $16.1 million, equivalent to $180.90
per square foot. Sears was the most productive with sales of
$203.70 per square foot. As described, they were up 7.5 percent
over 1994. Caldor saw nearly a 6.0 percent increase to $11.9
million or $146.20 per square foot. Leggett had a 5.1 percent
increase to $9.2 million or nearly $141 per square foot.
On balance, the performance of the majors in 1995 can be
considered excellent in light of the turmoil which has taken
control of many of the nation's retailers.
Competition
There have been no material changes to the competitive
landscape with the exception of a new Target store under
construction on a site near the mall. It has an anticipated
grand opening on July 4, 1996. We would expect that this store
would compete most directly with Caldor.
Comments
Within the shopping center industry, a trend toward
specialization has evolved so as to maximize sales per square
foot by deliberately meeting customer preferences rather than
being all things to all people. This market segmentation is
implemented through the merchandising of the anchor stores and
the tenant mix of the mall stores. The subject has an attractive
anchor alignment for the trade area which it serves. All of
these department stores posted sales increases in 1995.
During the year there was a relatively good amount of tenant
activity. Despite loosing some tenants to the global problems
effecting many of the national and regional chains, several new
deals were completed resulting in some net absorption. There are
still some hard areas to lease and finding the right tenant(s) is
a difficult task in today's leasing environment.
Conclusion
We have analyzed the retail trade history and profile of the
Baltimore MSA and Carroll County in order to make reasonable
assumptions as to the expected performance of the subject's trade
area.
A metropolitan and locational overview was presented which
highlighted important points about the study area and demographic
and economic data specific to the trade area was presented. The
trade area profile discussed encompassed a zip code based
analysis. Marketing information relating to these sectors was
presented and analyzed in order to determine patterns of change
and growth as it impacts the subject. Finally, we included a
brief discussion of some of the competitive retail centers in the
market area. The data is useful in giving quantitative
dimensions of the total trade area, while our comments serve to
provide qualitative insight into this trade area. The following
summarizes our key conclusions:
- The subject enjoys a visible and accessible location within one of
the nation's largest MSA economies.
- The subject's primary and total trade area continues to grow at rates
above the regional mean. Current demographic statistics show a total
trade area of approximately 317,000 persons residing in nearly
116,000 households.
- Sales for mature stores slipped 1.7 percent last year mirroring many
of the global troubles that impacted retailers, particularly the
apparel chains. However, the department stores were in direct
contrast of this trend with all four anchors posting healthy
increases.
- Management needs to continue to aggressively pursue those tenant
types which would compliment the overall merchandising flavor of the
center. Vacancy is still relatively high. Since the mall has never
been above 85 percent occupancy, we feel that it has a structural
vacancy problem that results from too much GLA to support based on
the size of the market area.
- The mall has some near term risk with nearly 30 percent of the
existing leases expiring before 1997 and Target coming on line this
summer.
THE SUBJECT PROPERTY
Property Description
The Cranberry mall contains a gross leasable area of 524,556
square feet of GLA. The subject site is situated at the
southeast quadrant of Routes 27 and 140 in Westminster, Maryland.
The total area of the site is 57.745 acres. Overall, the
property was noted to be in good condition. Outside of tenant
leasings and terminations, the only recent significant change to
the mall was a 6,000 square foot addition to the cinema,
increasing its capacity from six to nine screens during 1994. A
discussion of recent leasing activity can be found in the Income
Approach section of this report.
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.
Over the course of the past year, Cranberry Mall finished
with an 80.5 percent occupancy. As of our previous report, the
subject had an overall vacancy of approximately 20.0 percent,
slightly higher than this analysis.
Real Property Taxes and Assessments
The subject property is assessed for the purpose of taxation
by Carroll County, and by the City of Westminster. The current
assessment for the subject is in the total amount of $19,600,000.
The resulting tax liability is $670,520 based on current mill
rates. A review of the subject's historical tax liability is
shown below:
Real Estate Taxes
Year Amount
1992/93 $704,336
1993/94 $566,183
1994/95 $664,400
1995/96 $670,520
Zoning
The subject site is zoned P-RSC, Planned Regional Shopping
Center by the City of Westminster. We are advised that this
district permits a variety of retail uses including the subject's
current utilization.
FLOORPLAN FOR CRANBERRY MALL
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.
In our last full narrative appraisal report, we evaluated the
site's highest and best use as currently improved and as if
vacant. In both cases, the highest and best use must meet these
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 use. We
believe that such a use will yield to ownership the greatest
return over the longest period of time.
VALUATION PROCESS
Appraisers typically use three approaches in valuing real
property: The Cost Approach, the Income Approach and the Sales
Comparison Approach. The type and age of the property and the
quantity and quality of data effect the applicability in a
specific appraisal situation.
The Cost Approach renders an estimate of value based upon the
price of obtaining a site and constructing improvements, both
with equal desirability and utility as the subject property.
Historically, investors have not emphasized cost analysis in
purchasing investment grade properties such as regional malls
The estimation of obsolescence for functional and economic
conditions as well as depreciation on improvements makes this
approach difficult at best. Furthermore, the Cost Approach fails
to consider the value of department store commitments to regional
shopping centers and the difficulty of site assemblage for such
properties. As such, the Cost Approach will not be employed in
this analysis due to the fact that the marketplace does not
rigidly trade leased shopping centers on a cost/value basis.
The Sales Comparison Approach is based on an estimate of
value derived from the comparison of similar type properties
which have recently been sold. Through an analysis of these
sales, efforts are made to discern the actions of buyers and
sellers active in the marketplace, as well as establish relative
unit values upon which to base comparisons with regard to the
mall. This approach has a direct application to the subject
property. Furthermore, this approach has been used to develop
investment indices and parameters from which to judge the
reasonableness of our principal approach, the Income Approach.
By definition, the subject property is considered an income/
investment property. Properties of this type are historically
bought and sold on the ability to produce economic benefits,
typically in the form of a yield to the purchaser on investment
capital. Therefore, the analysis of income capabilities are
particularly germane to this property since a prudent and
knowledgeable investor would follow this procedure in analyzing
its investment qualities. Therefore, the Income Approach has
been emphasized as our primary methodology for this valuation.
This valuation concludes with a final estimate of the subject's
market value based upon the total analysis as presented herein.
SALES COMPARISON APPROACH
Methodology
The Sales Comparison Approach provides an estimate of market
value by comparing recent sales of similar properties in the
surrounding or competing area to the subject property. Inherent
in this approach is the principle of substitution, which holds
that, when a property is replaceable in the market, its value
tends to be set at the cost of acquiring an equally desirable
substitute property, assuming that no costly delay is encountered
in making the substitution.
By analyzing sales that qualify as arms-length transactions
between willing and knowledgeable buyers and sellers, market
value and price trends can be identified. Comparability in
physical, locational, and economic characteristics is an
important criterion when comparing sales to the subject property.
The basic steps involved in the application of this approach are
as follows:
1. Research recent, relevant property sales and current offerings
throughout the competitive marketplace;
2. Select and analyze properties considered most similar to the
subject, giving consideration to the time of sale, change in
economic conditions which may have occurred since date of sale, and
other physical, functional, or locational factors;
3. Identify sales which include favorable financing and calculate the
cash equivalent price; and
4. Reduce the sale prices to a common unit of comparison, such as price
per square foot of gross leasable area sold;
5. Make appropriate adjustments between the comparable properties and
the property appraised;
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 overwhelming consensus that Class A
property would trade in the 7.0 to 8.0 percent capitalization
rate range. Conversely, there are many second tier and lower
quality malls offered on the market at this time. With limited
demand from a much thinner market, cap rates for this class of
malls are felt to be in the much broader 8.5 to 15.0 percent
range. Reportedly, there are 50+/- malls on the market currently.
Pessimism about the long term viability of many of these lower
quality malls has been fueled by the recent turmoil in the retail
industry. It is felt that the subject fits into this latter
category.
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 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.
TABLE SHOWING 1995 REGIONAL MALL SALES
TABLE SHOWING 1994 REGIONAL MALL SALES
Cushman & Wakefield has extensively tracked regional mall
transaction activity for several years. In this analysis we will
show sales trends since 1991. Summary charts for the older sales
(1991-1993) are provided in the Addenda. The more recent sales
(1994/1995) are provided herein. These sales are inclusive of
good quality Class A or B+/- properties that are dominant in their
market. Also included are weaker properties in second tier
cities that have a narrower investment appeal. As such, the mall
sales presented in this analysis show a wide variety of prices on
a per unit basis, ranging from $59 per square foot up to $556 per
square foot of total GLA purchased. When expressed on the basis
of mall shop GLA acquired, the range is more broadly seen to be
$93 to $647 per square foot. Alternatively, the overall
capitalization rates that can be extracted from each transaction
range from 5.60 percent to rates in excess of 11.0 percent.
One obvious explanation for the wide unit variation is the
inclusion (or exclusion) of anchor store square footage which has
the tendency to distort unit prices for some comparables. Other
sales include only mall shop area where small space tenants have
higher rents and higher retail sales per square foot. A shopping
center sale without anchors, therefore, gains all the benefits of
anchor/small space synergy without the purchase of the anchor
square footage. This drives up unit prices to over $250 per
square foot, with most sales over $300 per square foot of salable
area. A brief discussion of historical trends in mall
transactions follows.
- The fourteen sales included for 1991 show a mean price per square
foot sold of $282. On the basis of mall shop GLA sold, these sales
present a mean of $357. Sales multiples range from .74 to 1.53 with
a mean of 1.17. Capitalization rates range from 5.60 to 7.82 percent
with an overall mean of 6.44 percent. The mean terminal
capitalization rate is approximately 100 basis points higher, or 7.33
percent. Yield rates range between 10.75 and 13.00 percent, with a
mean of 11.52 percent for those sales reporting IRR expectancies.
- In 1992, the eleven transactions display prices ranging from $136 to
$511 per square foot of GLA sold, with a mean of $259 per square
foot. For mall shop area sold, the 1992 sales suggest a mean price
of $320 per square foot. Sales multiples range from .87 to 1.60 with
a mean of 1.07. Capitalization rates range between 6.00 and 7.97
percent with the mean cap rate calculated at 7.31 percent for 1992.
For sales reporting a going-out cap rate, the mean is shown to be
7.75 percent. Yield rates range from 10.75 to around 12.00 percent
with a mean of 11.56 percent.
- For 1993, a total of sixteen transactions have been tracked. These
sales show an overall average sale price of $242 per square foot
based upon total GLA sold and $363 per square foot based solely upon
mall GLA sold. Sales multiples range from .65 to 1.82 and average
1.15. Capitalization rates continued to rise in 1993, showing a range
between 7.00 and 10.10 percent. The overall mean has been calculated
to be 7.92 percent. For sales reporting estimated terminal cap
rates, the mean is also equal to 7.92 percent. Yield rates for 1993
sales range from 10.75 to 12.50 percent with a mean of 11.53 percent
for those sales reporting IRR expectancies. On balance, the year was
notable for the number of dominant Class A malls which transferred.
- Sales data for 1994 shows fourteen confirmed transactions with an
average unit price per square foot of $197 per square foot of total
GLA sold and $288 per square foot of mall shop GLA. Sales multiples
range from .57 to 1.43 and average .96. The mean going-in
capitalization rate is shown to be 8.37 percent. The residual
capitalization rates average 8.13 percent. Yield rates range from
10.70 to 11.50 percent and average 11.17 percent. During 1994, many
of the closed transactions involved second and third tier malls. This
accounted for the significant drop in unit rates and corresponding
increase in cap rates. Probably the most significant sale involved
the Riverchase Galleria, a 1.2 million square foot center in Hoover,
Alabama. LaSalle Partners purchased the mall of behalf of the
Pennsylvania Public School Employment Retirement System for $175.0
million. The reported cap rate was approximately 7.4 percent.
- Cushman & Wakefield has researched 14 mall transactions for 1995. The
chart in the Addenda summarizes the pertinent facts regarding each
sale. With the exception of Sale No. 95-1 (Natick Mall) and 95-2
(Smith Haven Mall), by and large the quality of malls sold are lower
than what has been shown for prior years. For example, the average
transaction price has been slipping. In 1993, the peak year, the
average deal was nearly $133.8 million. Currently, it is shown to be
$90.7 million which is even skewed upward by Sale Nos. 95-1 and 95-2.
The average price per square foot of total GLA is calculated to be
$152 per square foot. The range in values of mall GLA sold are $93
to $607 with an average of $275 per square foot. Characteristics of
these lesser quality malls would be higher initial capitalization
rates. The range for these transactions is 7.47 to 11.1 percent with
a mean of 9.14 percent, the highest average over the past five years.
Most market participants feel that continued turmoil in the retail
industry will force cap rates to move higher.
While these unit prices implicitly contain both the physical
and economic factors affecting the real estate, the statistics do
not explicitly convey many of the details surrounding a specific
property. Thus, this single index to the valuation of the
subject property has limited direct application. The price per
square foot of mall shop GLA acquired yields one common form of
comparison. However, this can be distorted if anchor and/or
other major tenants generate a significant amount of income. The
following chart summarizes the range and mean for this unit of
comparison by year of sale.
Price/SF Price
Transaction Unit Rate /SF Sales
Year Range * Mean 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 Unit NOI Sale Unit NOI
No. Rate Per No. Rate 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 these sales
transferred either on an all cash (100 percent equity) basis or
its equivalent utilizing market-based financing. Where
necessary, we have adjusted the purchase price to its cash
equivalent basis for the purpose of comparison.
As suggested, sales which include anchors typically have
lower square foot unit prices. In our discussions with major
shopping center owners and investors, we learned that
capitalization rates and underwriting criteria have become more
sensitive to the contemporary issues dealing with the department
store anchors. As such, investors are looking more closely than
ever at the strength of the anchors when evaluating an
acquisition.
As the reader shall see, we have attempted to make
comparisons of the transactions to the subject primarily along
economic lines. For the most part, the transactions have
involved dominant or strong Class A centers in top 50 MSA
locations which generally have solid, expanding trade areas and
good income profiles. Some of the other transactions are in
decidedly inferior second tier locations with limited growth
potential and near term vacancy problems. These sales tend to
reflect lower unit rates and higher capitalization rates.
Value "As Is"
Because the subject is theoretically 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 $8.45 per square foot
(CY 1996), based upon 524,556+/- 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 $8.45
per square foot, the subject falls at the low end 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 at the low end of the range
indicated by the comparables would be applicable to the subject.
The subject's anticipated net income can be initially compared to
the composite mean of the annual transactions in order to place
the subject in a frame of reference. This is shown on the
following chart.
Sales Mean Subject Subject
Year NOI Forecast Ratio
1991 $14.25 $8.45 59.3%
1992 $16.01 $8.45 52.8%
1993 $15.51 $8.45 54.5%
1994 $15.62 $8.45 54.1%
1995 $12.35 $8.45 68.4%
With first year NOI forecasted at approximately 53 to 68
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 X 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
Net Indicated
Sale NOI/SF Income Price
No. Multiplier $/SF
95- 1 $8.45 12.44 $105
95- 2 $8.45 13.41 $113
95- 3 $8.45 10.53 $ 89
95- 4 $8.45 11.13 $ 94
95- 5 $8.45 10.80 $ 91
95- 6 $8.45 9.00 $ 76
95- 7 $8.45 9.38 $ 79
95- 8 $8.45 10.06 $ 85
95- 9 $8.45 10.50 $ 89
95-10 $8.45 12.02 $102
95-11 $8.45 10.49 $ 89
95-12 $8.45 10.05 $ 85
95-13 $8.45 12.87 $109
95-14 $8.45 12.90 $109
Mean $8.45 11.11 $108
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 $76 to $113 per square foot of
owned GLA with a mean of $108 per square foot.
We recognize that the sale price per square foot of gross
leasable area, including land, implicitly contains both the
physical and economic factors of the value of a shopping center.
Such statistics by themselves, however, do not explicitly convey
many of the details surrounding a specific income producing
property like the subject. Nonetheless, the process we have
undertaken here is an attempt to quantify the unit price based
upon the subject's income producing potential.
The subject has a high level of vacancy and some risk in
achieving stabilization. Mall shop sales levels have been
disappointing and its trade area is slowly growing to the size
needed to support a mall with too much GLA. Finally, some near
term risk exists with target coming on-line soon.
Considering the characteristics of the subject relative to
the above, we believe that a unit rate range of $80 to $85 per
square foot is appropriate. Applying this unit rate range to
524,556+/- square feet of owned GLA results in a value of
approximately $42.0 million to $44.6 million for the subject as
below.
524,556 SF 524,556 SF
x $80 x $85
$41,965,000 $44,587,000
Rounded Value Estimate - Market Sales Unit Rate Comparison
$42,000,000 to $44,600,000
Sales Multiple Method
Arguably, it is the mall shop GLA sold and its intrinsic
economic profile that is of principal concern in the investment
decision process. A myriad of factors influence this rate,
perhaps none of which is more important than the sales
performance of the mall shop tenants. Accordingly, the
abstraction of a sales multiple from each transaction lends
additional perspective to this analysis.
The sales multiple measure is often used as a relative
indicator of the reasonableness of the acquisition price. As a
rule of thumb, investors will look at a sales multiple of 1.0 as
a benchmark, and will look to keep it within a range of .75 to
1.25 times mall shop sales performance unless there are
compelling reasons why a particular property should deviate.
The sales multiple is defined as the sales price per square
foot of mall GLA divided by average mall shop sales per square
foot. As this reasonableness test is predicated upon the
economics of the mall shops, technically, any income (and hence
value) attributed to anchors that are acquired with the mall as
tenants should be segregated from the transaction. As an income
(or sales) multiple has an inverse relationship with a
capitalization rate, it is consistent that, if a relatively low
capitalization rate is selected for a property, it follows that a
correspondingly above-average sales (or income) multiple be
applied. In most instances, we are not privy to the anchor's
contributions to net income. As such, the sales multiples
reported may be slightly distorted to the extent that the imputed
value of the anchor's contribution to the purchase price has not
been segregated.
Sales Multiple Summary
Sale Going-In Sales
No. OAR Multiple
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 $226 per square foot for all
reporting tenants. This is flat based on 1995 levels.
In the case of the subject, the overall capitalization rate
being utilized for this analysis is considered to be
substantially higher than the mean exhibited by the comparable
sales. As such, we would be inclined to utilize a multiple below
the mean indicated by the sales. As such, we will utilize a
lower sales multiple to apply to just the mall shop space.
Applying a ratio of say, 65 to 70 percent to the forecasted sales
of $226 per square foot, the following range in value is
indicated.
Unit Sales Volume (Mall Shops) $226 $226
Sales Multiple x .65 x .70
Adjusted Unit Rate $146.90 $158.20
Mall Shop GLA x 193,125 x 193,125
Value Indication $28,370,000 $30,552,000
The analysis shows an adjusted value range of approximately
$28.4 to $30.6 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
$1,492,000 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
$14.2 million.
Arguably, department stores have qualities that add certain
increments of risk over and above regional malls, wherein risk is
mitigated by the diversity of the store types. A recent Cushman
& Wakefield survey of free-standing retail building sales
consisting of net leased discount department stores, membership
warehouse clubs, and home improvement centers, displayed a range
in overall capitalization rates between 8.8 and 10.9 percent with
a mean of approximately 9.6 percent. All of the sales occurred
with credit worthy national tenants in place. The buildings
ranged from 86,479 to 170,000 square feet and were located in
high volume destination retail areas.
Trends indicate that investors have shown a shift in
preference to initial return and, as will be discussed in a
subsequent section, overall capitalization rates have been
showing increases over the past several years. Moreover, when
the acquisition of a shopping mall includes anchor department
stores, investors will typically segregate income attributable to
the anchors and analyze these revenues with higher capitalization
rates than those revenues produced by the mall shops. Therefore,
based upon the preceding discussion, it is our opinion that
overall capitalization rates for department stores are reasonably
reflected by a range of 9.5 to 11.0 percent. We have chosen the
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 $14.2 million, the resultant range is shown to be
approximately $42.6 to $44.8 million. Giving consideration to
all of the above, the following value range is warranted for the
subject property based upon the sales multiple analysis.
Estimated Value - Sales Multiple Method
Rounded to $42,600,000 to $44,800,000
Value Conclusion
We have considered all of the above relative to the physical
and economic characteristics of the subject. It is difficult to
relate the subject to comparables that are in such widely
divergent markets with different cash flow characteristics. The
subject has relatively low sales levels, a high vacancy factor
and a low representation of national tenants. Its second tier
location does not present strong opportunities for growth. We
also recognize that an investor may view the subject's position
as being vulnerable to competition. Nonetheless, it is the
dominant mall in its market area and is benefited by having a
good anchor alignment.
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: 524,556+/-
Price Per SF of Salable Area: $80 to $85
Indicated Value Range: $42,000,000 to $44,600,000
Sales Multiple Analysis
Indicated Value Range $42,600,000 to $44,800,000
The parameters above show a value range of approximately
$42.0 to $44.8 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 $42.5 to $44.5 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 the 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 not forecasted to
achieve stabilization for several years. Thus, the direct
capitalization method has been omitted from the valuation
process.
Discounted Cash Flow Analysis
The Discounted Cash Flow (DCF) produces an estimate of value
through an economic analysis of the subject property in which the
net income generated by the asset is converted 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
remerchandising, but short enough to reasonably estimate the
expected income and expenses of the real estate.
TABLE SHOWING PROJECTED ANNUAL CASH FLOW FOR CRANBERRY MALL
FROM 1996 TO 2006
The revenues and expenses which an informed investor may
expect to incur from the subject property will vary, without a
doubt, over the holding period. Major investors active in the
market for this type of real estate establish certain parameters
in the computation of these cash flows and criteria for decision
making which this valuation analysis must include if it is to be
truly market-oriented. These current computational parameters
are dependent upon market conditions in the area of the subject
property as well as the market parameters for this type of real
estate which we view as being national in scale.
By forecasting the anticipated income stream and discounting
future value at reversion into 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; a reimbursement of certain
expenses incurred in the ownership and operation of the real
estate; and other miscellaneous revenues.
The minimum base rent represents a legal contract
establishing a return to investors in the real estate, while the
passing of certain expenses on to 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
$7,547,387 in potential gross revenues, equivalent to $14.39 per
square foot of total appraised (owned) GLA of 524,556 square
feet, including mall shops and all owned department stores.
These forecasted revenues may be allocated to the following
components:
Cranberry Mall
Revenue Summary
Initial Year of Investment - 1996
Revenue Component Amount Unit Rate* Income Ratio
Minimum Rent** $4,564,530 $ 8.70 60.5%
Overage Rent*** $ 224,000 $ 0.43 3.0%
Expense Recoveries $2,483,857 $ 4.74 32.9%
Recoveries
Miscellaneous Income $ 275,000 $ 0.52 3.6%
Total $7,547,387 $ 14.39 100.0%
* Reflects total owned GLA of 524,556 SF
** Net of free rent
*** Net of recaptures
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 the four
department stores, revenues from the cinema and outparcels 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 to problematic levels that have resulted
in several leases being renegotiated.
Interior Mall Shops
Rent from all interior mall tenants comprise the majority of
minimum rent. Aggregate rent from these tenants is forecasted to
be $2,906,664, or $14.82 per square foot. Minimum rent may be
allocated to the following components:
Cranberry Mall
Minimum Rent Allocation
Interior Mall Shops
1996 Applicable Unit Rate
Revenue GLA * (SF)
Mall Shops $2,602,899 193,125 SF $13.48
Kiosks $ 63,000 917 SF $68.70
Food Court $ 240,765 10,838 SF $22.21
Total $2,906,664 204,880 SF $14.82
* Represents leasable area as opposed to actual leased or occupied
area exclusive of non-owned space.
** Net of free rent
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.
Typically, we would view the rent attainment levels in the
existing mall as being representative of the total property.
However, the center is characterized by many older and some
troubled leases that have been renegotiated to more tolerant
levels based upon the tenants sales performance. The following
section details the more important changes which have influenced
the mall over the past twelve months.
1995 Tenant Activity
1995 appeared to be a relatively active year at the mall. In
addition to the problems facing many of the national chains which
have been downsizing or liquidating all of their assets there
were a number of local/regional tenants that also experienced
difficulty. Provided below is a summary of leasing activity over
the past year.
- Lane Bryant (Suite 1.45) signed a ten and one-half year lease for
4,749 square feet at a $14.00 fixed rent. The tenant received a
rather substantial allowance of $379,920, or $80.00 per square foot.
- Free Style Hair (Suite 1.53) took the space formerly occupied by New
York Casuals for a five year term. The rent starts at $18.57 per
square foot and steps to $21.10 per square foot in the fourth year.
- S.J. Watch Repair (Suite 10.3) had rent reduced from $20,000 to
$18,000 per year for 1995 only.
- JC Penney (Suite 1.09) exercised their option to renew their lease
for five years until September 30, 2000 in their catalog store. The
rent will increase from $12.00 to $15.80 per square foot.
- Carlton Cards (Suite 127) extended the lease for space. The new
lease commenced on January 1, 1996 for ten years. The rent is set at
$24.00 per square foot for five years and increases to $26.00 per
square foot for the balance of the term. Tenant agreed to remodel
the store by July 1, 1996.
- Shenk & Tittle (Suite 2.01/02) took 3,618 square feet for ten years
in September 1995. The rent is for $10.25 per square foot for five
years and $12.25 per square foot for years six through ten. An
allowance of $54,270 was given with 50 percent in cash and 50 percent
as a rent credit.
- Haiders Ice Cream (Suite 2.59) took this formerly vacant food court
suite for ten years. The lease was expected to commence in February
1996. Rent is initially set at $20.75 per square foot. It steps to
$23.72 per square foot after three years and $26.68 per square foot
after the fifth year. The tenant received eight months free rent and
mall charges are based on 852 square feet of GLA.
- Nail Studio (Suite 1.07) took this 496 square foot unit for three
years at an annual rent of $18,256, or $36.81 per square foot.
- Savings in Sight (Suite 1.43) signed a ten year lease commencing in
July 1995 at an initial rent of $35,680 or $20.00 per square foot.
The rent will step to $26.00 per square foot over the term. The
tenant received a $10,000 construction allowance.
- Paul Harris (Suite 2.09) opened this 3,254 square foot unit in May
1995 for ten and one-half years. Rent was initially set at 10 percent
of sales. Subsequently, it increases to $13.00 per square foot in
January 1997, $15.00 per square foot in January 1999 and $17.00 per
square foot in January 2002. Tenant took space "as is".
- Casa Rico (Suite 1.91) a restaurant, has signed a ten year lease for
5,094 square feet. The lease is structured as a gross lease for
$88,000 or $17.28 per square foot plus 5 percent of sales over
$1,500,000.
- Pro Image (Suite 1.39) has one year and two months remaining on
their lease. The tenant is in default and has poor sales and is not
paying any rent or mall charges.
- Tully's (Suite 1.77) has been having financing difficulty and is
seeking a rent reduction. The budget is reflecting a reduction in
rent from $90,000 to approximately $46,500. We have reflected same
in our analysis.
- Fashion Bug (Suite 1.29-35) is having some financial problems and is
seeking relief. The budget is forecasting a rent reduction from
$110,528 to approximately $60,500 which we have reflected in our
analysis.
- Roy Rogers (Suite 2.41) is having financial problems and the budget
is reflecting a reduction in rent from $46,000 to $23,000. We have
followed this change in our cash flow.
- Tees, Etc. (Suite 2.53) agreed to a slight rent reduction from $36.30
to $33.30 per square foot until March 31, 1996 and $37.30 per square
foot through the remainder of the term. Their breakpoint was also
changed.
Tenants who vacated during the year include:
Suite Tenant Size (SF)
1.51 B. Dazzled 945
1.69 Video Store 2,885
2.17 Pine Factory 735
K-1 Earring Tree 187
K-3 Gold by the Inch 150
2.33 Foot Action * 4,467
2.37 Kinney Shoe * 3,174
* Left but are paying rent
Recent Leasing by Size
We have looked at the most recent leasing in the mall,
analyzing the beginning rent, ending rent and lease term. As can
be seen, sixteen transactions have been included, totaling 47,099
square feet of space. These deals represent both new tenants and
relocation tenants to the mall. The average rent achieved is
equal to $15.91 per square foot. To better understand leasing
activity at the subject, this type of analysis becomes more
meaningful when broken down by size category.
To further develop our market rent assumptions in the mall,
we have arrayed the subject's most recent leases by size on the
Facing Page chart. These leases include new deals and tenant
renewals within the mall. Since the bulk of recent leasing has
been by smaller to mid-sized tenants, we have broadened the scope
to include several larger lease transactions which are now one to
two years old.
TABLE ILLUSTRATING RECENT LEASING ACTIVITY - MALL SHOP
TENANTS BY SIZE - CRANBERRY MALL (CARROLL COUNTY, MARYLAND)
The lease terms average approximately nine years. Over the
lease term, the average rent is shown to increase by 11.5
percent, however, this may be slightly skewed by the Paul Harris
and Savings in Sight leases which grow by 30 percent.
Our experience has generally shown that there is typically an
inverse relationship between size and rent. That is to say that
the larger suites will typically command a lower rent per square
foot. Category No. 1 (less than 800 SF) shows an average of
$38.70 per square foot.
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.
TABLE COMPARING OCCUPANCY COSTS FOR
VARIOUS MSAs AROUND THE UNITED STATES
TABLE CALCULATING AVERAGE MALL SHOP RENT
AT CRANBERRY MALL
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 (1995) 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 to 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 are reported to be
$226 per square foot. In light of the mall's performance, we are
forecasting sales to remain flat in 1996.
After considering all of the above, we have developed a
weighted average rental rate of approximately $17.00 per square
foot based upon a relative weighting of a tenant space by size.
We have tested this average rent against total occupancy cost.
Since total occupancy costs are projected to be at the high end
for a mall of the subject's calibre, we feel that base rent
should not exceed an 8.0 percent ratio (to sales) on average.
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.
Occupancy Cost - Test of Reasonableness
Our weighted average rent of approximately $17.00 can next be
tested against total occupancy costs in the mall based upon the
standard recoveries for new mall tenants. Our total occupancy
cost analyses can be found on the following chart.
Cranberry Mall
Total Occupancy Cost Analysis - 1996
Tenant Cost Estimated Expenses/SF
Economic Base Rent $ 17.00
(Weighted Average)
Occupancy Costs (A)
Common Area Maintenance (1) $ 10.06
Real Estate Taxes (2) $ 3.04
Other Expenses (3) $ 2.50
Total Tenant Costs $ 32.60
Projected Average Sales (1995) $ 226.00
Rent to Sales Ratio 7.5%
Cost of Occupancy Ratio 14.4%
(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 annual occupied area. Generally, the
standard lease clause provides for a 15 percent administrative
factor less certain exclusions including anchor and major tenant
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 annual occupied area which is
the recovery basis for taxes. It is exclusive of majors contributions
(department stores and tenants greater than 10,000 square feet).
(3) Other expenses include tenant contributions for mall and premises HVAC
and other miscellaneous items.
Total costs, on average, are shown to be 14.4 percent of
projected average 1996 retail sales which we feel is high but
moderately manageable. This is due primarily to the fact that
fixed expenses at the subject are projected to be over $13.00 per
square foot.
However, since these costs are occupancy sensitive to the
extent their recovery is tied to the average occupied area of the
mall, they will moderate as the mall leases up. Furthermore, for
tenants who use GLA as the basis for their denominator recovery,
will have a much lower expense obligation.
Food Court
The 10,838 square foot food court provides for a total of
eleven suites which is slightly large for a food court.
Currently, there are two vacancies (1.13 and 2.57) although some
of the existing tenants are having trouble and will likely not
renew or may leave if they don't obtain rent relief. The most
recent lease was signed with Haiders Ice Cream where the tenant
took 1,012 square feet for approximately ten years at an initial
rent of $21,000 ($20.75 per square foot) which steps to $26.68.
Other existing rents range from a low of $17.68 per square foot
(Taco Bell) to a high of $44.44 per square foot (Hot Sam). The
more productive stores in terms of unit sales volume include
Pretzels Plus ($465 per square foot), Subway ($432 per square
foot) and Taco Bell ($274 per square foot).
After giving consideration to the above, we have ascribed a
market rent of $30.00 per square foot to all food court suites
less than 1,100 square feet. For those suites which are larger,
we have used a rate of $22.50 per square foot.
Kiosks
There are six permanent kiosks provided for at Cranberry
Mall. Three are leased according to the following terms:
Tenant Size (SF) Annual Unit Rent
Rent
Sunsations 150 $20,000 $133.33
Piercing Pagoda 120 $20,000 * $166.67
Things Remembered 160 $18,000 $112.50
* Steps to $22,000
We have leased the remaining three kiosks at $20,000 per
annum, assuming five year terms and flat leases with no rental
increases. Permanent kiosks also pay mall charges.
Concessions
Free rent is an inducement offered by developers to entice a
tenant to locate in their project over a competitor's. This
marketing tool has become popular in the leasing of office space,
particularly in view of the over-building which has occurred in
many markets. As a rule, most major retail developers have been
successful in negotiating leases without including free rent.
Our experience with regional malls shows that free rent is
generally limited to new projects in marginal locations without
strong anchor tenants that are having trouble leasing, as well as
older centers that are losing tenants to new malls in their trade
area. Management reports that free rent has been a relative non-
issue with new retail tenants. A review of the most recent
leasing confirms this observation. It has generally been limited
to one or two months to prepare a suite for occupancy when it has
been given.
Accordingly, we do not believe that it will be necessary to
offer free rent to retail tenants at the subject. It is noted
that while we have not ascribed any free rent to the retail
tenants, we have, however, made rather liberal allowances for
tenant workletters which acts as a form of inducement to convince
a tenant to locate at the subject. These allowances are liberal
to the extent that ownership has been relatively successful in
leasing space "as is" to tenants. As will be explained in a
subsequent section of this appraisal, we have made allowances of
$8.00 per square foot to new (currently vacant) and for future
turnover space. We have also ascribed a rate of $1.00 per square
foot to rollover space. Raw space is given a $25.00 per square
foot allowance. 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 37,662 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
19.5 percent of mall GLA and 7.2 percent overall. It is noted
that vacancy has decreased slightly over the past year. As of
January 1, 1995, there were only 37,710 square feet vacant.
The chart on the Facing Page details our projected absorption
schedule.
TABLE ILLUSTRATING LEASE-UP/ABSORPTION PROJECTIONS
FOR CRANBERRY MALL
The absorption of the in-line space over a three year period
is equal to 3,139 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. We have assumed a seven year
average lease term with a 10 percent rent step at the start of
year five.
Based on this lease-up assumption, the following chart tracks
occupancy through 1999.
Annual Average
Occupancy (Mall GLA)
1996 72.7%
1997 73.2%
1998 83.8%
1999 86.5%
Cinema and Outparcels
The cinema and outparcels contribute approximately $317,700
in base rent. The cinema currently pays $9.47 per square foot
which steps up to $10.15 per square foot in September 1997. Long
John Silver and Kentucky Fried Chicken are currently paying
$34,000 and $40,250, respectively. Both leases have stipulated
rent increases.
Anchor Tenants
The final category of minimum rent is related to the anchor
tenants which pay rent at the subject property.
Anchor tenant revenues are forecasted to amount to $1,340,169
in calendar year 1996. This amount is equal to $4.38 per square
foot of anchor store GLA and represents 29.4 percent of total
minimum rent. The following schedule summarizes anchor tenant
rent obligations.
Cranberry Mall
Scheduled Anchor Tenant Revenues
Tenant Demised Area Expiration With Options Annual Rent Unit Rate
Caldor 81,224 SF January 2028 $568,568 $7.00
Sears 70,060 SF October 2012 $195,000 $2.78
Leggett 65,282 SF March 2027 $228,487 $3.50
Montgomery 89,260 SF October 2030 $348,114 $3.90
Ward
Total 305,826 SF --- $1,340,169 $4.38
While anchor tenants contribute a relatively low amount of
rent on a unit rate basis, it is important to recognize that
their aggregate contribution is quite substantial. With nearly
30 percent of minimum base revenues in the initial year of
investment, anchor tenant revenues provide stability to the cash
flow by virtue of their creditworthiness.
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 Baltimore metropolitan area in general has been negatively
impacted by the recession. Sales at many retail establishments
have been down for the past few years and competition has
increased from discounters and category killers. Finally, the
subject has been 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 *
1996-1997 Flat
1998 +2.0%
Thereafter +3.0%
* Indicated growth rate over the previous year's rent
Releasing Assumption
The typical lease term for new in-line retail leases in
centers such as the subject generally ranges from five to twelve
years. Market practice dictates that it is not uncommon to get
rent bumps throughout the lease terms either in the form of fixed
dollar amounts or a percentage increase based upon changes in
some index, usually the Consumer Price Index (CPI). Often the
CPI clause will carry a minimum annual increase and be capped at
a higher maximum amount.
For new leases in the regional malls, ten year terms are most
typical. Essentially, the developer will deliver a "vanilla"
suite with mechanical services roughed in and minimal interior
finish. This allows the retailer to finish the suite in
accordance with their individual specifications. Because of the
up-front costs incurred by the tenants, they require a ten year
lease term to adequately amortize these costs. In certain
instances, the developer will offer some contribution to the cost
of finishing out a space over and above a standard allowance.
Upon lease expiration, it is our best estimate that there is
a 60 percent probability that an existing tenant will renew their
lease while the remaining 40 percent will vacate their space at
this time. While the 40 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 several months.
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.
Cranberry Mall
Renewal Assumptions
Lease Free Tenant Lease
Tenant Type Term Rent Steps Rent Alterations Commissions
Mall Shops and 7 yrs. 10% in 4th year No Yes Yes
Food Court
Kiosks 5 yrs. Flat No No 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
$4,564,530 in minimum rental income. This estimate of base
rental income is equivalent to $8.70 per square foot of total
owned GLA. Alternatively, minimum rental income accounts for
60.5 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 7.0 to 10.0 percent.
Anchor tenants typically have the lowest percentage clause with
ranges of 1.5 to 3.0 percent most 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 a substantial amount of
tenant defections and charges, 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 $226 per square foot.
Thus, in the initial full year of the investment holding
period, overage revenues are estimated to amount to $224,864 (net
of any recaptures) equivalent to $0.43 per square foot of total
GLA and 3.0 percent of potential gross revenues.
On balance, our forecasts are deemed to be conservative.
Generally, most percentage rent is projected to come from Sears
and Wards with nearly 68 percent of the property's forecasted
overage rent.
Sales Growth Rates
In the Retail Market Analysis section of this report, we
discussed that retail specialty store sales at the subject
property have been declining in recent years.
Retail sales in the Baltimore MSA have been increasing at a
compound annual rate of 4.7 percent per annum since 1985,
according to Sales and Marketing Management. According to both
the Cushman & Wakefield and Korpacz surveys, major investors are
looking at a range of growth rates of 0 percent initially to a
high of 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, we have forecasted that
sales for existing tenants will be flat in 1996. Subsequently,
we have forecasted 2 percent growth for 1997, an increase of 2.5
percent in 1998 and 3 percent thereafter.
Sales Growth Rate Forecast
Period Annual Growth Rate
1996 Flat
1997 + 2.0%
1998 + 2.5%
Thereafter + 3.0%
In all, we believe we have been conservative in our sales
forecast for new and turnover tenants upon the expiration of an
initial lease. At lease expiration, we have forecasted a 40
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, insurance, common area
maintenance (CAM) and certain miscellaneous charges including
mall and premise HVAC. Miscellaneous income is essentially
derived from specialty leasing for temporary tenants, Christmas
kiosks and other charges including special pass-throughs. In the
first full year of the investment, it is projected that the
subject property will generate approximately $2.5 million in
reimbursements for these operating expenses and $275,000 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 below. 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 if applicable
Less Contributions from department stores and mall
tenants over 10,000+/- square feet
Equals: Net pro-ratable CAM billable to mall tenants on the
basis of gross leasable occupied area (GLOA).
All department stores pay nominal amounts for CAM. Their
contributions are collectively detailed under CAM-MAJORS on the
cash flow. The 1996 budgeted CAM billings for the majors can be
detailed as follows:
Cranberry Mall
Department Store Common Area Maintenance Obligations
Store Description Contribution 1996
Sears Yrs 1- 5 None $13,000
Yrs 6-10 @ $13,000/Yr. ($.185/SF)
Yrs 11-15 @ $16,250/Yr. ($.23/SF)
Option @ $16,250/Yr.
Leggett None $ 0
Caldor Average of first 60 months $10,574
CAM serves as base,
Then pro-rata increases
Montgomery Yrs 1 - 5 @ $44,630/Yr. ($.50/SF) $44,630
Ward +$.05/SF every five years thereafter
Total $68,204
In addition, the standard lease provides for the exclusion of
tenants in excess of 10,000 square feet from the calculation when
computing a tenant's pro-rata share of CAM. This has the effect
of excluding Fashion Bug, Lerner, and the Cinema. In 1996, their
CAM contributions are budgeted at $70,685, $77,000 and $180,515,
respectively.
Real Estate Taxes
Anchor tenants also make contribution to real estate taxes.
In general, the mall standard is for the mall tenants to pay
their pro-rata share based upon the average occupied area during
the year.
Sears will pay based on its pro-rata share over the fifth
lease year. Both Caldor and Leggett pay based on their
calculated share over a base amount. Wards now has a pro-rata
assessment and they pay taxes based on this amount. Budgeted
1996 anchor tenant tax contributions are as follows:
Major's Real Estate Tax Contributions - 1996
Caldor $ 41,302
Leggett $ 24,961
Montgomery Ward $ 56,449
Sears $ 8,718
Total $ 131,430
Finally, since the new mall standard contribution is based
upon an exclusion of tenants in excess of 10,000 square feet, the
Cinema, Lerner, and Fashion Bug budgeted contributions are
excluded. The balance of the 1996 budgeted tax expense is passed
through to the mall tenants.
Other Recoveries
Other recoveries consist of insurance common area or mall
HVAC recovery and premise HVAC recovery. Insurance billings are
essentially relegated to older leases within the mall. The newer
lease structure covers the cost of any of these items within the
tenants CAM charge. These latter two charges are assessed to
tenants by lease agreement. In 1996, the unit market rate is
estimated at $1.00 per square foot and $1.50 per square foot,
respectively. We note that management has been successful in
negotiating higher rates from new tenants. However, other
tenants have negotiated rates below these figures. Therefore, we
have selected these rates as they fall near the middle of the
range for typical recoveries within the mall.
Temporary Leasing and Miscellaneous Income
Miscellaneous revenues are derived from a number of sources.
One of the more important is specialty leasing. The specialty
leasing is related to temporary tenants that occupy vacant in-
line space. Shopco has been relatively successful with this
procedure at many of their malls.
Other sources of miscellaneous revenues included forfeited
security deposits, temporary kiosk (Christmas) rentals, phone
revenues, lottery commissions, interest income and income from
the renting of strollers. We have forecasted miscellaneous
income of $50,000 in 1996. In addition, management is projecting
$229,600 from temporary tenants in 1996. We have used $225,000
in our first year forecast. On balance, we have forecasted these
aggregate other revenues at $275,000 which we project will grow
by 3 percent per annum. Our forecast for these additional
revenues is net of provision for vacancy and credit loss.
Allowance for Vacancy and Credit Loss
The investor of an income producing property is primarily
interested in the cash revenues that an income-producing property
is likely to produce annually over a specified period of time
rather than what it could produce if it were always 100 percent
occupied with all tenants actually paying rent in full and on
time. It is normally a prudent practice to expect some income
loss, either in the form of actual vacancy or in the form of
turnover, non-payment or slow payment by tenants. We have
reflected a 7.0 percent 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 7.0 percent factor as the mall leases
up based upon the following schedule.
1996 4.0%
1997 5.0%
1998 6.0%
Thereafter 7.0%
In this analysis we have also forecasted that there is a 60
percent probability that an existing tenant will renew their
lease. Upon turnover, we have forecasted that rent loss
equivalent to six months would be incurred to account for the
time and/or costs associated with bringing the space back on
line. Thus, minimum rent as well as overage rent and certain
other income has been reduced by this forecasted probability.
We have calculated the effect of the total provision of
vacancy and credit loss on the in-line shops. 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 8.0 percent of total potential gross revenues to a high of
22.2 percent. On average, the total allowance for vacancy and
credit loss over the 10 year projection period averages 12.6
percent of these revenues.
Total Rent Loss Forecast *
Year Credit Physical Total Loss
Loss Vacancy Provision
1996 4.0% 16.5% 20.5%
1997 5.0% 17.2% 22.2%
1998 6.0% 5.4% 11.4%
1999 7.0% 2.7% 9.7%
2000 7.0% 1.2% 8.3%
2001 7.0% 1.0% 8.0%
2002 7.0% 1.6% 8.6%
2003 7.0% 3.5% 10.5%
2004 7.0% 6.2% 13.2%
2005 7.0% 6.7% 13.7%
Avg. 12.6%
* Includes phased global vacancy provision for
unseen vacancy and credit loss as well as
weighted downtime provision of lease turnover.
As discussed, if an existing mall tenant is a consistent
under-performer with sales substantially below the mall average,
then the turnover probability applied is 100 percent. This
assumption, while adding a degree of conservatism to our
analysis, reflects the reality that management will continually
strive to replace under performers. On balance, the aggregate
deductions of all gross revenues reflected in this analysis are
based upon overall long-term market occupancy levels and are
considered what a prudent investor would conservatively allow for
credit loss. The remaining sum is effective gross income which
an informed investor may anticipate the subject property to
produce. We believe this is reasonable in light of overall
vacancy in this subject's market area as well as the current
leasing structure at the subject.
Effective Gross Income
In the initial full year of the investment, CY 1996,
effective gross revenues ("Total Income" line on cash flow) are
forecasted to amount to approximately $7,324,983, equivalent to
$13.96 per square foot of total owned GLA.
Effective Gross Revenue Summary
Initial Year of Investment - 1996
Aggregate Unit Income
Sum Rate Ratio
Potential Gross Income $7,547,387 $14.39 100.0%
Less: Vacancy and Credit Loss $ 222,404 $ 0.40 2.9%
Effective Gross Income $7,324,983 $13.96 97.1%
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 and common area
maintenance, utilities and insurance. 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. Unless otherwise cited,
expenses are forecasted to grow by 3.5 percent per annum over the
holding period.
Reimbursable Operating Expenses
We have analyzed each item of expense individually and
attempted to project what the typical investor in a property like
the subject would consider reasonable, based upon informed
opinion, judgment and experience. The following is a detailed
summary and discussion of the reimbursable operating expenses
incurred in the operation of the subject property during the
initial year of the investment holding period.
Common Area Maintenance - This expense category includes
the annual cost of miscellaneous building maintenance
contracts, recoverable labor and benefits, security,
insurance, landscaping, snow removal, cleaning and
janitorial, exterminating, supplies, trash removal,
exterior lighting, common area energy, gas and fuel,
equipment rental, interest and depreciation, and other
miscellaneous charges. In addition, ownership can
generally recoup the cost of certain extraordinary
capital items from the tenants. Typically, this is
limited to certain miscellaneous capital expenditures.
In malls like the subject 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. However,
as discussed, we have not forecasted that any of these
charges will be passed along to a mall tenant due to the
high cost of occupancy. Most tenants are subject to a 15
percent administrative surcharge although some are
assessed 25 percent. Historically, the annual CAM
expense (before anchor contributions) can be summarized
as follows:
Historical CAM Expense
Year Aggregate Amount
1993 $1,027,000
1994 $1,237,000
1995 Forecast $1,348,000
1996 Budget $1,320,000
The 1996 CAM budget is shown to be $1,320,000 before
interest and depreciation charges. An allocation of this
budget by line item provided in the Addenda. We have
used $1,325,000 in our analysis, equal to $6.86 per
square foot of mall GLA. Provided on the Facing Page is
a survey of comparable CAM budgets of other regional
malls which support this estimate.
TABLE COMPARING COMMON AREA MAINTENANCE EXPENSE FOR
VARIOUS MSAs AROUND THE UNITED STATES
Real Estate Taxes - The projected taxes to be incurred in
1996 are equal to $670,520. 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 and major tenant contributions
which are estimated at $243,354 in 1996.
HVAC - This expense is essentially related to providing
service for heating, ventilating and air conditioning.
The tenants at Cranberry Mall reimburse for both mall
HVAC (common area) and premise HVAC (individual usage).
These recoveries have been detailed previously. The 1996
expense to ownership is budgeted at $405,000.
Non-Reimbursable Expenses
Total non-reimbursable expenses at the subject property are
projected from accepted practices and industry standards. Again,
we have analyzed each item of expenditure in an attempt to
project what the typical investor in a property similar to the
subject would consider reasonable, based upon actual operations,
informed opinion, and experience. The following is a detailed
summary and discussion of non-reimbursable expenses incurred in
the operation of the subject property for the initial year.
Unless otherwise stated, it is our assumption that these expenses
will increase by 3.5 percent per annum thereafter.
General and Administrative - Expenses related to the
administrative aspects of the mall include costs
particular to the operation of the mall, including
salaries, travel and entertainment, and dues and
subscriptions. A provision is also made for professional
services including legal and accounting fees and other
professional consulting services. In 1996, we reflect
general and administrative expenses of $55,000.
Merchant Association/Marketing - Merchants Association
charges represent the landlord's contribution to the cost
of the association for the property. Also included are
expenses related to the temporary tenant program
including payroll for the promotional and leasing staff.
In the initial year, the cost is forecasted to amount to
$75,000.
Miscellaneous - This catch-all category is provided for
various miscellaneous and sundry expenses that ownership
will typically incur. Such items as unrecovered repair
costs, preparation of suites for temporary tenants,
certain non-recurring expenses, expenses associated with
maintaining vacant space, and bad debts in excess of our
credit loss provision would be included here. In the
initial year, these miscellaneous items are forecasted to
amount to approximately $100,000.
Management - The annual cost of managing the subject
property is projected to be 4.0 percent of minimum and
percentage rent. In the initial year of our analysis,
this amount is shown to be $191,541. Alternatively, this
amount is equivalent to approximately 2.6 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 40 percent. We have forecasted a rate of $1.00 per
square foot for renewal (rollover) tenants, based on a
renewal probability of 60 percent. The blended rate
based on our 60/40 turnover probability is therefore
$3.80 per square foot. For "raw" space which has never
been occupied, we have used a charge of $25.00 per square
foot. It is also 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 $3.00 per square foot for new tenants and
$1.25 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. We have elected
to model this same formula as it is within the range of
charges we have seen for these services. The cost is
weighted by our 60/40 percent renewal/turnover
probability. Thus, upon lease expiration, a leasing
commission charge of $1.95 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
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 and 1997 and $50,000 per
annum thereafter as a contingency fund for these
unforeseen expenses.
Replacement Reserves - It is customary and prudent to set
aside an amount annually for the replacement of short-
lived capital items such as the roof, parking lot and
certain mechanical items. The repairs and maintenance
expense category has historically included some capital
items which have been passed through to the tenants.
This appears to be a fairly common practice among most
malls. However, we feel that over a holding period some
repairs or replacements will be needed that will not be
passed on to the tenants. Due to the inclusion of many
of the capital items in the maintenance expense category,
the reserves for replacement classification need not be
sizeable. This becomes a more focused issue when the CAM
expense starts to get out of reach and tenants begin to
complain. For purposes of this report, we have estimated
an expense of $0.15 per square foot of owned GLA during
the first year, thereafter increasing by our expense
growth rate throughout our cash flow analysis.
Net Operating 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 $4.43 million which is equivalent to 60.5
percent of effective gross income. Deducting other expenses
including capital items results in a net cash flow before debt
service of approximately $4.04 million.
Cranberry Mall
Operating Summary
Initial Year of Investment - 1996
Aggregate Sum Unit Rate* Operating Ratio
Effective Gross Income $7,324,983 $13.96 100.0%
Operating Expenses $2,892,061 $ 5.51 39.5%
Net Operating Income $4,432,922 $ 8.45 60.5%
Other Expenses $ 389,441 $ .74 5.3%
Cash Flow $4,043,481 $ 7.71 55.2%
* Based on total owned GLA of 524,556 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 3.2%
Cash Flow: 3.0%
Growth rates are shown to be 3.2 and 3.0 percent,
respectively. We note that this annual growth is a result of the
atypcial income in the early years of the cash flow due to
vacancy. On a stabilized basis (1998-2005), net income growth is
shown to be only 1.9 percent which is a more reasonable forecast
for a real estate investment 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 Rate
The overall capitalization rate bears a direct relationship
between net operating income generated by the real estate in the
initial year of investment (or initial stabilized year) and the
value of the asset in the marketplace. Overall rates are also
affected by the existing leasing schedule of the property, the
strength or weakness of the local rental market, the property's
position relative to competing properties, and the risk/return
characteristics associated with competitive investments.
The trend has been for rising capitalization rates. We feel
that much of this has to do with the quality of the product that
has been selling. Sellers of the better performing dominant
Class A malls have been unwilling to waver on their pricing.
Many of the malls which have sold over the past 18 to 24 months
are found in less desirable second or third tier locations or
represent turnaround situations with properties that are posed
for expansion or remerchandising. With fewer buyers for the top
performing assets, sales have been somewhat limited.
Overall Capitalization Rates Regional Mall Sales
Year Range Mean Basis Point Change
1988 5.00%-8.00% 6.16% --
1989 4.58%-7.26% 6.05% -11
1990 5.06%-9.11% 6.33% +28
1991 5.60%-7.82% 6.44% +11
1992 6.00%-7.97% 7.31% +87
1993 7.00%-10.10% 7.92% +61
1994 6.98%-10.29% 8.37% +45
1995 7.47%-11.10% 9.14% +79
The data above shows that, with the exception of 1989, the
average cap rate has shown a rising trend each year. Between
1988 and 1989, the average rate declined by 11 basis points.
This was partly a result of dramatically fewer transactions in
1989, as well as the sale of Woodfield Mall at a reported cap
rate of 4.58 percent. In 1990, the average cap rate jumped 28
basis points to 6.33 percent. Among the 16 transactions we
surveyed that year, there was a marked shift of investment
criteria upward, with additional basis point risk added due to
the deteriorating economic climate for commercial real estate.
Furthermore, the problems with department store anchors added to
the perceived investment risk.
1992 saw owners become more realistic in their pricing as
some looked to move product because of other financial pressures.
The 87 basis point rise to 7.31 percent reflected the reality
that, in many markets, malls were not performing as strongly as
expected. A continuation of this trend was seen in 1993 as the
average rate increased by 61 basis points. The trend in deals
over the past two year period shows a respective rise in average
cap rates of 45 and 59 basis points. For the year, 1994
transactions were a mix of quality, ranging from premier,
institutional grade centers (Biltmore Fashion Park, Riverchase
Galleria), to B-centers such as Corte Madera Town Center and
Crossroads Mall. The continuation of this trend into 1995 is in
evidence as owners of the better quality malls are either
aggressively pricing them or keeping them off of the market until
it improves further. Also, the beating that REIT stocks
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
rs
OAR/ 6.50-9.50 7.50-9.50 7.00-8.50 7.50-8.50 7.00-8.00 7.50-9.00
Going-In 7.6 8.4 7.50 8.1 7.47 8.25
OAR/ 7.00-9.50 7.50-10.50 7.50-8.75 8.00-9.25 7.00-9.00 8.00-10.00
Terminal 8.0 8.8 7.95 8.6 8.17 8.83
IRR 10.00-11.50 10.00-13.00 10.00-11.50 11.00-12.00 10.00-11.50 10.50-12.00
10.5 11.5 10.70 11.4 10.72 11.33
The Fourth Quarter 1995 Peter F. Korpacz survey finds that
cap rates have remained relatively stable. They recognize that
there is extreme competition for the few premier malls that are
offered for sale which should exert downward pressure on rates.
However, most of the available product is B or C quality which
are not attractive to most institutional investors. The survey
did, however, note a dramatic change for the top tier investment
category of 20 to 30 true "trophy" assets in that investors think
it is unrealistic to assume that cap rates could fall below 7.0
percent.
NATIONAL REGIONAL MALL MARKET
FOURTH QUARTER 1995
KEY INDICATORS CURRENT LAST
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
Cranberry Mall is a mall which has not yet realized its
potential. It is still, however, the dominant retail destination for the
Westminster area of Carroll County. In addition to its four strong anchor
stores, mall shops are reasonably well merchandised. The trade area is
relatively affluent and growing, and the physical plant is in good condition.
The potential for future mall competition is unlikely in this region but
category killers and discounters pose a threat.
We do note that occupancy costs are moderately high which has
the effect of restricting market or base rent growth. We also
note the necessary sizable lease-up of mall space in order to
stabilize operations may be problematic in the short term. On
balance, a property with the characteristics of the subject would
potentially trade at an overall rate between 9.50 and 10.0
percent based on first year income operating on a stabilized
operating income basis. It is difficult to be more optimistic
with this type of analysis when the property requires a high
level of absorption for lease-up.
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 25 basis points to arrive at a projected
terminal capitalization rate ranging from 9.75 to 10.25 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 10.0 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 $62.9 million based on 2006 net income of
approximately $6.29 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
$6,288,236 $62,882,360 $1,257,650 $61,624,700
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 No. of GLA
Year Leases (SF) Cumulative %
1996 2 1,234 .64%
1997 23 52,838 28.00%
1998 5 5,708 31.00%
1999 9 23,811 43.30%
2000 7 9,484 48.20%
2001 3 6,100 51.30%
2002 5 3,055 52.90%
2003 13 25,357 66.10%
2004 26 62,026 98.20%
2005 20 37,308 117.50%
*Includes mall shops, kiosks and food court.
From the above, we see that a large percentage (28 percent)
of the GLA will expire by 1997. The largest expiration year is
2004 when leases totaling 62,026 square feet of the center will
expire. Over the total projection period, the mall will
completely turnover. 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 12.25 and 12.75 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 60 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. It
is assumed that new leases are written for an average of 7
years with a rent step of 10 percent in year 5. An exception
exists in the instance where a tenant is determined to be
paying base rent which is above market, or where percentage
rent is being generated in the base lease and is forecasted to
continue over the ensuing period. In these instances, we have
assumed that a flat lease will be written. Kiosk leases are
written for 5 year terms with no rent increase.
4. Market rents have been established for 1996 based upon an
overall average of about $17.00 per square foot for in-line
mall shop space. Subsequently, it is our assumption that market
rental rates for mall tenants will remain flat for two years,
increasing by 2.0 percent in 1998 and 3.0 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 be flat in 1996 and then grow by 2.0
percent in 1997, 2.5 percent in 1998 and 3.0 percent per year
throughout the balance of the holding period.
6. Expense recoveries are based upon terms specified in the
various lease contracts. The standard lease contract for real
estate taxes and common area maintenance billings for interior
mall tenants is based upon a tenants pro rata share with the
latter carrying an administrative surcharge of 15 percent.
Pro-rata share is generally calculated on leased (occupied)
area as opposed to leasable area. Department store
contributions are deducted before pass through to the mall
shops. HVAC charges are for mall and premise 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 40 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 7.0 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 generally forecasted to
increase by 3.5 percent per year except for management which is
based upon 4.0 percent of minimum and percentage rent annually.
Taxes are also 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
$78,500 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 $1.00 per square foot
with "raw" space getting $25.00 per square foot. Leasing
commissions reflect a rate structure of $3.00 per square foot
for new leases and $1.25 per square foot for renewal leases. A
contingency provision for other capital expenditures of
$200,000 per annum in years 1 and 2 and $50,000 per annum
thereafter has been made.
For a property such as the subject, it is our opinion that an
investor would require an all cash discount rate in the range of
12.25 to 12.75 percent. Accordingly, we have discounted the
projected future pre-tax cash flows to be received by an equity
investor in the subject property to a present value so as to
yield 12.25 to 12.75 percent at 25 basis point intervals on
equity capital over the holding period. This range of rates
reflects the risks associated with the investment. Discounting
these cash flows over the range of yield and terminal rates now
being required by participants in the market for this type of
real estate places additional perspective upon our analysis. A
valuation matrix for the subject appears on the facing page.
Through such a sensitivity analysis, it can be seen that the
present value of the subject property varies from approximately
$44.2 to $46.5 million. Giving consideration to all of the
characteristics of the subject previously discussed, we feel that
a prudent investor would require a yield which falls near the
middle of the range outlined above for this property.
Accordingly, we believe that based upon all of the assumptions
inherent in our cash flow analysis, an investor would look toward
as IRR around 12.50 percent and a terminal rate around 10.00
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 $45.0 million for the subject property as of January 1,
1996. The indices of investment generated through this indicated
value conclusion are shown on the following page.
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.
DISCOUNTED CASH FLOW ANALYSIS
Cranberry Mall (Westminster, Maryland)
Cushman & Wakefield, Inc.
Net Discount Present Value Composition Annual Cash
Year Cash Flow Factor @ 13.5% of Cash Flows of Yield on Cash Return
One $4,043,481 x 0.888889 = $3,594,205 7.93% 8.99%
Two $3,837,570 x 0.790123 = $3,032,154 6.69% 8.53%
Three $4,619,638 x 0.702332 = $3,244,519 7.16% 10.27%
Four $4,987,355 x 0.624295 = $3,113,581 6.87% 11.08%
Five $5,200,288 x 0.554929 = $2,885,790 6.37% 11.56%
Six $5,303,782 x 0.493270 = $2,616,198 5.77% 11.79%
Seven $5,386,885 x 0.438462 = $2,361,946 5.21% 11.97%
Eight $5,368,235 x 0.389744 = $2,092,239 4.62% 11.93%
Nine $5,155,504 x 0.346439 = $1,786,070 3.94% 11.46%
Ten $5,257,905 x 0.307946 = $1,619,152 3.57% 11.68%
Total Present Value of Cash Flows $26,345,855 58.13% 10.92% Avg
Reversion:
Eleven $6,288,236 (1) / 10.00% = $62,882,360
Less: Cost of Sale @ 2% $1,257,647
Net Reversion $61,624,713
x Discount Factor 0.307946
Total Present Value of Reversion: $18,977,093 41.87%
Total Present Value $45,322,948 100.00%
ROUNDED: $45,000,000
Owned GLA (SF): 193,125
Per Square Foot of Owned GLA: $233
Implicit Going-in Capitalization Rate:
Year One NOI $4,432,922
Going-In Cap Rate 9.85%
CAGR Concluded Value to Reversion 3.09%
Note: (1) Net Operating Income
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 $42,500,000 - $44,500,000
Income Approach
Discounted Cash Flow $45,000,000
This is considered a narrow range in possible value given the
magnitude of the value estimates. Both approaches are well
supported by data extracted from the market. There are, however,
strengths and weaknesses in each of these two approaches which
require reconciliation before a final conclusion of value can be
rendered.
Sales Comparison Approach
The Sales Comparison Approach arrived at a value indicted for
the property by analyzing historical arms-length transaction,
reducing the gathered information to common units of comparison,
adjusting the sale data for differences with the subject and
interpreting the results to yield a meaningful value conclusion.
The basis of these conclusions was the cash-on-cash return based
on net income and the adjusted price per square foot of gross
leasable area sold. An analysis of the subject on the basis of
its implicit sales multiple was also utilized.
The process of comparing historical sales data to assess what
purchasers have been paying for similar type properties is weak
in estimating future expectations. Although the unit sale price
yields comparable conclusions, it is not the primary tool by
which the investor market for a property like the subject
operates. In addition, no two properties are alike with respect
to quality of construction, location, market segmentation and
income profile. As such, subjective judgment necessarily become
a part of the comparative process. The usefulness of this
approach is that it interprets specific investor parameters
established in their analysis and ultimate purchase of a
property. In light of the above, the writers are of the opinion
that this methodology is best suited as support for the
conclusions of the Income Approach. It does provide useful
market extracted rates of return such as overall rates to
simulate investor behavior in the Income Approach.
Income Approach
Discounted Cash Flow Analysis
The subject property is highly suited to analysis by the
discounted cash flow method as it will be bought and sold in
investment circles. The focus on property value in relation to
anticipated income is well founded since the basis for investment
is profit in the form of return or yield on invested capital.
The subject property, as an investment vehicle, is sensitive to
all changes in the economic climate and the economic expectations
of investors. The discounted cash flow analysis may easily
reflect changes in the economic climate of investor expectations
by adjusting the variables used to qualify the model. In the
case of the subject property, the Income Approach can analyze
existing leases, the probabilities of future rollovers and
turnovers and reflect the expectations of overage rents.
Essentially, the Income Approach can model many of the dynamics
of a complex shopping center. The writers have considered the
results of the discounted cash flow analysis because of the
applicability of this method in accounting for the particular
characteristics of the property, as well as being the tool used
by many purchasers.
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:
FORTY FOUR MILLION DOLLARS
$44,000,000
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.
2. The statements of fact contained in this report are true and correct.
3. The reported analyses, opinions, and conclusions are limited only
by the reported assumptions and limiting conditions, and are our
personal, unbiased professional analyses, opinions, and conclusions.
4. We have no present or prospective interest in the property that is
the subject of this report, and we have no personal interest or bias
with respect to the parties involved.
5. Our compensation is not contingent upon the reporting of a
predetermined value or direction in value that favors the cause of the
client, the amount of the value estimate, the attainment of a
stipulated result, or the occurrence of a subsequent event. The
appraisal assignment was not based on a requested minimum valuation, a
specific valuation or the approval of a loan.
6. No one provided significant professional assistance to the persons
signing this report.
7. Our analyses, opinions, and conclusions were developed, and this report
has been prepared, in conformity with the Uniform Standards of
Professional Appraisal Practice of the Appraisal Foundation and the
Code of Professional Ethics and the Standards of Professional Appraisal
Practice of the Appraisal Institute.
8. The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
9. As of the date of this report, Richard W. Latella has completed the
requirements of the continuing education program of the Appraisal
Institute.
/s/ Richard W. Latella /s/ Jay F. Booth
Richard W. Latella, MAI Jay F. Booth
Senior Director Retail Valuation Group
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
1994.
Census Data: 8-Year Trends
No. of Total Total Average Average % Change New % Increase
Year Centers GLA Sales GLA per Sales in Sales Cen- in Total
(Billions) Center per SF per SF ters Centers
- - - ---- ------ ------------- ------------ ------- ------- ------- ----- ----------
1987 30,641 3,722,957,095 $602,294,426 121,502 $161.78 2.41% 2,145 7.53%
1988 32,563 3,947,025,194 $641,096,793 121,212 $162.43 0.40% 1,922 6.27%
1989 34,683 4,213,931,734 $682,752,628 121,498 $162.02 -0.25% 2,120 6.51%
1990 36,515 4,390,371,537 $706,380,618 120,235 $160.89 -0.70% 1,832 5.28%
1991 37,975 4,563,791,215 $716,913,157 120,179 $157.09 -2.37% 1,460 4.00%
1992 38,966 4,678,527,428 $768,220,248 120,067 $164.20 4.53% 991 2.61%
1993 39,633 4,770,760,559 $806,645,004 120,373 $169.08 2.97% 667 1.71%
1994 40,368 4,860,920,056 $851,282,088 120,415 $175.13 3.58% 735 1.85%
Compound
Annual +4.01% +3.88% +5.07% -.13% +1.14% N/A N/A N/A
Growth
Source: National Research Bureau Shopping Center Database and Statistical Model
From the chart we see that both total GLA and total number of centers have
increased at a compound annual rate of approximately 4.0 percent since 1987.
New construction was up 1.85 percent in 1994, a slight increase over 1993 but
still well below the peak year 1987 when new construction increased by
7.5 percent. Industry analysts point toward increased liquidity among
shopping center owners, due in part to the influx of capital from securitized
debt financiang and the return of lending by banks and insurance companies.
REITs have also been a source of capital and their appetite for new product has
provided a convenient take out vehicle.
Among the 40,368 centers in 1994, the following breakdown by
size can be shown.
U.S. Shopping Center Inventory, January 1995
Square Feet
Number of Centers (Millions)
----------------- ---------------
Size Range (SF) Amount Percent Amount Percent
--------------- ------ ------- ------ -------
Under 100,000 25,450 63% 1,266 25%
100,000-400,000 13,035 32% 2,200 45%
400,000-800,000 1,210 3% 675 15%
Over 800,000 673 2% 750 15%
Total 40,368 100% 4,865 100%
Source: National Research Bureau (some numbers slightly rounded).
According to the National Research Bureau, total sales in shopping
centers have grown at a compound rate of 5.07 percent since 1987. With
sales growth outpacing new construction, average sales per square foot
have been showing positive increases since the last recession. Aggregate
sales were up 5.5 percent nationwide from $806.6 billion (1993) to $851.3
billion (1994). In 1994, average sales were $175.13 per square foot, up
nearly 3.6 percent over 1993 and 1.14 percent on average over the past seven
years. The biggest gain came in the super- regional category (more than 1
million square feet) where sales were up 5.05 percent to $193.13 per square
foot.
The following chart tracks the change in average sales per square foot
by size category between 1993 and 1994.
Sales Trends by Size Category
1993-1994
Average Sales Per Square Foot
Category 1993 1994 % Change
Less than 100,000 SF $193.10 $199.70 +3.4%
100,001 to 200,000 SF $156.18 $161.52 +3.4%
200,001 to 400,000 SF $147.57 $151.27 +2.5%
400,001 to 800,000 SF $157.04 $163.43 +4.1%
800,001 to 1,000,000 SF $194.06 $203.20 +4.7%
More than 1,000,000 SF $183.90 $193.13 +5.0%
Total $169.08 $175.13 +3.6%
Source: National Research Bureau
Empirical data shows that the average GLA per capita is increasing.
In 1994, the average for the nation was 18.7. This was up 17 percent from
16.1 in 1988 and more recently, 18.5 square feet per capita in 1993. Among
states, Florida has the highest GLA per capita with 28.1 square feet and South
Dakota has the lowest at 9.40 square feet. The estimate for 1995 is for an
increase to 19.1 per square foot per capita. Per capita GLA for regional malls
(defined as all centers in excess of 400,000 square feet) has also been rising.
This information is presented on the following chart.
GLA per
Capita All Regional
Year Centers Malls
1988 16.1 5.0
1989 17.0 5.2
1990 17.7 5.3
1991 18.1 5.3
1992 18.3 5.5
1993 18.5 5.5
1994 18.7 5.4
Source: International Council of Shopping Center: The Scope of The Shopping
Center Industry and National Research Bureau
The Urban Land Institute, in the 1995 edition of Dollars and Cents of
Shopping Centers, reports that vacancy rates range from a low of 2.0 percent
in neighborhood centers to 14.0 percent for regional malls. Super-regional
malls reported a vacancy rate of 7.0 percent and community centers were 4.0
percent based upon their latest survey.
The retail industry's importance to the national economy can also be seen
in the level of direct employment. According to F.W. Dodge, the construction
information division of McGraw-Hill, new projects in 1994 generated $2.6
billion in construction contract awards and supported 41,600 jobs in
construction trade and related industries. This is nearly half of the
construction employment level of 95,360 for new shopping center development in
1990. It is estimated that 10.18 million people are now employed in shopping
centers, equal to about one of every nine non-farm workers in the country.
This is up 2.9 percent over 1991.
Market Shifts - Contemporary Trends in the Retail Industry
During the 1980s, the department store and specialty apparel store
industries competed in a tug of war for consumer dollars. Specialty stores
emerged largely victorious as department store sales steadily declined as a
percentage of total GAFO sales during the decade, slipping from 47.0
percent in 1979 to 44.0 percent in 1989. During this period, many
anchor tenants teetered from high debt levels incurred during
speculative takeovers and leveraged buyouts of the 1980s. Bankruptcies and
restructuring, however, have forced major chains to refocus on their
customer and shed unproductive stores and product lines. At year end 1994,
department store sales, as a percentage of GAFO sales, were approximately 37.5
percent.
The continued strengthening of some of the major department store chains,
including Sears, Federated/Macy's, May and Dayton Hudson, is in direct
contrast to the dire predictions made by analysts about the demise of the
traditional department store industry. This has undoubtedly been brought
about by the heightened level of merger and acquisition activity in the 1980s
which produced a burdensome debt structure among many of these entities.
When coupled with reduced sales and cash flow brought on by the recession,
department stores were unable to meet their debt service requirements.
Following a round of bankruptcies and restructurings, the industry has
responded with aggressive cost-cutting measures and a focused merchandising
program that is decidedly more responsive to consumer buying patterns. The
importance of department stores to mall properties is tantamount to a
successful project since the department store is still the principal
attraction that brings patrons to the center.
On balance, 1994/95 was a continued period of transition for the retail
industry. Major retailers achieved varying degrees of success in meeting the
demands of increasingly value conscious shoppers. Since the onset of the
national economic recession in mid-1990, the retail market has been
characterized by intense price competition and continued pressure on profit
margins. Many national and regional retail chains have consolidated
operations, closed underperforming stores, and/or scaled back on expansion
plans due to the uncertain spending patterns of consumers.
Consolidations and mergers have produced a more limited number of retail
operators, which have responded to changing spending patterns by
aggressively repositioning themselves within this evolving market. Much of
the recent retail construction activity has involved the conversion of existing
older retail centers into power center formats, either by retenanting or
through expansion. An additional area of growth in the retail sector is in
the "supercenter" category, which consists of the combined grocery and
department stores being developed by such companies as Wal- Mart and Kmart.
These formats require approximately 150,000 to 180,000 square feet in order
to carry the depth of merchandise necessary for such economies of scale and
market penetration.
Some of the important developments in the industry over the past year can
be summarized as follows:
- The discount department store industry emerged as arguably
the most volatile retail sector, lead by regional chains in the
northeast. Jamesway, Caldor and Bradlees each filed for Chapter
11 within six months and Hills Stores is on the block. Jamesway
is now in the process of liquidating all of its stores. Filene's
Basement was granted relief from some covenant restrictions and
its stock price plummeted. Ames, based in Rocky Hill,
Connecticut, will close 17 of its 307 stores. Kmart continues to
be of serious concern. Its debt has been downgraded to junk bond
status. Even Wal-Mart, accustomed to double digit sales growth,
has seen some meager comparable sales increases. These trends
are particularly troubling for strips since these tenants are
typical anchors.
- The attraction of regional malls as an investment has
diminished in view of the wave of consolidations and bankruptcies
affecting in-line tenants. Some of the larger restructurings
include Melville with plans to close up to 330 stores, sell
Marshalls to TJX Companies, split into three publicly traded
companies, and sell Wilsons and This End Up; Petrie Retail, which
operates such chains as M.J. Carroll, G&G, Jean Nicole, Marianne
and Stuarts, has filed for bankruptcy protection; Edison Brothers
(Jeans West, J. Riggins, Oak Tree, 5-7-9 Shops, etc.) announced
plans to close up to 500 stores while in Chapter 11; J. Baker
intends to liquidate Fayva Shoe division (357 low-price family
footwear stores); The Limited announced a major restructuring,
including the sale of partial interests in certain divisions;
Charming Shoppes will close 290 Fashion Bug and Fashion Bug Plus
stores; Trans World Entertainment (Record Town) has closed 115 of
its 600 mall shop locations. Other chains having trouble include
Rickel Home Centers which filed Chapter 11; Today's Man, a 35
store Philadelphia based discount menswear chain has filed; nine
subsidiaries of Fretta, including Dixon's, U.S. Holdings and
Silo, filed Chapter 11; and Clothestime, also in bankruptcy will
close up to 140 of its 540 stores. Merry-Go-Round, a chain that
operates 560 stores under the names Merry-Go-Round, Dejaiz and
Cignal is giving up since having filed in January 1994 and will
liquidate its assets. Toys "R" Us has announced a global
reorganization that will close 25 stores and cut the number of
items it carries to 11,000 from 15,000. Handy Andy, a 50 year
old chain of 74 home improvement centers which had been in
Chapter 11, has decided to liquidate, laying off 2,500 people.
- Overall, analysts estimate that 4,000 stores closed in 1995 and as many
as 7,000 more will close in 1996. Mom-and-Pop stores, where 75 percent
of U.S. retailers employ fewer than 10 people have been declining for
the past decade. Dun and Bradstreet reports that retail failures are up
1.4 percent over Last year - most of them small stores who don't have
the financial flexibility to renegotiate payment schedule.
- With sales down, occupancy costs continue to be a major
issue facing many tenants. As such, expansion oriented retailers
like The Limited, Ann Taylor and The Gap, are increasingly
shunning mall locations for strip centers. This has put further
pressure on mall operators to be aggressive with their rent
forecasts or in finding replacement tenants.
- While the full service department store industry led by Sears has seen
a profound turnaround, further consolidation and restructuring
continues. Woodward & Lothrop was acquired by The May Department
Stores Company and JC Penney; Broadway Stores was acquired by
Federated Department Stores; Elder Beerman has filed Chapter 11 and
will close 102 stores; Steinbach Stores will be acquired by Crowley,
Milner & Co.; Younkers will merge with Proffitts; and Strawbridge and
Clothier has hired a financial advisor to explore strategic
alternatives for this Philadelphia based chain.
- Aside from the changes in the department store arena, the most notable
transaction in 1995 involved General Growth Properties' acquisition of
the Homart Development Company in a $1.85 billion year-end deal.
Included were 25 regional malls, two current projects and several
development sites. In November, General Growth arranged for the sale
of the community center division to Developers Diversified for
approximately $505 million. Another notable deal involved Rite Aid
Corporation's announcement that it will acquire Revco Drug Stores in a
$1.8 billion merger to form the nation's largest drug store company
with sales of $11 billion and 4,500+/- stores.
- As of January 1, 1995 there were 311 outlet centers with 44.4 million
square feet of space. Outlet GLA has grown at a compound annual rate
of 18.1 percent since 1989. Concerns of over-building, tenant
bankruptcies, and consolidations have now negatively impacted this
industry as evidenced by the hit the outlet REIT stocks have taken.
Outlet tenants have not been immune to the global troubles impacting
retail sales as comparable store sales were down 3.1 percent through
November 1995.
- Category Killers and discount retailers have continued to drive the
demand for additional space. In 1995, new contracts were awarded for
the construction or renovation of 260 million square feet of stores
and shopping centers, up from 173 million square feet in 1991
according to F.W. Dodge, matching the highest levels over the past two
decades. It is estimated that between 1992 and 1994, approximately
55.0 percent of new retail square footage was built by big box
retailers. In 1994, it is estimated that they accounted for 80.0
percent of all new stores. Most experts agree that the country is
over-stored. Ultimately, it will lead to higher vacancy rates and
place severe pressure on aging, capital intensive centers. Many
analysts predict that consolidation will occur soon in the office
products superstores category where three companies are battling for
market share - OfficeMax, Office Depot and Staples.
- Entertainment is clearly the new operational requisite for property
owners and developers who are incorporating some form of entertainment
into their designs. With a myriad of concepts available, ranging from
mini-amusement parks to multiplex theater and restaurant themes, to
interactive high-tech applications, choosing the right formula is a
difficult task.
Investment Criteria and Institutional Investment Performance
Investment criteria for mall properties range widely. Many firms and
organizations survey individuals active in this industry segment in
order to gauge their current investment criteria. These criteria can be
measured against traditional units of comparison such as price (or value)
per square foot of GLA and overall capitalization rates.
The price that an investor is willing to pay represents the current or
present value of all the benefits of ownership. Of fundamental importance is
their expectation of increases in cash flow and the appreciation of the
investment. Investors have shown a shift in preference to initial return,
placing probably less emphasis on the discounted cash flow analysis (DCF). A
DCF is defined as a set of procedures in which the quantity,
variability, timing, and duration of periodic income, as well as the quantity
and timing of reversions, are specified and discounted to a present
value at a specified yield rate. Understandably, market thinking has
evolved after a few hard years of reality where optimistic cash flow
projections did not materialize. The DCF is still, in our opinion, a valid
valuation technique that when properly supported, can present a realistic
forecast of a property's performance and its current value in the marketplace.
Equitable Real Estate Investment Management, Inc. reports in their
Emerging Trends in Real Estate - 1996 that their respondents give
retail investments generally poor performance forecasts in their latest
survey due to the protracted merchant shakeout which will continue into 1996.
While dominant, Class A malls are still considered to be one of the best
real estate investments anywhere, only 13.0 percent of the respondents
recommended buying malls. Rents and values are expected to remain flat
(in real terms) and no one disputes their contention that 15 to 20 percent of
the existing malls nationwide will be out of business by the end of the
decade. For those centers that will continue to reposition themselves,
entertainment will be an increasingly important part of their mix.
Investors do cite that, after having been written off, department
stores have emerged from the shake-out period as powerful as ever. The
larger chains such as Federated, May and Dillard's, continue to acquire the
troubled regional chains who find it increasingly difficult to compete
against the category killers. Many of the nations largest chains are
reporting impressive profit levels, part of which has come about from their
ability to halt the double digit sales growth of the national discount
chains. Mall department stores are aggressively reacting to power and
outlet centers to protect their market share. Department stores are
frequently meeting discounters on price.
While power centers are considered one retail property type currently in
a growth mode, most respondents feel that the country is over-stored and
value gains with these types of centers will lag other property types,
including malls, over five and ten year time frames.
The following chart summarizes the results of their current survey.
Retail Property Rankings and Forecasts
Invest Potential
Investment Potential 1996 Predicted Value Gains
Property -------------------- Rent ---------------------
Type Rating1 Ranking2 Increase 1 Yr. 5Yrs. 10Yrs.
Regional Malls 4.9 8th 2.0% 2% 20% 40%
Power Centers 5.3 6th 2.3% 1% 17% 32%
Community Centers 5.4 5th 2.4% 2% 17% 33%
1 Scale of 1 to 10
2 Based on 9 property types
The NCREIF Property Index represents data collected from the Voting
Members of the National Council of Real Estate Investment Fiduciaries. As
shown in the following table, data through the third quarter of 1995 shows
that the retail index posted a positive 1.23 percent increase in total
return. Increased competition in the retail sector from new and expanding
formats and changing locational references has caused the retail index to trail
all other property types. As such, the -2.01 percent decline in value
reported by the retail subindex for the year were in line with investors'
expectations.
Retail Property Returns
NCREIF Index
Third Quarter 1995 (%)
Period Income Appreciation Total Change in CPI
3rd Qtr. 1995 1.95 - .72 1.23 .46
One Year 8.05 -2.01 5.92 2.55
Three Years 7.54 -3.02 4.35 2.73
Five Years 7.09 -4.61 2.23 2.92
Ten Years 6.95 .54 7.52 3.53
Source: Real Estate Performance Report
National Council of Real Estate Investment Fiduciaries
It is noted that the positive total return continues to be affected by
the capital return component which has been negative for the last five years.
However, as compared to the CPI, the total index has performed relatively
well.
Real Estate Investment Trust Market (REITs)
To date, the impact of REITs on the retail investment market has been
significant, although the majority of Initial Property Offerings (IPOs)
involving regional malls, shopping centers, and outlet centers did not enter
the market until the latter part of 1993 and early 1994. It is noted that
REITs have dominated the investment market for apartment properties and have
evolved into a major role for retail properties as well.
As of November 30, 1995, there were 297 REITs in the United States, about
79.0 percent (236) which are publicly traded. The advantages provided by
REITs, in comparison to more traditional real estate investment opportunities,
include the diversification of property types and location, increased liquidity
due to shares being traded on major exchanges, and the exemption from corporate
taxes when 95.0 percent of taxable income is distributed.
There are essentially three kinds of REITs which can either be
"open-ended", or Finite-life (FREITs) which have specified liquidation
dates, typically ranging from eight to fifteen years.
- Equity REITs center around the ownership of properties where
ownership interests (shareholders)receive the benefit of returns
from the operating income as well as the anticipated appreciation
of property value. Equity REITs typically provide lower yields
than other types of REITs, although this lower yield is
theoretically offset by property appreciation.
- Mortgage REITs invest in real estate through loans. The return to
shareholders is related to the interest rate for mortgages placed by
the REIT.
- Hybrid REITs combine the investment strategies of both the equity and
mortgage REITs in order to diversify risk.
The influx of capital into REITs has provided property owners with an
significant alternative marketplace of investment capital and resulted in a
considerably more liquid market for real estate. A number of
"non-traditional" REIT buyers, such as utility funds and equity/income
funds, established a major presence in the market during 1993/94.
1995 was not viewed as a great year for REITs relative to the advances seen
in the broader market. Through the end of November, equity REITs
posted a 9.3 percent total return according to the National Association
of Real Estate Investment Trusts (NAREIT). The best performer among equity
REITs was the office sector with a 29.4 percent total return. This was
followed by self-storage (27.3%), hotels (26.7%), triple-net lease
(20.6%), and health care (18.8%). Two equity REIT sectors were in the red -
outlet centers and regional malls.
Retail REITs
As of November 30, 1995, there were a total of 47 REITs specializing
in retail, making up approximately 16 percent of the securities in the REIT
market. Depending upon the property type in which they specialize, retail
REITs are divided into three categories: shopping centers, regional
malls, and outlet centers. The REIT performance indices chart shown as
Table A on the following page, shows a two-year summary of the total retail
REIT market as well as the performance of the three composite categories.
Table A - REIT Performance Indicies
Y-T-D Total Dividend No. of REIT Market
Return Yield Securities Capitalization*
----------- ----------- -------------- ----------------
As of November 30, 1995
----------------------------------------------------------
Total Retail 0.49% 8.36% 47 $14,389.1
Strip Centers 2.87% 8.14% 29 $ 8,083.3
Regional Malls -2.47% 9.06% 11 $ 4,886.1
Outlet Centers -2.53% 9.24% 6 $ 1,108.7
-------------------------------------------------------
As of November 30, 1994
-------------------------------------------------------
Total Retail -3.29% 8.35% 46 $12,913.1
Strip Center -4.36% 7.98% 28 $ 7,402.7
Regional Malls 2.84% 8.86% 11 $ 4,459.1
Outlet Centers -16.58% 8.74% 7 $ 1,051.4
* Number reported in thousands
Source: Realty Stock Review
As can be seen, the 47 REIT securities have a market
capitalization of approximately $14.4 billion, up 11.5 percent from the
previous year. Total returns were positive through November 1995,
reversing the negative return for the comparable period 12 months earlier. It
is noted that the positive return was the result of the strength of the
shopping center REITs which constitute nearly 60 percent of the market
capitalization. Total retail REITs dividend yields have remained constant over
the last year at approximately 8.36 percent. Regional mall and shopping
center REITs dominate the total market, making up approximately 85 percent of
the 47 retail REITs.
While many of the country's best quality malls and shopping centers have
recently been offered in the public market, this heavily capitalized
marketplace has provided sellers with an attractive alternative to the more
traditional market for large retail properties.
Regional Mall REITs
The accompanying exhibit Table B summarizes the basic
characteristics of eight REITs and one publicly traded real estate
operating company (Rouse Company) comprised exclusively or predominantly of
regional mall properties. Excluding the Rouse Company (ROUS), the IPOs have
all been completed since November 1992. The nine public offerings with
available information have a total of 281 regional or super regional malls
with a combined leasable area of approximately 229 million square feet. This
figure represents more than 14.0 percent of the total national supply of
this product type.
The nine companies are among the largest and best capitalized domestic real
estate equity securities, and are considerably more liquid than more
traditional real estate related investments. Excluding the Rouse Company,
however, these companies have been publicly traded for only a short period,
and there is not an established track record. General Growth was the star
performer in 1995 with a 15 percent increase in its stock price following the
acquisition of the Homart retail portfolio from Sears for $1.85 billion -
the biggest real estate acquisition of the decade.
Table B Regional Mall REIT analysis
Cushman & Wakefield, Inc.
REIT Portfolio CBL CWN EJD GGP MAC ROUS SPG TCO URB
- - - --------------------------------------------------------------------------------
Company Overview
- - - --------------------------------------------------------------------------------
Total Retail Cen. 95 23 51 40 16 67 56 19 12
-Super Reg.* 5 1 28 14 4 27 21 16 7
-Regional 11 22 23 25 10 27 35 3 2
-Community 79 - 11 1 2 13 55 - 3
-Other - - - - - - 3 - -
Tot. Mall GLA** 17,129 12,686 44,460 28,881 10,620 44,922 39,329 22,031 8,895
Tot.Mall Shop GLA**6,500 4,895 15,300 12,111 - 19,829 15,731 9,088 2,356
Avg. Total GLA/Cen.**180 552 872 722 664 670 702 1,160 741
Avg. Shop GLA/Cen.** 68 213 300 303 - 296 281 478 196
- - - --------------------------------------------------------------------------------
Mall Operations
- - - --------------------------------------------------------------------------------
Reporting year 1994 1994 1994 1994 1994 1994 1994 1994 1994
Avg. Sales PSF
of Mall GLA $226 $204 $260 $245 $262 $285 $259 $335 $348
Minimum Rent/Sales
ratio 8.6% 7.1% 8.3% - - - 6.8% 10.2% 8.1%
Total Occupancy
Cost/Sales ratio 12.2% 10.0% 12.4% - 11.2% - 10.2% 14.8% 11.7%
Mall Shop
Occupancy Level 88.7% 84.0% 85.0% 87.0% 92.9% - 86.2% 86.6% 93.3%
- - - --------------------------------------------------------------------------------
Share Price
- - - --------------------------------------------------------------------------------
IPO Date 10/27/93 8/9/93 6/30/94 4/8/93 3/9/94 1996 12/26/93 11/18/92 10/6/93
IPO Price $19.50 $17.25 $14.75 $22.00 $19.00 - $22.25 $11.00 $23.50
Current Price
(12/15/95) $21.63 $ 7.38 $13.00 $19.13 $19.75 $19.63 $25.13 $ 9.75 $21.75
52-Week High $22.00 $14.13 $15.13 $22.63 $21.88 $22.63 $26.00 $10.38 $22.50
52-Week Low $17.38 $ 6.50 $12.00 $18.13 $19.25 $17.50 $22.50 $ 8.88 $18.75
- - - --------------------------------------------------------------------------------
Capitalization and Yields
- - - --------------------------------------------------------------------------------
Outstanding
Shares*** 30.20 36.85 89.60 43.37 31.45 47.87 95.64 125.85 21.19
Market Cap.*** $653 $272 $1,165 $830 $621 $940 $2,403 $1,227 $461
Annual Dividend $1.59 $0.80 $1.26 $1.72 $1.68 $0.80 $1.97 $0.88 $1.94
Dividend Yield
(12/15/95) 7.35% 10.84% 9.69% 8.99% 8.51% 4.08% 7.84% 9.03% 8.92%
FFO 1995**** $1.85 $1.50 $1.53 $1.96 $1.92 $1.92 $2.28 $0.91 $2.17
FFO Yield
(12/15/95) 8.55% 20.33% 11.77% 10.25% 9.72% 9.78% 9.07% 9.33% 9.98%
- - - --------------------------------------------------------------------------------
Source: Salomon Brothers and Realty Stock Review; Annual Reports
* Super Regional Centers (>=800,000 Sq. Ft)
** Numbers in thousands (000) includes mall only
*** Numbers in millions
**** Funds From Operations is defined as net income (loss) before depreciation,
amoritizatoin, other non-cash items, extrodinary items, gains or losses of
assets and before minority interests in the Operating Partnership.
CBL - CBL & Associates
CWN - Crown American
EJD - Edward Debartolo
GGP - General Growth
MAC - Macerich Company
ROUS - Rouse Company
SPG - Simon Property
TCO - Taubman Centers
URB - Urban Shopping
Shopping Center REITs
Shopping center REITs comprise the largest sector of the retail REIT
market accounting for 29 out of the total 47 securities. General
characteristics of eight of the largest shopping center REITs are
summarized on Table C. The public equity market capitalization of the eight
companies totaled $6.1 billion as of December 15, 1995. The two largest,
Kimco Realty Corp. and New Plan Realty Trust have a market capitalization
equal to approximately 34.5 percent of the group total.
While the regional mall and outlet center REIT markets struggled
through 1995, shopping center REITs showed a positive November 30, 1995
year-to-date return of 2.87%. Through 1995, transaction activity in the
national shopping center market has been moderate. Most of the action in
this market is in the power center segment. As an investment, power
centers appeal to investors and REITs because of the high current cash
returns and long-term leases. However, with their popularity, the potential
for overbuilding is high. Also creating skepticism within this market is the
stability of several large discount retailers such as Kmart, and other
discount department stores which typically anchor power centers. Shopping
center REITs which hold numerous properties where struggling retailers are
located are currently keeping close watch over these centers in the event
of these anchor tenants vacating their space.
Similar to the regional mall REITs, shopping center REITs have been
publicly traded for only a short period and do not have a defined track
record. While the REITs have been in existence for a relatively short
period, the growth requirements of the companies should place upward pressure
on values due to continued demand for new product.
Table C Shopping Center REIT analysis
Cushman & Wakefield, Inc.
REIT Portfolio DDR FRT GRT JPR KIM NPR VNO WRI
- - - --------------------------------------------------------------------------------
Company Overview
- - - --------------------------------------------------------------------------------
Tot. Properties 111 53 84 46 193 123 65 161
Tot. Retail Centers 104 53 84 40 193 102 56 141
Tot. Retail GLA* 23,600 11,200 12,300 6,895 26,001 14,500 9,501 13,293
Avg. Shop GLA/Cen.* 227 211 146 172 135 142 170 94
- - - --------------------------------------------------------------------------------
Mall Operations
- - - --------------------------------------------------------------------------------
Reporting year - - 1994 - 1994 - - 1994
Total Rental Income - - $71,101 -$125,272 - -$112,223
Average Rent/SF $6.04 - $5.78 - $4.82 - - $8.44
Total Oper. Expenses - - $45,746 - $80,563 - - $76.771
Oper. Expenses/SF - - $3.72 - $3.10 - - $5.78
Oper. Expenses Ratio - - 64.3% - 64.3% - - 68.4%
Total Occupancy Level 96.6% 95.1% 96.3% 94.0% 94.7% 95.4% 94.0% 92.0%
- - - --------------------------------------------------------------------------------
Share Price
- - - --------------------------------------------------------------------------------
IPO Date 1992 1993 1994 1994 1991 1973 1993 1985
IPO Price $19.50 $17.25 $14.75 $22.00 $19.00 - $22.25 -
Current Price
(12/15/95) $29.88 $23.38 $17.75 $20.63 $42.25 $21.63 $36.13 $36.13
52-Week High $32.00 $23.75 $22.38 $21.38 $42.25 $23.00 $38.13 $38.13
52-Week Low $26.13 $19.75 $16.63 $17.38 $35.00 $18.75 $32.75 $32.75
- - - --------------------------------------------------------------------------------
Capitalization and Yields
- - - --------------------------------------------------------------------------------
Outstanding Shares** 19.86 32.22 24.48 19.72 22.43 53.26 24.20 26.53
Market Cap.*** $ 567 $ 753 $ 435 $ 407 $ 948 $1,152 $ 872 $ 959
Annual Dividend $2.40 $1.64 $1.92 $1.68 $2.16 $1.39 $2.24 $2.40
Dividend Yield
(12/15/95) 8.03% 7.01% 10.82% 8.14% 5.11% 6.43% 6.20% 6.64%
FFO 1995**** $2.65 $1.78 $2.25 $1.83 $3.15 $1.44 $2.67 $2.80
FFO Yield
(12/15/95) 8.87% 7.61% 12.68% 8.87% 7.46% 6.66% 7.39% 7.75%
- - - --------------------------------------------------------------------------------
Source: Salomon Brothers and Realty Stock Review; Annual Reports
* Numbers in thousands (000) includes mall only
** Numbers in millions
*** Funds From Operations is defined as net income (loss) before depreciation,
amoritizatoin, other non-cash items, extrodinary items, gains or losses of
assets and before minority interests in the Operating Partnership.
DDR - Development Diversified
FRT - Federal Realty Inv.
GRT - Glimcher Realty
JPR - JP Realty Inc.
KIM - Kimco Realty Corp.
NPR - New Plan Realty
VNO - Vornado Realty
WRI - Weingarten Realty
Outlook
A review of various data sources reveals the intensity of the development
community's efforts to serve a U.S. retail market that is still growing,
shifting and evolving. It is estimated 25- 30 power centers appear to be
capable of opening annually, generating more than 12 million square feet
of new space per year. That activity is fueled by the locational needs of
key power center tenants, 27 of which indicated in recent year-end reports
to shareholders an appetite for 900 new stores annually, an average of 30 new
stores per firm.
With a per capita GLA figure of 19 square feet, most analysts are in
agreement that the country is already over-stored. As such, new centers
will become feasible through the following demand generators:
- The gradual obsolescence of some existing retail locations
and retail facilities;
- The evolution of the locational needs and format preferences
of various anchor tenants; and
- Rising retail sales generated by increasing population and
household levels.
By the year 2000, total retail sales are projected to rise from $2.237
trillion in 1994 to almost $2.9 trillion; shopping center-inclined sales are
projected to rise by $361 billion, from $1.194 trillion in 1994 to nearly $1.6
trillion in the year 2000. Those increases reflect annual compound growth
rates of 4.1 percent and 4.5 percent, respectively, for the six-year period.
On balance, we conclude that the outlook for the retail industry is
one of cautious optimism. Because of the importance of consumer spending to
the economy, the retail industry is one of the most studied and analyzed
segments of the economy. One obvious benefactor of the aggressive expansion
and promotional pricing which has characterized the industry is the
consumer. There will continue to be an increasing focus on choosing the
right format and merchandising mix to differentiate the product from the
competition and meet the needs of the consumer. Quite obviously, many of the
nations' existing retail developments will find it difficult if not
impossible to compete. Tantamount to the success of these older centers must
be a proper merchandising or repositioning strategy that adequately
considers the feasibility of the capital intensive needs of such an
undertaking. Coincident with all of the change which will continue to
influence the industry is a general softening of investor bullishness. This
will lead to a realization that the collective interaction of the fundamentals
of risk and reward now require higher capitalization rates and long term
yield expectations in order to attract investment capital.
GRAPHIC SHOWING OPERATING EXPENSE BUDGET (1996)
GRAPHIC SHOWING TENANT SALES REPORT (1995)
GRAPHICH SHOWING PRO-JECT LEASE ABSTRACT REPORT
GRAPHICH SHOWING PRO-JECT PROLOGUE ASSUMPTIONS REPORT
GRAPHIC SHOWING PRO-JECT TENANT REGISTER REPORT
GRAPHIC SHOWING PRO-JECT LEASE EXPIRATION REPORT
GRAPHIC SHOWING ENDS FULL DATA REPORT FOR PRIMARY AND TOTAL TRADE AREA
GRAPHIC SHOWING REGIONAL MALL SALES (1991-1993)
GRAPHIC SHOWING CUSHMAN & WAKEFIELD INVESTOR SURVEY
QUALIFICATIONS OF RICHARD W. LATELLA
Professional Affiliations
Member, American Institute of Real Estate Appraisers
(MAI Designation #8346)
New York State Certified General Real Estate Appraiser #46000003892
Pennsylvania State Certified General Real Estate Appraiser #GA-001053-R
State of Maryland Certified General Real Estate Appraiser #01462
Minnesota Certified General Real Estate Appraiser #20026517
Commonwealth of Virginia Certified General Real Estate Appraiser #4001-003348
State of Michigan Certified General Real Estate Appraiser #1201005216
New Jersey Real Estate Salesperson (License #NS-130101-A)
Certified Tax Assessor - State of New Jersey
Affiliate Member - International Council of Shopping Centers, ICSC
Real Estate Experience
Senior Director, Retail Valuation Group, Cushman & Wakefield
Valuation Advisory Services. Cushman & Wakefield is a national
full service real estate organization and a Rockefeller Group
Company. While Mr. Latella's experience has been in appraising a
full array of property types, his principal focus is in the
appraisal and counseling for major retail properties and
specialty centers on a national basis. As Senior Director of
Cushman & Wakefield's Retail Group his responsibilities include
the coordination of the firm's national group of appraisers who
specialize in the appraisal of regional malls, department stores
and other major retail property types. He has personally
appraised and consulted on in excess of 200 regional malls and
specialty retail properties across the country.
Senior Appraiser, Valuation Counselors, Princeton, New Jersey,
specializing in the appraisal of commercial and industrial real
estate, condemnation analyses and feasibility studies for both
corporate and institutional clients from July 1980 to April 1983.
Supervisor, State of New Jersey, Division of Taxation, Local
Property and Public Utility Branch in Trenton, New Jersey, as
sisting and advising local municipal and property tax assessors
throughout the state from June 1977 to July 1980.
Associate, Warren W. Orpen & Associates, Trenton, New Jersey,
assisting in the preparation of appraisals of residential prop
erty and condemnation analyses from July 1975 to April 1977.
Formal Education
Trenton State College, Trenton, New Jersey
Bachelor of Science, Business Administration - 1977
As of the date of this report, Richard W. Latella, MAI, has
completed the requirements under the continuing education program
of the Appraisal Institute.
QUALIFICATIONS OF 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
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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
- - - ------------------------------------------------------------------------------
COMPLETE APPRAISAL OF
REAL PROPERTY
The Mall at Assembly Square
133 Middlesex Avenue
City of Somerville, Middlesex County,
Massachusetts
- - - ------------------------------------------------------------------------------
IN A SUMMARY REPORT
As of January 1, 1996
Shopco Regional Malls
Limited Partnership
3 World Financial Center - 29th Floor
New York, New York 10013
Cushman & Wakefield, Inc.
Valuation Advisory Services
51 West 52nd Street, 9th Floor
New York, NY 10019
April 1, 1996
Shopco Regional Malls
Limited Partnership
3 World Financial Center
29th Floor
New York, New York 10013
Re: Complete Appraisal of Real Property
The Mall at Assembly Square
133 Middlesex Avenue
City of Somerville, Middlesex County, Massachusetts
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 was prepared for Shopco Regional Malls LP (Client) and it is
intended only for the specified use of the Client. It may not be distributed
to or relied upon by other persons or entities without written permission of
the Appraiser.
The property was inspected by and the report was prepared by Richard W.
Latella, MAI. Brian J. Booth has provided significant assistance in the
analysis contained herein.
This is a complete Appraisal in a Summary Report which is intended to comply
with the reporting requirements set forth under Standards Rule 2-2b) of the
Uniform Standards of Professional Appraisal Practice for a Summary Appraisal
Report. As such, it presents only summary discussions of the data, reasoning,
and analyses that were used in the appraisal process to develop the appraiser's
opinion of value. Supporting documentation concerning the data, reasoning, and
analyses is retained in the appraiser's file. The depth of discussion
contained in this report is specific to the needs of the client and for the
intended use stated below. The appraiser is not responsible for unauthorized
use of this report. We are providing this report as an update to our last
analysis which was prepared as of January 1, 1995. As such, we have primarily
reported only changes to the property and its environs over the past year.
As a result of our analysis, we have formed an opinion that the market value of
the leased fee estate in the referenced property, subject to the assumptions,
limiting conditions, certifications, and definitions, as of January 1, 1996,
was:
TWENTY-THREE MILLION FIVE HUNDRED THOUSAND DOLLARS
$23,500,000
This value conclusion may be alloocated to the following components:
Mall $22,000,000
Expansion Land 1,500,000
----------
$23,500,000
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/Brian J. Booth
Brian J. Booth
Retail Valuation Group
/s/Richard W. Latella
Richard W. Latella, MAI
Senior Director
Retail Valuation Group
State of Massachusetts Certified General Appraiser
License No. 4287
BJB:RWL:emf
C&W File No. 96-9064-1
SUMMARY OF SALIENT FACTS AND CONCLUSIONS
--------------------------------------------------
Property Name: The Mall at Assembly Square
Location: 133 Middlesex Avenue
City of Somerville, Middlesex
County, Massachusetts
Assessor's Parcel Number: Map 086, Lot A-1
Interest Appraised: Leased fee
Date of Value: January 1, 1996
Date of Inspection: February 16, 1996
Ownership: Shearson Shopco Malls, LP
Land Area: Mall Site 23.9267+/- AC
Expansion Land: 2.0000+/- AC reported by ownership
-------
25.9267+/- AC
Zoning: Business Park Assembly
Highest and Best Use
If Vacant: Retail use built to
its maximum feasible F.A.R.
As Improved: Continued retail use with future
expansion/redevelopment potential.
Improvements
Type: Single level regional mall
Gross Leasable Area Allocation
Jordan Marsh 72,240+/- SF
Kmart 94,800+/- SF
-------
Total Anchor Stores 167,040+/- SF 51.8%
Mall Stores 155,194+/- SF 48.2%
------- -----
Total GLA 322,234+/- SF 100.0%
Condition: Good
Operating Data and Forecasts
Current Vacant Space: 36,105 SF
Current Occupancy: 76.7% based on mall gross leasable area
(inclusive of pre-committed tenants).
Forecasted Stabilized Occupancy: 92.0%
Forecasted Date of Stabilized
Occupancy: January 1, 1999
1996 Operating Expenses
(Budget): $2,811,756 ($18.12/SF of mall GLA)
(Appraiser's Forecast): $2,652,498 ($17.09/SF of mall GLA)
Investment Assumptions
Holding Period: 10 years
Income Growth Rate: Flat 1996-1998
+2.0% - 1999
+3.0% - Thereafter
Expense Growth Rate: +3.5%
Sales Growth Rate: -5.0% - 1996
Flat - 1997
+2.0% - 1998
+3.0% - Thereafter
Other Income: +3.0%
Tenant Improvements
New Mall Tenants: $8.00/SF
Renewing Mall Tenants: $1.00/SF
Vacancy between Tenants: 8 months
Renewal Probability: 60%
Terminal Capitalization Rate: 10.50%
Cost of Sale at Reversion: 2.00%
Discount Rate: 12.75%
Value Indicators
Sales Comparison Approach: $21,000,000 - $23,000,000
Income Approach
Discounted Cash Flow: $21,500,000
Value Conclusion: Mall $22,000,000
Exposure Time Explicit in
Value Conclusion: Not more than 12 months
Resulting Indicators
CY 1996 Net Operating Income: $1,646,746
Implicit Overall
Capitalization Rate: 7.49%
Price Per SF of Owned GLA: $68.27
Price Per SF of Mall Shop GLA: $141.76
Value Conclusion
Expansion Land: $1,500,000
Total Value: $23,500,000
Special Assumptions
1. Throughout this analysis we have relied on information
provided by ownership and management which we assume to be
accurate. We have been provided with summary information
only for new leases in the form of a rent roll or lease
abstracts. We have not been provided with actual lease
documents. There has been a substantial deterioration of
the tenant mix and leasing status since our last appraisal
report. Management has seen the need to renegotiate several
leases over the past several months. All tenant specific
assumptions are identified within the body of this report.
2. In past appraisals we have identified a 2.0+/- acre tract as
being excess land, as it was held for a possible expansion.
We assume that this land would still be available to
accommodate up to 60,000 square feet of building area as
proposed.
3. We have not reflected any of the proposed costs (or
benefits) of the on-going litigation with the adjacent
proposed Stop N Shop retail development on the former Porter
site.
4. During 1990, the Americans With Disabilities Act (ADA) was
passed by Congress. This is Civil Rights legislation which,
among other things, provides for equal access to public
placed for disabled persons. It applied to existing
structures as of January 1992 and new construction as of
January 1993. Virtually all landlords of commercial
facilities and tenants engaged in business that serve the
public have compliance obligations under this law. While we
are not experts in this field, our understanding of the law
is that it is broad-based, and most existing commercial
facilities are not in full compliance because they were
designed and built prior to enactment of the law. We
noticed no additional "readily achievable barrier removal"
problems but we recommend a compliance study be performed by
qualified personnel to determine the extent of non-
compliance and cost to cure.
We understand that, for an existing structure like the
subject, compliance can be accomplished in stages as all or
portions of the building are periodically renovated. The
maximum required cost associated with compliance-related
changes is 20 percent of total renovation cost. A prudent
owner would likely include compliance-related charges in
periodic future common area and tenant area retrofit. We
consider this in our future projections of capital
expenditures and retrofit allowance costs to the landlord.
At this time, most buyers do not appear to be reflecting
future ADA compliance costs for existing structures in their
overall rate or price per square foot decisions. This is
recent legislation and many market participants are not yet
fully aware of its consequences. We believe that over the
next one to two years, it will become more of a value
consideration. It is important to realize that ADA is a
Civil Rights law, not a building code. Its intent is to
allow disabled persons to participate fully in society and
not intended to cause undue hardship for tenants or building
owners.
5. 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 5
Identification of Property 5
Property Ownership and Recent History 5
Purpose and Intended Use of the Appraisal 5
Extent of the Appraisal Process 5
Date of Value and Property Inspection 6
Property Rights Appraised 6
Definitions of Value, Interest Appraised, and Other Pertinent
Terms 6
REGIONAL ANALYSIS 8
NEIGHBORHOOD ANALYSIS 15
RETAIL MARKET ANALYSIS 16
THE SUBJECT PROPERTY 25
REAL PROPERTY TAXES AND ASSESSMENTS 26
ZONING 27
HIGHEST AND BEST USE 28
VALUATION PROCESS 29
EXPANSION LAND 30
SALES COMPARISON APPROACH 32
INCOME APPROACH 48
RECONCILIATION AND FINAL VALUE ESTIMATE 83
ASSUMPTIONS AND LIMITING CONDITIONS 85
CERTIFICATION OF APPRAISAL 87
ADDENDA 88
PHOTOGRAPHS OF SUBJECT PROPERTY
---------------------------------------
PHOTOGRAPH: Depicting exterior view of Kmart facade.
PHOTOGRAPH: Depicting front elevation of the mall.
PHOTOGRAPH: Depicting view of Jordan Marsh facade.
PHOTOGRAPH: Depicting front elevation looking past Kmart.
PHOTOGRAPH: Depicting interior view.
PHOTOGRAPH: Depicting interior view.
PHOTOGRAPH: Depicting interior view of new food court.
PHOTOGRAPH: Depicting interior view of new food court.
INTRODUCTION
--------------------
Identification of Property
The subject property is the Mall at Assembly Square, a single
level, barbell shaped enclosed regional mall with a gross
leasable area of 322,234+/- square feet. Located at the
intersection of Middlesex Avenue and Interstate 93 in the City of
Somerville, Massachusetts, the mall is anchored by Jordan Marsh
and Kmart. Over the past two years, the subject has completed an
interior renovation that has substantially altered its appearance
and enhanced its appeal. In past appraisals we have identified a
2.0+/- acre tract as being excess land, as it was held for a
possible expansion. Given the property's deminished investment
appeal, we have elected to no longer apply any additional value
to this site.
Property Ownership and Recent History
Title to the subject property is held by Shearson Shopco
Malls LP. Title was acquired on October 11, 1988 from Assembly
Square Trust for a reported consideration of $42,538,000. It is
currently occupied by a number of tenants as a place of business.
Details of the major leases are provided in our original full
narrative report. A current tenant listing is contained in the
Addenda to this report.
The subject has been negatively affected by the global
troubles of many of the large national and regional retail
changes. As a result of many tenants leaving the mall, and other
tenants affected by aggressive competition, sales at the mall
have suffered. As such, management has been put in the position
of having to renegotiate several leases in order to keep
additional tenants from leaving the center. Further details will
be offered at a latter point in this appraisal.
Purpose and Intended Use of the Appraisal
The purpose of this summary appraisal is to estimate the
market value 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 on changes to the property and market
conditions since that time.
The function of this appraisal is to provide an independent
valuation analysis and to assist in monitoring ownership's
investment in the property.
Extent of the Appraisal Process
In the process of preparing this appraisal, we:
- Inspected the exterior of the building and the site improvements and a
representative sample of tenant spaces with Caroline Kennedy, the mall
manager.
- Interviewed representatives of the property management company, Shopco.
- Reviewed leasing policy, concessions, tenant build-out allowances and
history of recent rental rates and occupancy with management.
- Reviewed a detailed history of income and expense and a budget forecast
for 1996 including the budget for planned capital expenditures and repairs.
- Reviewed a current independent market study and demographics prepared by
Equifax National Decision Systems.
- Conducted market research of occupancies, asking rents, concessions and
operating expenses at competing retail properties including interviews
with on-site managers and a review of our own data base from previous
appraisal files.
- Prepared a detailed discounted cash flow analysis for the purpose of
discounting a forecasted net income stream to a present value.
- Conducted market inquiries into recent sales of similar regional malls
to ascertain sales price per square foot, net income multipliers and
capitalization rates. This process involved telephone interviews with
sellers, buyers and/or participating brokers.
- Prepared Sales Comparison and Income Approaches to value with a
reconciliation of each approach and a final value conclusion presented.
Date of Value and Property Inspection
Our date of value is January 1, 1996. On February 16, 1996
Richard W. Latella, MAI inspected the subject property and its
environs.
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.
MAP: DEPICTING GEOGRAPHIC LOCATION OF PROPERTY
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.
The following definitions are taken from various sources:
Market Value As Is on Appraisal Date
Value of the property appraised in the condition observed
upon inspection and as it physically and legally exists
without hypothetical conditions, assumptions, or
qualifications on the effective date of appraisal.
Legal Description
A legal description is retained in our files.
REGIONAL ANALYSIS
-------------------------
Metropolitan Boston Area Analysis
Introduction
The subject of this appraisal, The Mall at Assembly Square is
located in the City of Somerville. Area wide economic trends
have a direct impact on real estate values and as a result, we
have included a brief discussion of regional trends as the
foundation for our discussion of the subject area.
Somerville is located in the Boston MSA. The city of Boston
is the capital of the Commonwealth of Massachusetts and the
economic, educational, cultural and transportation focal point of
New England. The region traditionally had an economy based in
manufacturing, especially in textiles and related industries.
Manufacturing concerns increasingly relocated to lower cost
regions during the 1950s and 1960s, leading to significant
employment losses and to a regional recession. The economy began
to diversify into more service oriented activities during the
1970s, with particular concentrations in financial services and
the legal field.
During the mid-1980s, the metropolitan Boston area
experienced unprecedented growth, which was often referred to as
the "Massachusetts Miracle". In Eastern Massachusetts,
particularly the greater Boston area, the economic
characteristics of the area were very favorable resulting in an
expanding population created by in-migration for employment
opportunities. Consequently, construction increased to
accommodate the expansion of the population and area businesses.
The 1990s arrived with the largest national recession since
the Great Depression of the 1920s and 1930s. National defense
spending, a regional mainstay, has been cut thus far during this
decade. The computer industry, formerly heavily focused on micro-
and main-frame computers, experienced a structural shift to
personal computers causing substantial job losses. As a result
of the decline in these sectors, as well as a number of other
issues, governmental budgets for the first time experienced
shortfalls and the region's largest bank failed. In the real
estate sector, supply out-paced demand, vacancies and market
exposure times increased, and new construction effectively came
to a halt. The sudden decline in the property markets led to
depreciation in values for most types of real estate, and
contributed to a comprehensive regional slowdown. At the
beginning of 1993, the market began to stabilize and during the
remainder of the year job losses slowed and unemployment rates
began to fall, a trend which has continued into 1995. These
issues are discussed in detail in the following paragraphs.
Population
As shown in the following table, the 1990 U.S. Census
indicated a total population for the Commonwealth of
Massachusetts of approximately 6,014,425, up 4.9 percent from the
1980 Census estimates. According to the 1990 Census, more than
20 percent of the entire New England population is included in
the Boston Primary Metropolitan Statistical Area (PMSA) which had
a total population of 2,870,650.
Regional Population Statistics
and Forecasts
1990 1997 % Change
Boston PMSA 2,870,650(1) 2,928,082 2.0%(2)
Boston CMSA 4,171,747(1) 4,255,076 2.0%(2)
Massachusetts 6,014,425(1) 6,030,700 .3%(3)
New Englan 13,200,000(2) 13,292,000 .6%(3)
Sources: 1 1990 U.S. Census Reports
2 Equifax National Decision Systems
3 New England Economic Project
The New England Economic Project (NEEP), a consortium of
regional economists, estimated that the Massachusetts population
would increase approximately .3 percent by 1997 versus an
estimated increase for the New England Region of approximately .6
percent. The low rate of change in population is primarily
attributed to anticipated changes taking place in the
manufacturing and defense industries, both major employers in the
region. Equifax National Decision Systems (ENDS), another
demographic reporting firm, shows a Boston MSA population of
5,734,847 as of 1995. It is unclear how they define MSA but
their data also provides a projection of 5,849,397 to the year
2000.
Income
The dramatic surge in income levels during the early to
middle 1980s was one of the driving forces behind the rapidly
expanding New England economy. ENDS reports per capita income in
Massachusetts increased from $7,458 in 1980 to $17,224 in 1990,
an overall increase of approximately 131 percent or a compound
annual increase of approximately 8.7 percent over the ten year
period.
According to ENDS, average household income in Massachusetts
grew at a compound rate of 6.76 percent between 1980 and 1995 to
$55,322. Through 2000, the rate of change is forecasted to
decline slightly to 5.98 percent. The corresponding growth for
the Boston MSA is 6.87 percent and 5.96 percent, respectively.
As of 1995, the reported average household income for the MSA was
$57,270, Making the region slightly more affluent than the state
as a whole in terms of this single income measure.
Housing
The resurgence of the New England and Massachusetts economies
during the mid- 1980s was attended by a dramatic increase in
housing values. As shown in the following table, the median
value of existing single family homes in the greater Boston area
increased from $82,600 in 1983 to a high of $183,800 in third
quarter 1989, an increase of approximately 122 percent or an
average annual increase of about 20 percent. Much of New England
experienced similarly large increases.
Median Sales Prices - Single Family Homes
Boston Metropolitan Area
Year Median % Change
Price
1983 $82,600 3.0%
1984 $100,000 21.1%
1985 $134,200 34.2%
1986 $159,200 18.6%
1987 $177,200 11.3%
1988 $181,200 2.3%
1989 $181,900 0.4%
1990 $174,100 ( 4.3%)
1991 $170,100 ( 2.3%)
1992 $171,100 .6%
1993 $173,200 1.2%
1994 $179,100 3.4%
1995
(2nd Qtr) $179,000
Source: National Association of Realtors
Data through the second quarter 1995 shows that the median
price continues to be firm with the year end 1994 amount of
$179,100. The 3.4 percent increase in 1994 was the largest since
1987. Despite this increase in value, housing starts were down
12 percent in September and are expected to be down for the year
in the state.
Transportation
The Boston Metropolitan area is served by four major
interstate highways: I-90, I-93, I-95/Mass. Route 128 and I-495.
Boston truly provides the hub of this highway network with I-95
serving as the inner circumferential highway with extensions
north and south, I-495 acting as the outer circumferential
highway and I-90 representing the radial extending to the west
and I-93 to the northwest. The series of state highways
supplementing the interstate system are generally adequate from a
directional basis but all of these highways are overburdened.
Commuter traffic far exceeds the design and construction
capacities and congestion in the Downtown Boston and I-95 areas
continues to increase.
The Central Business District is directly served by the
Central Artery, a limited access highway that is a portion of I-
93. The artery connects with the Callahan and Sumner Tunnels
which provide access to Logan International Airport and
communities to the northeast. The capacities of these
thoroughfares are insufficient to meet the current levels of
demand and result in congestion during peak travel periods. As a
result, the Commonwealth of Massachusetts has been appropriated
$4.4 billion by the Federal Highway Administration to depress the
Central Artery and construct a third harbor tunnel between the
city and Logan Airport. This major reconstruction of the city's
main arterial road system is intended to alleviate the current
congestion problem. The new Central Artery is to include two
more lanes than the existing roadway and will connect with both
the existing and new tunnels. The new tunnel is to extend from
the termination of I-90 and its intersection with I-93 in an
easterly direction under Boston Harbor and emerge in East Boston
at Logan Airport. The tunnel, intended specifically for airport
traffic, is expected to facilitate access to the airport and
alleviate a major source of congestion on the Central Artery.
The demolition and excavation for the third harbor tunnel
commenced in early 1992. Construction for the depression of the
artery began at approximately the same time as the third harbor
tunnel. Major construction work on the artery is not to start,
however, until after the third harbor tunnel is completed.
These transportation improvements will impact the subject
market during the extended construction period by discouraging
shoppers from traveling into the Downtown and Back Bay areas of
the city. The suburbs will become more attractive because
parking is free and there will be less traffic congestion.
Employment and Economic Trends
Massachusetts reportedly lost 11.3 percent of its jobs
between 1989 and 1992, more than any other state in the nation.
The losses came from all sectors, but the manufacturing, high
technology and construction trades were considered the hardest
hit. In addition, many white collar positions were lost in the
computer, finance, real estate and banking services industries.
Preliminary data through December 1995 show that the state
has reversed this trend with approximately 29,000 jobs being
added. On an employment base of 3.15 million, this represents an
increase of slightly less than 1 percent. Massachusetts lagged
the U.S. economy which grew by 2.8 percent.
The state is still reeling from the massive downsizing and
consolidation which has taken place in banking, computers and
defense. In addition, high costs and an unfavorable industrial
mix continue to hamper growth. Taxes remain one of the biggest
costs of doing business and wages remain above the national
average. In addition, electricity and health insurance costs are
among the highest in the nation. Despite an improvement in the
general business climate in recent years, an effort spearheaded
by the Weld Administration, these regional factors continue to
hamper growth in the state.
The following table depicts the breakdown of non-agricultural
employment for the Boston MSA as of September 1995.
Non-Agricultural Employment Distribution
By Industry Group
Boston MSA *
Industry Percentage Employment
Government 11.9% 213,000
Construction 3.0% 54,600
Manufacturing 12.4% 221,200
Transportation, Communication 4.4% 78,700
and Utilities
Wholesale & Retail Trade 21.6% 387,000
Finance, Ins. & Real Estate 8.5% 152,100
Services 38.2% 683,700
----- ---------
Total Employment 100.0% 1,790,800
* As of May 1995
Source: U.S. Department of Labor
As can be seen from the chart, Services account for nearly
685,000 jobs or 38.2 percent of employment. This is followed by
Wholesale & Retail Trade (21.6 percent) and Manufacturing (12.4
percent).
The manufacturing sector continues to be the state's Achilles
heal. More than 200,000 manufacturing jobs have been lost in the
past decade. Although cutbacks and layoffs have slowed in recent
years, they have not ended. During the second quarter of 1995
Westboro-based computer maker Data General Corp. announced plans
to eliminate between 500 and 600 jobs over the next two years.
This news followed Wang Laboratories' decision to cut 1,000 jobs
by the end of 1995. In addition, Digital Equipment continues to
shrink its workforce to remain competitive and Raytheon continues
to steadily layoff workers as defense contracts continue their
downward spiral. Looking ahead, continued cuts at the state's
defense-related manufacturers are likely as military budgets are
trimmed. Because of these factors, WEFA forecasts manufacturing
employment to continue to decline at a rate exceeding the
national average over the next ten year period.
Not surprisingly, the non-manufacturing sector, particularly
services, has been the growth sector in the state economy.
Software, management and engineering services, education and
health care have all contributed to the gains. In addition, high-
technology software firms, like Lotus and Powersoft, continue to
fill the void left by the state's large computer manufacturers.
Looking ahead, Massachusetts will continue to benefit from its
information industries including software, higher education,
consulting, biotechnology and mutual funds. Other industries on
a hiring trend include computer products and services,
electronics, health services, telecommunications and retail.
Behind the growth of these industries, expect non-manufacturing
employment in Massachusetts to expand at a rate of roughly 2.0
percent during the 1995-1998 period.
The unemployment rates in Massachusetts, which lagged the
nation as a whole throughout most of the 1980s, increased
dramatically to a high of 9.3 percent during the summer of 1991,
well above the national figure. By contrast, during much of the
mid-1980s, unemployment rates in the region of 3.0 percent or
less were maintained.
The preliminary (December 1995) seasonally unadjusted
unemployment rate for Massachusetts was 4.8 percent and for the
United States was 5.2 percent. The December report for greater
Boston was 4.1 percent. These rates represent dramatic declines
in the unemployment rates since the peaks in 1991 and a decline
of four-tenths of a percent from 1994.
NEEP continues to forecast that a lasting economic recovery
in New England will lag the nation. While they expect non-farm
employment growth to continue next year, manufacturing employment
is expected to continue to decline for the near term. Services,
wholesale and retail trade, as expected, are leading job growth.
The New England region, however, is not expected to reach its
peak 1988 employment level again until later in this decade,
according to the NEEP conferees.
In support of NEEP's projections, the 1995 edition of
Emerging Trends in Real Estate published jointly by Equitable
Real Estate Investment Management and Real Estate Research
Corporation ranked Boston eighth of sixteen major metropolitan
areas with comments that included "expect higher ranking next
year" and ranked it "best of the Northeast markets". It
indicated that the market had bottomed out in 1994 and expected
it to rank near the top next year.
Retail Sales
The following table summarizes historic retail sales for the
Boston Metropolitan Statistical Area (MSA) for the ten year
period from 1985 to 1994.
Retail Sales (000's)
1985-1994
Year Boston MSA *
1985 $27,703,685
1986 $30,511,219
1987 $30,766,529
1988 $32,195,958
1989 $32,596,223
1990 $32,453,768
1991 $33,301,185
1992 $30,341,790
1993 $30,957,096
1994 $33,239,908
Compounded Annual
Growth Rate '85-94 +2.04%
CAGR '90-94 .60%
* Boston MSA includes Boston, Lawrence, Lowell and Brockton Areas.
Source: Sales and Marketing Management Survey of Buying Power
As can be seen from the above, retail sales have grown at an
average annual rate of approximately 2.0 percent since 1985.
However, sales actually declined in 1992 as a result of the
regional recession. Since that time they have recovered
slightly, growing at .60 percent per annum since 1990 including a
7.4 percent increase in 1994.
Conclusion
The New England region is currently within a period of
recovery in most economic sectors. Economists associated with
both private and public agencies believe that a lasting recovery
began in 1993, and employment growth rates in most major sectors
have increased as support for this contention. The overall pace
of the economic recovery is expected to be slow, however, as
continued job losses in the manufacturing, health care and
banking sectors are expected to have a tempering effect resulting
from these industries experiencing structural changes. Current
population projections show that, overall, job growth is expected
to take the form of replacements for past losses rather than a
return to significant in-migration. These "replacement" jobs are
expected to be largely in the service sectors, however, as
personal income growth is expected to continue to grow, but
slightly lag the region as a whole.
NEIGHBORHOOD ANALYSIS
-----------------------------
There have been no significant changes to the immediate
neighborhood since our last appraisal. However, the Somerville
Planning Department reports that the potential development of the
adjacent Porter site continues to slowly move along. Stop N'
Shop has submitted plans to develop the total 17 acre site with a
retail center. A Stop N' Shop superstore would anchor the
development along with two or three other big box retailers and
several smaller shops. The site has been tested and it has been
determined that certain environmental remediation is necessary.
The City reports that this is the first developmental proposal
that has ownership's backing and agreement to bear the cost of
the remediation.
We are advised the project has received nearly all necessary
approvals but has been bogged down with lawsuits by ownership of
the subject property. The development proposal would require
that the project obtain cross access easements with Assembly
Square Mall. At this writing, negotiations continue between the
two parties to work out an amicable solution.
We are further advised by the Planning Department that the
project has approvals for 208,000 square feet. The city would
like to begin the reconstruction of Foley Street this spring.
These officials expressed confidence that the project could
commence around the same time.
The Planning Department also reports that the city will
likely purchase a 9.0 acre tract in the rear of the Assembly
Square Redevelopment District for development with a light
industrial use at some point in the near future. Geotechnical
work could begin this year prior to transferring it to the MBTA.
There are several proposed uses for a site behind the
Middlesex County Courthouse including a hotel and restaurant.
This site has been speculated to be developed with a hotel for
several years but nothing has come to fruition. We do not expect
to see anything occur in the near future.
Finally, the state has approved funding to implement
engineering studies on a myriad of roadway and intersection
improvements in the immediate vicinity of the mall. The studies
are expected to take up to eighteen months. The cost of the
roadwork is pegged at $65.0 million. It is felt that work could
commence on these improvements sometime during 1998. The net
result will be enhanced accessibility for the mall from fronting
highways including I-93.
On balance, we are cautiously optimistic about the near term
prospects for the neighborhood. The level of proposed
development is in contrast to the limited investment in the
neighborhood in recent years. Given the momentum in the Boston
area economy which is slowly gaining vigor, we expect that the
long term prognosis for modest appreciation in real estate values
is a reasonable expectation.
RETAIL MARKET ANALYSIS
------------------------------
Trade Area Analysis
Overview
A retail center's trade area contains people who are likely
to patronize that particular retail center. These customers are
drawn by a given class of goods and services from a particular
tenant mix. A center's fundamental drawing power comes from the
strength of the anchor tenants as well as the regional and local
tenants which complement and support the anchors. A successful
combination of these elements creates a destination for customers
seeking a variety of goods and services while enjoying the
comfort and convenience of an integrated shopping environment.
In order to define and analyze The Mall at Assembly Square's
market potential, it is important to first establish the
boundaries of the primary and secondary trade areas from which
the subject will draw its customers. In some cases, defining the
trade areas 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. In the past, Meadow Glen Mall has always been cited as
the subject's most direct competitor, and for some tenants it
still is. However, New England Development has done such an
excellent job in merchandising the tenant mix at Cambridgeside
that it is now a principal competitor of Assembly Square.
Originally, it was felt that the mall's higher end orientation
would not appeal to the typical shopper that patronized the
subject. However, Cambridgeside has successfully integrated more
of a mass-market appeal through its tenant mix. In a January
1996 market study prepared by Helwig Associates, Inc. ,
Cambridgeside was noted as the place where the majority of the
respondents did most of their non-grocery shopping over the past
three months.
Traditionally, a retail center's sales are primarily
generated from within its primary trade area, which is typically
within reasonably close geographic proximity to the center
itself. Generally, between 55 and 65 percent of a center's sales
are generated within its primary trade area. The secondary trade
area generally refers to more outlying areas which provide less
frequent customers to the center. Residents within the secondary
trade area are more likely to shop closer to home due to time and
travel constraints. Typically, an additional 20 to 25 percent of
a center's sales will be generated from within the secondary
area. The tertiary trade area refers to more distant areas from
which occasional customers to the mall reside. These residents
may be drawn to the center by a particular service or store which
is not found locally. Industry experience shows that between 10
and 15 percent of a center's sales are derived from customers
residing outside of the trade area.
Once the trade area is defined, the area's demographics and
economic profile can be analyzed. This will provide key insight
into the area's dynamics as it relates to The Mall at Assembly
Square. The sources of economic and demographic data for the
trade area analysis are as follows: Equifax National Decision
Systems (ENDS), Sales and Marketing Management's Survey of Buying
Power, The Urban Land Institute's Dollars and Cents of Shopping
Centers (1995), CACI, The Sourcebook of County Demographics, The
Census of Retail Trade - 1992, and the market study prepared by
Helwig Associates, Inc.
Competition
In January 1996 Helwig Associates, Inc. completed a retail
market study for ownership. The study has shown that
Cambridgeside Galleria and Meadow Glen Mall represent the
subject's strongest competitors, followed by Square One and
Burlington Mall. Cambridgeside is located two miles from
Assembly Square while Meadow Glen is one mile north. While
Cambridgeside has continued to improve its tenant mix and sales
performance, the latter has suffered with several vacancies
noted. Many of the same global retail troubles which have
plagued Assembly Square have also hurt Meadow Glen. In addition,
it is unclear what the long term prospect for Marshalls and
Bradlees might be. Finally, the redevelopment of Square One
appears to have been a success and has affected the subject's
draw from the northeast. The study has also shown that the
profile of the typical shopper has changed to the extent that the
subject draws a more ethnic, lower to moderate income customer,
which has served to further differentiate Assembly Square from
the competition.
Proposed Competition
Proposed competition exists with respect to the Stop N Shop
project as planned for the Porter site. The City Planning
Department feels that on-going litigation will serve to delay it
but they believe construction will commence this year. Another
proposed center is the Gateway project on Route 16 in Everett,
one mile from the subject. This 600,000+/- square foot center has
been proposed for the former Monsanto site for several years. It
is our understanding that environmental problems have delayed it
and it will be at least one more year before they are resolved.
It is unclear at this point whether it will ever come to
fruition.
Trade Area Definition
The Helwig Associates, Inc. report has been based upon
intercept surveys conducted in December 1995 for the purpose of
establishing the subject's trade area boundaries as well as to
develop a profile of the mall's typical patron. This report is
retained in our files.
Basically, the intercept survey involved 476 interviews which
has results in a better understanding of the subject's trade area
delineation. Based upon these surveys, it was determined that
the subject's primary and secondary markets can be identified by
the following zip codes and communities:
Assembly Square Mall
Primary Secondary
Market Market
Zip Code Community Zip Code Community
02143 Somerville 02150 Chelsea
02144 Somerville 02141 Cambridge
02145 Somerville 02139 Cambridge
02129 Charlestown 02119 Roxbury
02148 Malden 02128 E. Boston
02149 Everett 02127 S. Boston
02155 Medford 02180 Stoneham
02151 Revere
02140 N. Cambridge
02121 Dorchester
02174 Arlington
02178 Belmont
01801 Woburn
02138 Cambridge
02124 Dorchester
The top seven zip codes which the Helwig study defines as the
primary market accounted for 58 percent of the center's shoppers
in the study, with the top two (02145 and 02155) accounting for
nearly 25 percent.
Based upon the current study, the subject's trade area is
shown to be substantially different from last year's Hollander,
Cohen and McBride report. We have utilized these current zip
codes in our analysis as a check against the results provided in
the report's conclusions.
Population
Once the market area has been established, the focus of our
analysis centers on the trade area's population. ENDS provides
historic, current and forecasted population estimates for the
total trade area. Patterns of development density and migration
are reflected in the current levels of population estimates. The
report provided on the facing page utilizes the statistics on the
basis of the total trade area (primary and secondary) citing the
communities as segregated by zip code which are shown above.
Comparisons can be made to the Boston MSA, State of
Massachusetts, and the United States as a whole. In the Addenda,
we have provided detailed profiles of both the primary and
secondary components, together with the total trade area.
Between 1980 and 1995, ENDS reports that the population
within the primary trade area decreased slightly by 6,159
residents to 233,417 reflecting a 2.6 percent decrease. Through
2000, the trade area is expected to reverse this negative trend
and increase to 237,519 residents which is equal to a 1.8 percent
increase.
Further analysis shows that the total market is expected to
see a continued decline which suggests that the secondary portion
of the trade area is losing residents.
Provided on the following page is a graphic representation of
the population change forecasted for the trade area. Note that
communities forecasted to have the most significant growth (5 -
6.65 percent) are found in Somerville as well as Cambridge,
immediately to the southwest of the subject. With the exception
of Charleston, all segments of the primary market are expected to
see modest growth.
MAP: Depicting the Total Trade Area of subject property, and
forecasted population change.
Households
A household consists of all the people occupying a single
housing unit. While individual members of a household purchase
goods and services, these purchases actually reflect household
needs and decisions. Thus, the household is a critical unit to
be considered when reviewing market data and forming conclusions
about the trade area as it impacts the retail center.
National trends indicate that the number of households are
increasing at a faster rate than the growth of the population.
Several noticeable changes in the way households are being formed
have caused the acceleration in this growth, specifically:
- The population in general is living longer on average. This results in
an increase of single and two person households.
- The divorce rate increased dramatically during the 1980s, again resulting
in an increase in single person households.
- Many individuals have postponed marriage, thus also resulting in more
single person households.
According to ENDS, the primary trade area gained 9,429
households between 1980 and 1995, an increase of 10.5 percent.
Between 1995 and 2000 the area is expected to grow, but at a
slower pace of 3.0 percent. Expanding to the total trade area,
the number of households increases substantially to 279,444.
Consistent with the national trend, the trade area is
experiencing household growth at rates in excess of population
changes primarily due to the factors mentioned above.
Correspondingly, a greater number of smaller households with
fewer children generally indicates more disposable income. In
1980, there were 2.66 persons per household in the total trade
area and by 1995, it is estimated to have decreased to 2.35.
Trade Area Income
One of the most significant statistics for retailers is the
trade area's income potential. Income levels, either on a per
capita, per family, or household basis, indicate the economic
level of the residents of the market area and form an important
component of this total analysis. More directly, average
household income, when combined with the number of households, is
a major determinant of an area's retail sales potential. The
trade area income figures support the profile of a broad-based
middle income market. According to ENDS, average household
income within the primary trade area is approximately $51,708
The subject's income level can be compared to the region,
state and United States.
Average Household Income
Area Income
Primary Trade Area $51,708
Total Trade Area $52,071
Boston MSA $49,495
State of Massachusetts $55,322
United States $46,791
Source: Equifax National Decision Systems
As can be seen, the subject's trade area components slightly
exceed area and state income levels.
Provided on the following page is a graphic presentation of
the average household income distribution throughout the trade
area. As can be seen, Somerville is generally a lower income
area in comparison to Medford, Cambridge and Belmont.
Retail Sales
Provided on the following page is a summary of retail sale
information for both the State of Massachusetts, the Boston MSA
and Middlesex County.
MAP: Depicting Total Trade Area of subject property by average income.
Retail Sales (000)
1985-1994
State of Boston Middlesex
Year Massachusetts MSA County
1985 $42,138,986 $27,703,685 $10,019,043
1986 $46,333,956 $30,511,219 $10,854,951
1987 $46,907,960 $30,766,529 $10,950,714
1988 $49,038,308 $32,195,958 $11,442,142
1989 $51,106,324 $32,596,223 $12,154,324
1990 $50,756,961 $32,453,768 $12,030,520
1991 $52,089,985 $33,301,185 $12,429,158
1992 $47,450,983 $30,341,790 $11,451,078
1993 $48,497,982 $30,957,096 $11,356,245
1994 $52,465,985 $33,239,908 $12,291,888
Compounded
Annual
Growth Rate +2.47% +2.04% +2.30%
1985-1994
Compound
Annual
Growth Rate + .83% + .60% + .54%
1990-1994
Source: Sales and Marketing Management Survey of Buying Power
As can be seen from the above, retail sales, which had been
flat or declining, have rebounded slightly in 1994 through the
state, county and MSA. We recognize that the Boston area economy
is only very recently beginning to show modest signs of
improvement. Actually, sales in 1994 rebounded strongly with 7.4
and 8.2 percent increases in the MSA and county, respectively.
Data for 1995 is not yet available but it is the consensus that
sales did not grow materially. 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. The chart below summarizes the
mall's performance during the period 1985-1994.
The Mall at Assembly Square
Retail Sales (000)
1985-1994
Jordan Mall
Year Marsh Kmart Stores Total
1985 $15,570 $10,008 $26,715 $52,293
1986 $16,966 $11,104 $30,705 $58,775
1987 $17,515 $12,791 $33,183 $63,489
1988 $18,279 $13,870 $36,108 $68,257
1989 $20,140 $14,099 $38,562 $72,801
1990 $19,117 $14,406 $36,245 $69,768
1991 $16,251 $14,690 $32,535 $63,476
1992 $16,469 $15,261 $32,013 $63,743
1993 $16,472 $14,963 $29,581 $61,016
1994 $16,906 $14,034 $27,737 $58,677
1995 $14,472 $13,971 $23,830 $52,273
Compounded
Annual
Growth Rate - .73% +3.39% -1.14% --
1985-1995
Compound Annual
Growth Rate
1990-1995 -5.42% - .61% -8.05% -5.61%
The data above shows that sales have been declining at the
mall in total since their peak of $72.8 million in 1989. The
decline is largely attributed to the mall shop sales which have
dropped by nearly $14.7 million or 28 percent since 1989 to $23.8
million currently. Mall shop sales have declined every year
since 1989, falling at a compound annual rate of 7.7 percent.
This decline is attributed to the increased competitiveness of
Cambridgeside, the opening of Square One Mall nine miles north of
the subject in Saugus, and the severe impact of retail
consolidations and bankruptcies affecting the industry in
general.
It is generally considered that comparable mall shops sales
are a better indicator of the mall's performance. In 1995,
comparable or mature stores (defined as those stores in existence
and reporting sales for the prior year), sales decreased by 13
percent to $187.10 per square foot based on reporting mall shop
gross leasable area of 104,099+/- square feet. Comparable sales
were $215.10 per square foot in 1994.
Jordan Marsh had a particularly bad year with sales declining
by 14.4 percent to $14.5 million, or approximately $200.00 per
square foot. This will have a hard impact on the mall since they
were historically a large percentage rent contributor. The
store's parent company (Federated) has decided to change all of
its Jordan Marsh stores to Macy's during 1996. It is difficult
to predict what impact this will have on sales at this time.
Kmart's sales were nearly flat, declining by only .4 percent
to $13,971,000, or $147.30 per square foot. This performance
compares well to the 6.2 percent drop in 1994, which was a direct
result of the opening of a new Kmart on Route 93 in South Bay
Center. Given the overall performance of the mall in 1995, their
results can be considered relatively good.
Comments
Within the shopping center industry, a trend toward
specialization has evolved so as to maximize sales per square
foot by deliberately meeting customer preferences rather than
being all things to all people. This market segmentation is
implemented through the merchandising of the anchor stores and
the tenant mix of the mall stores. The recent market study
suggests that the demographic makeup of its trade area is
changing. The survey cited several store types that the
respondents would like to see added including a discount store
such as Marshalls, TJ Maxx, Wal-Mart, Bradlees or Filene's
Basement. Other requests were for another department store
(Filene's) and a greater selection of sit-down restaurants. With
so many tenants having left the mall, management has an
opportunity to rethink its long term merchandising objectives in
light of the changing customer profile.
During 1995, The Mall at Assembly Square had experienced
relatively high turnover and attrition. The majority of tenants
who left were a result of national problems being experienced by
the chain on a global basis and not necessarily related to one
particular location. 1995 was one of the most troublesome years
in retail in recent memory. The renovation during 1993/94 also
affected the sales levels of many tenants causing some of the
more marginal ones to leave the mall. The subject has also been
impacted by Cambridgeside and the opening of Square One Mall.
The food court renovation was completed during the year but
has not been successful. Although Dunkin Donuts was brought in
during the year and is apparently doing well, several other food
court tenants have suffered and there still exist several
vacancies. In addition, Dapper Dans, the center's sit-down
restaurant has not been paying any rent or mall charges.
Management is re-evaluating their leasing focus and will, at
least for the near term, be concentrating on stabilizing the
property.
Conclusion
We have analyzed the retail trade history and profile of the
Boston MSA and Middlesex County in order to make reasonable
assumptions as to the expected performance of the subject's trade
area.
A metropolitan and locational overview was presented which
highlighted important points about the study area and demographic
and economic data specific to the trade area was presented. The
trade area profile discussed encompassed a zip code based
analysis. Marketing information relating to these sectors was
presented and analyzed in order to determine patterns of change
and growth as it impacts The Mall at Assembly Square. Finally,
we included a brief discussion of some of the competitive retail
centers in the market area. The data is useful in giving
quantitative dimensions of the total trade area, while our
comments serve to provide qualitative insight into this trade
area. The following summarizes our key conclusions:
- The subject enjoys a moderately visible and accessible location within
one of the nation's largest MSA economies. Proposed near term (3 to 4
years) highway improvements will be of great benefit to the mall.
- The subject's market area is one of the most densely developed areas
in the country. The primary market consists of 233,400 residents.
Within the total trade area of the mall there are nearly 675,000 persons
residing in nearly 277,500 households.
- Sales continued to slide during 1995 due to a number of factors, many of
which were related to global tenant problems. Competitive pressures
brought on by Cambridgeside, Square One, and a new Kmart also contributed
to sales declining. Sales performance has slipped to critical levels
for many tenants and management has found it necessary to renegotiate
several lease arrangements in an effort to help stabilize the property.
- The Helwig study has shown that the mall is capturing a modest 2.2
percent of GAFO potential from the total trade area, including 4.4
percent of the primary market. While the size of the trade area is
forecasted to decline in terms of population, projected increases in
income levels should bring steady increases in GAFO expenditures over
the next five years.
- With the threat of new competition, the subject is currently in a
vulnerable position that requires a cohesive plan to stabilize and
redirect its merchandising focus.
In conclusion, 1995 was a troublesome year for retail in
general with Assembly Square being particularly affected.
Management needs to make some hard decisions about its future
merchandising philosophy. With several tenants having left the
mall and many others on month-to-month leases, there is an
opportunity for redevelopment. We suggest that the appropriate
economic studies be implemented in order to help determine the
feasibility of redevelopment alternatives.
THE SUBJECT PROPERTY
----------------------------
The Mall at Assembly Square contains a gross leasable area of
322,234+/- square feet situated on a 25.9267+/- acre site. This GLA
estimate reflects the subject's most recent configuration based
upon leasing activity through year end 1995.
During 1995, the renovation of the food court and management
offices was completed. Capital projects which remain in the 1996
"wish list" include the balance of the roof repair and other
minor repairs. In view of the financial problems which have
befallen the mall, it does not appear likely that these projects
will be funded anytime soon.
As will be discussed in more detail in the Income Approach
section of this report, the subject has been severely impacted by
the global problems which affected retailers in 1995. Having had
a high proportion of these troubled retailers including several
Edison Brothers, Petrie Stores, and Merry-Go-Round units, the
subject experienced very high turnover through corporate
bankruptcies, downsizings and liquidations. In addition,
management found it necessary to renegotiate several leases to a
gross lease or month-to-month status. As such, income from
operations is expected to be substantially less in 1996. With
the inability to reduce fixed expenses to necessary levels, the
property is expected to operate in a deficit for the ensuing year.
To that end, management is focusing on developing an
alternate strategy which will take the property in a different
direction. We are advised that discussions are on-going with
several " big-box " retailers to come to the mall. One possible
scenario would involve inducing Jordan Marsh to close off their
interior mall entrance, and allowing a large user to locate next
to them. A deal had been discussed with Best Buy for 50,000+/-
square feet but it has since been put on hold in view of their
reluctance to continue a northeast expansion at this time.
Other prospective stores which have shown interest include
Bobs (Melville) and Service Merchandise. The economics of the
latter deal include a $13.50 per square foot rent with a cost of
$32.00 per square foot to build the store for the tenant. We
understand that these tenants have also been discussed as
possible tenants for the Stop N Shop project.
Physically, the elongated shape of the mall would appear to
be conducive to redevelopment along these lines. We believe that
such a scenario is consistent with the highest and best use of
the property at this time. The reality is that the mall has not
been able to effectively compete with other area centers and does
not have the ability to generate sufficient sales levels to keep
tenants at the rent levels they have contracted to pay.
At this time, we believe that continued efforts should be
made to stabilize the existing tenant base and income stream.
Subsequently, necessary feasibility studies should be conducted
in order to develop a cohesive repositioning strategy for the
long term viability of the mall.
MAP: Depicting floor plan of subject property.
REAL PROPERTY TAXES AND ASSESSMENTS
-------------------------------------------
The subject property is assessed for the purpose of taxation
by the City of Somerville for the 1995/96 tax year. The current
assessment over the subject is in the total amount of
$28,000,000. The current tax rate for real estate situated
within the City of Somerville is $29.00 per $1,000 of assessed
valuation. Application of this rate to the subject's assessment
produces current taxes of approximately $812,000. Ownership has
budgeted $830,507 for 1996 tax liability. This would account for
any anticipated increases that may occur in the following fiscal
year (July 1, 1996 - June 30, 1997). We have reflected this
budgeted amount in our current analysis.
ZONING
--------------
The subject property is currently zoned Business Park
Assembly by the City of Somerville. This new district was
created from the former Industry A designation as amended by the
new ordinance adopted on March 23, 1990.
Based on conversations with the city zoning officer, the
subject's current retail use is in conformance with the intent of
the Business Park Assembly District.
We know of no deed restrictions, private or public, that
further limit the subject property's use. The research required
to determine whether or not such restrictions exist, however, is
beyond the scope of this appraisal assignment. Deed restrictions
are a legal matter and only a title examination by an attorney or
title company can usually uncover such restrictive covenants.
Thus, we recommend a title search to determine if any such
restrictions do exist.
HIGHEST AND BEST USE
----------------------------
According to the Dictionary of Real Estate Appraisal, Third
Edition (1993), a publication of the American Institute of Real
Estate Appraisers, the highest and best use is defined as:
The reasonably probable and legal use of vacant land or
an improved property, which is physically possible,
appropriately supported, financially feasible, and that
results in the highest value. The four criteria the
highest and best use must meet are legal permissibility,
physical possibility, financial feasibility, and maximum
profitability.
We evaluated the site's highest and best use both as
currently improved and as if vacant in our original report. In
both cases, the highest and best use must meet the aforementioned
criteria. After considering all the uses which are physically
possible, legally permissible, financially feasible and maximally
productive, it is our opinion that a concentrated retail use
built to its maximum feasible FAR is the highest and best use of
the mall site as vacant. Similarly, we have considered the same
criteria with regard to the highest and best use of the site as
improved. However, in view of the changes the property has seen
over this past year, it is clear that some form of cohesive
repositioning strategy needs to be implemented. If the adjacent
Porter site is developed with big box tenants, the overall effect
on the mall could be migated to the extent the two projects could
work to compliment each other. We believe that the demographics
which influence the location are sufficient to support a
destination retail use. While we recognize the property has
deteriorated in value, we do not believe that the site is worth
more than the present value of the income stream being generated
by the operation of the property. 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 use with
a retail alignment that meets the needs of the area patrons. We
believe that such a use will yield to ownership the greatest
return over the longest period of time.
VALUATION PROCESS
-------------------------
Appraisers typically use three approaches in valuing real
property: The Cost Approach, the Income Approach and the Sales
Comparison Approach. The type and age of the property and the
quantity and quality of data effect the applicability in a
specific appraisal situation.
The Cost Approach renders an estimate of value based upon the
price of obtaining a site and constructing improvements, both
with equal desirability and utility as the subject property.
Historically, investors have not emphasized cost analysis in
purchasing investment grade properties such as regional malls.
The estimation of obsolescence for functional and economic
conditions as well as depreciation on improvements makes this
approach difficult at best. Furthermore, the Cost Approach fails
to consider the value of department store commitments to regional
shopping centers and the difficulty of site assemblage for such
properties. As such, the Cost Approach will not be employed in
this analysis due to the fact that the marketplace does not
rigidly trade leased shopping centers on a cost/value basis.
The Sales Comparison Approach is based on an estimate of
value derived from the comparison of similar type properties
which have recently been sold. Through an analysis of these
sales, efforts are made to discern the actions of buyers and
sellers active in the marketplace, as well as establish relative
unit values upon which to base comparisons with regard to the
mall. This approach has a direct application to the subject
property. Furthermore, this approach has been used to develop
investment indices and parameters from which to judge the
reasonableness of our principal approach, the Income Approach.
By definition, the subject property is considered an income/
investment property. Properties of this type are historically
bought and sold on the ability to produce economic benefits,
typically in the form of a yield to the purchaser on investment
capital. Therefore, the analysis of income capabilities are
particularly germane to this property since a prudent and
knowledgeable investor would follow this procedure in analyzing
its investment qualities. Therefore, the Income Approach has
been emphasized as our primary methodology for this valuation.
This valuation concludes with a final estimate of the subject's
market value based upon the total analysis as presented herein.
CHART: Depicting summary of retail land sales.
EXPANSION LAND
----------------------
The subject has been identified as having approximately 2.0+/-
acres of excess land based upon its expansion potential. Our
valuation of this land has utilized the Sales Comparison Approach
wherein we have analyzed recent transactions of comparable land
parcels. A summary of this market data is provided on the Facing
Page.
Commercial developers make both qualitative and quantitative
judgments in the acquisition of a site. Subjectively, a
developer considers the nature of surrounding land uses, the
proximity of complimentary services and the proximity of the site
to major traffic arteries. Objectively, the physical and
functional attributes of the site, as well as the cost of
preparing it for construction must be calculated. Lying between
these two extremes are the many aesthetic and economic factors
which come to influence the final product. The subject land is
level, accessible and virtually ready to be developed. Also, it
is an integral component of an established retail location.
Analysis of Sales
Retail Land Sale No. 1 is a 9.43 acre parcel situated on Old
Connecticut Path in Framingham. The sale closed in August 1993.
A 65,000 square foot Super Stop and Shop and 15,000 square feet
of ancillary retail opened in 1994 on the site. In addition to
the $5.5 million sale price, demolition of an existing structure
cost $300,000, off-site improvements were estimated at $314,000
and approximately $450,000 was spent to obtain approvals. Thus
the total cost of the land ready for development was $6,564,000
or $82.05 per square foot of gross building area, or $15.98 per
square foot of land area.
Retail Land Sale No. 2 is located immediately across from
Shoppers World, the largest power center in Boston. The 33 acre
parcel had only 13.2 usable acres due to site problems which in
this instance resulted from a steep slope and ledge on the site.
We were unable to obtain an estimate of the additional site costs
at the writing of this report. Home Quarters recently completed
a 130,000 square foot store along with 45,000 square feet of
ancillary retail.
Retail Land Sale No. 3 is an August 1994 sale of a 4.14 acre
parcel situated to the west of the Golden Triangle in Framingham,
one of the best retail areas in Boston. The site is level and on
grade with surrounding sites and is located at the intersection
of Routes 9 and 126. A 32,000 square foot retail building is
planned to house a 22,000 square foot Auto Palace and 10,000
square feet of ancillary retail.
Retail Land Sale No. 4 is an 11.0+/- acre, five parcel
assemblage situated immediately east of the Natick Mall on Speen
Street. The purchaser, Home Depot has built a 168,000 square
foot building on the site. In addition to the $11 million
purchase price, demolition cost approximately $500,000; off-site
improvements $350,000; and approximately $300,000 to $400,000 was
spent in leasehold buy-outs. Thus, the total price of the land
ready for development is $12,150,000 to $12,250,000, or $72.32 to
$72.91 per square foot.
Retail Land Sale No. 5 is located on Worcester Road in
Framingham. The 7.52 acre site sold in February 1993 to Shaw's
Supermarkets for a price per square foot of gross building area
of $60.22. The purchaser planned to construct a 44,833 square
foot supermarket on the site, however, several supermarkets in
the neighborhood either expanded or opened after the purchase of
this parcel and Shaw's determined it was infeasible to construct
a store on the site. As a result, it was recently sold to
Beckenstein Enterprises who plans to build a strip center
anchored by Staples Office Supplies.
Retail Land Sale No. 6 is located immediately north of the
Massport transportation facility at the Cochituate Road entrance
of Shoppers World. The 3.41 acre parcel is presently improved
with a 41,144 square foot office building which will be
demolished. The site can be developed with a 39,000 square foot
box retailer, however, the purchaser plans to build a 32,000
square foot retail strip center. According to the broker there
were six offers for the site ranging from $3.5 to $4.0 million.
Retail Land Sale No. 7, at $888,103 per acre, is a June 1994
sale of a 12.02 acre parcel located on First Avenue in Waltham
near the intersection of Winter Street and Route 128/I-95. The
site is situated on a hill so that it has excellent visibility
and signage from Route 128. Home Depot has built a 130,820
square foot home improvements store on the site. The price shown
on the table includes approximately $175,000 in demolition costs
for a former 160,000 square foot industrial building located on
the site.
The local retail land sale activity described above indicates
unadjusted prices ranging from $49.95 to $102.56 per square foot
of gross building area for approved development ranging from
32,650 to 175,000 square feet. On the basis of price per square
foot of land area, unit rates range from $10.23 to $26.90 per
square foot. Actual or proposed development densities (FAR)
range from 13 to 35 percent of the site.
We believe that these sales are all superior to the subject
by virtue of their location. The subject site actually
represents excess development capacity that is approved for up to
a 60,000 square foot expansion. We have also given consideration
to the on-going negotiations between ownership and Stop N' Shop
over the value of the access parcel needed for their retail
development to proceed. While the amount of area is undefined at
this time, we understand that it would include some of the excess
development capacity of the mall. It is our understanding that
ownership feels that Stop N' Shop will be willing to pay in the
vicinity of $1.2 million for the access parcel.
After giving consideration to all of the above, we have
valued the expansion parcel of 2.0+/- acres (87,120+/- square feet)
at $1,500,000. This would be equivalent to $17.22 per square
foot of land area and $25.00 per square foot of potential FAR.
The high price per square foot is directly due to the high
development density or FAR (.69) ownership feels they can achieve
on the site. While this exceeds the density of the comparables,
we are advised that it can be achieved in connection with the
excess parking available on the primary mall site.
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 have reentered the market. The re-emergence of real
estate investment trusts (REITs) has helped to provide liquidity
within the real estate market, pushing demand for well-tenanted,
quality property, particularly regional malls. Currently, REITs
are one of the most active segments of the industry and are
particularly attractive to institutional investors due to their
liquidity.
The market for dominant Class A institutional quality malls
is tight, as characterized by the limited amount of good quality
product available. It is the consensus that Class A property
would trade in the 7.0 to 8.0 percent capitalization rate range.
Conversely, there are many second tier and lower quality malls
offered on the market at this time. With limited demand from a
much thinner market, cap rates for this class of malls are felt
to be in the much broader 8.5 to 15.0 percent range. Reportedly,
there are 50+/- malls on the market currently. Pessimism about the
long term viability of many of these lower quality malls has been
fueled by the recent turmoil in the retail industry. It is felt
that the subject fits into this latter category.
To better understand where investors stand in today's
marketplace, we have surveyed active participants in the retail
investment market. Based upon interviews, 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 the cash flow and want to realize this
growth through real rent increases. High occupancy costs limit the
amount of upside through lease rollovers.
2. Market Dominance - The mall should truly be the dominant mall in the
market, affording it a strong barrier to entry. Some respondents feel
this is more important than the size of the trade area itself.
3. Strong Anchor Alignment - Having at least three department stores, two
of which are dominant in that market. The importance of the
traditional department store as an anchor tenant has returned to favor
after several years of weak performance and confusion as to the
direction of the industry. As a general rule, most institutional
investors would not be attracted to a two-anchor mall.
4. Dense Marketplace - Several of the institutional investors favor
markets of 300,000 to 500,000 people (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.
CHART: Depicting 1994 regional mall sales.
CHART: Depicting 1995 regional mall sales.
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 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 Price
Transaction Unit Rate /SF Sales
Year Range * Mean 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 $19.88
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 Unit NOI Sale Unit NOI
No. Rate Per SF No. Rate 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 these sales
transferred either on an all cash (100 percent equity) basis or
its equivalent utilizing market-based financing. Where
necessary, we have adjusted the purchase price to its cash
equivalent basis for the purpose of comparison.
As suggested, sales which include anchors typically have
lower square foot unit prices. In our discussions with major
shopping center owners and investors, we learned that
capitalization rates and underwriting criteria have become more
sensitive to the contemporary issues dealing with the department
store anchors. As such, investors are looking more closely than
ever at the strength of the anchors when evaluating an
acquisition.
As the reader shall see, we have attempted to make
comparisons of the transactions to the subject primarily along
economic lines. For the most part, the transactions have
involved dominant or strong Class A centers in top 50 MSA
locations which generally have solid, expanding trade areas and
good income profiles. Some of the other transactions are in
decidedly inferior second tier locations with limited growth
potential and near term vacancy problems. These sales tend to
reflect lower unit rates and higher capitalization rates.
Value "As Is"
Because the subject is theoretically 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 $5.11 per square foot
(CY 1996), based upon 322,234+/- 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 $5.11
per square foot, the subject falls well below 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 at the low end of the range
indicated by the comparables would be applicable to the subject.
The subject's anticipated net income can be initially compared to
the composite mean of the annual transactions in order to place
the subject in a frame of reference. This is shown on the
following chart.
Sales Mean Subject Subject
Year NOI Forecast Ratio
1991 $14.25 $5.11 35.9%
1992 $16.01 $5.11 31.9%
1993 $15.51 $5.11 32.9%
1994 $15.62 $5.11 32.7%
1995 $12.35 $5.11 41.4%
With first year NOI forecasted at approximately 32 to 41
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
Net
Sale NOI/SF Price/SF Income
No. 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 $145 11.11
Valuation of the subject property utilizing the net income
multipliers (NIM's) from the comparable properties accounts for
the disparity of the net operating incomes ($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 Subject Net Income Indicated Price
No. NOI/SF Multiplier $/SF
- - - ----- ------ ---------- ----
95- 1 $5.11 12.44 $64
95- 2 $5.11 13.41 $69
95- 3 $5.11 10.53 $54
95- 4 $5.11 11.13 $57
95- 5 $5.11 10.80 $55
95- 6 $5.11 9.00 $46
95- 7 $5.11 9.38 $48
95- 8 $5.11 10.06 $51
95- 9 $5.11 10.50 $54
95-10 $5.11 12.02 $61
95-11 $5.11 10.49 $54
95-12 $5.11 10.05 $51
95-13 $5.11 12.87 $66
95-14 $5.11 12.90 $66
Mean $5.11 11.11 $57
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 $46 to $69 per square foot of
owned GLA with a mean of $57 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 $60
to $65 per square foot is appropriate. Applying this unit rate
range to 322,234+/- square feet of owned GLA results in a value of
approximately $19.35 million to $20.95 million for the subject as
shown:
322,234 SF 322,234 SF
x $60 x $65
---------- ----------
$19,334,000 $20,945,200
Rounded Value Estimate - Market Sales Unit Rate Comparison
$19,350,000 to $20,950,000
Sales Multiple Method
Arguably, it is the mall shop GLA sold and its intrinsic
economic profile that is of principal concern in the investment
decision process. A myriad of factors influence this rate,
perhaps none of which is more important than the sales
performance of the mall shop tenants. Accordingly, the
abstraction of a sales multiple from each transaction lends
additional perspective to this analysis.
The sales multiple measure is often used as a relative
indicator of the reasonableness of the acquisition price. As a
rule of thumb, investors will look at a sales multiple of 1.0 as
a benchmark, and will look to keep it within a range of .75 to
1.25 times mall shop sales performance unless there are
compelling reasons why a particular property should deviate.
The sales multiple is defined as the sales price per square
foot of mall GLA divided by average mall shop sales per square
foot. As this reasonableness test is predicated upon the
economics of the mall shops, technically, any income (and hence
value) attributed to anchors that are acquired with the mall as
tenants should be segregated from the transaction. As an income
(or sales) multiple has an inverse relationship with a
capitalization rate, it is consistent that, if a relatively low
capitalization rate is selected for a property, it follows that a
correspondingly above-average sales (or income) multiple be
applied. In most instances, we are not privy to the anchor's
contributions to net income. As such, the sales multiples
reported may be slightly distorted to the extent that the imputed
value of the anchor's contribution to the purchase price has not
been segregated.
Sales Multiple Summary
Sale Going-In Sales
No. OAR Multiple
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 $178 per square foot for all
reporting tenants. This is a 5 percent reduction from 1995
sales.
In the case of the subject, the overall capitalization rate
being utilized for this analysis is considered to be
substantially higher than the mean exhibited by the comparable
sales. As such, we would be inclined to utilize a multiple below
the mean indicated by the sales. As such, we will utilize a
lower sales multiple to apply to just the mall shop space.
Applying a ratio of say, 60 to 65 percent to the forecasted sales
of $178 per square foot, the following range in value is
indicated.
Unit Sales Volume (Mall Shops) $178 $178
Sales Multiple x .60 x .65
Adjusted Unit Rate $106.80 $115.70
Mall Shop GLA x 155,194 x 155,194
Value Indication $16,575,000 $17,956,000
The analysis shows an adjusted value range of approximately
$16.6 to $17.9 million. Inherent in this exercise are mall shop
sales which are projections based on our investigation into the
market which might not fully measure investor's expectations. It
is clearly difficult to project with any certainty what the mall
shops might achieve in the future, 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
$580,000 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 $5.5
million.
Arguably, department stores have qualities that add certain
increments of risk over and above regional malls, wherein risk is
mitigated by the diversity of the store types. A recent Cushman
& Wakefield survey of free-standing retail building sales
consisting of net leased discount department stores, membership
warehouse clubs, and home improvement centers, displayed a range
in overall capitalization rates between 8.8 and 10.9 percent with
a mean of approximately 9.6 percent. All of the sales occurred
with credit worthy national tenants in place. The buildings
ranged from 86,479 to 170,000 square feet and were located in
high volume destination retail areas.
Trends indicate that investors have shown a shift in
preference to initial return and, as will be discussed in a
subsequent section, overall capitalization rates have been
showing increases over the past several years. Moreover, when
the acquisition of a shopping mall includes anchor department
stores, investors will typically segregate income attributable to
the anchors and analyze these revenues with higher capitalization
rates than those revenues produced by the mall shops. Therefore,
based upon the preceding discussion, it is our opinion that
overall capitalization rates for department stores are reasonably
reflected by a range of 9.5 to 11.0 percent. We have chosen the
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 $5.5 million, the resultant range is shown to be
approximately $22.1 to $23.5 million. Giving consideration to
all of the above, the following value range is warranted for the
subject property based upon the sales multiple analysis.
Estimated Value - Sales Multiple Method
Rounded to $22,100,000 to $23,500,000
Conclusion "As Is"
We have considered all of the above relative to the physical
and economic characteristics of the subject. It is difficult to
relate the subject to comparables that are in such widely
divergent markets with different cash flow characteristics. The
subject has poor sales levels compared to its peers, with an
atypical anchor alignment and a low 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: 322,234+/-
Price Per SF of Salable Area: $60 to $65
Indicated Value Range: $19,350,000 to $20,950,000
Sales Multiple Analysis
Indicated Value Range $22,100,000 to $23,500,000
The parameters above show a value range of approximately
$19.5 to $23.5 million for the subject.
Based on our total analysis, relative to the strengths and
weaknesses of each methodology, it would appear that the Sales
Comparison Approach indicates a market value within the more
defined range of $21.0 to $23.0 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 the 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 not forecasted to
achieve stabilization for several years. Thus, the direct
capitalization method has been omitted from the valuation
process.
Discounted Cash Flow Analysis
The Discounted Cash Flow (DCF) produces an estimate of value
through an economic analysis of the subject property in which the
net income generated by the asset is converted 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
remerchandising, but short enough to reasonably estimate the
expected income and expenses of the real estate.
CHART: Depicting projected annual cash flow for the years 1996 - 2006
for subject property.
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 the 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
$4,451,074 in potential gross revenues, equivalent to $13.81 per
square foot of total appraised (owned) GLA of 322,234 square
feet. These forecasted revenues may be allocated to the
following components:
The Mall at Assembly Square
Revenue Summary
Initial Year of Investment - 1996
Revenue Unit Income
Component Amount Rate * Ratio
- - - ------------ ---------- ------ ------
Minimum Rent $2,376,887 $ 7.38 53.4%
Overage Rent $ 47,864 $ 0.15 1.0%
Expense Recoveries $1,741,323 $ 5.40 39.1%
Miscellaneous Income $ 285,000 $ 0.88 6.4%
Total $4,451,074 $13.81 100.0%
* Reflects total owned GLA of 322,234 SF as reconfigured
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 the two 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 to problematic levels that have resulted
in several leases being renegotiated.
Interior Mall Shops
Rent from all interior mall tenants comprise the majority of
minimum rent. Aggregate rent from these tenants is forecasted to
be $1,834,894, or $11.82 per square foot. Minimum rent may be
allocated to the following components:
The Mall at Assembly Square
Minimum Rent Allocation
Interior Mall Shops
1996 Applicable Unit Rate
Revenue GLA * (SF)
--------- ------- ------
Mall Shops $1,670,201 147,621 SF $ 11.31
Kiosks $ 25,000 150 SF $166.67
Food Court $ 139,692 7,423 SF $ 18.81
Total $1,834,894 155,194 SF $ 11.82
* Represents leasable area as opposed to actual leased or occupied area
exclusive of non-owned space.
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.
Typically, we would view the rent attainment levels in the
existing mall as being representative of the total property.
However, the center is characterized by many troubled leases that
have been renegotiated to more tolerant levels based upon the
tenants sales performance. Management has been much more focused
on stabilizing the property than they have with new leasing. The
following section details the more important changes which have
influenced the mall over the past twelve months.
1995 Tenant Activity
1995 appeared to be a troublesome year at the mall. In
addition to the problems facing many of the national chains which
have been downsizing or liquidating all of their assets there
were a number of local/regional tenants that also experienced
difficulty. Provided below is a summary of leasing activity over
the past year.
- Marianne (Suite 2) and Marianne Plus (Suite 19-22) reverted to a gross
lease for 1996 with a flat rent of $100,000 vs. 8 percent of sales.
- No Name (Suite 9) vacated their space in January 1996. The tenant had
been paying $33.00 per square foot.
- DeJaiz (Suite 11) vacated their space the end of December as part of a
corporate liquidation of all stores.
- Chess King (Suite 14) vacated their 2,318 square foot unit the end of
December as part of a corporate liquidation.
- Casual Corner (Suite 16) had been on a month-to-month lease and elected
to leave at the end of last year.
- Lerner (Suite 17) extended their lease for one year but changed to a
gross lease equal to 5 percent of sales.
- Sam Goody (Suite 18B) continues to occupy this 2,616 square foot unit.
They have been in negotiations with management to take over the combined
Suites 49- 53 (4,441 square feet) for a ten year term. That space is
currently occupied by a temporary tenant. The proposed terms of the deal
are as follows:
Years 1 - 3 @ $18.00/SF
Years 4 - 7 @ $20.00/SF
Years 8 - 10 @ $22.00/SF
The tenant will get a construction allowance of $88,820, or
$20.00 per square foot. They have put the expansion off for at least
one more year.
- Wilsons (Suite 23) has left the mall as part of Melville's corporate
restructuring.
- Radio Shack (Suite 26) - There is a new lease out for signature with this
tenant to extend their lease which expires June 30, 1996. The new lease
is for an eight year term with rent increasing from $12.00 to $15.00 per
square foot for the first two years and $16.00 per square foot for the
balance. We are not aware of any concessions or tenant allowance.
- Compleate Athlete (Suite 27) - The lease has been amended for this tenant
to a gross deal.
- Pretzel Plus (Suite 29) - This tenant vacated the mall at the end of
1995.
- Dunkin Donuts (Suite 29A) - This new tenant came to the mall on a ten
year lease which commenced in July 1995. The stipulated rent is as
follows:
Years 1 - 3 @ $40.32/SF
Years 4 - 7 @ $48.39/SF
Years 8 - 10 @ $56.45/SF
The tenant incurred their cost of construction.
- Papa Gino's (Suite 31) downsized to 2,385 square feet with a new five
year lease which commenced in January 1995. The initial rent of $13.92
per square foot bumps to $25.20 per square foot in January 1996.
- Dapper Dan's (Suite 32/33) is in litigation with ownership over
approximately $300,000 in back rent. They have reportedly stopped paying
any rent pending the settlement of the litigation. Management has a
court order to remove them but is reluctant in order to keep the mall's
appearance as having a higher occupancy. A back-up deal with Chili's has
fallen through.
- Bavarian Strudel (Suite 36A) has vacated their food court unit at the end
of 1995.
- Lechters (Suite 15) received a $12,500 rent credit through July 1, 1996.
- Rocs (Suite 36B) downsized to 457 from 713 square feet.
- Taco Bell (Suite 37A) had signed a lease for a ten year term but have not
opened. We are advised that the likelihood of this deal happening is now
very small.
- 5-7-9 Shops (Suite 38) - This tenant has vacated their unit as part of a
corporate (Edison Brothers) bankruptcy.
- Merry-Go-Round (Suite 43) - This tenant has vacated the mall as part of
the corporate liquidation.
- Funcoland (Suite 44) - A new lease has been signed for this 990 square
foot unit for five years. The $18.00 per square foot rent commenced in
October 1995. It steps to $19.00 per square in year three. The tenant
received a three month rent abatement and a cash allowance of $8,000.
- Lord & Ladies (Suite 46) - This tenant vacated the store at the end of
December.
- North East Data Collection (Suite 47) - Lease signed for this 1,025
square foot space for a gross deal at $27,000 ($23.34 per square foot)
for three years.
- All For A Dollar (Suite 48) - This tenant sought and received rent relief
based on the following rent change.
Current $11.97/SF
2/96 $13.41/SF
2/97 $14.85/SF
1/98 $16.86/SF
- Suites 49-51, 53 - This 4,441 square foot space is still awaiting the Sam
Goody expansion.
- Walden Books (Suite 54) - Tenant lease has been amended effective
February 1, 1996 to extend the term on a month-to-month basis on a 5
percent gross lease. The tenant had been under a lease until January
1997 with annual rent of $34,050.
- Bakers, Jeans West and Wild Pair (Suites 39, 40, 41) are all on a
month-to-month basis in view of their corporate parent's (Edison
Brothers) bankruptcy. The deal has been redone to 5 percent of sales.
- G&G (Suite 8) has renegotiated their lease from $20.00 per square foot to
a gross lease with a $30,000 payment versus 8 percent of sales.
Based upon 1995 sales levels, with the assumption sales will
decrease by 5 percent in 1996, the following rent can be expected
from the renegotiated gross leases.
Tenant GLA Minimum vs. % 1996 Projected Unit Rate
(SF) Sales Rent (SF)
- - - ------------- ----- -------- ----- ---------- --------- ---------
Marianne 6,630 $100,000 8% $ 876,850 $100,000 $15.08
Marianne Plus 6,375 $100,000 8% $1,094,400 $100,000 $15.69
G&G 1,474 $ 30,000 8% $ 336,300 $ 30,000 $20.35
Lerner 5,415 -- 5% $ 538,650 $ 26,930 $ 4.97
Bakers 2,214 -- 5% $ 329,650 $ 16,480 $ 7.44
Jeans West 1,620 -- 5% $ 371,450 $ 18,570 $11.46
Wild Pair 1,620 -- 5% $ 243,200 $ 12,160 $ 7.51
Walden Books 2,619 -- 5% $ 484,500 $ 24,225 $ 9.25
Since there has been very little new leasing activity other
than the renegotiated deals due to poor performance, it is
difficult to measure market rent levels. However, since a
tenant's ability to pay rent is directly related to their sales
levels, an analysis of occupancy costs is appropriate.
Essentially, this is effectively what has been done where a lease
has been renegotiated to a percentage basis.
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 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, 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.
CHART: Occupancy Cost Analysis
CHART: Average Mall Shop Rent Calculation
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 -8.0
percent and total occupancy cost ratios of 11.5 and 12.1 percent,
respectively.
In general, while the rental ranges and ratio of base rent to
sales vary substantially from mall to mall and tenant to tenant,
they do provide general support for the rental ranges and ratio
which is projected for the subject property.
Conclusion - Market Rent Estimate for In-Line Shops
Previously, in the Retail Market Analysis section of the
appraisal, we discussed the subject's sales potential.
Comparable mall sales in calendar year 1995 are reported to be
$187 per square foot. In light of the mall's performance, we are
forecasting sales to decline by 5 percent to $178 per square foot
in 1996.
After considering all of the above, we have developed a
weighted average rental rate of approximately $9.00 per square
foot based upon a relative weighting of a tenant space by size.
We have tested this average rent against total occupancy cost.
Since total occupancy costs are projected to be at the high end
for a mall of the subject's calibre, we feel that base rent
should not exceed an 5.0 percent ratio (to sales) on average.
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.
Occupancy Cost - Test of Reasonableness
Our weighted average rent of approximately $9.00 can next be
tested against total occupancy costs in the mall based upon the
standard recoveries for new mall tenants. Our total occupancy
cost analyses can be found on the following chart.
The Mall at Assembly Square
Total Occupancy Cost Analysis - 1996
Tenant Cost Estimated Expenses/SF
Economic Base Rent $ 9.00
(Weighted Average)
Occupancy Costs (A)
Common Area Maintenance (1) $ 10.72
Real Estate Taxes (2) $ 2.89
Other Expenses (3) $ 2.00
Total Tenant Costs $ 24.61
Projected Average Sales (1995) $178.00
Rent to Sales Ratio 5.1%
Cost of Occupancy Ratio 13.8%
(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) with a 90 percent
minimum occupancy floor. 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).
(3) Other expenses include tenant contributions for mall HVAC and other
miscellaneous items.
Total costs, on average, are shown to be 13.8 percent of
projected average 1996 retail sales which we feel is high but
moderately manageable. This is due primarily to the fact that
fixed expenses at the subject are projected to be nearly $14.00
per square foot.
Food Court
The food court was renovated last year but is still troubled
with a high vacancy level. The 7,423 square foot food court has
a total of nine suites, four of which are occupied. A new lease
was signed last year with Dunkin Donuts at a relatively high
rent. On average, we have ascribed a $30.00 per square foot rent
to a typical food court suite (under 1,000 square feet).
Kiosks
We have also segregated permanent kiosks within our analysis
since they typically pay a much higher unit rent. Sunglass Hut
was the only permanent kiosk in place and this tenant is paying
$25,000 per annum on a five year lease. The rent roll had been
carrying four additional permanent kiosk spaces. However, we
have been advised that they have been effectively removed from
the project with the renovation. As such, they have been taken
out of this current analysis.
CHART: Lease-up/Absorption Projections
Based on the above, we have ascribed an initial market rent
of $25,000 per annum for a permanent kiosk.
Concessions
Free rent is an inducement offered by developers to entice a
tenant to locate in their project over a competitor's. This
marketing tool has become popular in the leasing of office space,
particularly in view of the over-building which has occurred in
many markets. As a rule, most major retail developers have been
successful in negotiating leases without including free rent.
Our experience with regional malls shows that free rent is
generally limited to new projects in marginal locations without
strong anchor tenants that are having trouble leasing, as well as
older centers that are losing tenants to new malls in their trade
area. Management reports that free rent has been a relative non-
issue with new retail tenants. A review of the most recent
leasing confirms this observation. It has generally been limited
to one or two months to prepare a suite for occupancy when it has
been given.
Accordingly, we do not believe that it will be necessary to
offer free rent to retail tenants at the subject. It is noted
that while we have not ascribed any free rent to the retail
tenants, we have, however, made rather liberal allowances for
tenant workletters which acts as a form of inducement to convince
a tenant to locate at the subject. These allowances are liberal
to the extent that ownership has been relatively successful in
leasing space "as is" to tenants. As will be explained in a
subsequent section of this appraisal, we have made allowances of
$8.00 per square foot to new (currently vacant) and for future
turnover space. We have also ascribed a rate of $1.00 per square
foot to rollover space. This assumption offers further support
for the attainment of the rent levels previously cited.
Absorption
Finally, our analysis concludes that the current vacant
retail space will be absorbed over a three year period through
January 1999. We have identified 36,105 square feet of vacant
space, net of newly executed leases and pending deals which have
good likelihood of coming to fruition. This is equivalent to
23.3 percent of mall GLA and 11.2 percent overall. It is noted
that vacancy has increased substantially over the past year. As
of January 1, 1995, there were only 9,858 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 2,257 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 77.3%
1997 76.7%
1998 91.7%
1999 99.4%
Anchor Tenants
The final category of minimum rent is related to the anchor
tenants (Jordan Marsh and Kmart) which pay rent at the subject
property.
Anchor tenant revenues are forecasted to amount to $541,993
in calendar year 1996. This amount is equal to $3.24 per square
foot of anchor store GLA and represents 22.8 percent of total
minimum rent. The following schedule summarizes anchor tenant
rent obligations.
The Mall at Assembly Square
Scheduled Anchor Tenant Revenues
Demised Expiration With Annual Unit
Tenant Area Options Rent Rate
- - - -------- --------- --------------- -------- -----
Jordan Marsh 72,240 SF 01/2025 $144,480 $2.00
Kmart 94,800 SF 11/2055 $397,513 $4.19
------- ------- ----
Total 167,040 SF - $541,993 $3.24
While anchor tenants contribute a relatively low amount of
rent on a unit rate basis, it is important to recognize that
their aggregate contribution is quite substantial. With nearly
23 percent of minimum base revenues in the initial year of
investment, anchor tenant revenues provide stability to the cash
flow by virtue of their creditworthiness.
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 Boston metropolitan area in general has been negatively
impacted by the recession. Sales at many retail establishments
have been down for the past few years. The impact of both Square
One and Cambridgeside will likely continue to be felt as some
additional shakeout will inevitably continue. Finally, the
subject has 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 *
- - - --------- ------------------
1996-1997 Flat
1998 +2.0%
Thereafter +3.0%
* Indicated growth rate over the previous year's rent
Releasing Assumption
The typical lease term for new in-line retail leases in
centers such as the subject generally ranges from five to twelve
years. Market practice dictates that it is not uncommon to get
rent bumps throughout the lease terms either in the form of fixed
dollar amounts or a percentage increase based upon changes in
some index, usually the Consumer Price Index (CPI). Often the
CPI clause will carry a minimum annual increase and be capped at
a higher maximum amount.
For new leases in the regional malls, ten year terms are most
typical. Essentially, the developer will deliver a "vanilla"
suite with mechanical services roughed in and minimal interior
finish. This allows the retailer to finish the suite in
accordance with their individual specifications. Because of the
up-front costs incurred by the tenants, they require a ten year
lease term to adequately amortize these costs. In certain
instances, the developer will offer some contribution to the cost
of finishing out a space over and above a standard allowance.
Upon lease expiration, it is our best estimate that there is
a 60 percent probability that an existing tenant will renew their
lease while the remaining 40 percent will vacate their space at
this time. While the 40 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 several months.
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.
Mall at Assembly Square
Renewal Assumptions
Lease Free Tenant Lease
Tenant Type Term Rent Steps Rent Alterations Commissions
- - - -------------- ----- --------------- ---- ----------- -----------
Mall Shops and
Food Court 7 yrs. 10% in 4th year No Yes Yes
Kiosks 5 yrs. 10% increase in No No Yes
3rd year
The rent step schedule upon lease expiration applies in most
instances. However, there is one exception to this assumption
with respect to tenants who are forecasted to be in a percentage
rent situation during the onset renewal period. This could occur
due to the fact that a tenant's sales were well above its
breakpoint at the expiration of the base lease. In these
instances, we have assumed a flat rent during the ensuing 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
$2,376,887 in minimum rental income. This estimate of base
rental income is equivalent to $7.38 per square foot of total
owned GLA. Alternatively, minimum rental income accounts for
53.4 percent of all potential gross revenues. Further analysis
shows that over the holding period (CY 1996-2005), minimum rent
advances at an average compound annual rate of 3.1 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
clause with ranges of 1.5 to 3.0 percent 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 a substantial amount of tenant
defections and charges, 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 $178 per square foot.
Thus, in the initial full year of the investment holding
period, overage revenues are estimated to amount to $47,864 (net
of any recaptures) equivalent to $0.15 per square foot of total
GLA and 1.0 percent of potential gross revenues.
On balance, our forecasts are deemed to be conservative.
Generally, most percentage rent is deemed to come from Jordan
Marsh with nearly 75 percent of the property's forecasted overage
rent.
Sales Growth Rates
In the Retail Market Analysis section of this report, we
discussed that retail specialty store sales at the subject
property have been declining in recent years.
Retail sales in the Boston MSA have been increasing at a
compound annual rate of 2.4 percent per annum since 1985,
according to Sales and Marketing Management. According to both
the Cushman & Wakefield and Korpacz surveys, major investors are
looking at a range of growth rates of 0 percent initially to a
high of 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, we have forecasted that
sales for existing tenants will decline by 5 percent in 1996.
This is consistent with budgetary projections. Subsequently, we
have forecasted no growth for 1997, an increase of 2 percent in
1998 and 3 percent thereafter.
Sales Growth Rate Forecast
Period Annual Growth Rate
1996 - 5.0%
1997 Flat
1998 + 2.0%
Thereafter + 3.0%
In all, we believe we have been conservative in our sales
forecast for new and turnover tenants upon the expiration of an
initial lease. At lease expiration, we have forecasted a 40
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 certain miscellaneous charges including mall HVAC.
Miscellaneous income is essentially derived from specialty
leasing for temporary tenants, Christmas kiosks and other charges
including special pass-throughs. In the first full year of the
investment, it is projected that the subject property will
generate approximately $1,741,323 in reimbursements for these
operating expenses and $285,000 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 below. 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
10,000+/- square feet
Equals: Net pro-ratable CAM billable to mall tenants on the basis of
gross leasable occupied area (GLOA).
We note that management has the ability to recover both
interest and depreciation expenses as well as the cost of the
renovation. However, in view of the projected high CAM cost to a
typical tenant, we have forecasted that ownership will not pass
any of these charges on to the tenants.
All department stores pay nominal amounts for CAM. Their
contributions are collectively detailed under MAJOR'S CAM on the
cash flow. The 1996 budgeted CAM billings for the majors can be
detailed as follows:
CAM 1996
Obligation Budget
Jordan Marsh $ 42,965
Kmart $ 70,000
Total $112,965
Real Estate Taxes
Anchor tenants again make contribution to taxes. Both pay a
pro-rata share of taxes based on the following fixed percentages:
Jordan Marsh - 22.2265 percent and Kmart - 29.1677 percent.
Other tenants have various contribution methods. In general, the
mall standard will be for the mall tenants to pay their pro-rata
share based upon average occupied area during the year after
anchor and major tenant contributions.
The department store tax obligation can be estimated as
follows:
Tax Obligation
Tenant % Share 1996 Estimate
Kmart 22.23% $242,240
Jordan Marsh 29.17% $184,591
Total 51.40% $426,831
Other recoveries consist of HVAC income, insurance income and
miscellaneous recoveries consisting of sprinkler and trash
charges. HVAC income is a standard charge of approximately $1.30
per square foot that most new tenants pay as a contribution
toward the maintenance of the HVAC plant. Generally, this charge
is subject to annual adjustment by CPI. The latter three charges
are essentially regulated to older leases within the mall. The
newer lease structure covers the cost of any of these items
within the tenants CAM charge. Sprinkler and trash income is
estimated at approximately $12,954 in 1996.
Miscellaneous Income
Miscellaneous revenues are derived from a number of sources.
One of the more important is specialty leasing. The specialty
leasing is related to temporary tenants that occupy vacant in-
line space. Shopco has been relatively successful with this
procedure at many of their malls. A schedule of miscellaneous
income is provided in the Addenda.
Other sources of miscellaneous revenues included forfeited
security deposits, temporary kiosk (Christmas) rentals, phone
revenues, lottery commissions, interest income and income from
the renting of strollers. The budget for 1996 did not project
any miscellaneous revenues. We have forecasted miscellaneous
income of $10,000 in 1996. In addition, management is projecting
$272,225 from temporary tenants in 1995. We have used $275,000
in our first year forecast. On balance, we have forecasted these
aggregate other revenues at $285,000 which we project will grow
by 3 percent per annum. Our forecast for these additional
revenues is net of provision for vacancy and credit loss.
Allowance for Vacancy and Credit Loss
The investor of an income producing property is primarily
interested in the cash revenues that an income-producing property
is likely to produce annually over a specified period of time
rather than what it could produce if it were always 100 percent
occupied with all tenants actually paying rent in full and on
time. It is normally a prudent practice to expect some income
loss, either in the form of actual vacancy or in the form of
turnover, non-payment or slow payment by tenants. We have
reflected an 8.0 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 8 percent factor as the mall leases up
based upon the following schedule.
1996 5%
1997 6%
1998 7%
Thereafter 8%
In this analysis we have also forecasted that there is a 60
percent probability that an existing tenant will renew their
lease. Upon turnover, we have forecasted that rent loss
equivalent to eight 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 8.0 percent of total potential gross revenues to a high of
29.3 percent. On average, the total allowance for vacancy and
credit loss over the 10 year projection period averages 14.8
percent of these revenues.
Total Rent Loss Forecast*
Year Loss Provision
1996 27.7%
1997 29.3%
1998 15.3%
1999 8.6%
2000 8.0%
2001 10.1%
2002 9.8%
2003 10.3%
2004 17.2%
2005 11.7%
Avg. 14.8%
* Includes phased global vacancy provision for unseen vacancy and credit loss
as well as weighted downtime provision of lease turnover.
As discussed, if an existing mall tenant is a consistent
under-performer with sales substantially below the mall average,
then the turnover probability applied is 100 percent. This
assumption, while adding a degree of conservatism to our
analysis, reflects the reality that management will continually
strive to replace under performers. On balance, the aggregate
deductions of all gross revenues reflected in this analysis are
based upon overall long-term market occupancy levels and are
considered what a prudent investor would conservatively allow for
credit loss. The remaining sum is effective gross income which
an informed investor may anticipate the subject property to
produce. We believe this is reasonable in light of overall
vacancy in this subject's market area as well as the current
leasing structure at the subject.
Effective Gross Income
In the initial full year of the investment, CY 1996,
effective gross revenues ("Total Income" line on cash flow) are
forecasted to amount to approximately $4,299,244, equivalent to
$13.34 per square foot of total owned GLA.
Effective Gross Revenue Summary
Initial Year of Investment - 1996
Aggregate Unit Income
Sum Rate Ratio
--------- ----- -----
Potential Gross Income $4,451,074 $13.81 100.0%
Less: Vacancy and $ 151,830 $ 0.47 3.4%
Credit Loss
Effective Gross Income $4,299,244 $13.34 96.6%
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 and common area
maintenance. 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. Unless otherwise cited,
expenses are forecasted to grow by 3.5 percent per annum over the
holding period.
Reimbursable Operating Expenses
We have analyzed each item of expense individually and
attempted to project what the typical investor in a property like
the subject would consider reasonable, based upon informed
opinion, judgment and experience. The following is a detailed
summary and discussion of the reimbursable operating expenses
incurred in the operation of the subject property during the
initial year of the investment holding period.
Common Area Maintenance - This expense category includes
the annual cost of miscellaneous building maintenance
contracts, recoverable labor and benefits, security,
insurance, landscaping, snow removal, cleaning and
janitorial, exterminating, supplies, trash removal,
exterior lighting, common area energy, gas and fuel,
equipment rental, interest and depreciation, and other
miscellaneous charges. In addition, ownership can
generally recoup the cost of certain extraordinary
capital items from the tenants. Typically, this is
limited to certain miscellaneous capital expenditures.
In malls like the subject 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. However,
as discussed, we have not forecasted that any of these
charges will be passed along to a mall tenant due to the
high cost of occupancy. Most tenants are subject to a 15
percent administrative surcharge although some are
assessed 25 percent. Historically, the annual CAM
expense (before anchor contributions) can be summarized
as follows:
Historical CAM Expense
Year Aggregate
Amount
1990 $1,208,837
1991 $1,191,424
1992 $1,276,863
1993 $1,410,107
1994 $1,674,453
1995 Forecast $1,592,200
1996 Budget $1,400,000
The 1996 CAM budget is shown to be $1,400,000. An
allocation of this budget by line item provided in the
Addenda. We have elected to use this amount in our
analysis.
Real Estate Taxes - The projected taxes to be incurred in
1996 are equal to $830,508. As discussed, the standard
recovery for this expense is charged on the basis of
average occupied area of non-major mall tenant GLA.
Taxes are charged to the mall tenants after first
deducting department store contributions which are
estimated at $426,881 in 1996.
Non-Reimbursable Expenses
Total non-reimbursable expenses at the subject property are
projected from accepted practices and industry standards. Again,
we have analyzed each item of expenditure in an attempt to
project what the typical investor in a property similar to the
subject would consider reasonable, based upon actual operations,
informed opinion, and experience. The following is a detailed
summary and discussion of non-reimbursable expenses incurred in
the operation of the subject property for the initial year.
Unless otherwise stated, it is our assumption that these expenses
will increase by 3.5 percent per annum thereafter.
General and Administrative - Expenses related to the
administrative aspects of the mall include costs
particular to the operation of the mall, including
salaries, travel and entertainment, and dues and
subscriptions. A provision is also made for professional
services including legal and accounting fees and other
professional consulting services. In 1996, we reflect
general and administrative expenses of $125,000.
Marketing - These costs include the expense related to
the temporary tenant program including payroll for the
promotional and leasing staff. In 1996, the budgeted
charge is approximately $50,000.
Merchant Association - Merchants Association charges
represent the landlord's contribution to the cost of the
association for the property. In the initial year, the
cost is forecasted to amount to $50,000.
Miscellaneous - This catch-all category is provided for
various miscellaneous and sundry expenses that ownership
will typically incur. Such items as unrecovered repair
costs, preparation of suites for temporary tenants,
certain non-recurring expenses, expenses associated with
maintaining vacant space, and bad debts in excess of our
credit loss provision would be included here. In the
initial year, these miscellaneous items are forecasted to
amount to approximately $100,000.
Management - The annual cost of managing the subject
property is projected to be 4.0 percent of minimum and
percentage rent. In the initial year of our analysis,
this amount is shown to be $96,990. 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 40 percent. We have forecasted a rate of $1.00 per
square foot for renewal (rollover) tenants, based on a
renewal probability of 60 percent. The blended rate
based on our 60/40 turnover probability is therefore
$3.80 per square foot. It is also 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 $2.00 per square foot for new tenants and
$1.25 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. We have elected
to model this same formula as it is within the range of
charges we have seen for these services. The cost is
weighted by our 60/40 percent renewal/turnover
probability. Thus, upon lease expiration, a leasing
commissions charge of $1.55 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
approved but we can make some provisions with reasonable
certainty for certain repairs. It was our opinion that a
prudent investor would make some provision for necessary
repairs and upgrades. To this end, we have reflected
expenditures of $100,000 per annum as a contingency fund
for these unforeseen expenses.
Replacement Reserves - It is customary and prudent to set
aside an amount annually for the replacement of short-
lived capital items such as the roof, parking lot and
certain mechanical items. The repairs and maintenance
expense category has historically included some capital
items which have been passed through to the tenants.
This appears to be a fairly common practice among most
malls. However, we feel that over a holding period some
repairs or replacements will be needed that will not be
passed on to the tenants. Due to the inclusion of many
of the capital items in the maintenance expense category,
the reserves for replacement classification need not be
sizeable. This becomes a more focused issue when the CAM
expense starts to get out of reach and tenants begin to
complain. For purposes of this report, we have estimated
an expense of $0.20 per square foot of owned GLA during
the first year, thereafter increasing by our expense
growth rate throughout our cash flow analysis.
Net Income/Net Cash Flow
The total expenses of the subject property, including
alterations, commissions, capital expenditures, and reserves, are
annually deducted from total income, thereby leaving a residual
net operating income or net cash flow to the investors in each
year of the holding period before debt service. In the initial
year of investment, the net operating income is forecasted to be
equal to approximately $1.65 million which is equivalent to 38.3
percent of effective gross income. Deducting other expenses
including capital items results in a net cash flow before debt
service of approximately $1.45 million.
Mall at Assembly Square
Operating Summary
Initial Year of Investment - 1996
Aggregate Unit Rate* Operating
Sum Ratio
Effective Gross Income $4,299,244 $13.34 100.0%
Operating Expenses $2,652,498 $ 8.23 61.7%
Net Operating Operating $1,646,746 $ 5.11 38.3%
Other Expenses $ 193,617 $ .60 4.5%
Cash Flow $1,453,129 $ 4.51 33.8%
* Based on total owned GLA of 322,234 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: 7.6%
Cash Flow: 7.7%
Growth rates are shown to be 7.6 and 7.7 percent,
respectively. We note that this annual growth is a result of the
atypcial income in the early years of the cash flow due to
vacancy. On a stabilized basis (1999-2005), net income growth is
shown to be only 1.9 percent which is a more reasonable forecast
for a real estate investment 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 added to
the perceived investment risk.
1992 saw owners become more realistic in their pricing as
some looked to move product because of other financial pressures.
The 87 basis point rise to 7.31 percent reflected the reality
that, in many markets, malls were not performing as strongly as
expected. A continuation of this trend was seen in 1993 as the
average rate increased by 61 basis points. The trend in deals
over the past two year period shows a respective rise in average
cap rates of 45 and 59 basis points. For the year, 1994
transactions were a mix of quality, ranging from premier,
institutional grade centers (Biltmore Fashion Park, Riverchase
Galleria), to B-centers such as Corte Madera Town Center and
Crossroads Mall. The continuation of this trend into 1995 is in
evidence as owners of the better quality malls are either
aggressively pricing them or keeping them off of the market until
it improves further. Also, the beating that REIT stocks
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 10.00-11.50 10.00-13.0010.00-11.5011.00-12.0010.00-11.5010.50-12.00
10.5 11.5 10.70 11.4 10.72 11.33
The Fourth Quarter 1995 Peter F. Korpacz survey finds that
cap rates have remained relatively stable. They recognize that
there is extreme competition for the few premier malls that are
offered for sale which should exert downward pressure on rates.
However, most of the available product is B or C quality which
are not attractive to most institutional investors. The survey
did, however, note a dramatic change for the top tier investment
category of 20 to 30 true "trophy" assets in that investors think
it is unrealistic to assume that cap rates could fall below 7.0
percent.
NATIONAL REGIONAL MALL MARKET
FOURTH QUARTER 1995
KEY INDICATORS CURRENT LAST
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
Assembly Square has gone through a number of changes over the
past year. As discussed, it has been severely impacted by
corporate bankruptcies, downsizings and restructurings. Its
anchors have also seen downward pressure on sales. With fixed
costs relatively high, ownership is under pressure to address the
needs of tenants with respect to health ratios that have risen to
intolerable levels. As such, a large reduction in net income is
forecasted for 1996. At the point of stabilization, our model
results in a net income growth which will lag inflation.
On balance, the mall is in need of repositioning and efforts
need to be made to explore the feasibility of making the
necessary changes. In this regard, we find that investors would
be cautious for the following reasons:
- It is a small mall with only two anchors that represent an atypical
alignment. Furthermore, one of the anchors is rumored to be close to
bankruptcy.
- The mall is vulnerable to new competition unless attempts are made to
expand or dramatically reposition it.
- The trade area is relatively dense with a primary market of approximately
100,000 households. The demographics however, are changing with more
ethnic, lower income shoppers.
On balance, we believe that a property with the sought after
characteristics of the subject would potentially trade at an
overall rate between 10.0 and 10.5 percent based on first year
income if it were operating on a stabilized basis. It is
difficult to be more optimistic with this type of analysis when
the property requires a high level of absorption for lease-up.
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 25 basis points to arrive at a projected
terminal capitalization rate ranging from 10.25 to 10.75 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 10.50 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 $30.9 million based on 2006 net income of
approximately $3.2 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
- - - --------------- ---------------- ---------------------------- ------------
$3,242,063 $30,876,800 $617,535 $30,259,300
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 Cumulative %
1996 6 20,782 13.4%
1997 6 22,408 27.8%
1998 1 3,464 30.0%
1999 3 7,805 35.1%
2000 5 15,319 45.0%
2001 7 16,681 55.7%
2002 2 3,572 58.0%
2003 6 17,815 69.5%
2004 22 57,468 106.5%
2005 9 20,960 120.0%
* Includes mall shops, kiosks and food court.
From the above, we see that a large percentage (45 percent)
of the GLA will expire by 2000. The largest expiration year is
2004 when leases totaling 57,468 square feet of the center will
expire. Over the total projection period, the mall will
completely turnover. 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 12.50 and 13.00 percent.
Present Value Analysis
Analysis by the discounted cash flow method is examined over
a holding period that allows the investment to mature, the
investor to recognize a return commensurate with the risk taken,
and a recapture of the original investment. Typical holding
periods usually range from 10 to 20 years and are sufficient for
the majority of institutional grade real estate such as the
subject to meet the criteria noted above. In the instance of the
subject, we have analyzed the cash flows anticipated over a ten
year period commencing on January 1, 1996.
A sale or reversion is deemed to occur at the end of the 10th
year (December 31, 2005), based upon capitalization of the
following year's net operating income. This is based upon the
premise that a purchaser in the 10th year is buying the following
year's net income. Therefore, our analysis reflects this
situation by capitalizing the first year of the next holding
period.
The present value is formulated by discounting the property
cash flows at various yield rates. The yield rate utilized to
discount the projected cash flow and eventual property reversion
has been based on an analysis of anticipated yield rates of
investors dealing in similar investments. The rates reflect
acceptable expectations of yield to be achieved by investors
currently in the marketplace shown in their current investment
criteria and as extracted from comparable property sales.
Cash Flow Assumptions
Our cash flows forecasted for the mall have been presented.
To reiterate, the formulation of these cash flows 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 60
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 7 years with a rent step of 10 percent in
year 5. 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 percent rent increase after 36 months.
4. Market rents have been established for 1996 based upon an overall
average of about $9.00 per square foot for in-line mall shop space.
Subsequently, it is our assumption that market rental rates for mall
tenants will remain flat for two years, increasing by 2.0 percent in
1998 and 3.0 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
decline by 5 percent in 1996, will remain flat in 1997 and then grow by
2.0 percent in 1998 and 3.0 percent per year throughout the balance of
the holding period.
6. Expense recoveries are based upon terms specified in the various lease
contracts. The standard lease contract for real estate taxes and
common area maintenance billings for interior mall tenants is based
upon a tenants pro rata share with the latter carrying an
administrative surcharge of 15 percent. Pro-rata share is generally
calculated on leased (occupied) area as opposed to leasable area.
Department store contributions are deducted before pass through to the
mall shops. 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 40
percent probability that the retail tenant will vacate the suite. At
this time we have forecasted that rent loss equivalent to 8 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 8 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 generally forecasted to increase by 3.5 percent per year except for
management which is based upon 3.5 percent of minimum and percentage
rent annually. Taxes are also forecasted to grow at 3.5 percent per
year. Alteration costs are assumed to escalate at our forecasted
expense inflation rate.
10. A provision for initial capital reserves of approximately $64,500 equal
to approximately $0.20 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 $1.00 per square foot. Leasing commissions reflect a rate
structure of $2.00 per square foot for new leases and $1.25 per square
foot for renewal leases. A contingency provision for other capital
expenditures of $100,000 per annum has been made.
CHART: Depicting reversion calculation.
CHART: Depicting sale yield matrix analysis
For a property such as the subject, it is our opinion that an
investor would require an all cash discount rate in the range of
12.50 to 13.0 percent. Accordingly, we have discounted the
projected future pre-tax cash flows to be received by an equity
investor in the subject property to a present value so as to
yield 12.50 to 13.0 percent at 25 basis point intervals on equity
capital over the holding period. This range of rates reflects
the risks associated with the investment. Discounting these cash
flows over the range of yield and terminal rates now being
required by participants in the market for this type of real
estate places additional perspective upon our analysis. A
valuation matrix for the subject appears on the Facing Page.
Through such a sensitivity analysis, it can be seen that the
present value of the subject property varies from approximately
$20.8 to $21.9 million. Giving consideration to all of the
characteristics of the subject previously discussed, we feel that
a prudent investor would require a yield which falls near the
middle of the range outlined above for this property.
Accordingly, we believe that based upon all of the assumptions
inherent in our cash flow analysis, an investor would look toward
as IRR around 12.75 percent and a terminal rate around 10.50
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 $21.5 million for the subject property as of January 1,
1996. The indices of investment generated through this indicated
value conclusion are shown on the following page.
DISCOUNTED CASH FLOW ANALYSIS
Mall at Assembly Square
Cushman & Wakefield, Inc.
Net Discount Present Value Composition Annual Cash
Year Cash Flow Factor @ 12.75% of Cash Flows of Yield on Cash Return
One $1,453,129 x 0.886918 = $1,288,806 6.03% 6.76%
Two $1,463,258 x 0.786623 = $1,151,033 5.38% 6.81%
Three $2,237,196 x 0.697670 = $1,560,826 7.30% 10.41%
Four $2,524,845 x 0.618776 = $1,562,315 7.31% 11.74%
Five $2,671,871 x 0.548804 = $1,466,333 6.86% 12.43%
Six $2,638,614 x 0.486744 = $1,284,330 6.01% 12.27%
Seven $2,732,172 x 0.431702 = $1,179,484 5.52% 12.71%
Eight $2,824,010 x 0.382884 = $1,081,269 5.06% 13.13%
Nine $2,463,165 x 0.339587 = $836,459 3.91% 11.46%
Ten $2,840,385 x 0.301186 = $855,484 4.00% 13.21%
Total Present Value of Cash Flows $12,266,339 57.37% 11.09% Avg
Reversion:
Eleven $3,242,063 (1) / 10.50% = $30,876,790
Less: Cost of Sale @ 2% $617,536
Net Reversion $30,259,255
x Discount Factor 0.301186
Total Present Value of Reversion $9,113,658 42.63%
Total Present Value $21,379,997 100.00%
ROUNDED: $21,500,000
Owned GLA (SF): 322,234
Per Square Foot of Owned GLA: $67
Implicit Going-in Capitalization Rate:
Year One NOI $1,646,746
Going-in Cap Rate 7.66%
CAGR Concluded Value to Reversion 3.35%
Note: (1) Net Operating Income
We note that the computed equity yield is not necessarily the
true rate of return on equity capital. This analysis has been
performed on a pre-tax basis. The tax benefits created by real
estate investment will serve to attract investors to a pre-tax
yield which is not the full measure of the return on capital.
RECONCILIATION AND FINAL VALUE ESTIMATE
Application of the Sales Comparison 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 $21,000,000 - $23,000,000
Income Approach
Discounted Cash Flow $21,500,000
Sales Comparison Approved $ 1,500,000
Expansion Land
This is considered a narrow range in possible value given the
magnitude of the value estimates. Both approaches are well
supported by data extracted from the market. There are, however,
strengths and weaknesses in each of these two approaches which
require reconciliation before a final conclusion of value can be
rendered.
Sales Comparison Approach
The Sales Comparison Approach arrived at a value indicted for
the property by analyzing historical arms-length transaction,
reducing the gathered information to common units of comparison,
adjusting the sale data for differences with the subject and
interpreting the results to yield a meaningful value conclusion.
The basis of these conclusions was the cash-on-cash return based
on net income and the adjusted price per square foot of gross
leasable area sold. An analysis of the subject on the basis of
its implicit sales multiple was also utilized.
The process of comparing historical sales data to assess what
purchasers have been paying for similar type properties is weak
in estimating future expectations. Although the unit sale price
yields comparable conclusions, it is not the primary tool by
which the investor market for a property like the subject
operates. In addition, no two properties are alike with respect
to quality of construction, location, market segmentation and
income profile. As such, subjective judgment necessarily become
a part of the comparative process. The usefulness of this
approach is that it interprets specific investor parameters
established in their analysis and ultimate purchase of a
property. In light of the above, the writers are of the opinion
that this methodology is best suited as support for the
conclusions of the Income Approach. It does provide useful
market extracted rates of return such as overall rates to
simulate investor behavior in the Income Approach.
Income Approach
Discounted Cash Flow Analysis
The subject property is highly suited to analysis by the
discounted cash flow method as it will be bought and sold in
investment circles. The focus on property value in relation to
anticipated income is well founded since the basis for investment
is profit in the form of return or yield on invested capital.
The subject property, as an investment vehicle, is sensitive to
all changes in the economic climate and the economic expectations
of investors. The discounted cash flow analysis may easily
reflect changes in the economic climate of investor expectations
by adjusting the variables used to qualify the model. In the
case of the subject property, the Income Approach can analyze
existing leases, the probabilities of future rollovers and
turnovers and reflect the expectations of overage rents.
Essentially, the Income Approach can model many of the dynamics
of a complex shopping center. The writers have considered the
results of the discounted cash flow analysis because of the
applicability of this method in accounting for the particular
characteristics of the property, as well as being the tool used
by many purchasers.
Conclusions
We have briefly discussed the applicability of each of the
methods presented. Because of certain vulnerable characteristics
in the Sales Comparison Approach, it has been used as supporting
evidence and as a final check on the value conclusion indicated
by the Income Approach methodology. The value exhibited by the
Income Approach is consistent with the leasing profile of the
mall. 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:
TWENTY THREE MILLION FIVE HUNDRED THOUSAND DOLLARS
$23,500,000
This valuation may be allocated to the following components:
Mall: $22,000,000
Expansion Land 1,500,000
TOTAL $23,500,000
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 inspected the property. Brian J. Booth did not
inspect the property but has contributed to the underlying analysis of the
property.
2. The statements of fact contained in this report are true and correct.
3. The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are our personal,
unbiased professional analyses, opinions, and conclusions.
4. We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
5. Our compensation is not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the amount
of the value estimate, the attainment of a stipulated result, or the
occurrence of a subsequent event. The appraisal assignment was not based
on a requested minimum valuation, a specific valuation or the approval of a
loan.
6. No one provided significant professional assistance to the persons signing
this report.
7. Our analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the Uniform Standards of Professional
Appraisal Practice of the Appraisal Foundation and the Code of Professional
Ethics and the Standards of Professional Appraisal Practice of the Appraisal
Institute.
8. The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
9. As of the date of this report, Richard W. Latella has completed the
requirements of the continuing education program of the Appraisal Institute.
/s/Richard Latella /s/Brian Booth
Richard W. Latella, MAI Brian J. Booth
Senior Director Retail Valuation Group
Retail Valuation Group
State of Massachusetts Certified General Appraiser
License No. 4287
ADDENDA
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NATIONAL RETAIL OVERVIEW
OPERATING EXPENSE BUDGET (1996)
TENANT SALES REPORT (1995)
PRO-JECT LEASE ABSTRACT REPORT
PRO-JECT PROLOGUE ASSUMPTIONS REPORT
PRO-JECT TENANT REGISTER REPORT
PRO-JECT LEASE EXPIRATION REPORT
ENDS FULL DATA REPORT FOR PRIMARY AND TOTAL TRADE AREA
REGIONAL MALL SALES (1991-1993)
CUSHMAN & WAKEFIELD INVESTOR SURVEY
APPRAISERS' QUALIFICATIONS
PARTIAL CLIENT LIST
CUSHMAN & WAKEFIELD, INC.
NATIONAL RETAIL OVERVIEW
Prepared by: Richard W. Latella, MAI
NATIONAL RETAIL MARKET OVERVIEW
Introduction
Shopping centers constitute the major form of retail activity in the United
States today. Approximately 55 percent of all non- automotive retail sales
occur in shopping centers. It is estimated that consumer spending
accounts for about two-thirds of all economic activity in the United States.
As such, retail sales patterns have become an important indicator of
the country's economic health.
During the period 1980 through 1995, total retail sales in the United
States increased at a compound annual rate of 6.16 percent. Data for the
period 1990 through 1995 shows that sales growth has slowed to an annual
average of 4.93 percent. This information is summarized on the following
chart. The Commerce Department reports that total retail sales fell
three-tenths of a percent in January 1996.
Total U.S. Retail Sales(1)
Year Amount Annual Change
(Billions)
1980 $ 957,400 N/A
1985 $1,375,027 N/A
1990 $1,844,611 N/A
1991 $1,855,937 .61%
1992 $1,951,589 5.15%
1993 $2,074,499 6.30%
1994 $2,236,966 7.83%
1995 $2,346,577 4.90%
Compound Annual
Growth Rate +6.16%
1980-1995
CAGR: 1990 - 1995 +4.93%
(1)1985 - 1995 data reflects recent revisions by the U.S. Department of
Commerce: Combined Annual and Revised Monthly Retail Trade.
Source: Monthly Retail Trade Reports Business Division, Current Business
Reports, Bureau of the Census, U.S. Department of Commerce.
The early part of the 1990s was a time of economic stagnation and
uncertainty in the country. The gradual recovery, which began as the
nation crept out of the last recession, has shown some signs of weakness as
corporate downsizing has accelerated. But as the recovery period reaches into
its fifth year and the retail environment remains volatile, speculation
regarding the nation's economic future remains. It is this uncertainty which
has shaped recent consumer spending patterns.
Personal Income and Consumer Spending
Americans' personal income advanced by six-tenths of a percent in
December, which helped raise income for all of 1995 by 6.1 percent, the
highest gain since 6.7 percent in 1990. This growth far outpaced the 2.5
percent in 1994 and 4.7 percent in 1993. Reports for February 1996 however,
reported that income grew at an annual rate of eight-tenths of a percent,
the biggest gain in thirteen months, and substantially above January's anemic
growth rate of one-tenth of a percent.
Consumer spending is another closely watched indicator of economic
activity. The importance of consumer spending is that it represents
two-thirds of the nation's economic activity. Total consumer spending rose
by 4.8 percent in 1995, slightly off of the 5.5 percent rise in 1994 and 5.8
percent in 1993. These increases followed a significant lowering on
unemployment and bolstered consumer confidence. The Commerce Department
reported that Americans spent at an annual rate of $5.01 trillion in January
1996, a drop of five-tenths of a percent. It was the third drop in five
months.
Unemployment Trends
The Clinton Administration touts that its economic policy has dramatically
increased the number of citizens who have jobs. Correspondingly, the
nation's unemployment rate continues to decrease from its recent peak in
1992. Selected statistics released by the Bureau of Labor Statistics are
summarized as follows:
Selected Employment Statistics
Civilian Labor Force Employed
Total Workers Total Workers Unemployment
Year(1) (000) % Change (000) % Change Rate
1990 124,787 .7 117,914 .5 5.5
1991 125,303 .4 116,877 -.9 6.7
1992 126,982 1.3 117,598 .6 7.4
1993 128,040 .8 119,306 1.5 6.8
1994 131,056 2.4 123,060 3.1 6.1
1995 132,337 .98 124,926 1.5 5.6
CAGR 1.18 1.16
1990-1995
(1)Year ending December 31
Source: Bureau of Labor Statistics U.S. Department of Labor
During 1995, the labor force increased by 1,281,000 or approximately
1.0 percent. Correspondingly, the level of employment increased by
1,866,000 or 1.5 percent. As such, the year end unemployment rate dropped by
five-tenths of a percent to 5.6 percent. For 1995, monthly job growth averaged
144,000. On balance, over 8.0 million jobs have been created since the
recovery began.
Housing Trends
Housing starts enjoyed a good year in 1994 with a total of 1.53 million
starts; this up 13.0 percent from 1.45 million in 1993. Multi-family was up
60.0 percent in 1994 with 257,00 starts. However, the National Asociation of
Homebuilders forsees a downshift in activity throughout 1995 resulting from the
laggard effect of the Federal Reserves's policy of raising interest rates. The
.50 percent increase in the federal funds rate on February 1, 1995 was the
seventh increase over the past thirteen months, bringing it to its highest
level since 1991. Sensing a retreat in the threat of inflation, the Fed
reduced the Federal Funds rate by 25 basis points in July 1995 to 5.75 percent.
Total housing starts rose by 6.0 percent to a seasonally adjusted annual
rate of 1.42 million units. Since family housing starts in November were at
1,102,00 units while multi-family jumped by 77,000 at an annual rate.
Applications for building permits rose by 3.2 percent to a rate of 1.28
million. The median new home price of new homes sold in the first nine months
of 1995 was $132,000. The median was $130,000 for all of 1994. The Commerce
Department reported that construction spending rose 2.9 percent in October to
an annual rate of $207.7 billion, compared to $217.9 billion in all of 1994.
The home ownership rate seems to be rising, after remaining stagnant over
the last decade. For the third quarter of 1995, the share of households that
own their homes was 65 percent, compared to 64.1 percent for a year earlier.
Lower mortgage rates are cited as a factor.
Gross Domestic Product
The report on the gross domestic product (GDP) showed that output for
goods and services expanded at an annual rate of just .9 percent in the
fourth quarter of 1995. Overall, the economy gained 2.1 percent in 1995, the
weakest showing in four years since the 1991 recession. The .9 percent
rise in the fourth quarter was much slower than the 1.7 percent expected
by most analysts. The Fed sees the U.S. economy expanding at a 2.0 to 2.25
percent pace during 1996 which is in-line with White House forecasts.
The following chart cites the annual change in real GDP since 1990.
Real GDP
Year % Change
1990 1.2
1991 - .6
1992 2.3
1993 3.1
1994 4.1
1995 * 2.1
* Reflects new chain weighted system of measurement. Comparable
1994 measure would be 3.5%
Source: Bureau of Economic Analysis
Consumer Prices
The Bureau of Labor Statistics has reported that consumer prices rose
by only 2.5 percent in 1995, the fifth consecutive year in which inflation
was under 3.0 percent. This was the lowest rate in nearly a decade when
the overall rate was 1.1 percent in 1986. All sectors were down
substantially in 1995 including the volatile health care segment which
recorded inflation of only 3.9 percent, the lowest rate in 23 years.
The following chart tracks the annual change in the CPI since 1990.
Consumer Price Index(1)
Year CPI % Change
1990 133.8 6.1
1991 137.9 3.0
1992 141.9 2.9
1993 145.8 2.7
1994 149.7 2.7
1995 153.5 2.5
(1) All Urban Workers
Source: Dept. of Labor, Bureau of Labor Statistics
Other Indicators
The government's main economic forecasting gauge, the Index of Leading
Economic Indicators shows that the vibrant 1994 economy continues to cool off.
The index is intended to project econoic growth over the next six months. The
Conference Board, an independent business group, reported that the index
rose two-tenths of a percent in December 1995, breaking a string of three
straight declines. It has become apparent that the Federal Reserve's
conservative monetary policy has had an effect on the economy and some
economists are calling for a further reduction in short term interest rates.
The Conference Board also reported that consumer confidence rebounded in
February 1996, following reports suggesting lower inflation. The board's
index of consumer confidence rose 9 points to 97 over January when
consumers worried about the government shutdown, the stalemate over the
Federal budget and the recent flurry of layoff announcements by big
corporations.
In another sign of increasingly pinched household budgets, consumers
sharply curtailed new installment debt in September 1995, when installment
credit rose $5.4 billion, barely half as much as August. Credit card
balances increased by $2.8 billion, the slimmest rise of the year. For the
twelve months through September 1995, outstanding credit debt rose 13.9
percent, down from a peak of 15.3 percent in May. Still, installment debt
edged to a record 18.8 percent of disposable income, indicating that
consumers may be reaching a point of discomfort with new debt.
The employment cost index is a measure of overall compensation
including wages, salaries and benefits. In 1995 the index rose by only 2.9
percent, the smallest increase since 1980. This was barely ahead of
inflation and is a sign of tighter consumer spending over the coming
year.
Economic Outlook
The WEFA Group, an economic consulting company, opines that the current
state of the economy is a "central bankers" dream, with growth headed
toward the Fed's 2.5 percent target, accompanied by stable if not
falling inflation. They project that inflation will remain in the 2.5 to
3.0 percent range into the foreseeable future. This will have a direct
influence on consumption (consumer expenditures) and overall inflation rates
(CPI).
Potential GDP provides an indication of the expansion of output, real
incomes, real expenditures, and the general standard of living of the
population. WEFA estimates that real U.S. GDP will grow at an average annual
rate between 2.0 and 2.5 percent over the next year and at 2.3 percent
through 2003 as the output gap is reduced between real GDP and potential GDP.
After 2003, annual real GDP growth will moderate, tapering to 2.2 percent per
annum.
Consumption expenditures are primarily predicated on the growth of
real permanent income, demographic influences, and changes in relative
prices over the long term. Changes in these key variables explain much of
the consumer spending patterns of the 1970s and mid-1980s, a period during
which baby boomers were reaching the asset acquisition stages of their lives;
purchasing automobiles and other consumer and household durables. Increases in
real disposable income supported this spending spurt with an average annual
increase of 2.9 percent per year over the past twenty years. Real
consumption expenditures increased at an average annual rate of 3.1 percent
during the 1970s and by an average of 4.0 percent from 1983 to 1988. WEFA
projects that consumption expenditure growth will slow to 2.0 percent per year
by 2006 as a result of slower population growth and aging. It is also
projected that the share of personal consumption expenditures
relative to GDP will decline over the next decade. Consumer spending as a
share of GDP peaked in 1986 at 67.4 percent after averaging about 63.0
percent over much of the post- war period. WEFA estimates that consumption's
share of aggregate output will decline to 64.5 percent by 2003 and 62.7
percent by 2018.
Retail Sales
In their publication, NRB/Shopping Centers Today 1994 Shopping
Center Census, the National Research Bureau reports that overall retail
conditions continued to improve for the third consecutive year in 1994.
Total shopping center sales increased 5.5 percent to $851.3 billion in 1994,
up from $806.6 billion in 1993. The comparable 1993 increase was 5.0
percent. Retail sales in shopping centers (excluding automotive and
gasoline service station sales) now account for about 55.0 percent of
total retail sales in the United States.
Total retail sales per square foot have shown positive increases
over the past three years, rising by 8.7 percent from approximately $161 per
square foot in 1990, to $175 per square foot in 1994. It is noted that the
increase in productivity has exceeded the increase in inventory which bodes
well for the industry in general. This data is summarized on the following
table.
Selected Shopping Center Statistics
1990-1994
% Compound
1990 1991 1992 1993 1994 Change Annual
1990-93 Growth
Retail Sales in
Shopping Centers * $706.40 $716.90 $768.20 $806.60 $851.30 20.5% 4.8%
Total Leasable
Area** 4.4 4.6 4.7 4.8 4.9 11.4% 2.7%
Unit Rate $160.89 $157.09 $164.20 $169.08 $175.13 8.7% 2.1%
*Billions of Dollars
** Billions of Square Feet
Source: National Research Bureau
To put retail sales patterns into perspective, the following
discussion highlights key trends over the past few years.
- As a whole, 1993 was a good year for most of the nation's major
retailers. Sales for the month of December were up for most,
however, the increase ranged dramatically from 1.1 percent at
Kmart to 13.3 percent at Sears for stores open at least a year.
It is noted that the Sears turnaround after years of slippage
was unpredicted by most forecasters.
- With the reporting of December 1994 results, most retailers
posted same store gains between 2.0 and 6.0 percent. The
Goldman Sachs Retail Composite Comparable Store Sales Index, a
weighted average of monthly same store sales of 52 national
retail companies rose 4.5 percent in December. The weakest
sales were seen in women's apparel, with the strongest sales
reported for items such as jewelry and hard goods. Most
department store companies reported moderate increases in same
store sales, though largely as a result of aggressive
markdowns. Thus, profits were negatively impacted for many
companies.
- For 1994, specialty apparel sales were lackluster at best, with
only .4 percent comparable sales growth. This is of concern to
investors since approximately 30.0 percent of a mall's small
shop space is typically devoted to apparel tenants. Traditional
department stores experienced 3.4 percent same store growth in
1994, led by Dillard's 5.0 percent increase. Mass merchants'
year-to-year sales increased by 6.7 percent in 1994, driven by
Sears' 7.9 percent increase. Mass merchants account for 35.0 to
55.0 percent of the anchors of regional malls and their
resurgence bodes well for increased traffic at these centers.
- Sales at the nation's largest retailer chains rose tepidity in
January, following the worst December sales figures since the
1990-91 recession in 1995. Same store sales were generally
weak in almost all sectors, with apparel retailers being
particularly hard hit. Some chains were able to report
increases in sales but this generally came about through
substantial discounting. As such, profits are going to suffer
and with many retailers being squeezed for cash, 1996 is
expected to be a period of continued consolidations and
bankruptcy. The Goldman Sachs composite index of same store
sales grew by 1.1 percent in January 1996, compared to a 4.7
percent for January 1995.
Provided on the following chart is a summary of overall and same store
sales growth for selected national merchants for the most recent period.
Same Store Sales for the Month of January 1996
% Change From Previous Year
Name of Retailer Overall Same Store Basis
Wal-Mart +16.0% + 2.6%
Kmart + 4.0% + 7.7%
Sears, Roebuck & Company + 4.0% + 0.6%
J.C. Penney - 3.0% - 4.3%
Dayton Hudson Corporation + 8.0% + 2.0%
May Department Stores + 7.0% + 0.7%
Federated Department Stores + 3.0% + 5.1%
The Limited Inc. + 6.0% - 2.0%
Gap Inc. +48.0% + 6.0%
Ann Taylor - 1.0% - 17.0%
Source: New York Times
According to the Goldman sachs index, department store sales fell by 1.1
percent during January, discount stores rose by 4.5 percent, and specialty hard
goods retailers fell by 4.7 percent.
The outlook for retail sales growth is one of cautious optimism.
Some analysts point to the fact that consumer confidence has resulted
in increases in personal debt which may be troublesome in the long run.
Consumer loans by banks rose 13.9 percent in the twelve months that ended
on September 30, 1995. But data gathered by the Federal Reserve on
monthly payments suggest that debt payments are not taking as big a bite out
of income as in the late 1980s, largely because of the record refinancings at
lower interest rates in recent years and the efforts by many Americans to
repay debts.
GAFO and Shopping Center Inclined Sales
In a true understanding of shopping center dynamics, it is important to
focus on both GAFO sales or the broader category of Shopping Center Inclined
Sales. These types of goods comprise the overwhelming bulk of goods and
products carried in shopping centers and department stores and consist of
the following categories:
- General merchandise stores including department and other stores;
- Apparel and accessory stores;
- Furniture and home furnishing stores; and
- Other miscellaneous shoppers goods stores.
Shopping Center Inclined Sales are somewhat broader and include such
classifications as home improvement and grocery stores.
Total retail sales grew by 7.8 percent in the United States in 1994 to
$2.237 trillion, an increase of $162 billion over 1993. This followed an
increase of $125 billion over 1992. Automobile dealers captured $69+/-
billion of total retail sales growth last year, while Shopping Center
Inclined Sales accounted for nearly 40.0 percent of the increase ($64
billion). GAFO sales increased by $38.6 billion. This group was led
by department stores which posted an $18.0 billion increase in sales. The
following chart summarizes the performance for this most recent comparison
period.
Retail Sales by Major Store Type
1993-1994 ($MIL.)
1993-1994
Store Type 1994 1993 % Change
GAFO:
General Merchandise $282,541 $264,617 6.8%
Apparel & Accessories 109,603 107,184 2.3%
Furniture & Furnishings 119,626 105,728 13.1%
Other GAFO 80,533 76,118 5.8%
GAFO Subtotal $592,303 $553,647 7.0%
Convenience Stores:
Grocery $376,330 $365,725 2.9%
Other 21,470 19,661 9.2%
Subtotal $397,800 $385,386 3.2%
Drug 81,538 79,645 2.4%
Convenience Subtotal $479,338 $465,031 3.1%
Other:
Home Improvement &
Building Supplies Stores $122,533 $109,604 11.8%
Shopping Center-Inclined 1,194,174 1,128,282 5.8%
Subtotal 526,319 456,890 15.2%
Automobile Dealers 142,193 138,299 2.8%
Gas Stations 228,351 213,663 6.9%
Eating and Drinking Places 145,929* 137,365* 6.2%
All Other
Total Retail Sales $2,236,966 $2,074,499 7.8%
* Estimated sales
Source: U.S. Department of Commerce and Dougal M. Casey: Retail Sales and
Shopping Center Development Through The Year 2000 (ICSC White Paper)
GAFO sales grew by 7.0 percent in 1994 to $592.3 billion, led by furniture
and furnishings which grew by 13.1 percent. From the above it can be
calculated that GAFO sales accounted for 26.5 percent of total retail sales
and nearly 50.0 percent of all shopping center-inclined sales.
The International Council of Shopping Centers (ICSC) publishes a Monthly Mall
Merchandise Index which tracks sales by store type for more than 400 regional
shopping centers. The index shows that sales per square foot rose by 1.8
percent to $256 per square foot in 1994. The following chart identified the
most recent year-end results.
Index Sales per Square Foot
1993-1994 Percent Change
Store Type 1994 1993 ICSC Index
GAFO:
Apparel & Accessories:
Women's Ready-To-Wear $189 $196 - 3.8%
Women's Accessories and 295 283 + 4.2%
Specialties 231 239 - 3.3%
Men's and Boy's Apparel 348 310 +12.2%
Children's Apparel 294 292 + 0.4%
Family Apparel 284 275 + 3.3%
Women's Shoes 330 318 + 3.8%
Men's Shoes 257 252 + 1.9%
Family Shoes 340 348 - 2.2%
Shoes (Misc.) $238 $238 - 0.2%
SUBTOTAL
Furniture & Furnishings:
Furniture & Furnishings $267 $255 + 4.5%
Home Entertainment &
Electronics 330 337 - 2.0%
Miscellaneous 291 282 + 3.3%
SUBTOTAL $309 $310 - 0.3%
Other GAFO:
Jewelry $581 $541 + 7.4%
Other 258 246 + 4.9%
SUBTOTAL $317 $301 + 5.3%
TOTAL GAFO $265 $261 + 1.6%
NON-GAFO
FOOD:
Fast Food $365 $358 + 2.0%
Restaurants 250 245 + 2.2%
Other 300 301 - 0.4%
SUBTOTAL $304 $298 + 1.9%
OTHER NON-GAFO:
Supermarkets $236 $291 -18.9%
Drug/HBA 254 230 +10.3%
Personal Services 264 253 + 4.1%
Automotive 149 133 +12.2%
Home Improvement 133 127 + 4.8%
Mall Entertainment 79 77 + 3.2%
Other Non-GAFO Misc. 296 280 + 5.7%
SUBTOTAL $192 $188 + 2.4%
TOTAL NON-GAFO $233 $228 + 2.5%
TOTAL $256 $252 + 1.8%
Note: Sales per square foot numbers are rounded to whole dollars. Three
categories illustrated here have limited representation in the ICSC sample:
Automotive, +12.2%; Home Improvement, +4.8%; and Supermarkets, -18.9%.
Source: U.S. Department of Commerce and Dougal M. Casey.
GAFO sales have risen relative to household income. In 1990 these sales
represented 13.9 percent of average household income. By 1994 they rose to 14.4
percent. Projections through 2000 show a continuation of this trend to 14.7
percent. On average, total sales were equal to nearly 55.0 percent of
household income in 1994.
Determinants of Retail Sales Growth and U.S. Retail Sales by Key
Store Type 1990 1994 2000(P)
Determinants
Population 248,700,000 260,000,000 276,200,000
Households 91,900,000 95,700,000 103,700,000
Average Household Income $37,400 $42,600 $51,600
Total Census Money Income $3.4 Tril. $4.1 Tril. $5.4 Tril.
% Allocations of Income to Sales
GAFO Stores 13.9% 14.4% 14.7%
Convenience Stores 12.9% 11.7% 10.7%
Home Improvement Stores 2.8% 3.0% 3.3%
Total Shopping Center-
Inclined Stores 29.6% 29.1% 28.8%
Total Retail Stores 54.3% 54.6% 52.8%
Sales ($Billion)
GAFO Stores $472 $592 $795
Convenience Stores 439 479 580
Home Improvement Stores 95 123 180
Total Shopping Center-
Inclined Stores $1,005 $1,194 $1,555
TOTAL RETAIL SALES $1,845 $2,237 $2,850
Note: Sales and income figures are for the full year; population
and household figures are as of April 1 in each respective year.
P = Projected.
Source: U.S. Census of Population, 1990; U.S. Bureau of the Census Current
Population Reports: Consumer Income P6-168, 174, 180, 184 and 188; Berna Miller
with Linda Jacobsen, "Household Futures", American Demographics, March 1995;
Retail Trade sources already cited; and Dougal M. Casey: ICSC White Paper
GAFO sales have risen at a compound annual rate of approximately
6.8 percent since 1991 based on the following annual change in sales.
1990/91 2.9%
1991/92 7.0%
1992/93 6.6%
1993/94 7.0%
According to a recent study by the ICSC, GAFO sales are expected to
grow by 5.0 percent per annum through the year 2000, which is well above the
4.1 percent growth for all retail sales. This information is presented in the
following chart.
Retail Sales in the United States, by Major Store Type
1994 2000(P) Percent Change
Compound
Store Type ($ Billions) ($ Billions) Total Annual
GAFO:
General Merchandise $ 283 $ 370 30.7% 4.6%
Apparel & Accessories 110 135 22.7% 3.5%
Furniture/Home Furnishings 120 180 50.0% 7.0%
Other Shoppers Goods 81 110 35.8% 5.2%
GAFO Subtotal $ 592 $ 795 34.3% 5.0%
CONVENIENCE GOODS:
Food Stores $ 398 $ 480 20.6% 3.2%
Drugstores 82 100 22.0% 3.4%
Convenience Subtotal $ 479 $ 580 21.1% 3.2%
Home Improvement 123 180 46.3% 6.6%
Shopping Center-
Inclined Subtotal $1,194 $1,555 30.2% 4.5%
All Other 1,043 1,295 24.2% 3.7%
Total $2,237 $2,850 27.4% 4.1%
Note: P = Projected. Some figures rounded.
Source: U.S. Department of Commerce, Bureau of the Census and Dougal M. Casey.
In considering the six-year period January 1995 through December
2000, it may help to look at the six-year period extending from January
1989 through December 1994 and then compare the two time spans.
Between January 1989 and December 1994, shopping center- inclined
sales in the United States increased by $297 billion, a compound growth rate
of 4.9 percent. These shopping center- inclined sales are projected to
increase by $361 billion between January 1995 and December 2000, a compound
annual growth rate of 4.5 percent. GAFO sales, however, are forecasted to
increase by 34.3 percent or 5.0 percent per annum.
Industry Trends
According to the National Research Bureau, there were a total of 40,368
shopping centers in the United States at the end of 1994. During this year,
735 new centers opened, an 10.0 percent increase over the 667 that opened in
1993. The upturn marked the first time since 1989 that the number of openings
increased. The greatest growth came in the small center category (less than
100,000 square feet) where 457 centers were constructed. In terms of GLA
added, new construction in 1994 resulted in an addition of 90.16 million
square feet of GLA from approximately 4.77 billion to 4.86 billion square
feet. The following chart highlights trends over the period 1987 through
1995.
Census Data: 8-Year Trends
No. of Total Total Average Average % Change New % Increase
Year Centers GLA Sales GLA per Sales in Sales Cen- in Total
(Billions) Center per SF per SF ters Centers
- - - ---- ------ ------------- ------------ ------- ------- ------- ----- ----------
1987 30,641 3,722,957,095 $602,294,426 121,502 $161.78 2.41% 2,145 7.53%
1988 32,563 3,947,025,194 $641,096,793 121,212 $162.43 0.40% 1,922 6.27%
1989 34,683 4,213,931,734 $682,752,628 121,498 $162.02 -0.25% 2,120 6.51%
1990 36,515 4,390,371,537 $706,380,618 120,235 $160.89 -0.70% 1,832 5.28%
1991 37,975 4,563,791,215 $716,913,157 120,179 $157.09 -2.37% 1,460 4.00%
1992 38,966 4,678,527,428 $768,220,248 120,067 $164.20 4.53% 991 2.61%
1993 39,633 4,770,760,559 $806,645,004 120,373 $169.08 2.97% 667 1.71%
1994 40,368 4,860,920,056 $851,282,088 120,415 $175.13 3.58% 735 1.85%
Compound
Annual +4.01% +3.88% +5.07% -.13% +1.14% N/A N/A N/A
Growth
Source: National Research Bureau Shopping Center Database and Statistical Model
From the chart we see that both total GLA and total number of centers have
increased at a compound annual rate of approximately 4.0 percent since 1987.
New construction was up 1.85 percent in 1994, a slight increase over 1993 but
still well below the peak year 1987 when new construction increased by
7.5 percent. Industry analysts point toward increased liquidity among
shopping center owners, due in part to the influx of capital from securitized
debt financiang and the return of lending by banks and insurance companies.
REITs have also been a source of capital and their appetite for new product has
provided a convenient take out vehicle.
Among the 40,368 centers in 1994, the following breakdown by
size can be shown.
U.S. Shopping Center Inventory, January 1995
Square Feet
Number of Centers (Millions)
----------------- ---------------
Size Range (SF) Amount Percent Amount Percent
--------------- ------ ------- ------ -------
Under 100,000 25,450 63% 1,266 25%
100,000-400,000 13,035 32% 2,200 45%
400,000-800,000 1,210 3% 675 15%
Over 800,000 673 2% 750 15%
Total 40,368 100% 4,865 100%
Source: National Research Bureau (some numbers slightly rounded).
According to the National Research Bureau, total sales in shopping
centers have grown at a compound rate of 5.07 percent since 1987. With
sales growth outpacing new construction, average sales per square foot
have been showing positive increases since the last recession. Aggregate
sales were up 5.5 percent nationwide from $806.6 billion (1993) to $851.3
billion (1994). In 1994, average sales were $175.13 per square foot, up
nearly 3.6 percent over 1993 and 1.14 percent on average over the past seven
years. The biggest gain came in the super- regional category (more than 1
million square feet) where sales were up 5.05 percent to $193.13 per square
foot.
The following chart tracks the change in average sales per square foot
by size category between 1993 and 1994.
Sales Trends by Size Category
1993-1994
Average Sales Per Square Foot
Category 1993 1994 % Change
Less than 100,000 SF $193.10 $199.70 +3.4%
100,001 to 200,000 SF $156.18 $161.52 +3.4%
200,001 to 400,000 SF $147.57 $151.27 +2.5%
400,001 to 800,000 SF $157.04 $163.43 +4.1%
800,001 to 1,000,000 SF $194.06 $203.20 +4.7%
More than 1,000,000 SF $183.90 $193.13 +5.0%
Total $169.08 $175.13 +3.6%
Source: National Research Bureau
Empirical data shows that the average GLA per capita is increasing.
In 1994, the average for the nation was 18.7. This was up 17 percent from
16.1 in 1988 and more recently, 18.5 square feet per capita in 1993. Among
states, Florida has the highest GLA per capita with 28.1 square feet and South
Dakota has the lowest at 9.40 square feet. The estimate for 1995 is for an
increase to 19.1 per square foot per capita. Per capita GLA for regional malls
(defined as all centers in excess of 400,000 square feet) has also been rising.
This information is presented on the following chart.
GLA per
Capita All Regional
Year Centers Malls
1988 16.1 5.0
1989 17.0 5.2
1990 17.7 5.3
1991 18.1 5.3
1992 18.3 5.5
1993 18.5 5.5
1994 18.7 5.4
Source: International Council of Shopping Center: The Scope of The Shopping
Center Industry and National Research Bureau
The Urban Land Institute, in the 1995 edition of Dollars and Cents of
Shopping Centers, reports that vacancy rates range from a low of 2.0 percent
in neighborhood centers to 14.0 percent for regional malls. Super-regional
malls reported a vacancy rate of 7.0 percent and community centers were 4.0
percent based upon their latest survey.
The retail industry's importance to the national economy can also be seen
in the level of direct employment. According to F.W. Dodge, the construction
information division of McGraw-Hill, new projects in 1994 generated $2.6
billion in construction contract awards and supported 41,600 jobs in
construction trade and related industries. This is nearly half of the
construction employment level of 95,360 for new shopping center development in
1990. It is estimated that 10.18 million people are now employed in shopping
centers, equal to about one of every nine non-farm workers in the country.
This is up 2.9 percent over 1991.
Market Shifts - Contemporary Trends in the Retail Industry
During the 1980s, the department store and specialty apparel store
industries competed in a tug of war for consumer dollars. Specialty stores
emerged largely victorious as department store sales steadily declined as a
percentage of total GAFO sales during the decade, slipping from 47.0
percent in 1979 to 44.0 percent in 1989. During this period, many
anchor tenants teetered from high debt levels incurred during
speculative takeovers and leveraged buyouts of the 1980s. Bankruptcies and
restructuring, however, have forced major chains to refocus on their
customer and shed unproductive stores and product lines. At year end 1994,
department store sales, as a percentage of GAFO sales, were approximately 37.5
percent.
The continued strengthening of some of the major department store chains,
including Sears, Federated/Macy's, May and Dayton Hudson, is in direct
contrast to the dire predictions made by analysts about the demise of the
traditional department store industry. This has undoubtedly been brought
about by the heightened level of merger and acquisition activity in the 1980s
which produced a burdensome debt structure among many of these entities.
When coupled with reduced sales and cash flow brought on by the recession,
department stores were unable to meet their debt service requirements.
Following a round of bankruptcies and restructurings, the industry has
responded with aggressive cost-cutting measures and a focused merchandising
program that is decidedly more responsive to consumer buying patterns. The
importance of department stores to mall properties is tantamount to a
successful project since the department store is still the principal
attraction that brings patrons to the center.
On balance, 1994/95 was a continued period of transition for the retail
industry. Major retailers achieved varying degrees of success in meeting the
demands of increasingly value conscious shoppers. Since the onset of the
national economic recession in mid-1990, the retail market has been
characterized by intense price competition and continued pressure on profit
margins. Many national and regional retail chains have consolidated
operations, closed underperforming stores, and/or scaled back on expansion
plans due to the uncertain spending patterns of consumers.
Consolidations and mergers have produced a more limited number of retail
operators, which have responded to changing spending patterns by
aggressively repositioning themselves within this evolving market. Much of
the recent retail construction activity has involved the conversion of existing
older retail centers into power center formats, either by retenanting or
through expansion. An additional area of growth in the retail sector is in
the "supercenter" category, which consists of the combined grocery and
department stores being developed by such companies as Wal- Mart and Kmart.
These formats require approximately 150,000 to 180,000 square feet in order
to carry the depth of merchandise necessary for such economies of scale and
market penetration.
Some of the important developments in the industry over the past year can
be summarized as follows:
- The discount department store industry emerged as arguably
the most volatile retail sector, lead by regional chains in the
northeast. Jamesway, Caldor and Bradlees each filed for Chapter
11 within six months and Hills Stores is on the block. Jamesway
is now in the process of liquidating all of its stores. Filene's
Basement was granted relief from some covenant restrictions and
its stock price plummeted. Ames, based in Rocky Hill,
Connecticut, will close 17 of its 307 stores. Kmart continues to
be of serious concern. Its debt has been downgraded to junk bond
status. Even Wal-Mart, accustomed to double digit sales growth,
has seen some meager comparable sales increases. These trends
are particularly troubling for strips since these tenants are
typical anchors.
- The attraction of regional malls as an investment has
diminished in view of the wave of consolidations and bankruptcies
affecting in-line tenants. Some of the larger restructurings
include Melville with plans to close up to 330 stores, sell
Marshalls to TJX Companies, split into three publicly traded
companies, and sell Wilsons and This End Up; Petrie Retail, which
operates such chains as M.J. Carroll, G&G, Jean Nicole, Marianne
and Stuarts, has filed for bankruptcy protection; Edison Brothers
(Jeans West, J. Riggins, Oak Tree, 5-7-9 Shops, etc.) announced
plans to close up to 500 stores while in Chapter 11; J. Baker
intends to liquidate Fayva Shoe division (357 low-price family
footwear stores); The Limited announced a major restructuring,
including the sale of partial interests in certain divisions;
Charming Shoppes will close 290 Fashion Bug and Fashion Bug Plus
stores; Trans World Entertainment (Record Town) has closed 115 of
its 600 mall shop locations. Other chains having trouble include
Rickel Home Centers which filed Chapter 11; Today's Man, a 35
store Philadelphia based discount menswear chain has filed; nine
subsidiaries of Fretta, including Dixon's, U.S. Holdings and
Silo, filed Chapter 11; and Clothestime, also in bankruptcy will
close up to 140 of its 540 stores. Merry-Go-Round, a chain that
operates 560 stores under the names Merry-Go-Round, Dejaiz and
Cignal is giving up since having filed in January 1994 and will
liquidate its assets. Toys "R" Us has announced a global
reorganization that will close 25 stores and cut the number of
items it carries to 11,000 from 15,000. Handy Andy, a 50 year
old chain of 74 home improvement centers which had been in
Chapter 11, has decided to liquidate, laying off 2,500 people.
- Overall, analysts estimate that 4,000 stores closed in 1995 and as many
as 7,000 more will close in 1996. Mom-and-Pop stores, where 75 percent
of U.S. retailers employ fewer than 10 people have been declining for
the past decade. Dun and Bradstreet reports that retail failures are up
1.4 percent over Last year - most of them small stores who don't have
the financial flexibility to renegotiate payment schedule.
- With sales down, occupancy costs continue to be a major
issue facing many tenants. As such, expansion oriented retailers
like The Limited, Ann Taylor and The Gap, are increasingly
shunning mall locations for strip centers. This has put further
pressure on mall operators to be aggressive with their rent
forecasts or in finding replacement tenants.
- While the full service department store industry led by Sears has seen
a profound turnaround, further consolidation and restructuring
continues. Woodward & Lothrop was acquired by The May Department
Stores Company and JC Penney; Broadway Stores was acquired by
Federated Department Stores; Elder Beerman has filed Chapter 11 and
will close 102 stores; Steinbach Stores will be acquired by Crowley,
Milner & Co.; Younkers will merge with Proffitts; and Strawbridge and
Clothier has hired a financial advisor to explore strategic
alternatives for this Philadelphia based chain.
- Aside from the changes in the department store arena, the most notable
transaction in 1995 involved General Growth Properties' acquisition of
the Homart Development Company in a $1.85 billion year-end deal.
Included were 25 regional malls, two current projects and several
development sites. In November, General Growth arranged for the sale
of the community center division to Developers Diversified for
approximately $505 million. Another notable deal involved Rite Aid
Corporation's announcement that it will acquire Revco Drug Stores in a
$1.8 billion merger to form the nation's largest drug store company
with sales of $11 billion and 4,500+/- stores.
- As of January 1, 1995 there were 311 outlet centers with 44.4 million
square feet of space. Outlet GLA has grown at a compound annual rate
of 18.1 percent since 1989. Concerns of over-building, tenant
bankruptcies, and consolidations have now negatively impacted this
industry as evidenced by the hit the outlet REIT stocks have taken.
Outlet tenants have not been immune to the global troubles impacting
retail sales as comparable store sales were down 3.1 percent through
November 1995.
- Category Killers and discount retailers have continued to drive the
demand for additional space. In 1995, new contracts were awarded for
the construction or renovation of 260 million square feet of stores
and shopping centers, up from 173 million square feet in 1991
according to F.W. Dodge, matching the highest levels over the past two
decades. It is estimated that between 1992 and 1994, approximately
55.0 percent of new retail square footage was built by big box
retailers. In 1994, it is estimated that they accounted for 80.0
percent of all new stores. Most experts agree that the country is
over-stored. Ultimately, it will lead to higher vacancy rates and
place severe pressure on aging, capital intensive centers. Many
analysts predict that consolidation will occur soon in the office
products superstores category where three companies are battling for
market share - OfficeMax, Office Depot and Staples.
- Entertainment is clearly the new operational requisite for property
owners and developers who are incorporating some form of entertainment
into their designs. With a myriad of concepts available, ranging from
mini-amusement parks to multiplex theater and restaurant themes, to
interactive high-tech applications, choosing the right formula is a
difficult task.
Investment Criteria and Institutional Investment Performance
Investment criteria for mall properties range widely. Many firms and
organizations survey individuals active in this industry segment in
order to gauge their current investment criteria. These criteria can be
measured against traditional units of comparison such as price (or value)
per square foot of GLA and overall capitalization rates.
The price that an investor is willing to pay represents the current or
present value of all the benefits of ownership. Of fundamental importance is
their expectation of increases in cash flow and the appreciation of the
investment. Investors have shown a shift in preference to initial return,
placing probably less emphasis on the discounted cash flow analysis (DCF). A
DCF is defined as a set of procedures in which the quantity,
variability, timing, and duration of periodic income, as well as the quantity
and timing of reversions, are specified and discounted to a present
value at a specified yield rate. Understandably, market thinking has
evolved after a few hard years of reality where optimistic cash flow
projections did not materialize. The DCF is still, in our opinion, a valid
valuation technique that when properly supported, can present a realistic
forecast of a property's performance and its current value in the marketplace.
Equitable Real Estate Investment Management, Inc. reports in their
Emerging Trends in Real Estate - 1996 that their respondents give
retail investments generally poor performance forecasts in their latest
survey due to the protracted merchant shakeout which will continue into 1996.
While dominant, Class A malls are still considered to be one of the best
real estate investments anywhere, only 13.0 percent of the respondents
recommended buying malls. Rents and values are expected to remain flat
(in real terms) and no one disputes their contention that 15 to 20 percent of
the existing malls nationwide will be out of business by the end of the
decade. For those centers that will continue to reposition themselves,
entertainment will be an increasingly important part of their mix.
Investors do cite that, after having been written off, department
stores have emerged from the shake-out period as powerful as ever. The
larger chains such as Federated, May and Dillard's, continue to acquire the
troubled regional chains who find it increasingly difficult to compete
against the category killers. Many of the nations largest chains are
reporting impressive profit levels, part of which has come about from their
ability to halt the double digit sales growth of the national discount
chains. Mall department stores are aggressively reacting to power and
outlet centers to protect their market share. Department stores are
frequently meeting discounters on price.
While power centers are considered one retail property type currently in
a growth mode, most respondents feel that the country is over-stored and
value gains with these types of centers will lag other property types,
including malls, over five and ten year time frames.
The following chart summarizes the results of their current survey.
Retail Property Rankings and Forecasts
Invest Potential
Investment Potential 1996 Predicted Value Gains
Property -------------------- Rent ---------------------
Type Rating1 Ranking2 Increase 1 Yr. 5Yrs. 10Yrs.
Regional Malls 4.9 8th 2.0% 2% 20% 40%
Power Centers 5.3 6th 2.3% 1% 17% 32%
Community Centers 5.4 5th 2.4% 2% 17% 33%
1 Scale of 1 to 10
2 Based on 9 property types
The NCREIF Property Index represents data collected from the Voting
Members of the National Council of Real Estate Investment Fiduciaries. As
shown in the following table, data through the third quarter of 1995 shows
that the retail index posted a positive 1.23 percent increase in total
return. Increased competition in the retail sector from new and expanding
formats and changing locational references has caused the retail index to trail
all other property types. As such, the -2.01 percent decline in value
reported by the retail subindex for the year were in line with investors'
expectations.
Retail Property Returns
NCREIF Index
Third Quarter 1995 (%)
Period Income Appreciation Total Change in CPI
3rd Qtr. 1995 1.95 - .72 1.23 .46
One Year 8.05 -2.01 5.92 2.55
Three Years 7.54 -3.02 4.35 2.73
Five Years 7.09 -4.61 2.23 2.92
Ten Years 6.95 .54 7.52 3.53
Source: Real Estate Performance Report
National Council of Real Estate Investment Fiduciaries
It is noted that the positive total return continues to be affected by
the capital return component which has been negative for the last five years.
However, as compared to the CPI, the total index has performed relatively
well.
Real Estate Investment Trust Market (REITs)
To date, the impact of REITs on the retail investment market has been
significant, although the majority of Initial Property Offerings (IPOs)
involving regional malls, shopping centers, and outlet centers did not enter
the market until the latter part of 1993 and early 1994. It is noted that
REITs have dominated the investment market for apartment properties and have
evolved into a major role for retail properties as well.
As of November 30, 1995, there were 297 REITs in the United States, about
79.0 percent (236) which are publicly traded. The advantages provided by
REITs, in comparison to more traditional real estate investment opportunities,
include the diversification of property types and location, increased liquidity
due to shares being traded on major exchanges, and the exemption from corporate
taxes when 95.0 percent of taxable income is distributed.
There are essentially three kinds of REITs which can either be
"open-ended", or Finite-life (FREITs) which have specified liquidation
dates, typically ranging from eight to fifteen years.
- Equity REITs center around the ownership of properties where
ownership interests (shareholders)receive the benefit of returns
from the operating income as well as the anticipated appreciation
of property value. Equity REITs typically provide lower yields
than other types of REITs, although this lower yield is
theoretically offset by property appreciation.
- Mortgage REITs invest in real estate through loans. The return to
shareholders is related to the interest rate for mortgages placed by
the REIT.
- Hybrid REITs combine the investment strategies of both the equity and
mortgage REITs in order to diversify risk.
The influx of capital into REITs has provided property owners with an
significant alternative marketplace of investment capital and resulted in a
considerably more liquid market for real estate. A number of
"non-traditional" REIT buyers, such as utility funds and equity/income
funds, established a major presence in the market during 1993/94.
1995 was not viewed as a great year for REITs relative to the advances seen
in the broader market. Through the end of November, equity REITs
posted a 9.3 percent total return according to the National Association
of Real Estate Investment Trusts (NAREIT). The best performer among equity
REITs was the office sector with a 29.4 percent total return. This was
followed by self-storage (27.3%), hotels (26.7%), triple-net lease
(20.6%), and health care (18.8%). Two equity REIT sectors were in the red -
outlet centers and regional malls.
Retail REITs
As of November 30, 1995, there were a total of 47 REITs specializing
in retail, making up approximately 16 percent of the securities in the REIT
market. Depending upon the property type in which they specialize, retail
REITs are divided into three categories: shopping centers, regional
malls, and outlet centers. The REIT performance indices chart shown as
Table A on the following page, shows a two-year summary of the total retail
REIT market as well as the performance of the three composite categories.
Table A - REIT Performance Indicies
Y-T-D Total Dividend No. of REIT Market
Return Yield Securities Capitalization*
----------- ----------- -------------- ----------------
As of November 30, 1995
----------------------------------------------------------
Total Retail 0.49% 8.36% 47 $14,389.1
Strip Centers 2.87% 8.14% 29 $ 8,083.3
Regional Malls -2.47% 9.06% 11 $ 4,886.1
Outlet Centers -2.53% 9.24% 6 $ 1,108.7
-------------------------------------------------------
As of November 30, 1994
-------------------------------------------------------
Total Retail -3.29% 8.35% 46 $12,913.1
Strip Center -4.36% 7.98% 28 $ 7,402.7
Regional Malls 2.84% 8.86% 11 $ 4,459.1
Outlet Centers -16.58% 8.74% 7 $ 1,051.4
* Number reported in thousands
Source: Realty Stock Review
As can be seen, the 47 REIT securities have a market
capitalization of approximately $14.4 billion, up 11.5 percent from the
previous year. Total returns were positive through November 1995,
reversing the negative return for the comparable period 12 months earlier. It
is noted that the positive return was the result of the strength of the
shopping center REITs which constitute nearly 60 percent of the market
capitalization. Total retail REITs dividend yields have remained constant over
the last year at approximately 8.36 percent. Regional mall and shopping
center REITs dominate the total market, making up approximately 85 percent of
the 47 retail REITs.
While many of the country's best quality malls and shopping centers have
recently been offered in the public market, this heavily capitalized
marketplace has provided sellers with an attractive alternative to the more
traditional market for large retail properties.
Regional Mall REITs
The accompanying exhibit Table B summarizes the basic
characteristics of eight REITs and one publicly traded real estate
operating company (Rouse Company) comprised exclusively or predominantly of
regional mall properties. Excluding the Rouse Company (ROUS), the IPOs have
all been completed since November 1992. The nine public offerings with
available information have a total of 281 regional or super regional malls
with a combined leasable area of approximately 229 million square feet. This
figure represents more than 14.0 percent of the total national supply of
this product type.
The nine companies are among the largest and best capitalized domestic real
estate equity securities, and are considerably more liquid than more
traditional real estate related investments. Excluding the Rouse Company,
however, these companies have been publicly traded for only a short period,
and there is not an established track record. General Growth was the star
performer in 1995 with a 15 percent increase in its stock price following the
acquisition of the Homart retail portfolio from Sears for $1.85 billion -
the biggest real estate acquisition of the decade.
Table B Regional Mall REIT analysis
Cushman & Wakefield, Inc.
REIT Portfolio CBL CWN EJD GGP MAC ROUS SPG TCO URB
- - - --------------------------------------------------------------------------------
Company Overview
- - - --------------------------------------------------------------------------------
Total Retail Cen. 95 23 51 40 16 67 56 19 12
-Super Reg.* 5 1 28 14 4 27 21 16 7
-Regional 11 22 23 25 10 27 35 3 2
-Community 79 - 11 1 2 13 55 - 3
-Other - - - - - - 3 - -
Tot. Mall GLA** 17,129 12,686 44,460 28,881 10,620 44,922 39,329 22,031 8,895
Tot.Mall Shop GLA**6,500 4,895 15,300 12,111 - 19,829 15,731 9,088 2,356
Avg. Total GLA/Cen.**180 552 872 722 664 670 702 1,160 741
Avg. Shop GLA/Cen.** 68 213 300 303 - 296 281 478 196
- - - --------------------------------------------------------------------------------
Mall Operations
- - - --------------------------------------------------------------------------------
Reporting year 1994 1994 1994 1994 1994 1994 1994 1994 1994
Avg. Sales PSF
of Mall GLA $226 $204 $260 $245 $262 $285 $259 $335 $348
Minimum Rent/Sales
ratio 8.6% 7.1% 8.3% - - - 6.8% 10.2% 8.1%
Total Occupancy
Cost/Sales ratio 12.2% 10.0% 12.4% - 11.2% - 10.2% 14.8% 11.7%
Mall Shop
Occupancy Level 88.7% 84.0% 85.0% 87.0% 92.9% - 86.2% 86.6% 93.3%
- - - --------------------------------------------------------------------------------
Share Price
- - - --------------------------------------------------------------------------------
IPO Date 10/27/93 8/9/93 6/30/94 4/8/93 3/9/94 1996 12/26/93 11/18/92 10/6/93
IPO Price $19.50 $17.25 $14.75 $22.00 $19.00 - $22.25 $11.00 $23.50
Current Price
(12/15/95) $21.63 $ 7.38 $13.00 $19.13 $19.75 $19.63 $25.13 $ 9.75 $21.75
52-Week High $22.00 $14.13 $15.13 $22.63 $21.88 $22.63 $26.00 $10.38 $22.50
52-Week Low $17.38 $ 6.50 $12.00 $18.13 $19.25 $17.50 $22.50 $ 8.88 $18.75
- - - --------------------------------------------------------------------------------
Capitalization and Yields
- - - --------------------------------------------------------------------------------
Outstanding
Shares*** 30.20 36.85 89.60 43.37 31.45 47.87 95.64 125.85 21.19
Market Cap.*** $653 $272 $1,165 $830 $621 $940 $2,403 $1,227 $461
Annual Dividend $1.59 $0.80 $1.26 $1.72 $1.68 $0.80 $1.97 $0.88 $1.94
Dividend Yield
(12/15/95) 7.35% 10.84% 9.69% 8.99% 8.51% 4.08% 7.84% 9.03% 8.92%
FFO 1995**** $1.85 $1.50 $1.53 $1.96 $1.92 $1.92 $2.28 $0.91 $2.17
FFO Yield
(12/15/95) 8.55% 20.33% 11.77% 10.25% 9.72% 9.78% 9.07% 9.33% 9.98%
- - - --------------------------------------------------------------------------------
Source: Salomon Brothers and Realty Stock Review; Annual Reports
* Super Regional Centers (>=800,000 Sq. Ft)
** Numbers in thousands (000) includes mall only
*** Numbers in millions
**** Funds From Operations is defined as net income (loss) before depreciation,
amoritizatoin, other non-cash items, extrodinary items, gains or losses of
assets and before minority interests in the Operating Partnership.
CBL - CBL & Associates
CWN - Crown American
EJD - Edward Debartolo
GGP - General Growth
MAC - Macerich Company
ROUS - Rouse Company
SPG - Simon Property
TCO - Taubman Centers
URB - Urban Shopping
Shopping Center REITs
Shopping center REITs comprise the largest sector of the retail REIT
market accounting for 29 out of the total 47 securities. General
characteristics of eight of the largest shopping center REITs are
summarized on Table C. The public equity market capitalization of the eight
companies totaled $6.1 billion as of December 15, 1995. The two largest,
Kimco Realty Corp. and New Plan Realty Trust have a market capitalization
equal to approximately 34.5 percent of the group total.
While the regional mall and outlet center REIT markets struggled
through 1995, shopping center REITs showed a positive November 30, 1995
year-to-date return of 2.87%. Through 1995, transaction activity in the
national shopping center market has been moderate. Most of the action in
this market is in the power center segment. As an investment, power
centers appeal to investors and REITs because of the high current cash
returns and long-term leases. However, with their popularity, the potential
for overbuilding is high. Also creating skepticism within this market is the
stability of several large discount retailers such as Kmart, and other
discount department stores which typically anchor power centers. Shopping
center REITs which hold numerous properties where struggling retailers are
located are currently keeping close watch over these centers in the event
of these anchor tenants vacating their space.
Similar to the regional mall REITs, shopping center REITs have been
publicly traded for only a short period and do not have a defined track
record. While the REITs have been in existence for a relatively short
period, the growth requirements of the companies should place upward pressure
on values due to continued demand for new product.
Table C Shopping Center REIT analysis
Cushman & Wakefield, Inc.
REIT Portfolio DDR FRT GRT JPR KIM NPR VNO WRI
- - - --------------------------------------------------------------------------------
Company Overview
- - - --------------------------------------------------------------------------------
Tot. Properties 111 53 84 46 193 123 65 161
Tot. Retail Centers 104 53 84 40 193 102 56 141
Tot. Retail GLA* 23,600 11,200 12,300 6,895 26,001 14,500 9,501 13,293
Avg. Shop GLA/Cen.* 227 211 146 172 135 142 170 94
- - - --------------------------------------------------------------------------------
Mall Operations
- - - --------------------------------------------------------------------------------
Reporting year - - 1994 - 1994 - - 1994
Total Rental Income - - $71,101 -$125,272 - -$112,223
Average Rent/SF $6.04 - $5.78 - $4.82 - - $8.44
Total Oper. Expenses - - $45,746 - $80,563 - - $76.771
Oper. Expenses/SF - - $3.72 - $3.10 - - $5.78
Oper. Expenses Ratio - - 64.3% - 64.3% - - 68.4%
Total Occupancy Level 96.6% 95.1% 96.3% 94.0% 94.7% 95.4% 94.0% 92.0%
- - - --------------------------------------------------------------------------------
Share Price
- - - --------------------------------------------------------------------------------
IPO Date 1992 1993 1994 1994 1991 1973 1993 1985
IPO Price $19.50 $17.25 $14.75 $22.00 $19.00 - $22.25 -
Current Price
(12/15/95) $29.88 $23.38 $17.75 $20.63 $42.25 $21.63 $36.13 $36.13
52-Week High $32.00 $23.75 $22.38 $21.38 $42.25 $23.00 $38.13 $38.13
52-Week Low $26.13 $19.75 $16.63 $17.38 $35.00 $18.75 $32.75 $32.75
- - - --------------------------------------------------------------------------------
Capitalization and Yields
- - - --------------------------------------------------------------------------------
Outstanding Shares** 19.86 32.22 24.48 19.72 22.43 53.26 24.20 26.53
Market Cap.*** $ 567 $ 753 $ 435 $ 407 $ 948 $1,152 $ 872 $ 959
Annual Dividend $2.40 $1.64 $1.92 $1.68 $2.16 $1.39 $2.24 $2.40
Dividend Yield
(12/15/95) 8.03% 7.01% 10.82% 8.14% 5.11% 6.43% 6.20% 6.64%
FFO 1995**** $2.65 $1.78 $2.25 $1.83 $3.15 $1.44 $2.67 $2.80
FFO Yield
(12/15/95) 8.87% 7.61% 12.68% 8.87% 7.46% 6.66% 7.39% 7.75%
- - - --------------------------------------------------------------------------------
Source: Salomon Brothers and Realty Stock Review; Annual Reports
* Numbers in thousands (000) includes mall only
** Numbers in millions
*** Funds From Operations is defined as net income (loss) before depreciation,
amoritizatoin, other non-cash items, extrodinary items, gains or losses of
assets and before minority interests in the Operating Partnership.
DDR - Development Diversified
FRT - Federal Realty Inv.
GRT - Glimcher Realty
JPR - JP Realty Inc.
KIM - Kimco Realty Corp.
NPR - New Plan Realty
VNO - Vornado Realty
WRI - Weingarten Realty
Outlook
A review of various data sources reveals the intensity of the development
community's efforts to serve a U.S. retail market that is still growing,
shifting and evolving. It is estimated 25- 30 power centers appear to be
capable of opening annually, generating more than 12 million square feet
of new space per year. That activity is fueled by the locational needs of
key power center tenants, 27 of which indicated in recent year-end reports
to shareholders an appetite for 900 new stores annually, an average of 30 new
stores per firm.
With a per capita GLA figure of 19 square feet, most analysts are in
agreement that the country is already over-stored. As such, new centers
will become feasible through the following demand generators:
- The gradual obsolescence of some existing retail locations
and retail facilities;
- The evolution of the locational needs and format preferences
of various anchor tenants; and
- Rising retail sales generated by increasing population and
household levels.
By the year 2000, total retail sales are projected to rise from $2.237
trillion in 1994 to almost $2.9 trillion; shopping center-inclined sales are
projected to rise by $361 billion, from $1.194 trillion in 1994 to nearly $1.6
trillion in the year 2000. Those increases reflect annual compound growth
rates of 4.1 percent and 4.5 percent, respectively, for the six-year period.
On balance, we conclude that the outlook for the retail industry is
one of cautious optimism. Because of the importance of consumer spending to
the economy, the retail industry is one of the most studied and analyzed
segments of the economy. One obvious benefactor of the aggressive expansion
and promotional pricing which has characterized the industry is the
consumer. There will continue to be an increasing focus on choosing the
right format and merchandising mix to differentiate the product from the
competition and meet the needs of the consumer. Quite obviously, many of the
nations' existing retail developments will find it difficult if not
impossible to compete. Tantamount to the success of these older centers must
be a proper merchandising or repositioning strategy that adequately
considers the feasibility of the capital intensive needs of such an
undertaking. Coincident with all of the change which will continue to
influence the industry is a general softening of investor bullishness. This
will lead to a realization that the collective interaction of the fundamentals
of risk and reward now require higher capitalization rates and long term
yield expectations in order to attract investment capital.
GRAPHIC SHOWING OPERATING EXPENSE BUDGET (1996)
GRAPHIC SHOWING TABLE SHOWING TENANT SALES REPORT (1995)
GRAPHIC SHOWING PRO-JECT LEASE ABSTRACT REPORT
GRAPHIC SHOWING PRO-JECT PROLOGUE ASSUMPTIONS REPORT
GRAPHIC SHOWING PRO-JECT TENANT REGISTER REPORT
GRAPHIC SHOWING PRO-JECT LEASE EXPIRATION REPORT
GRAPHIC SHOWING ENDS FULL DATA REPORT FOR PRIMARY AND TOTAL TRADE AREA
GRAPHIC SHOWING REGIONAL MALL SALES (1991-1993)
GRAPHIC SHOWING CUSHMAN & WAKEFIELD INVESTOR SURVEY
QUALIFICATIONS OF RICHARD W. LATELLA
Professional Affiliations
Member, American Institute of Real Estate Appraisers
(MAI Designation #8346)
New York State Certified General Real Estate Appraiser
#46000003892
Pennsylvania State Certified General Real Estate Appraiser #GA-
001053-R
State of Maryland Certified General Real Estate Appraiser #01462
Minnesota Certified General Real Estate Appraiser #20026517
Commonwealth of Virginia Certified General Real Estate Appraiser
#4001-003348
State of Michigan Certified General Real Estate Appraiser
#1201005216
New Jersey Real Estate Salesperson (License #NS-130101-A)
Certified Tax Assessor - State of New Jersey
Affiliate Member - International Council of Shopping Centers,
ICSC
Real Estate Experience
Senior Director, Retail Valuation Group, Cushman & Wakefield
Valuation Advisory Services. Cushman & Wakefield is a national
full service real estate organization and a Rockefeller Group
Company. While Mr. Latella's experience has been in appraising a
full array of property types, his principal focus is in the
appraisal and counseling for major retail properties and
specialty centers on a national basis. As Senior Director of
Cushman & Wakefield's Retail Group his responsibilities include
the coordination of the firm's national group of appraisers who
specialize in the appraisal of regional malls, department stores
and other major retail property types. He has personally
appraised and consulted on in excess of 200 regional malls and
specialty retail properties across the country.
Senior Appraiser, Valuation Counselors, Princeton, New Jersey,
specializing in the appraisal of commercial and industrial real
estate, condemnation analyses and feasibility studies for both
corporate and institutional clients from July 1980 to April 1983.
Supervisor, State of New Jersey, Division of Taxation, Local
Property and Public Utility Branch in Trenton, New Jersey, as
sisting and advising local municipal and property tax assessors
throughout the state from June 1977 to July 1980.
Associate, Warren W. Orpen & Associates, Trenton, New Jersey,
assisting in the preparation of appraisals of residential prop
erty and condemnation analyses from July 1975 to April 1977.
Formal Education
Trenton State College, Trenton, New Jersey
Bachelor of Science, Business Administration - 1977
As of the date of this report, Richard W. Latella, MAI, has
completed the requirements under the continuing education program
of the Appraisal Institute.
QUALIFICATIONS OF BRIAN J. BOOTH
General Experience
Brian J. Booth joined Cushman & Wakefield Valuation Advisory
Services in 1995. Cushman & Wakefield is a national full service
real estate organization.
Mr. Booth previously worked for two years at C. Spencer
Powell & Associates in Portland, Oregon, where he was an
associate appraiser. He worked on the analysis and valuation of
numerous properties including, office buildings, apartments,
industrials, retail centers, vacant land, and special purpose
properties.
Academic Education
Bachelor of Science (BS) Willamette University (1993)
Major: Business-Economics Salem, Oregon
Study Overseas (Spring 1992) London University
London, England
Appraisal Education
110 Appraisal Principles Appraisal Institute 1993
120 Appraisal Procedures Appraisal Institute 1994
310 Income Capitalization Appraisal Institute 1994
320 General Applications Appraisal Institute 1994
410 Standards of Professional Practice A Appraisal Institute 1993
420 Standards of Professional Practice B Appraisal Institute 1993
Professional Affiliation
Candidate MAI, Appraisal Institute
PARTIAL CLIENT LIST
VALUATION ADVISORY SERVICES
CUSHMAN & WAKEFIELD, INC.
NEW YORK
PROFESSIONALS ARE JUDGED BY THE CLIENTS THEY SERVE
VALUATION ADVISORY SERVICES enjoys a long record of service in a
confidential capacity to nationally prominent institutional and
corporate clients, investors, government agencies and many of the
nations largest law firms. Following is a partial list of
clients served by members of VALUATION ADVISORY SERVICES - NEW
YORK OFFICE.
Aetna
Air Products and Chemicals, Inc.
Aldrich, Eastman & Waltch, Inc.
Allegheny-Ludlam Industries
AMB Institutional Realty Advisors
America First Company
American Bakeries Company
American Brands, Inc.
American District Telegraph Company
American Express
American Home Products Corporation
American Savings Bank
Apple Bank
Apple South
Archdiocese of New York
Associated Transport
Atlantic Bank of New York
AT&T
Avatar Holdings Inc.
Avon Products, Inc.
Bachner, Tally, Polevoy, Misher & Brinberg
Baer, Marks, & Upham
Balcor Inc.
BancAmerica
Banca Commerciale Italiana
Banco de Brasil, N.A.
Banco Santander Puerto Rico
Banque Paribas
Baker & Mackenzie
Bank of America
Bank of Baltimore
Bank of China
Bank of Montreal
Bank of New York
Bank of Nova Scotia
Bank of Seoul
Bank of Tokyo Trust Company
Bank Leumi Le-Israel
Bankers Life and Casualty Company
Bankers Trust Company
Banque Indosuez
Barclays Bank International, Ltd.
Baruch College
Battery Park City Authority
Battle, Fowler, Esqs.
Bayerische Landesbank
Bear Stearns
Berkshire
Bertlesman Property, Inc.
Betawest Properties
Bethlehem Steel Corporation
Bloomingdale Properties
Borden, Inc.
Bowery Savings Bank
Bowest Corporation
Brandt Organization
Brooklyn Hospital
BRT Realty Trust
Burke and Burke, Esqs.
Burmah-Castrol
Cadillac Fairview
Cadwalader, Wickersham & Taft
Caisse National DeCredit
Campeau Corporation
Campustar
Canadian Imperial Bank of Commerce
Canyon Ranch
Capital Bank
Capital Cities-ABC, Inc.
Care Incorporated
Carter, Ledyard & Milburn
Chase Manhattan Bank, N.A.
Chemical Bank Corporation
Chrysler Corporation
C. Itoh & Company
Citibank, NA
Citicorp Real Estate
City University of New York
Clayton, Williams & Sherwood
Coca Cola, Inc.
Cohen Brothers
College of Pharmaceutical Sciences
Collegiate Church Corporation
Columbia University
Commonwealth of Pennsylvania
Consolidated Asset Recovery Company
Consolidated Edison Company of New York, Inc.
Continental Realty Credit, Inc.
Copley Real Estate Advisors
Corning Glass Works
Coudert Brothers
Covenant House
Cozen and O'Connor
Credit Agricole
Credit Lyonnais
Credit Suisse
Crivello Properties
CrossLand Savings Bank
CSX
Dai-Ichi Kangyo Bank
Dai-Ichi Sempei Life Insurance
Daily News, Inc.
Daiwa Securities
Dart Group Corporation
David Beardon & Company
Davidoff & Malito, Esqs
Dean Witter Realty
Debevoise & Plimpton
DeMatteis Organization
Den Norske Bank
Deutsche Bank
DiLorenzo Organization
Dime Savings Bank
Dodge Trucks, Inc.
Dollar/Dry Dock Savings Bank
Donovan, Leisure, Newton & Irvine
Dreyer & Traub
Dun and Bradstreet, Inc.
Eastdil Realty Advisors
East New York Savings Bank
East River Savings Bank
East Rutherford Industrial Park
Eastman Kodak Company
Eaton Corporation
Eichner Properties, Inc.
Ellenburg Capital Corporation
Emigrant Savings Bank
Empire Mutual Insurance Company
Endowment Realty Investors
Enzo Biochem, Inc.
Equitable Life Assurance Society of America
Equitable Real Estate
European American Bank
F.S. Partners
Famolare, Inc.
Farwest Savings & Loan Association
Federal Asset Disposition Authority
Federal Deposit Insurance Company
Federal Express Corporation
Federated Department Stores, Inc.
Feldman Organization
Fidelity Bond & Mortgage Company
Findlandia Center
First Bank
First Boston
First Chicago
First National Bank of Chicago
First Nationwide Bank
First New York Bank for Business
First Tier Bank
First Winthrop
Fisher Brothers
Fleet Bank
Flying J, Inc.
Foley and Lardner, Esqs.
Ford Bacon and Davis, Inc.
Ford Foundation
Ford Motor Company
Forest City Enterprises
Forest City Ratner
Forum Group, Inc.
Franchise Finance Corporation of America
Fried, Frank, Harris, Shriver & Jacobson
Friendly's Ice Cream Corporation
Fruehauf Trailer Corporation
Fuji Bank
Fulbright & Jaworski
G.E. Capital Corporation
General Electric Credit Corporation
General Motors Corporation
Gerald D. Hines Organization
Gibson Dunn and Crutcher
Gilman Paper
Gladstone Equities
Glimcher Company
Glynwed, Ltd.
Goldman, Sachs & Co.
Greater New York Savings Bank
Greycoat Real Estate Corp.
Greyhound Lines Inc.
Grid Properties
GTE Realty
Gulf Coast Restaurants
Gulf Oil
HDC
HRO International
Hammerson Properties
Hanover Joint Ventures, Inc.
Hartz Mountain Industries
Hawaiian Trust Company, Ltd.
Hertz Corporation
Home Federal
Home Savings of America
HongKong & Shanghai Banking Corporation
Horn & Hardart
Huntington National Bank
Hypo Bank
IDC Corporation
Ideal Corporation
ING Corporation
Integon Insurance
International Business Machines Corporation
International Business Machines Pension Fund
International Telephone and Telegraph Corporation
Investors Diversified Services, Inc.
Iona College
Irish Intercontinental Bank
Irish Life Assurance
Israel Taub
Isetan of America, Inc.
J & W Seligman & Company, Inc.
JMB Realty
J. B. Brown and Sons
J. C. Penney Company, Inc.
J. P. Morgan
Jamaica Hospital
James Wolfenson & Company
Jerome Greene, Esq.
Jewish Board of Family & Children's Services
Jones Lang Wootton
K-Mart Corporation
Kelly, Drye and Warren, Esqs.
Kennedy Associates
Key Bank of New York
Kerr-McGee Corporation
Kidder Peabody Realty Corp.
Kitano Arms Corporation
Knickerbocker Realty
Koeppel & Koeppel
Kronish, Lieb, Weiner & Hellman
Krupp Realty
Kutak, Rock and Campbell, Esqs.
Ladenburg, Thalman & Co.
Lans, Feinberg and Cohen, Esqs.
Lands Division, Department of Justice
Lazard Freres
LeBoeuf, Lamb, Greene & MacRae
Lefrak Organization
Lehman Brothers
Lennar Partners
Lepercq Capital Corporation
Lexington Corporate Properties
Lexington Hotel Corporation
Lincoln Savings Bank
Lion Advisors
Lomas & Nettleton Investors
London & Leeds
Long Term Credit Bank of Japan, Ltd.
Lutheran Church of America
Lynton, PLC
Macluan Capital Corporation
Macy's
MacAndrews and Forbes
Mahony Troast Construction Company
Manhattan Capital Partners
Manhattan College
Manhattan Life Insurance
Manhattan Real Estate Company
Manufacturers Hanover Trust Company
Marine Midland Bank
Mason Tenders
Massachusetts Mutual Life Insurance Company
May Centers, Inc.
Mayer, Brown, Platt
McDonald's Corporation
McGinn, Smith and Company
McGrath Services Corporation
MCI Telecommunications
Mellon Bank
Memorial Sloan-Kettering Cancer Center
Mendik Company
Mercedes-Benz of North America
Meridian Bank
Meritor Savings Bank
Merrill Lynch Hubbard
Merchants Bank
Metropolis Group
Metropolitan Life Insurance Company
Metropolitan Petroleum Corporation
Meyers Brothers Parking System Inc.
Michigan National Corp.
Milbank, Tweed
Millennium Partners
Miller, Montgomery, Sogi and Brady, Esqs.
Mitsui Fudosan - New York Inc.
Mitsui Leasing, USA
Mitsubishi Bank
Mitsubishi Trust & Banking Corporation
Mobil Oil Corporation
Moody's Investors Service
Moran Towing Corporation
Morgan Guaranty
Morgan Hotel Group
Morse Shoe, Inc.
Moses & Singer
Mountain Manor Inn
Mudge Rose Guthrie Alexander & Ferdon, Esqs.
Mutual Benefit Life
Mutual Insurance Company of New York
National Audubon Society, Inc.
National Bank of Kuwait
National Can Company
National CSS
National Westminster Bank, Ltd.
Nelson Freightways
Nestle's Inc.
New York Bus Company
New York City Division of Real Property
New York City Economic Development Corporation
New York City Housing Development Authority
New York City School Construction Authority
New York Life Insurance Company
New York State Common Fund
New York State Employee Retirement System
New York State Parks Department
New York State Teachers
New York State Urban Development Corporation
New York Telephone Company
New York Urban Servicing Company
New York Waterfront
Niagara Asset Corporation
Nippon Credit Bank, Inc.
Nomura Securities
Norcross, Inc.
North Carolina Department of Insurance
NYNEX Properties Company
Olympia and York, Inc.
Orient Overseas Associates
Orix USA Corporation
Otis Elevator Company
Owens-Illinois Corporation
PaineWebber, Inc.
Pan American World Airways, Inc.
Paul, Weiss, Rifkind
Park Tower Associates
Parke-Davis and Company
Paul Weiss Rifkind, Esqs.
Penn Central Corporation
Penn Mutual Life Insurance Company
Pennsylvania Retirement Fund
Penthouse International
Pepsi-Cola Company
Peter Sharp & Company
Petro Stopping Center
Pfizer International, Inc.
Philip Morris Companies, Inc.
Philips International
Phoenix Home Life
Pittston Company
Polyclinic Medical School and Hospital
Port Authority of New York and New Jersey
Postel Investment Management
Prentiss Properties Realty Advisors
Procida Organization
Proskauer Rose Goetz and Mandelsohn, Esqs.
Provident Bank
Prudential Securities
Pyramid Company
Rabobank Nederland
Ratner Group
RCA Corporation
Real Estate Recovery
Realty Income Corporation
Remson Partners
Republic Venezuela Comptrollers Office
Revlon, Inc.
Rice University
Richard Ellis
Richards & O'Neil
Ritz Towers Hotel Corporation
River Bank America
Robert Bosch Corporation
Robinson Silverman Pearce Aron
Rockefeller Center, Inc.
Rockefeller Center Properties
Roman Catholic Diocese of Brooklyn
Roosevelt Hospital
Rosenman & Colin
Royal Bank of Scotland
RREEF
Rudin Management Co., Inc.
Saint Vincent's Medical Center of New York
Saks Fifth Avenue
Salomon Brothers Inc.
Salvation Army
Sanwa Bank
SaraKreek USA
Saxon Paper Corporation
Schroder Real Estate Associates
Schulman Realty Group
Schulte, Roth & Zabel
BDO Seidman
Seaman Furniture Company, Inc.
Security Pacific Bank
Semperit of America
Sentinel Realty Advisors
Service America Corp.
Shea & Gould, Esqs.
Shearman and Sterling, Esqs.
Shearson Lehman American Express
Shidler Group
Sidley & Austin
Silver Screen Management, Inc.
Silverstein Properties, Inc.
Simpson, Thacher and Bartlett, Esqs.
Skadden, Arps, Slate, Meagher & Flom
Smith Barney
Smith Corona Corporation
Sol Goldman
Solomon Equities
Sonnenblick-Goldman
Southtrust Bank of Alabama
Spitzer & Feldman, PC
Stahl Real Estate
Standard & Poors
State Teachers Retirement System of New York
State Teachers Retirement System of Ohio
Stauffer Chemical Corporation
Stephens College
Sterling Drug, Inc.
Stroheim and Roman, Inc.
Stroock and Stroock and Lavan, Esqs.
Sullivan and Cromwell, Esqs.
Sumitomo Life Realty
Sumitomo Mutual Life Insurance Company
Sumitomo Trust Bank
Sun Oil Company
Sutherland, Asbill & Brennan
Swiss Bank Corporation
Tenzer Greenblat, Esqs.
Textron Financial
Thatcher, Proffitt, Wood
The Shopco Group
Thomson Information/Publishing
Thurcon Properties, Ltd.
Tobishima Associates
Tokyo Trust & Banking Corporation
Transworld Equities
Travelers Realty, Inc.
Triangle Industries
TriNet Corporation
UBS Securities Inc.
UMB Bank & Trust Company
Unibank
Union Bank of Switzerland
Union Carbide Corporation
Union Chelsea National Bank
United Bank of Kuwait
United Fire Fighters of New York
United Parcel Service
United Refrigerated
United States District Court, Southern District of New York
United States Life Insurance
United States Postal Service
United States Trust Company
Upward Fund, Inc.
US Cable Corp.
Vanity Fair Corporation
Verex Assurance, Inc.
Victor Palmieri and Company, Inc.
Village Bank
Vornado Realty Trust
W.P. Carey & Company, Inc.
Wachtell, Lipton, Rosen & Katz, Esqs.
Waterfront New York Realty Corporation
Weil, Gotshal & Manges
Weiss, Peck & Greer
Wells Fargo & Co.
Westpac Banking Corporation
Western Electric Company
Western Union International
Westinghouse Electric Corporation
White & Case
Wilkie Farr and Gallagher, Esqs.
William Kaufman Organization
Windels, Marx, Davies & Ives
Winthrop Financial Associates
Winthrop Simston Putnam & Roberts
Witco Corporation
Wurlitzer Company
Yarmouth Group
