GS MORTGAGE SECS CORP II COM MORT PAS THR CER SRS 1998 GL 11 - 8-K - 19970722 - EXHIBIT_99
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COMPLETE APPRAISAL OF
REAL PROPERTY
Downtown Plaza
211 East Ocean Boulevard
Long Beach, California 90802
Cushman & Wakefield of California, Inc. CUSHMAN &
555 South Flower Street, Suite 4200 WAKEFIELD(R)
Los Angeles, CA 90071-2418 A ROCKEFELLER GROUP COMPANY
Tel: (213) 955-5100
Fax: (213) 627-4044
August 12, 1996
Mr. Dan Kesich
GMAC COMMERCIAL MORTGAGE CORPORATION
650 Dresher Road
Horsham, PA 19044-8015
RE: Appraisal of Real Property
Downtown Plaza
211 East Ocean Boulevard
Long Beach, California 90802
Dear Mr. Kesich:
Enclosed are two final copies of the appraisal referenced above.
If you have any comments, please do not hesitate to call me at
(213) 955-6493.
Sincerely,
CUSHMAN & WAKEFIELD OF CALIFORNIA, INC.
James W. Myers, MAI
Senior Director
Valuation Advisory Services
Enclosure(s)
JWM/jkm
COVRLTR.DOC
COMPLETE APPRAISAL OF
REAL PROPERTY
Downtown Plaza
211 East Ocean Boulevard
Long Beach, California 90802
IN A SUMMARY REPORT
As of August 1, 1996
Prepared For:
GMAC Commercial Mortgage Corporation
650 Dresher Road
Horsham, PA 19044~-8015
Prepared By:
Cushman & Wakefield of California, Inc.
Valuation Advisory Services
555 South Flower Street, 42nd Floor
Los Angeles, California 90071
Cushman & Wakefield of Caffornia, Inc. CUSHMAN &
555 South Flower Street, Suite 4200 WAKEFIELD(R)
Los Angeles, CA 90071-2418 A ROCKEFELLER GROUP COMPANY
Tel: (213) 955~-5100
Fax: (213) 627~-4044
RE: Appraisal of Real Property
Downtown Plaza
211 East Ocean Boulevard
Long Beach, California 90802
Dear Ms. Tsuya:
In fulfillment of our agreement as outlined in the Letter of Engagement,
Cushman & Wakefield of California, Inc. is pleased to transmit our summary
report estimating the market value of the leased fee estate in the referenced
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 is a complete appraisal prepared in accordance with the Uniform
Standards of Professional Appraisal Practice (USPAP) of The Appraisal Institute.
The results of the appraisal are being conveyed in a Summary report according to
our agreement. Because this is a summary report, the level of detail of
presentation is less than that found in a self-contained report.
This report was prepared for GMAC Commercial Mortgage Corporation and it
is intended only for the specified use of said 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 Miles Loo, Jr.
and James W. Myers, MAI.
As a result of our analysis, we have formed an opinion that the market
value of the leased fee estate in the subject property, subject to the
assumptions, limiting conditions, certifications, and definitions, as of August
1, 1996 was:
EIGHT MILLION DOLLARS
$8,000,000
Ms. Avis Tsuya
Page 2
August 5, 1996
The preceding estimate of market value are based upon a forecasted
marketing period of approximately 12 months, which we believe (through a review
of recent office building sale activity, as well as with conversations with
local office/investment brokers) is reasonably representative for this product
type.
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 OF CALIFORNIA, INC.
/s/Miles Loo, Jr. /s/James W. Myers
Miles Loo, Jr. James W. Myers, MAI
Appraiser Senior Director
Valuation Advisory Services Valuation Advisory Services
Provisional Real Estate Appraiser Certified General Real Estate Appraiser
License No.: AP023313 License No.: AG002662
Property Name: Downtown Plaza
Location:
Office Parcel: Northeast corner of East Ocean Boulevard
and The Promenade North. The street
address is 211 East Ocean Boulevard,
Long Beach, Los Angeles County,
California.
Parking Parcel: North side of Seaside Way extending
from Locust Avenue to Collins Way.
Assessor's Parcel Number:
Office Parcel: 7280-029-024
Parking Parcel: 7278-007-041, 042, 043, and 044
Interest Appraised: Leased fee estate
Date of Value: August 5, 1996
Date of Inspections: August 5, 1996
Ownership: WMP Real Estate Limited, a Delaware
limited partnership
Land Area:
Office Parcel: 42,160 square feet (0.97 acres) per
Assessor's Maps
Parking Parcel: 29,110 square feet (0.67 acres) per
Assessor's Maps
1995-96 Property Assessment
Office ParcelParking Parcel
---------------------------
Land: $1,714,600 $1,135,400
Building: 6,461,000 29,000
---------- ----------
Total: $8,175,600 $1,164,400
1995-96 Estimated Ad Valorem Taxes: $89,757 $11,780
Zoning:
Office: CB, Commercial Business
Parking Parcel: PD-6 (subarea 7), Downtown Shoreline &
Planned
Highest and Best Use
CUSHMAN &
WAKEFIELD(R)
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VALUATION ADVISORY SERVICES
---------------------------
Summary Of Salient Facts And Conclusions
================================================================================
If Vacant: Commercial development, such as a
single tenant or multi-tenant office
building; however, current market
conditions are not conducive to
speculative, multi-tenant office
development at the present time,
thus a holding period would be
required before development of this
type would likely occur.
As Improved: As developed, with a multi-tenant,
office building.
Improvements
Type: Six-story class "B" office building
over two levels of subterranean
parking.
Year Built: 1982
Area 100,146+/- RSF
Condition: Average
Operating Data and Forecasts
Current Occupancy: 92.8%
Forecasted First Year Occupancy
(Fiscal Year 1997): 93%
Forecasted Average Occupancy: 8.4%
Average Annual Rental Rate $14.86 annually per square foot
Forecasted: $16.20 annually per square foot
Operating Expenses
Last Full Year (1995): $8.82 per net rentable square foot
Budget (1996): $8.02 per net rentable square foot
Forecasted (1997 FY): $8.37 per net rentable square foot
Value Indicators
Sales Comparison Approach: $9,000,000 ($89.87 per square foot of
net rentable area)
Income Approach: $7,600,000 ($75.89) per square foot of
net rentable area)
CUSHMAN &
WAKEFIELD(R)
---------------------------
VALUATION ADVISORY SERVICES
---------------------------
Summary Of Salient Facts And Conclusions
--------------------------------------------------------------------------------
Discounted Cash Flow Assumptions
Market Rental Growth Rate
1996: 3.5% percent
Thereafter: 3.5% percent
Expense Growth Rates
Utilities: 3.5% percent
All others: 3.5% percent
Credit Loss Allowance: 5.0% percent
Projected Term of Future Leases: 5 years
Vacancy Between Tenants 2 months (after weighting)
Renewal Probability: 65%
Tenant Improvements
New Tenants: $12.50 per square foot
Renewal Tenants: $5.00 per square foot
Terminal Capitalization Rate: 10.5%
Cost of Sale at Reversion: 2.0%
Discount Rate: 12.0%
Value Conclusion
As Is Value Estimate: $8,000,000
Resulting Indicators
Going-in Capitalization Rate
(Overall Capitalization Rate): 10.8%
Price Per Square Foot
(Net Rentable Area): $79.88
Estimated Marketing Time: 12 months
Special Assumption: Please refer to the complete list of
assumptions and limiting conditions
included at the end of this report.
1) We have not deducted costs for
capital work currently in progress or
required in the future for ADA
compliance.
CUSHMAN &
WAKEFIELD(R)
---------------------------
VALUATION ADVISORY SERVICES
---------------------------
TABLE OF CONTENTS
Page
PHOTOGRAPHS OF THE SUBJECT PROPERTY ...........................................1
INTRODUCTION ..................................................................8
Identification of Property ..................................................8
Property Ownership and Recent History .......................................8
Purpose and Function of the Appraisal .......................................8
Extent of the Appraisal Process .............................................8
Date of Value and Property Inspection .......................................9
Property Rights Appraised ...................................................9
Definitions of Value, Interest Appraised, and Other Pertinent Terms .........9
Legal Description ..........................................................11
NEIGHBORHOOD ANALYSIS ........................................................12
Location and Boundaries ....................................................12
Immediate Surroundings .....................................................12
Access and Transportation ..................................................13
Employment .................................................................13
Naval Property Reuse .......................................................14
Aviation / Aerospace Industry ..............................................14
Queensway Bay Plan .........................................................14
Port of Long Beach .........................................................14
Conclusion .................................................................15
LOS ANGELES OFFICE MARKET ANALYSIS ...........................................16
Office Market Analysis .....................................................16
Los Angeles County Office Market Overview ..................................16
Employment .................................................................21
Services ...................................................................22
LOS ANGELES SOUTH OFFICE MARKET ANALYSIS .....................................26
Los Angeles South Office Market ............................................26
Long Beach Market ..........................................................26
Direct Competition .........................................................28
Conclusions ................................................................28
PROPERTY DESCRIPTION .........................................................29
Site Description ...........................................................29
Improvements Description ...................................................29
REAL PROPERTY TAXES AND ASSESSMENTS ..........................................30
ZONING .......................................................................31
HIGHEST AND BEST USE .........................................................32
SALES COMPARISON APPROACH ....................................................34
Methodology ................................................................34
INCOME APPROACH ..............................................................37
Methodology ................................................................37
Potential Gross Income .....................................................37
Operating Expenses .........................................................41
CUSHMAN &
WAKEFIELD(R)
VALUATION ADVISORY SERVICES
Table Of Contents
Capitalization .............................................................42
Derivation of Discount Rate ................................................43
RECONCILIATION AND FINAL ESTIMATE OF VALUE ...................................46
ASSUMPTIONS AND LIMITING CONDITIONS ..........................................47
CERTIFICATION OF APPRAISAL ...................................................49
ADDENDA ......................................................................50
Legal Description
Copy of Floor Plans
Project Assumptions and Analysis
Cushman & Wakefield Investor Survey
Qualifications of Miles Loo, Jr.
Qualifications of James W. Myers, MAI
CUSHMAN &
WAKEFIELD(R)
---------------------------
VALUATION ADVISORY SERVICES
---------------------------
INTRODUCTION
Identification of Property
The subject property consists of two non-contiguous parcels improved with
an office building and related parking and site improvements ("The Office
Parcel") and a surface parking lot ("The Parking Parcel"). The Office Parcel
contains 42,160 square feet of land area, and is improved with a 1982-built
Class "B" six-story office building containing 100,146 square feet of rentable
area. These improvements, known as Downtown Plaza, are located at the northeast
corner of East Ocean Boulevard and The Promenade North in the downtown portion
of the City of Long Beach. The street address is 211 East Ocean Boulevard. Based
on the rent roll provided for our review the property is currently 92.8 percent
leased overall, including a second floor lease for a tenant signed but not yet
in occupancy.
The subject property also includes a non-contiguous "Parking Parcel"
located about two blocks southeasterly of the Office Parcel, on the north side
of Seaside Way extending from Locust Avenue to Collins Way. This parcel contains
29,110 square feet according to Assessors maps. The parcel is improved with a
surface parking lot containing 79 marked spaces. The parking lot is leased to
the adjacent hotel (Breakers Hotel) for a term through September 30, 2000
(subject to termination option for "up to" 29 spaces).
The Los Angeles County Assessor's office identifies the subject as parcel
numbers 7280-029-024 (The Office Parcel) and 7278-007-041,042,043, and 044
(The Parking Parcel).
Property Ownership and Recent History
According to a grant deed dated June 27, 1996 the ownership in the subject
property was transferred from WHC-ONE Investors, L.P. to WMP Real Estate
Limited Partnership. This ownership transfer appears to have involved related
parties, and to have been based on an allocated value of approximately
$9,200,000 in conjunction with an allocation based on a "....certain
Distribution and Contribution Agreement" which included other properties.
According to Assessor's information the grantor in the June 27, 1996 transfer
acquired the property in a trustee sale involving multiple properties in August,
1994. No allocation or sales price was available, and we are not aware of any
other sales or marketing efforts involving the property during the past three
years.
Purpose and Function of the Appraisal
The purpose of the appraisal is to provide an estimate of market value of
the leased fee estate in the property. The function of this report is to assist
GMAC Commercial Mortgage Corporation in an evaluation of the property for loan
underwriting purposes.
Extent of the Appraisal Process
In the process of preparing this appraisal, we:
o Inspected the property with the property manager and building engineer;
o Reviewed leases and rent rolls relating to the current subject
tenancies.
o Reviewed a detailed history of the income and expenses and a budget
forecast for 1996, including the budget for planned capital
expenditures and repairs;
o Conducted market research into occupancies, asking rents, and operation
expenses at competing buildings including interviews with on-site
managers and a review of our own data base;
o Conducted market inquiries into recent sales of similar building to
ascertain the sales prices per-square foot and capitalization rates.
This process involved telephone interviews with sellers, buyers and/or
participating brokers; and
o Prepared Sales Comparison and Income Approaches to vale. The Cost
Approach was not used.
Date of Value and Property Inspection
The date of value is August 1, 1996, with our date of our last inspection
being the same.
Property Rights Appraised
We valued the leased fee estate, which in a legal conveyance through sale
represent the fee simple title, subject to the existing encumbrances, i.e., the
tenant leases, etc., in the improvements and corresponding land area.
Definitions of Value, Interest Appraised, and Other Pertinent Terms
The definition of market value taken from the Uniform Standards of
Professional Appraisal Practice, 1994 Edition, published by 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.
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.
Based upon the available sales data in the marketplace, as well as our
discussions six to nine months would appear to have been reasonably
appropriate for the subject property as the date of valuation.
Definitions of pertinent terms taken from the Dictionary of Real Estate
Appraisal, Third Edition (1993), published by The Appraisal Institute, are
as follows:
Fee Simple Estate
Absolute ownership unencumbered by any other interest or estate, subject
only to the limitations imposed by the governmental powers of taxation,
eminent domain, police power, and escheat.
Leased Fee Estate
An ownership interest held by a landlord with the rights of use and
occupancy conveyed by lease to others. The rights of the lessor (the leased
fee owner) and the leased fee are specified by contract terms contained
within the lease.
Market Rent
The rental income that a property would most probably command on the open
market; indicated by the current rents paid and asked for comparable space
as of the date of the appraisal.
Cash Equivalent
A price expressed in terms of cash, as distinguished from a price expressed
totally or partly in terms of the face amounts of notes or other securities
that cannot be sold at their face amounts.
Discounted Cash Flow (DCF) Analysis
The procedure in which a discount rate is applied to a set of projected
income streams and a reversion. The analyst specifies the quantity,
variability, timing, and duration of the income streams as well as the
quantity and timing of the reversion and discounts each to its present
value at a specified yield rate. DCF analysis can be applied with any yield
capitalization technique and may be performed on either a lease-by-lease or
aggregate basis.
Legal Description
A complete legal description of the property is included in the Addenda.
A general legal description is included below.
Office Parcel
"Parcel A" - Lots 4, 6, 8, 10, 12, 13, 14 and portion of lot 2 in block 112
of Long Beach Townsite, in the city of Long Beach, as shown in Map Book 19,
Pages 91, et seq.; "Parcel B" - Lots 15, 16, 17 and 18 in block 112 of Long
Beach Townsite, in the city of Long Beach, as shown in Map Book 19, Pages 91, et
seq.; and "Parcel C" - Lots 7, 8, 9, 10, 11, 12, 13 and 14 in block B of Ocean
Pier Tract, in the city of Long Beach as shown in Map Book 5, Page 135, as filed
in the Office of County Recorder of Los Angeles County.
Parking Parcel
Lots 7, 8, 9, 10, 11, 12, 13 and 14 in block "L" of Ocean Pier Tract, in
the city of Long Beach, in the county of Los Angeles, State of California, as
per map recorded in Book 5, Page 135 of maps, in the office of the county
recorder of said county together with those portions of Marine Way 20 feet wide
vacated and Seaside Way a portion of which is vacated.
The subject property is located in the southwestem portion of Los Angeles
County in the state's fifth largest city, City of Long Beach. The City of Long
Beach is part of a larger region known as the South Bay, an area which
encompasses approximately 300 square miles of generally densely populated cities
and/or communities. The South Bay region is generally bordered to the west and
south by the Pacific Ocean, to the north by the Century Freeway (I-105), and to
the east by the San Gabriel River Freeway (I-605). The South Bay region
encompasses all of southern Los Angeles County and a portion of northwestern
Orange County. Major cities within the South Bay area based on residential
population include Carson, Hawthorne, Lakewood, Long Beach, Redondo Beach, and
Torrance.
Centrally located in the southerly portion is the City of Long Beach, which
is situated in the southern portion of the larger South Bay area, it is bordered
to the west by the Communities of San Pedro and Wilmington, to the north by the
cites of Carson, Cerritos, and Lakewood, to the east by the City of Seal Beach,
and to the south by the Pacific Ocean. The surrounding land uses in the
subject's immediate vicinity include commercial service, retail, hotel and
residential development, and the local area is generally fully developed.
Immediate Surroundings
Ocean Boulevard is an important commercial and traffic corridor in the Long
Beach area. It includes high-rise commercial development and provides access in
an east/west direction from the Long Beach Freeway (I-710). Across the street
from the "office parcel", on the south side of Ocean Boulevard and west of
Locust Avenue, is the 180 Building, a 12-story 1982-built Class "B" office
building containing approximately 200,028 square feet. Just east of The 180
Building is the 13-story Breakers Hotel. To the west of the 180 Building is the
former Jergen's Trust site which is currently offered for sale or lease as a
residential development site. Farther west, at 110 East Ocean Boulevard, is a
14-story, 1950-built commercial building. North of Ocean Boulevard and next to
the subject on the east side is Home Savings Tower, a 10-story 103,000 square
foot office building. Further east is the Shoreline Square, consisting of
417,000 square feet with 21 stories and built in 1989. This complex also
includes a 462-room high-rise Sheraton Hotel.
Slightly north of the subject property is First Street, which contains
central bus stops for the city of Long Beach and Metro Rail Blue Line, a light
rail system extending approximately 22 miles from downtown Long Beach and
downtown Los Angeles. The subject property faces the bus and train stations,
which results in significant transient activity. This street provides no access
for vehicular traffic, except to buses, trains and pedestrian traffic. As a
result, this is viewed as somewhat of a detriment to the subject's ground floor
bank space facing First Street.
Bordering the subject property to the west is The Promenade North, a
pedestrian walkway, which extends from the Long Beach Convention Center
facilities and the Hyatt Regency Hotel to the south of Long Beach Plaza, a
regional shopping center to the north of the subject. The Promenade North is
dedicated to widths varying from 68 to 80 feet and is well-landscaped with
several park benches. It provides the subject with the visibility of a corner
parcel from eastbound traffic on Ocean Boulevard, but does not benefit from full
street corner exposure. Immediately west of the Promenade North is the high-rise
Renaissance Hotel which faces Ocean Boulevard.
The City of Long Beach has very good access to outlying areas by way of the
regional freeway network, the Metro Rail Blue Line, and local surface streets.
The San Diego Freeway traverses the northern portion of the city in an east/west
direction and provides access to several freeways in the South Bay region. Long
Beach is bordered to the west by the Long Beach Freeway, which provides access
in a northerly direction to the central portion of the South Bay and further
north to Pasadena. The San Gabriel River Freeway provides access in a northerly
direction from the southeastern portion of Long Beach to central Los Angeles
County.
The Metro Rail Blue Line is a light rail system which extends for
approximately 22 miles between downtown Long Beach and downtown Los Angeles. The
Blue Line opened in mid 1990 and presently operates 22 stations, with a future
extension of the line from downtown Los Angeles to Pasadena presently being
planned. Ridership on the Blue Line has increased from an average of 19,000
riders per day in the line's first year of operation to an estimated 33,000
riders per day / 12,000,000 annually in calendar year 1996. The Blue Line
originates near the intersection of Long Beach Boulevard and Ocean Boulevard in
the Long Beach Civic Center area, approximately one block west of the subject
property, and extends in a northerly direction along Long Beach Boulevard to
Pacific Coast Highway.
Major surface streets in the City of Long Beach in a north/south direction
include Atlantic Avenue, Long Beach Boulevard, and Cherry Avenue. Important
surface streets in an east/west direction through the city include Ocean
Boulevard, Anaheim Street, and Pacific Coast Highway, which changes direction
from east/west to north/south with Lakewood Boulevard at Traffic Circle
approximately four miles northeast of the subject property.
Employment
Information provided by the City of Long Beach Economic Development
Department indicates that the major employers within the city are as follows:
Employer # of Employees
-------- --------------
McDonnell Douglas 18,700
Long Beach Unified School District 6,500
City of Long Beach 5,750
Long Beach Memorial Medical Center 4,000
California State Univ., Long Beach 4,000
U.S. Postal Service 2,200
St. Mary Medical Center 2,200
Southern California Edison 1,700
Recent growth in the communications, entertainment, transportation,
aerospace and environmental services sectors is the result of the state and
local tax incentive and improvement programs, such as the State Enterprise Zone,
Los Angeles Revitalization Zone, and city= sponsored business loan programs to
help attract and retain businesses. Continuing efforts should result in job
growth and business opportunities in years to come.
Following the 1991 announcement of the U.S. Navy base closure, Long Beach
created a plan that called for the development of more than 400-acres of former
Navy property. The reuse plan presents unique opportunities that emphasizes job
creation and economic revitalization. The table below summarizes how the four
parcels being returned will be restored and sustain economic growth.
===================================================================================================================================
Existing Property Available New Property Usage Projected Job
Acreage Opportunities
Naval Station 197 Port Of Long Beach 2,735
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3 Multi-service center for the homeless 10
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Naval Hospital 70 1,000,000 SF Super volume retail center, 3,000
"Long Beach Towne Center"
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Naval Housing 62 Long Beach Unified School District high 200
school and middle school
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17 Job Corps Training Center 300
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32 CSULB Research & Training Center and 3,000
Long Beach Business Incubator
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18 Transitional housing for homeless persons 30
-----------------------------------------------------------------------------------------------------------------------------------
5 Educational, training facilities for homeless To be determined
persons
-----------------------------------------------------------------------------------------------------------------------------------
1 Child care for homeless persons To be determined
===================================================================================================================================
Aviation / Aerospace Industry
As the local aviation and aerospace industry is expected to make a comeback
over the next several years, one of the more important employers in the Long
Beach area is McDonnell Douglas/Douglas Aircraft, which is a commercial aircraft
and defense related facility in Long Beach. The Douglas Aircraft division is
involved in the development and manufacture of commercial aircraft and announced
in the third quarter of 1995 that it would begin on the MD-11 fuselage and
MD-95 production programs at the company's facilities in Long Beach. The City of
Long Beach and State of California led "Red Team" worked side-by-side with
Douglas executives, labor leaders and other business development partners in
bringing to Long Beach 1,500 to 2,000 new jobs.
Queensway Bay Plan
After the fallout of the proposal submitted by The Walt Disney Company in
1991 to develop a theme park on much of the land along the downtown Long Beach
waterfront, Long Beach planned an aggressive strategy to rejuvenate its downtown
core and convention center, called the Queensway Bay Plan. Long Beach has
already invested more than $200 million since 1992 to build a $750 million
310-acre waterfront development that will include a world class aquarium,
stores, restaurants, entertainment and marina facilities. As Phase I of four is
already under way, which includes several of the infrastructure improvements and
construction of the Long Beach Aquarium of the Pacific to be completed by
1997-98, Long Beach is expecting to generate about 3,500 additional jobs and
inject more than $275 million a year into the Long Beach economy.
Port of Long Beach
The strong growth in international trade has kept the Port of Long Beach as
the nation's number one container port for the past two years. Recognized as the
Gateway to the Pacific Rim,
both imports and exports generate an estimated $3 billion in wages and $430
million in local and state taxes last year. As this year's volume and value of
exports are highly expected to rise, and to accommodate for future growth, the
Port is in the midst of a five-year, $1.3 billion improvement plan. This plan
will include the construction of new terminal facilities, roads and railways on
200-acres soon to be acquired from the U.S. Navy as a result of the closure of
the more than 400-acre Long Beach Naval Station. On-site improvements at the
Port of Long Beach are expected to generate 5,500 new direct and indirect jobs
over the next several years, and the construction of the Alameda Corridor should
generate more than 10,000 construction related jobs over the next six years,
with a nationwide minimum of 70,000 permanent new jobs created within a decade
of building the Corridor.
Conclusion
As the city of Long Beach aggressively restructures its economy to achieve
greater diversity, it is quickly becoming a major Southern California shopping,
dining and entertainment destination. Hotel occupancy increased 17% last year in
Long Beach's hospitality market and expected growth in 1996 is 3%, with that
level building over the next few years. And with the help of several new large
developments, including the planned 1,000,000 square foot retail center and
revitalization of three existing shopping centers, the city will provide
thousands of jobs as well as new and exciting shopping opportunities over the
next couple of years. As a result, the Downtown Plaza will most likely benefit
from these economic stimuli.
Los Angeles County
MARKET & SUBMARKET STATISTICS
End Of the 1st Quarter of 1996
Direct Overall Net
Number Direct Vacancy Overall Vacancy Absorption Wtd. Avg.
Market/Submarket Inventory of Bldgs Availabilities Rate Availability Rate 1st Qtr Ytd 1996 Rental Rate
====================================================================================================================================
CENTRAL LOS ANGELES 56,716,565 274 13,154,140 23.2% 14,234,656 25.1% (308,448) (308,448) $18.60
------------------------------------------------------------------------------------------------------------------------------------
1 Downtown Los Angeles 36,568,896 110 7,507,819 20.5% 8,353,162 22.8% (183,462) (183,462) $19.46
2 Mid-Wilshire Corridor 13,363,443 77 4,006,947 30.0% 4,210,795 31.5% (38,939) (38,939) $17.07
3 San Gabriel Valley 6,785,226 87 1,639,374 24.2% 1,670,699 24.6% (86,047) (86,047) $18.40
====================================================================================================================================
WEST LOS ANGELES 40,278,865 316 6,893,279 17.1% 7,838,972 19.5% (229,422) (229,422) $23.08
------------------------------------------------------------------------------------------------------------------------------------
4 Hollywood/West Hollywood 3,874,934 45 819,328 21.1% 824,000 21.3% (99,518) (99,518) $18.34
5 Beverly Hills/ Century City 14,351,740 89 2,390,018 16.7% 2,571,444 17.9% (49,875) (49,875) $24.48
6 Westwood/West Los Angeles 17,304,111 139 2,951,755 17.1% 3,626,577 21.0% (27,667) (27,667) $24.60
7 Marina Area/Culver City 4,748,080 43 732,178 15.4% 816,951 17.2% (52,362) (52,362) $17.64
====================================================================================================================================
SOUTH LOS ANGELES 30,505,628 251 5,995,240 19.0% 6,878,096 22.5% (392,838) (392,838) $16.92
------------------------------------------------------------------------------------------------------------------------------------
8 LAX/EI Segundo 13,515,551 86 2,805,167 20.8% 3,607,250 26.7% (325,166) (325,166) $15.48
9 Torrance 7,144,480 79 1,430,572 20.0% 1,483,151 20.8% 47,241 47,241 $17.88
10 Long Beach 9,845,597 86 1,759,501 17.9% 1,787,695 18.2% (114,913) (114,913) $18.60
====================================================================================================================================
NORTH LOS ANGELES 39,608,321 474 5,367,245 13.6% 6,594,785 16.6% 163,131 163,131 $19.82
------------------------------------------------------------------------------------------------------------------------------------
11 Simi/Conejo Valley 4,568,138 89 523,217 11.5% 852,257 18.7% (8,680) (8,680) $17.76
12 West Valley 8,680,098 99 1,595,634 18.4% 1,921,043 22.1% (138,093) (138,093) $19.32
13 Central Valley 8,555,670 113 1,443,787 16.9% 1,612,712 18.8% 81,177 81,177 $19.32
14 East Valley (including 17,804,415 173 1,804,607 10.1% 2,208,773 12.4% 228,727 228,727 $21.25
Pasadena)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL 167,109,379 1,315 31,409,904 18.8% 35,546,509 21.3% (767,577) (767,577) $19.47
====================================================================================================================================
MARKET SIZE COMPARISON CHART
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[The table below was presented as a pie chart in the printed material.]
Area %
---- ---
North 24%
Central 34%
West 24%
South 18%
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[DATA POINTS TO BE SUPPLIED]
AVAILIBILITIES BAR CHART
[GRAPHIC OMITTED]
[DATA POINTS TO BE SUPPLIED]
MARKET WEIGHTED AVERAGE RENTAL RATE COMPARISON CHART
LOS ANGELES OFFICE MARKET ANALYSIS
Office Market Analysis
Los Angeles County Office Market Overview
Supply and Tenant Demand
According to Cushman & Wakefield's first-quarter, 1996 surveys the combined
Los Angeles County office market contained a total inventory of 167,109,379
square feet. This figure excludes owner user, medical, and government office
buildings.
The accompanying exhibit provides a statistical overview of the office
inventory for Los Angeles County, including a breakdown by markets. The markets
included in the sectors used in this report are summarized below.
Sector Markets
Los Angeles Central/Downtown: Downtown Los Angeles
Mid-Wilshire Corridor
San Gabriel Valley
Los Angeles West: Hollywood/West Hollywood
Beverly Hills/Century City
Westwood/West L.A./Santa Monica
Marina Area/Culver City
Los Angeles South Bay: El Segundo/LAX
Long Beach
Torrance
Los Angeles North: Simi/Conejo Valleys
West San Fernando Valley
Central San Fernando Valley
East San Fernando Valley/Tri-Cities
Each market within the larger markets is comprised of a series of
submarkets. Although the markets and individual office markets compete to
varying degrees on a larger scale for the Los Angeles County tenant base, each
market is characterized independently in general terms by a typical targeted
tenant or industry type. The table below presents a general overview of the
tenant base for the markets.
Los Angeles Office Market Analysis
================================================================================
Sector Tenant Base
Los Angeles Central/Downtown Financial
Legal
Telecommunications
Energy
Accounting
Real Estate
Govemment/Quasi-Govemment
Los Angeles West: Legal
Accounting
Entertainment
Insurance
Real Estate
Financial Services
Advertising
Los Angeles South: Aerospace
High-Tech
Research & Development
Los Angeles North: Entertainment
Insurance
Legal
Accounting
Engineering
Considerable duplication exists within the office tenant base for the Los
Angeles County office markets. However, the office markets maintain separate
identities in terms of the primary tenancies and relative prestige and
corresponding relative rental rate structures for comparable buildings within
the separate markets. Legal and accounting firms provide considerable tenant
demand within each of the markets, for example, but the type and focus of these
professional firms is directed toward the business base within the sector.
Downtown Los Angeles law and accounting firms consist primarily of larger
national or regional firms oriented toward corporations and government for
example, while westside Los Angeles firms typically are smaller and specialize
in a particular field, such as entertainment law.
Historical Office Development
Fundamental shifts occurred in the greater Los Angeles office market during
the past decade. The most significant changes include the exodus of major
insurance companies and corporations from the Mid-Wilshire District to more
suburban locations such as Warner Center and Glendale during the 1980s, and the
movement of some entertainment firms from Hollywood and Beverly Hills to areas
such as Burbank (North Los Angeles), Woodland Hills/Warner Center (North Los
Angeles), or Culver City and Santa Monica (West Los
* - Including Miracle Mile, Pasadena and Pasadena East
** - excluding Miracle Mile
*** - Without Tri-Cities
ANNUAL OFFICE BUILDING CONSTRUCTION TREND LINE
LOS ANGELES COUNTY
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[DATA POINTS TO BE SUPPLIED]
Los Angeles Office Market Analysis
Angeles). These shifts have involved relocations within the Los Angeles County
marketplace, and most of the current markets have emerged as separate, viable
office locations during the past decade. The established Los Angeles County
office markets as of 1980 consisted of downtown Los Angeles, the Mid-Wilshire
sector, Pasadena, Beverly Hills, Century City, and the Ventura Boulevard
corridor in the San Fernando Valley. Approximately 55% of the total existing
office development in Los Angeles County has been completed during the period
since 1982.
A number of the current major office markets or submarkets were effectively
created during roughly the past decade. Most of the development in the following
markets (total current supply in parenthesis) has been completed since 1980:
Warner Center (5,325,021 square feet) Burbank/Universal City (5,517,729 square
feet), Glendale (5,052,071 square feet), Brentwood (3,254,337 square feet),
Culver City/Westchester (3,643,649 square feet), and Long Beach (7,419,205
square feet). Much of the development in the Glendale, Burbank, Culver City, and
downtown Long Beach office markets was assisted to varying degrees by government
agencies, including redevelopment agencies. Significant assistance (political
and/or financial) by government agencies has also increased the office
development in previously established markets such as downtown Los Angeles and
Pasadena. Prior to about 1980 several of these alternative office locations
either did not exist or the available supply in the market was not sufficient to
represent serious competition for the established office markets. The existence
of a number of alternative office market locations within the Los Angeles basin
is a significant consideration in analyzing historical vacancy and rental trends
in the individual markets prior to 1982 for the purpose of projecting future
performance.
Future Competitive Supply
Future competitive office development in the Los Angeles County markets is
restricted by two primary factors: 1) economic conditions - the current
financial infallibility of most new development and the absence of available
financing for office development of new office properties; and 2) political
conditions - the governmental restrictions limiting new development. Although
the economic factors limiting development, which are based on lending
restrictions and economic infallibility under current leasing conditions and
effective rental rates, represent the primary reason for limited new development
in the recent, past and near future, the political constraints on new
development as the most significant factor limiting new competitive office
supply in a number of the markets and market for the long term.
1) Economic Constraints
Market rental rates in Los Angeles County submarkets are currently below
(to varying degrees) the levels required to justify new Class A office
development. The current (1st Quarter 1996) weighted average asking rental rate
for all direct office space availabilities in Los Angeles County is $19.48
per-square-foot annually, full service gross. The individual markets have
weighted average rental rates (asking) from $15.48 to $24.60 per-square-foot.
New construction costs for mid to high-rise office buildings vary by market
location and underlying land cost. The relative strength of the markets in terms
of tenant demand and the
SUMMARY OF DEVELOPMENT CONSTRAINTS (POLITICAL)
LOS ANGELES AREA OFFICE MARKETS
Location Development Control
Suburban North
Burbank Specific Plan
San Fernando Valley Specific Plan
Ventura Boulevard Specific Plan/Proposition U
Warner Center Specific Plan
Westside
Park Mile Specific Plan
Miracle Mile Interim Control Ordinance
Beverly Hills Restrictive Zoning
Westwood Specific Plan
Brentwood Proposition U/Specific Plan
West Los Angeles Proposition U
Santa Monica Restrictive Zoning/Specific Plan
Century City Specific Plan
Los Angeles Office Market Analysis
"spread" between the rents required support new development and the current
market rental levels in the various markets fluctuates considerably, but
virtually no new speculative office construction has occurred in Los Angeles
County markets since 1992. Refer to accompanying exhibit for historical
construction activity since 1980.
2) Political Constraints
Other than the downtown market and the South Los Angeles market area,
nearly every sector of the City of Los Angeles and adjacent suburban cities with
a meaningful office market has implemented restrictions on new development, tied
to political factors, traffic mitigation and other infrastructure issues. These
restrictions will negatively impact the political feasibility of significant
amounts of new office construction under any future economic office market
scenario. The accompanying exhibit summarizes Los Angeles area markets with
meaningful political constraints on development currently in place or pending.
The specific plans are based on automobile "trips" (costs associated with
traffic mitigation costs) or other criteria (typically tied to infrastructure).
The political influence of the homeowners groups, which typically have active
slow- or no-growth philosophies toward new development, is strong and has
increased considerably during the past decade.
In addition to typical zoning and planning issues, new development of
significant size and scope within specific plan areas will require substantial
additional entitlement fees to be paid prior to approval for new development.
The fees are usually based on the anticipated new traffic generated by a
proposed project, and the costs are assessed based on square footage and use.
The "prime' westside markets, including Westwood, Century City, Brentwood, and
Santa Monica have substantial fees for new development, as does the Miracle Mile
District, and the Ventura Boulevard corridor of the San Fernando Valley
(including Encino and Woodland Hills).
The most significant political constraint on new competitive office supply
in the City of Los Angeles markets has been Proposition "U", which was passed in
1986 and down-zoned all Height District I properties in the City of Los Angeles.
Known also as Ordinance No. 161684, Proposition "U" amended the zoning code for
all areas of the City of Los Angeles to include height district designations
ranging from 1 to 4, with much of the city downzoned to height district No. 1.
Properties within this designation are limited to a maximum of 3 stories or 45
feet in height. The 'wave" in new high-rise construction during the latter
portion of the last decade (the 1980's) was in part accelerated by developers
and lenders who hurried high-rise office developments through the planning and
development stages before the sites were downzoned. Properties in the downtown
Los Angeles market area are not within this height classification, but most
other areas of the City have been impacted, including West Los Angeles and the
Ventura Boulevard corridor of the San Fernando Valley. The portions of the City
most directly effected by Proposition U and the specific plans summarized on the
chart are generally the most affluent, prestigious residential areas, and office
buildings in these locations have typically commanded some of the highest rental
rates in the County. These areas also experienced some of the greatest levels of
new development during the previous decade (1980's). The concerns of the
surrounding residential communities over the
increasing traffic and the decline in the overall quality of life has led to the
formation of a number of politically influential homeowners groups that can be
described as actively anti-development. Although there are some political and
governmental controls on future development in the downtown market area, the
number of projects currently entitled for development or win the pipeline" for
approval is substantial, and the surrounding residential base is not as
organized, active, or apparently as influential as the more affluent communities
situated in the west and north Los Angeles County markets.
Probable Future Development Activity
As discussed above the economic and political constraints on new office
development have resulted in virtually no new office construction in Los Angeles
County markets since 1992. The "spread' between current market rental rates and
the rents required to justify new development varies from submarket to
submarket. The highest rental rates in the county are currently achieved in the
"Tri-Cities" markets and the 'prime' westside Los Angeles markets. While there
are several potential speculative office development parcels in these markets,
new multi-tenant development appears to be two or more years in the future.
Owner-user projects such as the proposed Dreamworks animation facility in
Glendale or "redevelopment' projects such as the former Lockheed "Skunkworks"
facility in Burbank for a major entertainment industry tenant are expected to
commence during the second half of 1996. Build-to-suit activity for Dreamworks
studios and related businesses in the Playa Vista area of west Los Angeles and
Glendale may occur during 1997-1998. In terms of speculative office development
potential, however, several potential office sites in prime locations have
remained vacant for a number of years due to market conditions, and market
rental 'spikes" will be required before new speculative office development can
occur.
Vacancy
The landlord-direct vacancy rate for Los Angeles County office markets was
18.8 percent, based on 31,409,904 square feet available for lease at the end of
1st quarter, 1996. Our review of the data on a submarket by submarket basis
indicates there are isolated submarkets that experienced considerably lower
direct vacancy levels than the countywide figure, such as Universal City and the
Burbank Media District. Most markets within Los Angeles County, with the
exception of the Tri-Cities area, have direct vacancy rates above 15 percent,
and several have current direct vacancy levels in the range of 20 percent. The
previous Los Angeles County Office Market Statistics chart illustrates the
vacancy breakdown by sector.
Including sublease availabilities the overall Los Angeles County office
market vacancy level was 21.3 percent as of 1st quarter, 1996, which compares
with 21.0 percent as of year-end, 1995. The overall vacancy level is down from
unchanged from the 21.8 percent overall vacancy level at the end of 1994. The
sublease marketplace became a more important component of the overall office
leasing market during the first few years of this decade, particularly within
the downtown Los Angeles market, as the national economic recession and other
factors led to business consolidation and mergers. Many types of businesses were
affected, including major law and accounting firms, aerospace firms, high-tech
firms, energy firms, telecommunications companies, financial services firms,
insurance companies, and
Los Angeles County
================================================================================
Including L.A. Central/Downtown Excluding L.A. Central/Downtown
Vacancy Rates Vacancy Rates
Year Quarter Direct Sublease Overall Direct Sublease Overall
================================================================================
Vacancy Ratio Bar Graph
Excluding Los Angeles Central/Downtown Overall Vacancy Rate
[GRAPHIC OMITTED]
[DATA POINTS TO BE SUPPLIED]
Los Angeles Office Market Analysis
banks and savings and loans. The oversupply of office space during the first
portion of this decade led to additional sublease availabilities as developers
assumed existing tenant obligations for space in other buildings prior to the
termination of the tenant's previous lease. Although sublease space was
previously a secondary competitive marketplace for short-term lease requirements
or tenants with questionable credit ratings, a few office markets in Los Angeles
County have sublease markets that compete effectively with landlord direct
space, which in turn applies additional downward pressure on rents for direct
office space. As shown the exhibit, "Office Market Vacancy Trends", the overall
Los Angeles County market has experienced a slow, gradual improvement in direct
and sublease vacancy levels during the period from fourth quarter, 1992 through
year-end, 1995.
Near-Term Vacancy Trends
The Los Angeles Central office sector, which includes the "distressed"
downtown and Mid-Wilshire areas, experienced negative net absorption of 711,752
square feet during 1995. The total Los Angeles County net absorption during 1995
was positive 272,154 square feet including the impact of the negative absorption
in the Central Los Angeles sector. Excluding Los Angeles Central, the remainder
of the county (the West, South, and North markets) experienced positive
absorption of 983,906 square feet for an inventory of 116,707,590 square feet.
The chart shows the potential for a continued, gradual decrease in vacancy
levels for the three markets of the county (excluding the Central sector). As
vacancy levels decline overall and within the most desirable submarkets, rental
rates for office space in these markets should logically increase.
The Los Angeles Central Sector, which includes downtown Los Angeles and the
Mid-Wilshire corridor, have experienced generally higher vacancy levels and
lower absorption during the past several years than the remainder of the county.
The historical vacancy trends exhibit includes a column which adjusts the
inventory and availabilities as of year-end 1991 through 1995 to exclude the Los
Angeles Central sector.
Employment
The chart on an accompanying page summarizes the employment base for the
six major counties in the Southern California area. Los Angeles County had an
average total employment of 4,979,800 positions in 1995, which accounted for 53
percent of the total employment within the six-county area. The most significant
employment markets in the county include services (36.2 percent),
wholesale/retail trade (20.0 percent), and manufacturing (14.6 percent). Los
Angeles County has a notably higher percentage of employment within the services
and manufacturing markets as compared to the other major counties in Southern
California, which reflects the important concentration of film, television, and
musical production/distribution companies in the region as well as the ongoing
work by major aerospace/defense companies in the Los Angeles area.
From 1990 to 1995, Los Angeles County endured a 7.5 percent decline in
total employment, due in large part to the decrease of 18.8 percent in the
manufacturing sector which reflected the consolidation within the
aerospace/defense industry. Of the six major counties in Southern California,
only Los Angeles and Orange Counties suffered a decline in total employment over
this five-year period. The U.S. Labor Department reported the January 1996
national unemployment rate at 5.5 percent, which was essentially unchanged from
the year prior level of 5.4 percent. On a statewide basis, the unemployment rate
of 8.3 percent for California was generally unchanged from the January 1995
level of 8.2 percent. The unemployment rate in Los Angeles County was 8.2
percent in January 1996, which is notably decreased from the year prior level
and which continues the downward trend in the unemployment rate for the county
over the past 12 to 18 months. Regional economists project that the unemployment
rate on a countywide basis will continue to decline over the next few years. The
anticipated decline in the unemployment rate is based on the fact that the
downsizing by major aerospace/defense companies has been largely completed and
the growth in the services sector is expected to continue over the next several
years.
Total employment in Los Angeles County is projected by Woods & Poole to
increase at a compound rate of 0.45 percent per year from 1995 to 2000, which is
notably improved from the past few years but lags the projected employment
growth for the other major counties in Southern California. However, the
forecasted employment growth by Woods & Poole for Los Angeles County is fairly
conservative in comparison to recent projections by the California Employment
Development Department and the Los Angeles County Economic Development
Corporation. Each of these organizations has forecast job growth for Los Angeles
County in the range of 2.0 to 2.5 percent during 1996, with growth during the
period from 1995 to 2000 expected to outpace the national average employment
growth rate.
Services
The services sector has shown the only significant growth in terms of total
employment from 1990 to 1995 in Los Angeles County and Southern California as a
whole. The services sector includes entertainment, healthcare, business
services, lodging, and personal services. Within the services sector, the
entertainment industry has experienced significant growth over the past few
years, both in terms of the worldwide demand for television/film product and the
level of employment. The entertainment industry has emerged as a growing source
of relatively high wage employment within the Los Angeles area and has surpassed
the defense industry in terms of countywide employment. A November 1995 report
by the California Employment Development Department indicated that the total
countywide employment in the entertainment industry is estimated at 147,500
jobs, which is increased by nearly 12.5 percent from the July 1994 level of
employment. A similar report by the California Department of Finance estimated
the entertainment industry employment figure at 172,000 positions. The disparity
in the reported entertainment employment figures provided by these two agencies
reflects the different methodologies used in collecting the employment data.
However, both sources of data support the very significant growth within this
industry and its increasing role as a catalyst for economic growth in the Los
Angeles area.
The local entertainment industry has recently been investing in new
production facilities in the Hollywood area, West Los Angeles, and the Cities of
Glendale and Burbank in an effort to meet the growing demand for multi-media
products and services. Such leading companies as Walt Disney Company and NBC
Studios in Burbank, MCA in Universal City, Sony Pictures in Culver City, and the
recently formed Dreamworks headed by Steven Spielberg, Jeffrey Katzenberg, and
David Geffen are creating multi-media divisions which will increase the demand
for computer/high technology-oriented positions in the Los Angeles area. The
level of entertainment employment is expected to increase due to the strong
international demand for film product and the ongoing evolution of the cable
television industry.
The second largest category of employment within the services sector is the
health services segment. The field of healthcare has been one of the more stable
industry segments in terms of employment changes over the past few years. The
Los Angeles area is home to some of the most advanced medical and medical
teaching facilities in the country, including Cedars-Sinai Medical Center, the
City of Hope, and the University of Southern California and the University of
California at Los Angeles schools of medicine. Reports by industry experts
suggest that the Los Angeles area has an overcapacity of local hospital
facilities, which will result in more consolidation within the industry and/or
the closure of underperforming hospitals over the next few years. However, the
impact on total employment within the county stemming from the anticipated
consolidations is uncertain at the present time.
Employment growth within the services sector is forecast by the Southern
California Association of Governments (SCAG) to be relatively strong from 1995
to 2000. SCAG forecasts the services segment of the employment base to increase
at a compound rate of 3.8 percent per year from 1995 to 2000 for Los Angeles
County, which compares favorably to the projected growth for the total
countywide employment base of 1.6 percent per year from 1995 to 2000. Within the
services sector, the motion picture industry is projected to grow at a compound
rate of 7.7 percent per year from 1995 to 2000, and the business services
segment is projected to grow at a compound rate of 5.2 percent per year from
1995 to 2000. However, the finance, insurance and real estate sector (FIRE),
which is a separate employment category from the services sector, is projected
to grow at a more modest pace of 0.8 percent per year (compounded) from 1995 to
2000.
Gross Leasing Activity
Cushman & Wakefield defines gross leasing activity as the sum of all
completed leasing transactions including subleasing but excluding renewals. The
accompanying graph illustrates the pattern in net absorption and gross leasing
activity for the combined Los Angeles County office marketplace on a annual
basis since 1990. Over the past six years (1990 through 1995), gross leasing
activity has been relatively stable on an annual basis, averaging approximately
18 million square feet. The leasing activity includes assumed leases and other
factors, and does not represent fLeA absorption, which is one indication of new
demand.
Los Angeles County Office Space
--------------------------------------------------------------------------------
1989 to 1995
--------------------------------------------------------------------------------
Year NOA (sqft) % Decrease
---- ---------- ----------
1990 8,258,928
1991 2,261,311 -72.6%
1992 (5,207) -100.2%
1993 (248,158) 4665.9%
1994 (997,235) 301.9%
1995 272,154 -127.3%
================================================================================
Total 9,541,793
================================================================================
Annual Average 1,590,299
Historical Net Office Absorption
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\
[DATA POINTS TO BE SUPPLIED]
Los Angeles Office Market Analysis
OFFICE MARKET
Net Absorption Trends
Los Angeles County
================================================================================
Including Los Angeles Excluding Los Angeles
Central / Downtown Central / Downtown
Net Absorption (SF) Net Absorption (SF)
Year YTD YTD
========= ================== ===================
1991 2,261,311 882,518
--------- ------------------ -------------------
1992 (5,207) 251,057
--------- ------------------ -------------------
1993 (248,158) 55,268
--------- ------------------ -------------------
1994 (997,235) 234,566
--------- ------------------ -------------------
1995 272,154 983,906
========= ================== ===================
Net Absorption Bar Chart
Excluding Los Angeles Central/Downtown
Cushman & Wakefield calculates net absorption based on net change in
directly occupied office space. The chart on the accompanying page summarizes
the annual trends in net office absorption for Los Angeles County during the
period 1991 through 1995. A graph compares net office absorption with the gross
leasing activity summarized previously. Net absorption declined sharply from
1990 to 1992, from positive absorption of 2.3 million square feet in 1991 to
negative absorption in 1992. Following negative absorption in 1993 and 1994
county-wide net absorption increased to 272,154 square feet during 1995. The Los
Angeles Central office markets posted substantial negative net absorption from
1992 to 1995. Excluding Los Angeles Central, the three remaining areas (West,
North and South County), experienced positive net absorption of 983,906 square
feet during 1995.
The net absorption figures discussed above are based on the net change in
direct occupied office space. This calculation does not include changes in the
sublease availabilities. The current (1st quarter 1996) sublease availabilities
in Los Angeles County total 4,136,605 square feet, or 11.6 percent of the Los
Angeles County available (for lease) office supply. Although several submarkets
have substantial sublease availabilities, the downtown Los Angeles Central
Business District represents the greatest single component of this supply, with
approximately 845,000 square feet or 20 percent of the countywide sublease
space. The LAX/El Segundo market also has significant sublease availabilities.
As noted previously, however, the sublease supply has decreased gradually from
3.6 percent at the end of fourth quarter, 1991 to 2.3 percent at the end of
1995.
The chart below shows the cumulative oversupply of office space added to
the Los Angeles County office market since 1990.
================================================================================
SF SF SF
Year New Construction Net Absorption Oversupply
--------------------------------------------------------------------------------
1990 6,690,483 8,258,928 (1,568,445)
--------------------------------------------------------------------------------
1991 7,977,729 2,261,311 5,716,418
--------------------------------------------------------------------------------
1992 1,897,805 (5,207) 1,903,012
--------------------------------------------------------------------------------
1993 0 (248,158) 248,158
--------------------------------------------------------------------------------
1994 0 (997,235) 997,235
--------------------------------------------------------------------------------
1995 180,700 272,154 (91,454)
--------------------------------------------------------------------------------
Totals 16,746,717 9,541,793 7,204,924
The commercial office real estate market in Los Angeles has experienced a
significant transformation during roughly the past 20-year period. Los Angeles
has grown from a regional (southern California) business center to a financial
center for the western United States and the international focus for trade and
financial relations with the Pacific Rim countries. The factors influencing this
transformation include global, national, and regional trends and events.
The national and regional economic recession during the period from roughly
the third quarter, 1990 through 1993 exacerbated the oversupply conditions
established during the past decade. The historically strong net new demand for
office space declined significantly, with most office markets experiencing flat
or negative office space absorption during the past few years. Financing for new
speculative developments was virtually unavailable, but new development
continued to 1992 based upon previous construction lending commitments. About 1
0 million square feet of new office supply was completed during 1991 and 1992.
Several submarkets in Los Angeles County office market provided signs of
recovery during 1993 and 1994, and have continued to tighten during 1995,
particularly the Tri-Cities and prime westside markets. The level of office
building investment activity increased substantially during the past 24 months
in Los Angeles County. Many submarkets experienced declining direct and overall
vacancy rates during 1994 and 1995. Gross leasing activity remained stable on a
countywide basis, and all markets excluding the Los Angeles Central Sector
experienced positive absorption during 1995. On a submarket by submarket basis
several individual markets appear to be steadily improving and may experience
relatively strong absorption, occupancy and value increases in the near future.
As shown in previous charts, the Los Angeles County office market,
particularly when the poorly-performing Central sector is isolated from the
remainder of the county, has exhibited positive absorption during 1995 and
appears positioned for a continued, stable improvement in occupancy levels. The
employment growth in several markets, particularly the entertainment industry
including the film and recording industries), has enabled several submarkets to
outperform the county as a whole during the past several years. The submarkets
which have most directly benefited from the growth of the entertainment industry
include Burbank and Glendale in the North Los Angeles sector, and the westside
markets of Beverly Hills, the Miracle Mile, Century City, Santa Monica, West Los
Angeles, and Culver City. The office locations adjacent to these submarkets and
Class "B" buildings in these submarkets have benefited from "overflow" demand
from entertainment industry tenants, and have also attracted tenants from other
businesses who have been driven from Class A buildings in the prime submarkets
by higher rental rates.
Los Angeles South
MARKET & SUBMARKET STATISTICS
End of the 2nd Quarter of 1996
Direct Overall
Number Direct Vacancy Overall Vacancy Net Absorption Wtd. Avg.
Market/Submarket Inventory of Bldgs Availabilities Rate Availability Rate 2nd Qtr YTD 1996 Rental Rate
====================================================================================================================================
LAX / EL SEGUNDO 13,669,986 88 3,076,644 22.5% 3,726,440 27.3% (203,256) (502,797) $15.72
------------------------------------------------------------------------------------------------------------------------------------
1 Los Angeles Airport 4,206,225 20 1,254,826 29.8% 1,270,077 30.2% (6,552) (62,751) $13.32
2 El Segundo 9,463,761 68 1,821,818 19.3% 2,456,363 26.0% (196,704) (440,046) $17.52
====================================================================================================================================
TORRANCE 7,144,480 79 1,472,752 20.8% 1,532,089 21.4% (53,165) (5,628) $17.28
------------------------------------------------------------------------------------------------------------------------------------
3 190th Street Corridor 3,222,161 31 790,293 24.5% 827,622 25.7% 10,081 37,028 $16.56
4 Central Torrance 3,572,017 45 663,108 18.6% 685,116 19.2% (62,287) (46,086) $18.00
5 San Pedro 350,302 3 19,351 5.5% 19,351 5.5% (959) 3,430 $19.68
====================================================================================================================================
LONG BEACH 9,845,597 86 1,671,040 17.0% 1,720,190 17.5% 79,330 (33,074) $18.60
------------------------------------------------------------------------------------------------------------------------------------
6 Long Beach Freeway 2,053,676 18 262,986 12.8% 275,084 13.4% 1,421 (34,333) $16.92
7 North Long Beach 1,020,608 13 239,948 23.5% 239,948 23.5% (12,669) (18,959) $14.88
8 Downtown Long Beach 3,820,393 20 946,073 24.8% 978,476 25.6% 72,686 44,546 $20.16
9 Long Beach Marina 457,018 6 69,381 15.2% 69,381 15.2% 1,442 (14,732) $19.56
10 Cerritos 2,493,902 29 152,652 6.1% 157,301 6.3% 16,450 (9,596) $16.80
------------------------------------------------------------------------------------------------------------------------------------
TOTAL 30,660,063 253 6,220,436 20.3% 6,978,719 22.8% (177,091) (541,499) $16.92
====================================================================================================================================
========================================================== ==========================================================
Market Size Comparison Chart Availibilities Bar Graph
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[DATA POINTS TO BE SUPPLIED]
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Submarket Weighted Average Rental Rate Comparison Chart
[GRAPHIC OMITTED -- BAR CHART]
[DATA POINTS TO BE SUPPLIED]
====================================================================================================================================
LOS ANGELES SOUTH OFFICE MARKET ANALYSIS
Los Angeles South Office Market
The Los Angeles South office market encompasses three market areas located
primarily in the South Bay area of Los Angeles County. The Los Angeles South
office sector is the smallest of the four office markets in Los Angeles County,
behind the Central Los Angeles, West Los Angeles, and Los Angeles North markets,
respectively. The Los Angeles South sector is comprised of three markets: El
Segundo, Torrance, and Long Beach. The individual submarkets that comprise the
overall Los Angeles South market exhibit a wide range in construction quality,
location, tenant based, and corresponding rental rates. The chart on the
accompanying page summarizes the Los Angeles South office sector and the
submarkets in this area.
The Los Angeles South office market contained 30,660,063 square feet of
Class A and B space, excluding owner/user, medical and government buildings. The
office development in the Los Angeles South market is concentrated in three
major areas or Sectors: LAX/El Segundo, Torrance, and Long Beach. The individual
submarkets that comprise the overall competitive office market are
differentiated according to access, market perception, tenant appeal and
improvement quality, and rental rates.
As of the second quarter 1996, the Los Angeles South office market
exhibited a direct vacancy rate of 20.3 percent. The direct vacancy rate, which
does not include sublease availabilities, is generally higher with the direct
vacancy rate for the larger Los Angeles County office market of 18.8 percent as
of end of first quarter, 1996. The overall vacancy rate for the Los Angeles
South market, which includes both direct and sublease availabilities, was 22.8
percent as of second quarter, 1996. The overall vacancy rate for the Los Angeles
South market is above the corresponding figure of 21.3 percent for the Los
Angeles County office market.
The more significant office markets in the Los Angeles South area, in terms
of the quality and amount of office product, include El Segundo, LAX (Los
Angeles International Airport), Central Torrance, the 190th Street Corridor, and
Downtown Long Beach. The El Segundo submarket, which is situated immediately
south of and adjacent to the LAX submarket, contains a significant concentration
of high technology, aerospace/defense, and business service companies. The
office product in this submarket ranges from multi-building business parks to
high-rise space. The Downtown Long Beach submarket contains an important
concentration of accounting, legal, and investment firms, which have been
attracted to this submarket by the high quality product in the downtown area as
well as the growing volume of international trade and related business generated
by the Port of Los Angeles and the Port of Long Beach.
Long Beach Market
The Long Beach office market contains a total of 9,845,597 square feet of
office space or 32 percent of the office product in the Los Angeles South
sector. As indicated on a preceding chart, Downtown Long Beach, with 3,820,393
square feet of rentable office area, is the largest
MARKET & SUBMARKET STATISTICS
End Of the 2nd Quarter of 1996
Direct Overall Wtd. Avg.
Number Direct Vacancy Overall Vacancy Net Absorption Rental
Market/Submarket Inventory of Bldgs Availabilities Rate Availabilities Rate 2nd Qtr YTD 1996 Rate
====================================================================================================================================
LONG BEACH 9,845,597 86 1,671,040 17.0% 1,720,190 17.5% 79,330 (33,074) $18.60
------------------------------------------------------------------------------------------------------------------------------------
Long Beach Freeway 2,053,676 18 262,986 12.8% 275,084 13.4% 1,421 (34,333) $16.92
North Long Beach 1,020,608 13 239,948 23.5% 239,948 23.5% (12,669) (18,959) $14.88
Downtown Long Beach 3,820,393 20 946,073 24.8% 978,476 25.6% 72,686 44,546 $20.16
Long Beach Marina 457,018 6 69,381 15.2% 69,381 15.2% 1,442 (14,732) $19.56
Cerritos 2,493,902 29 152,652 6.1% 157,301 6.3% 16,450 (9,596) $16.80
Submarket Comparison Chart Availabilities Bar Graph
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
[DATA POINTS TO BE SUPPLIED]
Long Beach Freeway 21%
North Long Beach 10%
Downtown Long Beach 39%
Long Beach Marina 5%
Cerritos 25%
Los Angeles South Office Market
submarket within the Long Beach area as it accounts for approximately 39 percent
of the office space in the Long Beach area.
As of the second quarter 1996, direct and sublease availabilities in the
Long Beach market totaled 1,720,190 square feet for an overall vacancy rate of
17.5 percent. The overall vacancy rate for the Long Beach area was notably lower
than the overall vacancy rate for the Los Angeles South market (22.8 percent).
Within the Los Angeles South market, overall vacancy levels ranged from a low of
17.5 percent in the Long Beach market to a high of 30.2 percent in the El
Segundo market. The recent vacancy rate for the Long Beach market is
significantly influenced by the supply of space which is available on a direct
or sublease basis in the Downtown Long Beach submarket. Downtown Long Beach has
an overall vacancy rate Of 25.6 percent and the total space available within
this submarket accounts for 57 percent Of the total direct and sublease
availabilities in the Long Beach market and 14 percent of the available space in
the Los Angeles South office market.
Within the Long Beach market, weighted average asking rental rates range
from a low of $14.88 per square foot per year (FSG) in North Long Beach to a
high of $20.16 per square foot per year (FSG) in Downtown Long Beach. The
overall weighted average rental rate for the Long Beach market is $18.60
per-square-foot-per year (FSG), which is the highest weighted average asking
rental rate of the three markets within the Los Angeles South sector.
The table below summarizes the trend in weighted average asking rental
rates on a per square foot basis for both Class A and B office space within the
Long Beach sector.
Long Beach Market
Weighted Average Rental Rates
Annual PSF
1993* 1995* 1996* % Change
----- ----- ----- --------
Long Beach Market $20.16 $18.72 $18.60 -7.1%
----------------- ------ ------ ------ -----
- Long Beach Freeway $20.52 $18.48 $16.92 -9.9%
- North Long Beach $18.00 $15.00 $14.88 -16.7%
- Downtown Long Beach $21.84 $19.92 $20.16 -8.8%
- Long Beach Marina $17.16 $18.96 $18.56 +10.5%
- Cerritos* $15.84 $16.80 $16.80 +6.1%
* Data is as of the second quarter 1993 and the fourth quarter 1995, and
second quarter 1996.
The chart above illustrates the change in asking rental rates in the Long
Beach market over the course of the ten quarters through year-end 1995, as well
as the three-year period through second quarter, 1996. The overall decrease of
7.1 percent through 1995 is largely attributable to the decline in asking rents
in the Downtown Long Beach area, since this
RENTAL AND OCCUPANCY SURVEY 2nd Quarter 1996
Long Beach Downtown
Competitive Office Buildings
===========================================================================================================================
Building Information Available Space (SF) Overall
Item Building Name No. of Area Avg. Flr. Year Availibity
No. / Location Class Stores (SF) Area (SF) Built Floor(s) Direct Sublease (SF)
===========================================================================================================================
L-1 100 Broadway Building B 6 193,390 32,232 1987 Ground 2,490 0
100 Broadway 2-6 34,681 0 Total
---- ------ -
37,171 0 37,171
---------------------------------------------------------------------------------------------------------------------------
L-2 Harbor Bank Building B 6 109,000 18,167 1982 Ground 0 0
11 Golden Shore Avenue 2-5 38,517 0 Total
---- ------ -
38,517 0 38,517
---------------------------------------------------------------------------------------------------------------------------
L-3 Catalina Landing B 4 275,000 68,750 1985 Ground 32,672 0
310-340 Golden Shore 2-4 57,407 0 Total
Avenue ---- ------ -
90,079 0 90,079
---------------------------------------------------------------------------------------------------------------------------
L-4 World Trade Center A 27 436,692 16,174 1988 Ground 11,495 0
One World Trade Center 2-26 64,395 5,122 Total
---- ------ -----
75,890 5,122 81,012
---------------------------------------------------------------------------------------------------------------------------
L-5 Landmark Square A 24 413,000 17,208 1991 Ground 8,754 1,177
111 West Ocean Boulevard 3-24 69,919 4,982 Total
---- ------ -----
78,673 6,159 84,832
---------------------------------------------------------------------------------------------------------------------------
L-6 The 180 Building B 12 200,028 16,669 1982 Ground 19,681 0
180 East Ocean Boulevard 2-12 163,760 0 Total
---- ------- -
183,441 0 183,441
---------------------------------------------------------------------------------------------------------------------------
L-7 Home Savings Building B 10 103,000 10,300 1982 Ground 18,464 0
249 East Ocean Boulevard 2-9 21,875 0 Total
---- ------ -
40,339 0 40,339
---------------------------------------------------------------------------------------------------------------------------
L-8 Shoreline Square A 21 417,000 19,857 1988 Ground 0 0
301 East Ocean Boulevard 2-10 62,025 0 Total
---- ------ -
62,025 0 62,025
---------------------------------------------------------------------------------------------------------------------------
L-9 American Savings Building B 10 127,991 12,799 1984 Mezz 7,960 0
401 East Ocean Boulevard 3-10 69,838 0 Total
---- ------ -
77,796 0 77,798
---------------------------------------------------------------------------------------------------------------------------
L-10 Sumitomo Tower Building B 18 163,264 9,070 1968 Ground 0 0
444 West ocean Boulevard 5-17 60,910 0 Total
---- ------ -
60,910 0 60,901
---------------------------------------------------------------------------------------------------------------------------
L-11 Oceangate Tower B 12 202,000 16,833 1971 Plaza/Lob 18,784 0
100 oceangate Avenue 4-11 21,451 0 Total
---- ------ -
40,235 0 40,235
---------------------------------------------------------------------------------------------------------------------------
L-12 Arco Center A 14 220,625 15,759 1983 Ground 0 4,630
200 Oceangate Avenue 2-15 44,091 0 Total
---- ------ ------
44,091 4,630 48,721
---------------------------------------------------------------------------------------------------------------------------
L-13 Arco Center A 14 218,296 15,593 1968 Ground 898 0
300 Oceangate Avenue 5-17 28,038 0 Total
---- ------ -
28,038 0 28,936
---------------------------------------------------------------------------------------------------------------------------
L-14 Union Bank Building B 14 157,683 11,263 1975 Ground 0 0
400 Oceangate Avenue 2-11 9,765 7,661 Total
---- ------ ------
9,765 7,661 17,426
---------------------------------------------------------------------------------------------------------------------------
L-15 One Golden Shore B 2 32,246 16,123 1977 Ground 0 0
One Golden Shore 0 0 0 Total
---- ------ -
0 0 0
===========================================================================================================================
MARKET SUB-TOTALS 194 3,269,217 16,852 867,861 23,572 891,433
===========================================================================================================================
Subj. Downtown Plaza B 6 100,146 16,691 1982 Ground 0 0
211 East Ocean Boulevard 3-4 7,185 0 Total
---- ------ -
7,185 0 7,185
===========================================================================================================================
MARKET TOTALS 200 3,369,363 16,847 875,046 23,572 898,618
===========================================================================================================================
================================================================================
Quoted Occupancy Parking
Item Building Name Annual Rent Lease Ratio Ratio/
No. / Location PSF PSF Type (Incl.SL) 1,000 SF
================================================================================
L-1 100 Broadway Building $20.40 - $20.40 FSG 80.8% 2.50
100 Broadway $20.40 - $20.40 FSG
--------------------------------------------------------------------------------
L-2 Harbor Bank Building 64.7% 3.70
11 Golden Shore Avenue $18.60 - $18.60 FSG
--------------------------------------------------------------------------------
L-3 Catalina Landing $16.80 - $16.80 FSG 67.2% 3.50
310-340 Golden Shore $16.80 - $16.80 FSG
Avenue
--------------------------------------------------------------------------------
L-4 World Trade Center $21.00 - $21.00 FSG 81.4% 2.80
One World Trade Center $18.60 - $24.00 FSG
--------------------------------------------------------------------------------
L-5 Landmark Square $19.20 - $22.20 FSG 79.5% 3.30
111 West Ocean Boulevard $19.20 - $22.20 FSG
--------------------------------------------------------------------------------
L-6 The 180 Building $21.00 - $23.40 FSG 8.3% 4.00
180 East Ocean Boulevard $21.00 - $23.40 FSG
--------------------------------------------------------------------------------
L-7 Home Savings Building $22.20 - $22.20 FSG 60.8% 3.00
249 East Ocean Boulevard $16.20 - $18.00 FSG
--------------------------------------------------------------------------------
L-8 Shoreline Square 85.1% 2.50
301 East Ocean Boulevard $25.20 - $30.00 FSG
--------------------------------------------------------------------------------
L-9 American Savings Building $15.00 - $18.60 FSG 39.2% 2.70
401 East Ocean Boulevard $15.00 - $18.60 FSG
--------------------------------------------------------------------------------
L-10 Sumitomo Tower Building 62.7% 3.50
444 West ocean Boulevard $16.20 - $17.40 FSG
--------------------------------------------------------------------------------
L-11 Oceangate Tower $16.80 -- $18.60 FSG 80.1% 3.00
100 oceangate Avenue $16.80 $18.60 FSG
--------------------------------------------------------------------------------
L-12 Arco Center $16.80 -- $16.80 FSG 77.9% 3.00
200 Oceangate Avenue $21.96 $22.92 FSG
--------------------------------------------------------------------------------
L-13 Arco Center $21.96 -- $24.00 FSG 86.7% 3.00
300 Oceangate Avenue $21.96 $24.00 FSG
--------------------------------------------------------------------------------
L-14 Union Bank Building 85.9% 2.20
400 Oceangate Avenue $16.20 - $18.60 FSG
--------------------------------------------------------------------------------
L-15 One Golden Shore 100.0% 4.40
One Golden Shore
================================================================================
MARKET SUB-TOTALS 72.7%
================================================================================
Subj. Downtown Plaza 92.8% 3.20
211 East Ocean Boulevard $16.20 - $16.20 FSG
================================================================================
MARKET TOTALS 73.3%
================================================================================
OFFICE BUILDING ACTIVITY CHART
DOWNTOWN LONG BEACH
[GRAPHIC OMITTED]
[DATA POINTS TO BE SUPPLIED]
Los Angeles South Office Market
submarket comprises approximately 57 percent of the total available space
(direct and sublease) in the Long Beach area. Three of the five submarkets;
within the Long Beach office market experienced declines in the weighted average
asking rental rate from second quarter 1993 to fourth quarter 1995, with the
most significant decrease on a percentage basis occurring in the North Long
Beach submarket. The Long Beach Marina and Cerritos submarkets posted increases
in the range of six to ten percent in the weighted average asking rental rate
from 1993 to 1995.
Absorption and Vacancy Trends
The accompanying exhibits summarize the direct and overall (including
sublease availabilities) vacancy trends for the submarkets comprising the Long
Beach office market from year-end 1992 through second quarter, 1996, as well as
the historical net absorption for the same period. Although performance by
submarket varies, the data shows a steady trend in declining overall and direct
availabilities since 1992. The combination of modest but stable net absorption
and the absence of new construction has resulted in a decline in vacancy levels
in the Long Beach market from 22.6 percent to 17.0 percent from year-end 1992 to
second quarter, 1996 (direct vacancy) and from 23.6 percent to 17.5 percent
(overall vacancy).
Direct Competition
The subject is located along the Ocean Boulevard corridor, which is the
prime office location in the downtown Long Beach submarket. The accompanying
exhibit summarizes the current occupancy and rental profile for the 15
competitive Class A and B office buildings in this neighborhood. The buildings
range in height from two to 27 stories and in size from approximately 32,000
square feet to 436,000 square feet. Excluding the subject the combined overall
(including sublease space) occupancy level is 72.7 percent for a total inventory
of about 3,270,000 square feet. Excluding mezzanine space the quoted asking
rental rates for available space ranges from $16.20 to $30.00 per-square-foot
annually full service gross, with the predominate range from $16.20 to $22.20.
Conclusions
The subject's downtown Long Beach market has lagged the general Los Angeles
County office market recovery which has begun during the past two years. The
subject's market and other submarkets in the Long Beach area have experienced a
slow, stable improvement in occupancy levels, however, due to continued positive
net absorption and no new construction. The current significant "spread" between
market rental rates and the rental rates required to justify new development
continue to delay any new development, particularly in the downtown Long Beach
submarket for the foreseeable future. The level of investment activity in this
market and other Los Angeles County office markets has accelerated significantly
during the past 12 months, driven by both the availability of capital and by the
trends in vacancy rates.
The subject includes two non-contiguous parcels: the "Office Parcel" and
the "Parking Parcel". The Office Parcel contains 42,160 square feet of land
area, and is located at the northeast corner of East Ocean Boulevard and The
Promenade North in the downtown portion of the City of Long Beach. The site is
generally rectangular in shape, and the topography is also generally level
The property also includes a non-contiguous "Parking Parcel" located about
two blocks southeasterly of the Office Parcel, on the north side of Seaside Way
extending from Locust Avenue to Collins Way. This parcel contains 29,110 square
feet according to Assessors maps. The parcel is improved with a surface parking
lot containing 79 marked spaces. The parking lot is leased to the adjacent hotel
(Breakers Hotel) for a term through September 30, 2000 (subject to termination
option for "up to" 29 spaces). This parcel is generally level, but slopes
slightly downward to the south.
We have assumed that the soil's load-bearing capacity is sufficient to
support the existing structures. All essential utilities including electricity,
water, sewer, and telephone are currently serving the site.
According to The Los Angeles County Flood Atlas, Community Panel No. 060136
0020 B, effective September 15, 1993, the subject property is situated in Zone C
and does not require flood insurance.
Improvements Description
The subject "Office Parcel" is improved with a 1982-built Class "B"
six-story office building containing 100,146 square feet of rentable area, based
on the "remeasured" area shown on the rent roll provided for our review. The "as
leased" area is 98,362 rentable square feet. The improvements, known as Downtown
Plaza, are of Class "B" construction, with reinforced concrete frame and glass
curtain walls. The building is constructed over a two-level subterranean garage
containing approximately 295 marked spaces (including approximately 205 tandem
spaces and 90 single spaces). The floorplates are somewhat triangular in shape,
and are "terraced", with upper floor balconies providing southerly-facing views
for many suites. There are three elevators serving the parking levels and six
office floors.
Capital Issues
The subject does not comply with current ADA code requirements, and
upgrades were in progress as of the date of our property inspection. It is our
understanding based on verbal information provided by the property manager and a
review of limited budget data that approximately $420,000 has been budgeted for
capital work for ADA compliance, common area upgrades including painting and
lobby renovation, exterior and interior painting, roof repair, and mechanical
system upgrades. We have not reviewed detailed budgets and it is our
understanding these improvements are projected to be completed by year-end 1996.
We have not deducted for remaining capital costs, and recommend an inspection of
the property be made by qualified experts to determine the level of code
compliance and the cost of any remaining improvements.
The current method of taxation of real property in California is mandated
by Proposition 13, under which real estate taxes were reduced to one percent of
the property's full market value as of the 1975/76 fiscal year, plus any voter
approved bond indebtedness. The assessor's assessment of market value is limited
to a maximum two percent annual increase, unless the property is transferred or
there is substantial new construction. In either of these two events, the
property is reappraised to current market value, usually as evidenced by the
sales price and/or the construction cost.
Assessed value is not an accurate reflection of market value, and it is not
particularly sensitive to economic fluctuations in market value. Assessed value
is the figure which is put on the Assessor's roll and is the basis upon which
the property tax is charged to property owners. The Proposition 13 Property Tax
initiative received very strong support from the general public as resistance to
property increases continue. It is unlikely that the basic premises of this law
will be changed in the near future.
Tax Rates
The 1995/96 tax rate for the land and improvements in Tax Rate Area 05542
is 1.011677% percent and is based upon $100 of assessed values.
Tax Assessment
Following is the subject's total current assessment:
1995/96 Property Assessment Summary
Office Parcel Parking Parcel Totals
--------------------------------------------------------------------------------
Land $1,714,600 $1,135,400 $2,500,000
Building $6,461,000 $29,000 $6,490,000
--------------------------------------------------------------------------------
Total $8,175,600 $1,164,400 $8,990,000
================================================================================
Direct Assessments
Following is an itemized list of current direct assessments for the subject
property:
========================================================
Direct Assessments
========================================================
1995/96
--------------------------------------------------------
Long Beach LDSCP $ 438.25
L.A. County Flood Control $ 379.03
MWD Water Stand-by Chart No. 8 $ 12.16
County Sanitation District No. 3 $5,735.28
L.A. County Park Districts $ 481.34
--------------------------------------------------------
Total $7,046.06
========================================================
The tax rate and the direct assessments appear to be
in line with the rates and assessments in the competitive
market area. Current annual taxes are estimated at
approximately $102,000.
DOWNTOWN SHORELINE
SUBAREAS
Planned Development Ordinance: PD-6
LONG BEACH CITY, CA
ZONING
Office Parcel
The office parcel is zoned city of Long Beach CB, Commercial Business. This
zone was created for the Central Business district to preserve and enhance the
downtown area's role as the center of commerce, culture and civic life for the
city and surrounding communities. The city recognizes this district as being
unique in its intensity and diversity of use, its contribution to the history,
culture and image of the city, and its aesthetic and architectural significance.
Under the current municipal code, parking requirements for general office
use are four parking spaces per 1,000 square feet of gross usable floor area up
to 20,000 square feet plus two spaces per 1,000 square feet of gross building
area thereafter. Requirements for retail banking is six stalls per 1,000 square
feet of gross retail banking area plus four spaces per 1,000 square feet of
gross office area.
This zoning classification requires the minimum lot size to be no less than
10,000 SF and establishes no maximum building height.
The first story uses, in addition to the requirements and standards of this
zoning regulation, is restricted to retail, personal service, restaurant, tavern
or theater entrances, as well as other building entrances, lobbies, plazas or
driveways. The permitted uses shall occupy the entire street frontage of ground
floors. No other uses shall occupy this area.
Parking Parcel
The parking parcel is zoned city of Long Beach PD-6 (subarea 7), Downtown
Shoreline Planned Development District. The area within the Plan boundary
contains both public and private property, with some existing major land uses,
but with significant undeveloped and underdeveloped property. This Plan is
intended to coordinate future public and private improvements in a mixed
land-use concept.
The subarea wherein the parking parcel lies contains an office building and
the Breakers Hotel (designated by the City as a cultural landmark). Permitted
uses within this subarea are restricted to residential, hotel, or an office with
hotel or residential uses occupying not less than one-third land area of this
subarea. Special design features are required for any new developments between
the Jergins Trust Site and the Breakers Hotel. These features must include a
coordinated theme for the entire entrance area for the full length of the
Promenade South, create visual and physical linkage between the Ocean Boulevard
downtown area and the shoreline, and the Ocean Boulevard park strip between
Locust and Pine shall be designed to emphasize the Promenade entrance.
Subarea 7 parking requirements for new construction shall provide parking
spaces as required for new development, but must be enclosed and located below
Ocean Boulevard level. Office building parking shall be available for public use
on evenings and weekends. Office uses may lease Convention Center parking for
usual business requirements. The reuse of existing buildings shall maintain its
current parking requirements.
The highest and best use must be (1). legally permissible, (2) physically
possible, (3) financially feasible, and (4) maximally productive. The size,
shape, and physical attributes of the site are considered sufficient to
accommodate most forms of development. Given the existing office zoning and the
surrounding development (which consists of a relatively equal mixture of office,
retail, hotel, industrial, and vacant land), some type of commercial use would
be most compatible with surrounding development. Further, as discussed in the
Office Market Analysis section of this report, the downtown Long Beach office
submarket has continued its recovery with a year-end 1995 overall occupancy
level of approximately 72.7 percent. Direct weighted average rental rates for
this type of space represent the highest rates in the Long Beach market area at
$19.92 per square foot (including all classes of space). Therefore, it is our
opinion the highest and best use of the site is for some type of office
development as of a future date when new construction becomes economically
justified.
Highest and Best Use, As Improved
As noted in the Property Description section of this report, the subject
site is improved with a six-story, 100,146 square foot (NRA) office building and
related site improvements. Constructed in 1982, the project is in average
condition. Further, the design and layout are considered to be adequate for its
current use.
The office submarket in which the subject competes is stable with
increasing occupancy levels and rental rates. It is our opinion that the highest
and best use of this site, as improved, is for continued use as a Class "B"
office building.
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 affect the
applicability of each approach in a specific appraisal situation.
The principle of substitution that forms the basis for the Cost Approach
holds that "no prudent person will pay more for a property than the amount with
which he can obtain, by purchase of a site and construction of a building, a
property of equal desirability and utility."
The Cost Approach has historically been a reasonably reliable indicator of
value for new, legally conforming office buildings in the Los Angeles market
area. It is not particularly relevant in the traditional sense for this
appraisal, however. External, or economic conditions have rendered the
indication from this approach essentially meaningless. This situation has
delayed the timeframe for new construction to such a degree that the principle
of substitution, which is based on the price an investor would pay to acquire a
site and construct a building of similar utility without undue delay, is no
longer a possible scenario. The investors in this type of property report that a
basic criterion for evaluating a potential purchase is that the price paid must
be below the estimated replacement cost of the property. The basis for this
criterion is the perception that new development is economically infeasible at
current rental rates and vacancy levels. The profit component, which is the
incentive for new development, at the minimum has been removed from the market.
We have accordingly not used a Cost Approach in this appraisal.
The Sales Comparison Approach involved a search for recent sales of
comparable improved properties and an analysis of the data as it relates to the
subject property.
In the Income Approach we estimated the subject's capacity to produce
income through an analysis of the defined office market. An estimated value for
the subject property was derived through a computerized Discounted Cash Flow
Analysis and Direct Capitalization.
We concluded the appraisal process by reviewing each of the applicable
approaches to value. We considered the type and reliability of data and the
applicability of each approach. Finally, we reconciled the two approaches and
estimated the final value.
SUMMARY OF COMPARABLE OFFICE BUILDINGS SALES AND MARKETING ACTIVITY
====================================================================================================================================
Improvements Sales Price
Item Property Name/Location Date of Sale Year No. of Rentable Occupancy Total PSF OAR
No Built Stories Area at Sale
====================================================================================================================================
I-1a 100 West Broadway 7/96 1986 6 194,087 84% $20,200,000 $104.08 14.1%
Long Beach, CA (above
market
rents)
@ 84% occ.
------------------------------------------------------------------------------------------------------------------------------------
I-1b 100 West Broadway 7/95 1986 6 194,087 78% $14,000,000 12.0%
Long Beach, CA (note $72.13
purchase)
------------------------------------------------------------------------------------------------------------------------------------
I-2 Sumitomo Bank Building 6/96 1968 15 (tower) 178,886 68% $9,200,000 $48.55 13.6%
444 West Ocean Blvd. 1 (annex) 10,600 @ 68% occ.
Long Beach, CA --------
189,486
------------------------------------------------------------------------------------------------------------------------------------
I-3a Park Tower 3/96 1981 7 112,777 75% $7,200,000 $63.84 8.0%
5150 East Pacific Coast Hwy. @ 75% occ.
Long Beach, CA
------------------------------------------------------------------------------------------------------------------------------------
I-3b Park Tower 4/94 1981 7 112,777 50% $5,600,000 $49.65 6.3%
5150 East Pacific Coast Hwy. @ 50% occ.
Long Beach, CA
------------------------------------------------------------------------------------------------------------------------------------
I-4 Allstate Building Current 1982 12 199,366 9% $14,000,000 $70.22 N/A
180 East Ocean Blvd. Escrow asking (9% leased)
Long Beach, CA
$12,000,000 $60.19 Pro-forma
reported 95% OAR
escrow 19.6%
price
------------------------------------------------------------------------------------------------------------------------------------
I-5a L'Opera Building Current 1910 6 65,538 100% $5,350,000 $81.63 10.0%
101-115 Pine Ave. Escrow asking @ 100% occ.
Long Beach, CA 1988/1996
remodeled
------------------------------------------------------------------------------------------------------------------------------------
I-5b L'Opera Building 6/95 1910 6 65,538 60% $3,500,000 $53.40 N/A
101-15 Pine Ave.
Long Beach, CA 1988/1996
remodeled
------------------------------------------------------------------------------------------------------------------------------------
I-6 New Wilshire 11/95 1986 16 203,934 78% $21,450,000 $105.18 10.3%
6100 Wilshire Blvd. @ 78% occ.
Los Angeles, CA
------------------------------------------------------------------------------------------------------------------------------------
Subject Downtown Plaza -- 1982 6 100,146 93% -- -- --
211 East Ocean Blvd.
Long Beach, CA
====================================================================================================================================
SALES COMPARISON APPROACH
Methodology
In the Sales Comparison Approach, we estimated the value of the subject by
comparing it with similar, recently sold properties in the surrounding or
competing area. 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, we can identify value and price trends.
The sold properties must be comparable to the subject in physical, locational,
and economic characteristics. The basic steps of this approach are:
1. Research recent, relevant property sales and current offerings
throughout the competitive area;
2. Select and analyze those properties considered most similar to the
subject, giving consideration to the time of sale, any change in
economic conditions which may have occurred since the date of sale,
and other physical, functional or locational factors;
3. Reducing the sales price to common units of comparison, such as price
per-square-foot of building area;
4. Make appropriate adjustments between the comparable properties and the
property appraised;
5. Identify sales which include favorable financing and calculate the
cash equivalent price;
6. Interpret the adjusted sales data and draw a logical value conclusion.
The most widely-used and market-oriented units of comparison for office
properties is the sales price per-square-foot of building area. All comparable
sales have been analyzed on this basis.
Cushman & Wakefield tracks office building transactions in Los Angeles
County involving sales or arm's length "creative" acquisitions of properties in
excess of 50,000 square feet. The table below summarizes the activity in this
category during the past three years.
Los Angeles County Office Building Transactions
Greater Than 50,000 SF
No. Of Aggregate Average
Year Transactions Sales Price Price/Sale.
---- ------------ ------------ -------------
1993 35 $480 million $13.7 million
1994 38 $305 million $8.0 million
1995 44 $840 million $19.1 million
The sales activity during each year included a wide cross section of
buildings in terms of quality, size, tenancy, and market location. The pace and
average pricing for transactions during
1995 demonstrated a substantial increase above the two prior years, which
accurately reflects the growth in the number of well-capitalized investors
interested in Los Angeles County office product.
The subject is a well-leased, average quality mid-rise office building in
an average Los Angeles County office market location. The level of market
activity involving office properties has increased significantly during the past
year, and several office buildings in the subject's downtown Long Beach market
have recently transferred ownership or are currently in escrow. The comparable
office building sales and marketing activity we considered for comparison with
the subject are summarized on the accompanying exhibit. The data includes four
closed sales and two current escrows, as well as the two more dated "re-sales"
of two of the current items. The data includes four properties located in the
subject's directly competitive downtown Long Beach office market (items I-1,
I-2, I-4, and I-5), a property in a more peripheral Long Beach office location
(I-5) and an office building located in the Miracle Mile district of the City of
Los Angeles (I- 6). The data was selected based on comparability in one or more
of the following criteria: 1) location; 2) leasing status; 3) improvement
quality and age; 4) size of the asset and total magnitude (in terms of dollars)
of the transaction; 5) investor profile; and 5) occupancy at sale.
As shown on the chart two of the data items (I-1 and I-5) represent recent
or pending re-sales of assets acquired by the current sellers during the past 12
months. The current investment market for office properties in Los Angeles
County has increased in terms of the number of transactions due to the
increasing influx of capital, and the well-capitalized local investors who
acquired properties earlier in the recovery period are now selling the assets
(typically following additional lease up or capital upgrades) at a premium to
buyers higher up in the "investment food chain'. We have accordingly focused the
sales analysis on the most recent activity.
The price per-square-foot of rentable area represents the most reliable
method for estimating a value for the subject based on the Sales Comparison
Approach. The analysis and adjustments we considered is briefly described below.
Property Rights Conveyed
Each of the data items involved similar leased fee ownership positions as
the subject. Item I-1 also includes an additional "parking parcel" which
generates additional revenue through a lease to third party ownership.
Seller Financing/Cash Equivalency
Each of the data items involves "cash-to-the-seller' acquisitions, and no
adjustment for seller financing is warranted.
Conditions of Sale
No unusual seller motivations were uncovered which would suggest the
purchase prices were impacted by non-market conditions.
Location
As noted above five of the size data items are located in the subjects Long
Beach market, and four of these items are located within a few blocks of the
subject. Items I-1 and I-5 are
located directly north of the subject property. Item I-6 is situated in a
submarket with a comparable vacancy level and slightly higher market rental
rates than downtown Long Beach.
Improvement Quality
The subject is superior to I-2,I-4, and I-5, generally similar to I-3, and
inferior to I-1 and I-6 in terms of quality.
Occupancy at Sale
The subject is generally similar or superior to most of the comparable data
items in terms of leasing profile at the time of sale.
Conclusions
The subject is most similar overall to I-1, which sold during July, 1996.
This property is nearly identical in terms of location, although the subject has
superior views, and is slightly superior in terms of quality. We concluded below
the rounded $104 per-square-foot price for this sale for the subject, at $90
per-square-foot of rentable area.
100,146 SF x $90 PSF = $9,013,140
Rounded value by Sales Comparison Approach: $9,000,000
ROLLOVER EXPOSURE
Downtown Plaza
211 East Ocean Long Beach, CA
====================================================================================================================================
Rollover Occupied Percentage Expiry Cumulative Rollover
Year Suite Tenant Area (SF)* of Building Date SQFT Percent
------------------------------------------------------------------------------------------------------------------------------------
1996 310 Eagle Pacific Insurance 7,560 7.5% Nov-96
------------------------------------------------------------------------------------------------------------------------------------
7,560 7.5% 7,560 7.5%
------------------------------------------------------------------------------------------------------------------------------------
1997 0 0.0%
------------------------------------------------------------------------------------------------------------------------------------
0 0.0% 0 0.0%
------------------------------------------------------------------------------------------------------------------------------------
1998 405 Pacific Crane Maint. 2,453 2.4% May-98
360 Compass Productions 2,873 2.9% Jul-98
------------------------------------------------------------------------------------------------------------------------------------
5,326 5.3% 12,886 12.9%
------------------------------------------------------------------------------------------------------------------------------------
1999 500 City of Long Beach 14,992 15.0% Dec-99
------------------------------------------------------------------------------------------------------------------------------------
14,992 15.0% 27,878 27.8%
------------------------------------------------------------------------------------------------------------------------------------
2000 102 The Designory 3,492 3.5% Jan-00
600 The Designory 24,963 24.9% Jan-00
------------------------------------------------------------------------------------------------------------------------------------
28,455 28.4% 56,333 56.3%
------------------------------------------------------------------------------------------------------------------------------------
2001 400 La Torracca & Goettsch 11,182 11.2% Jan-01
200 Corporate Offices 17,717 17.7% Aug-01
------------------------------------------------------------------------------------------------------------------------------------
28,899 28.9% 85,232 85.1%
------------------------------------------------------------------------------------------------------------------------------------
2003 101 Coast Federal Savings 7,729 7.7% Mar-03
------------------------------------------------------------------------------------------------------------------------------------
7,729 7.7% 92,961 92.8%
------------------------------------------------------------------------------------------------------------------------------------
Combined vacant space 7,185
------------------------------------------------------------------------------------------------------------------------------------
Total Building NRA (SF): 101,146 Cumulative Rollover: 100.0%
====================================================================================================================================
[GRAPHIC OMITTED -- BAR CHART SHOWING ABOVE ROLLOVER PERCENTAGES BY YEAR]
---------------------------
* Based on remeasured area
INCOME APPROACH
Methodology
The Income Approach is a method of converting the anticipated economic
benefits of owning property into a value estimate through capitalization. The
principle of 'anticipation" underlies this approach in that investors recognize
the relationship between an asset's income and its value. In order to value the
anticipated economic benefits of a particular property, potential income and
expenses must be estimated, and the most appropriate capitalization method must
be selected.
The two most common methods of converting net income into value are direct
capitalization and discounted cash-flow analysis. In direct capitalization, net
operating income is divided by an overall rate extracted from market sales to
indicate a value. In the discounted cash-flow method, anticipated future net
income streams and a reversionary value are discounted to an estimate of net
present value at a chosen yield rate (internal rate of return).
In our opinion both the direct capitalization and the discounted cash flow
are appropriate methods for estimating the value of subject property. We
accordingly have utilized both methods within the Income Approach.
Potential Gross Income
Subject Occupancy Profile
The exhibits on the accompanying pages include rent roll data, a stacking
plan, and a lease expiration summary (Rollover) for the subject property. The
exhibits were prepared by Cushman & Wakefield based on leases and data provided
by the property management.
The subject is currently 92.8 percent leased based on the "remeasured"
rentable building area. There are currently eight tenants, including one tenant
with multiple suites (The Designory) and a tenant with a signed lease but not
yet in occupancy. The tenants range in size from 2,444 square feet to 28,066
square feet. Current rental rates range from $7.80 to $33.85 per-square-foot
annually, full service gross, with a weighted average rent of $14.86. The low
end of this range corresponds to the initial rent for the executive suite tenant
currently improving its space, while the upper end of the rental rate range
corresponds to Coast Federal, which has a ground floor retail bank branch and
prominent building signage. The predominant rental range for current tenants is
from about $15 to $16 per-square-foot.
Four major tenants have premises greater than 1 0,000 square feet, as
summarized below.
Remeasure Lease % of Total
Tenant Area Leased (SF) Expiration NRA
------ ---------------- ---------- ---
The Designory 28,455 1/2000 28.4%
Esprit Jones 17,717 8/2001 17.7%
City of Long Beach 14,992 12/1999 15.0%
La Torrance 11,182 1/2001 11.2%
The "Esprit Jones" tenant in suite 200 is an executive suite business which
has succeeded the previous executive suite operation previously controlled
(subject to a management agreement) by the landlord. The tenant is currently
improving its premises, and the lease commencement is projected as August 24,
1996. The tenant also operates approximately six other executive suite
businesses in the south bay area.
Rollover Profile
The accompanying exhibit summarizes the re-leasing exposure from current
leases. The lease expirations during the first three years of the holding period
totals 20,446 square feet, or 20.4 percent of the total rentable area. The major
tenant expires in January, 2000. The subjects rollover profile is relatively
favorable in comparison with other properties in this market.
Assumptions Regarding the Existing Leases
With the exception of the previously noted changes, our analysis
specifically assumes the existing tenants will remain in the property and
continue paying rent under the terms of their leases. Information provided by
management indicates that no tenants are currently in default and the tenant
base generally appears to be stable.
Estimate of Current Market Rent
According to our research the current quoted rental rate for the available
subject space on the third and fourth floors is $16.20 per-square-foot annually,
full service gross. The tenant improvement allowance is "negotiable" but
typically new tenants receive up to $15 per-square-foot in build-out allowance.
We based market rent estimates for the subject property on our
investigations of competitive buildings in the market, including a comparison of
quoted rental rates and concessions for available space, discussions with
leasing brokers active in this market, and a review of recently signed leases
for space in the subject and competitive properties. The exhibit on the
accompanying page summarizes a rental and occupancy survey of 16 competitive
downtown Long Beach office properties with a combined rentable area of
approximately 3.27 million square feet. The Class A buildings have a current
quoted rental rate range from $16.80 to $30.00 per-square-foot annually, full
service gross, with a predominant range from about $21.00 to $24.00
per-square-foot. Buildings in the subject's class B category exhibit a range in
rental rates from $15.00 to $23.40 per-square-foot, with most rents in the range
from $16.20 to $20.40 per-square-foot. Some leases include relatively minimal
free rent concessions, but most are structured on an "effective" basis,
typically flat for three to five-year terms. The tenant improvement allowances
vary, depending upon the condition of the existing premises and the requirements
of the tenant.
RENTAL AND OCCUPANCY SURVEY 2nd Quarter 1996
Long Beach Downtown
Competitive Office Buildings
==================================================================================================================================
Building Information
Avg.Flr. Overall
Item Building Name/ No. of Area Area Year Available Space (SF) Availability
No. Location Class Stories (SF) (SF) Built Floor(s) Direct Sublease (SF)
==================================================================================================================================
L-1 100 Broadway Building B 6 193,390 32,232 1967 Ground 2,490 0
100 Broadway 2-6 34,681 0 Total
---- ------- ------
37,171 0 37,171
----------------------------------------------------------------------------------------------------------------------------------
L-2 Harbor Bank Building B 6 109,000 18,167 1982 Ground 0 0
11 Golden Shore Avenue 2-5 38,517 0 Total
---- ------- ------
38,517 0 38,517
----------------------------------------------------------------------------------------------------------------------------------
L-3 Catalina Landing B 4 275,000 68,750 1985 Ground 32,672 0
310-340 Golden Shore Avenue 2-4 57,407 0 Total
---- ------- ------
90,079 0 90,079
----------------------------------------------------------------------------------------------------------------------------------
L-4 World Trade Center A 27 436,692 16,174 1988 Ground 11,495 0
One World Trade Center 2-26 64,395 5,122 Total
---- ------- ------
75,890 5,122 81,012
----------------------------------------------------------------------------------------------------------------------------------
L-5 Landmark Square A 24 413,000 17,208 1991 Ground 8,754 1,177
111 West Ocean Boulevard 3-24 69,919 4,962 Total
---- ------- ------
78,673 6,159 84,832
----------------------------------------------------------------------------------------------------------------------------------
L-6 The 180 Building
180 East Ocean Boulevard B 12 200,028 16,669 1982 Ground 19,681 0
2-12 163,760 0 Total
---- ------- ------
183,441 0 183,441
----------------------------------------------------------------------------------------------------------------------------------
L-7 Home Savings Building B 10 103,000 10,300 1982 Ground 18,464 0
249 East Ocean Boulevard 2-9 21,875 0 Total
---- ------- ------
40,339 0 40,339
----------------------------------------------------------------------------------------------------------------------------------
L-8 Shoreline Square A 21 417,000 19,857 1988 Ground 0 0
301 East Ocean Boulevard 2-10 62,025 0 Total
---- ------- ------
62,025 0 62,025
----------------------------------------------------------------------------------------------------------------------------------
L-9 American Savings Building B 10 127,991 12,799 1964 Mezz 7,960 0
401 East Ocean Boulevard 3-10 69,838 0 Total
---- ------- ------
77,798 0 77,798
----------------------------------------------------------------------------------------------------------------------------------
L-10 Sumitomo Tower Building B 18 163,264 9,070 1968 Ground 0 0
444 West Ocean Boulevard 5-17 60,901 0 Total
---- ------- ------
60,901 0 60,901
----------------------------------------------------------------------------------------------------------------------------------
L-11 Oceangate Tower B 12 202,000 16,833 1971 Plaza/Lob 18,784 0
100 Oceangate Avenue 4-11 21,451 0 Total
---- ------- ------
40,235 0 40,235
----------------------------------------------------------------------------------------------------------------------------------
L-12 Arco Center A 14 220,625 15,759 1983 Ground 0 4,630
200 Oceangate Avenue 2-15 44,091 0 Total
---- ------- ------
44,091 4,630 48,721
----------------------------------------------------------------------------------------------------------------------------------
L-13 Arco Center A 14 218,298 15,593 1968 Ground 898 0
300 Oceangate Avenue 5-17 28,038 0 Total
---- ------- ------
28,936 0 28,936
----------------------------------------------------------------------------------------------------------------------------------
L-14 Union Bank Building B 14 157,683 11,263 1975 Ground 0 0
400 Oceangate Avenue 2-11 9,765 7,661 Total
---- ------- ------
9,765 7,661 17,426
----------------------------------------------------------------------------------------------------------------------------------
L-15 One Golden Shore B 2 32,246 16,123 1977 Ground 0 0
One Golden Shore 0 0 0 Total
---- ------- ------
0 0 0
----------------------------------------------------------------------------------------------------------------------------------
MARKET SUB-TOTALS 194 3,269,217 16,852 867,861 23,572 891,433
==================================================================================================================================
Subj. Downtown Plaza B 6 100,146 16,691 1982 Ground 0 0
211 East Ocean Boulevard 3-4 7,185 0 Total
---- ------- ------
7,185 0 7,185
----------------------------------------------------------------------------------------------------------------------------------
MARKET TOTALS 200 3,369,363 16,847 875,046 23,572 898,618
==================================================================================================================================
========================================================================================================
Quoted Occupancy Parking
Item Building Name/ Annual Rent Lease Ratio Ratio/
No. Location PSF PSF Type (Incl. SL) 1,000 SF
========================================================================================================
L-1 100 Broadway Building $20.40 - $20.40 FSG 80.8% 2.50
100 Broadway $20.40 - $20.40 FSG
--------------------------------------------------------------------------------------------------------
L-2 Harbor Bank Building 64.7% 3.70
11 Golden Shore Avenue $18.60 - $18.60 FSG
--------------------------------------------------------------------------------------------------------
L-3 Catalina Landing $16.80 - $16.80 FSG 67.2% 3.50
310-340 Golden Shore Avenue $16.80 - $16.80 FSG
--------------------------------------------------------------------------------------------------------
L-4 World Trade Center $21.00 - $21.00 FSG 81.4% 2.80
One World Trade Center $18.60 - $24.00 FSG
--------------------------------------------------------------------------------------------------------
L-5 Landmark Square $19.20 - $22.20 FSG 79.5% 3.30
111 West Ocean Boulevard $19.20 - $22.20 FSG
--------------------------------------------------------------------------------------------------------
L-6 The 180 Building
180 East Ocean Boulevard $21.00 - $23.40 FSG 8.3% 4.00
$21.00 - $23.40
--------------------------------------------------------------------------------------------------------
L-7 Home Savings Building $22.20 - $22.20 FSG 60.8 3.00
249 East Ocean Boulevard $16.20 - $18.00 FSG
--------------------------------------------------------------------------------------------------------
L-8 Shoreline Square FSG 85.1% 2.50
301 East Ocean Boulevard $25.20 - $30.00 FSG
--------------------------------------------------------------------------------------------------------
L-9 American Savings Building $15.00 - $18.60 FSG 39.2% 2.70
401 East Ocean Boulevard $15.00 - $18.60
--------------------------------------------------------------------------------------------------------
L-10 Sumitomo Tower Building 62.7% 3.50
444 West Ocean Boulevard $16.20 - $17.40 FSG
--------------------------------------------------------------------------------------------------------
L-11 Oceangate Tower $16.80 - $18.60 FSG 80.1% 3.00
100 Oceangate Avenue $16.80 - $18.60 FSG
--------------------------------------------------------------------------------------------------------
L-12 Arco Center $16.80 - $16.80 FSG 77.9% 3.00
200 Oceangate Avenue $21.96 - $22.92 FSG
--------------------------------------------------------------------------------------------------------
L-13 Arco Center $21.96 - $24.00 FSG 86.7% 3.00
300 Oceangate Avenue $21.96 - $24.00 FSG
--------------------------------------------------------------------------------------------------------
L-14 Union Bank Building 88.9% 2.20
400 Oceangate Avenue $16.20 - $18.60 FSG
--------------------------------------------------------------------------------------------------------
L-15 One Golden Shore 100.0% 4.40
One Golden Shore
--------------------------------------------------------------------------------------------------------
MARKET SUB-TOTALS 72.7%
========================================================================================================
Subj. Downtown Plaza 92.8% 3.20
211 East Ocean Boulevard $16.20 - $16.20 FSG
--------------------------------------------------------------------------------------------------------
MARKET TOTALS 73.3%
========================================================================================================
Office Building Activity Chart
[GRAPHIC OMITTED -- COMBINATION LINE AND BAR GRAPH SHOWING
OCCUPANCY RATION IN COMPARISON WITH THE NUMBER OF STORIES]
Income Approach
Most second generation leases include tenant allowances from about $5 to $20
per-square-foot. An example of a recent lease in a directly competitive building
is summarized below.
Property: 401 E. Ocean Blvd.
Floor: 7
Date of Lease: 6/96
Size of Premises: 5,000 SF
Tenant: Barwill Agencies
Term: 5 Years
Annual PSF Rent: $14.40 Full Service, Flat for Term
Free Rent: 2 months
Tenant Allowance: $8 PSF
Effective Rent: $13.92 PSF
Recent subject leasing activity is summarized below.
Tenant: Esprit Jones (new tenant)
Floor: 2
Date of Lease: 6/96
Size of Premises: 16,797 SF
Term: 5 Years
Annual PSF Rent: $7.80 Full Service
Adjustments
Mos 7-12: $12.00
Mos. 13-24: $13.80
Mos. 25-36: $15.00
Mos. 37-48: $15.60
Mos. 49-60: $18.00
Free Rent: 2 months
Tenant Allowance: $15 PSF
Effective Rent: $14.07 PSF (5 years)
Income Approach
================================================================================
Tenant: La Torrance et al (renewal)
Floor: 4
Date of Lease: 5/95
Size of Premises: 11,698 SF
Term: 6 Years
Annual PSF Rent: $16.80 Full Service
Adjustments
Mos 25-48: $18.00
Mos. 49-72: $20.16
Free Rent: None
Tenant Allowance: $5 PSF
Effective Rent: $18.32 PSF (6 years)
Tenant: Pacific Crane (renewal)
Floor 4
Date of Lease- 5/95
Size of Premises: 2,444 SF
Term: 3 Years
Annual PSF Rent: $15.00 Full Service
Adjustments
Mos 19-36: $16.20
Free Rent: None
Tenant Allowance: $2.64 PSF
Effective Rent: $15.60 PSF (3 years)
Achievable market rental rates for the subject will vary based on the
length of the lease term. the floor level and views, the size and credit rating
of the tenant, and the required concessions from the landlord. Based on our
analysis of the data we concluded the following "typical" market rent and
concession package for the subject property.
FSG Mos. Per Rentable SF
Annual Rent Free Tenant Improvements
Lease Term Initial PSF Adjustments Rent New Renew
---------- ----------- ----------- ---- --- -----
5 Years $16.20 Flat None $12.50 $5
Parking Revenue
The subject parking revenues for 1995 and year-to-date 1996 are summarized
on the accompanying exhibit. As noted on the exhibit the available data suggests
the 1995 figures may not represent full-year information. We projected parking
revenue based on the most recent actual data (year-to-date 1996) and estimated
$1.70 per-square-foot annually based on occupied area. We estimated parking
expenses at $40,000 annually (in 1996 dollars).
Downtown Plaza
1993-1996 Historical & Budgeted Operating Expense Statements
Total Net Rentable Area (sf): 100,146
================================================================================
Year End 1995 1996 Budget
STATEMENTS Total PSF Total PSF
================================================================================
REVENUE
Base Rent $1,263,177 $12.61 $1,284,662 $12.83
Expense Reimbursements 90,969 0.91 50,805 0.51
Parking Income 90,085 0.90 183,916 1.84
Miscellaneous Income 1,510 0.02 41,712 0.42
--------------------------------------------------------------------------------
Total Revenue 1,445,741 14.44 1,561,095 15.59
--------------------------------------------------------------------------------
OPERATING EXPENSES
Reimbursable
Utilities $244,056 2.44 $261,500 $2.61
Cleaning 64,913 0.65 73,800 0.74
Repair & Maintenance 105,044 1.05 97,220 0.97
Administration 88,723 0.89 122,724 1.23
General Building 16,961 0.17 34,350 0.34
Security 38,348 0.38 25,381 0.25
Management Fees 28,645 0.29 31,222 0.31
Insurance 38,673 0.39 53,691 0.54
--------------------------------------------------------------------------------
Sub-Total (reimbursable) $625,363 $6.24 $699,888 $6.99
--------------------------------------------------------------------------------
Non-Reimbursable $9,429 $0.09 $2,020 $0.02
--------------------------------------------------------------------------------
Sub-Total (non-reimbursable) 634,793 $6.34 $701,908 $7.01
--------------------------------------------------------------------------------
Real Property Taxes $248,964 $2.49 $100,852 $1.01
--------------------------------------------------------------------------------
Total Expenses $888,757 $8.82 $802,760 $8.02
================================================================================
================================================================================
NET OPERATING INCOME (NOI) $561,984 $5.61 $758,335 $7.57
================================================================================
Net Operating Income
Expense Chart Trends Chart
[GRAPHIC OMITTED] [GRAPHIC OMITTED]
[DATA POINTS TO BE SUPPLIED] [DATA POINTS TO BE SUPPLIED]
EXPENSE CATEGORIES
Utilities Electricity, gas, water/sewage
Cleaning Janitorial
Repair & Maintenance Grounds maintenance and repairs & maintenance
Administration On-site office, general admin., payroll & burden,
advertising & marketing, and property tax service
fee
General Building Supplies, equipment, trash removal, window cleaning
& exterminating
Security Building security
Management Fees Management fees
Insurance Property insurance
Non-Reimbursable Non-Reimbursable
Real Property Taxes Real estate taxes
--------------------------------------------------------------------------------
Income Approach
Other Income
The subject Parking Parcel is leased to the adjacent Breakers Hotel for a
term through September, 2000. The lease rate is $44 per space per month (79
spaces) for the first year of the term (through 1996), with an increase to $50
per space beginning the second year of the lease. We modeled this lease based on
the current terms, or a rounded $40,000 annually during 1996, and assumed a 3.5%
annual increase throughout the holding period.
Vacancy and Collection Loss
Both the investor and the appraiser are primarily interested in the cash
revenue that an income property is likely to produce annually over a specified
period of time rather than what it could produce if it were always 100 percent
occupied and all the tenants were actually paying their 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 of rent.
The subject is currently 92.8 percent leased, and the current tenant
profile has a relatively favorable lease expiration schedule. As discussed in
the Market Analysis, the subject's Long Beach office submarkets; have shown a
stable pattern of declining vacancy levels over the past several years, and no
new competitive buildings are expected to be completed in the near future. Based
on the current subject occupancy level and the improving market conditions, we
projected global vacancy and collection loss (against all revenues) of 5.0% and
an additional lag vacancy between leases of 6 months for 5-year lease terms.
Based on the 65% renewal probability assumption the indicated (rounded) weighted
vacancy between leases is 2 months.
Operating Expenses
The historical and budgeted expenses for the subject for the period 1995
(actual) and 1996 (budgeted) are summarized on an accompanying exhibit. The
summary was prepared by Cushman & Wakefield based on statements provided by the
property management.
We analyzed the historical and budgeted data as well as comparable expense
data for other downtown Long Beach office buildings. Our expense conclusions for
the property, expressed in 1996 dollars, are summarized below.
We converted the net operating income into a value indication by means of
discounted cash-flow analysis and direct capitalization.
Discounted Cash Flow Analysis
By forecasting the anticipated income stream and discounting future value
at reversion to current value, the capitalization process can be applied to
derive a value that the investor would pay to receive that particular income
stream.
Investors in office buildings typically make a forecast of net operating
income and cash flow over a period of time ranging from five to 15 years. This
projection is used to determine a purchase price justified by the degree of risk
inherent in the proposed investment.
We modeled the following specific assumptions within the cash flow model.
1) Holding Period - We modeled an 11-year holding period on a fiscal
year basis beginning August 1, 1996. We extended the typical 10-year
period by one year based on the future rollover pattern, which results
in "non-stabilized" releasing during the 11th year.
2) Income Projections - Existing tenants were modeled according to the
terms of the leases. Absorption tenants and future speculative
rollover tenants were modeled according to the market rent and
concession conclusions presented previously. These conclusions are
restated below.
FSG Mos. Per Rentable SF
Annual Rent Free Tenant Improvements
Lease Term Initial PSF Adjustments Rent New Renew
---------- ----------- ----------- ---- --- -----
5 Years $16.20 Flat None $12.50 $5
3) Vacancy and Collection - We modeled a combination of "global" vacancy
and collection, and lag vacancy between leases. The assumptions are
summarized below.
Global Vacancy and Collection - We modeled an overall 5%
deduction against revenues throughout the projection period.
Lag Vacancy - We modeled lag vacancy between leases based on an
assumed 6 months vacancy between 5-year terms. These projections
were weighted by the 65% renewal probability assumption, which
results in a weighted deduction of 2 months between 5-year terms.
5) Renewal Probability - We assumed a 65% renewal probability for all
tenants.
6) Leasing Commissions - This expense was modeled at 6% for 5-year
leases. Renewing tenants were modeled with one-half commission.
7) Reversion - The reversion price was calculated by applying a 10.5%
overall capitalization rate to the 11th year's net operating income.
Following a deduction for a 2.0% cost of sale, the reversion price was
added to the previous year's net cash flow prior to discounting.
We used the ProJect and Excel cash flow programs to simulate the projected
operating characteristics for the subject property under the preceding
assumptions. The cash flow and value table are on an accompanying page, and
additional detail is included in the Addenda.
Derivation of Discount Rate
The accompanying exhibit entitled "Comparative Analysis of U.S. Treasuries
and REITs" provides an overview of the alternative marketplaces for capital
investment during the period from June, 1995 through May, 1996. The graph and
accompanying data show that equity REIT yields are not necessarily sensitive to
changes in interest rates. Although yields for intermediate Treasuries increased
by nearly 50 basis points during the 12-month period, yields for equity REITs
(on average) decreased by 30 basis points during the same period. Investor
concerns of higher inflation can increase Treasury yield requirements, but the
real estate market can represent a "hedge" against inflation due to pricing
increases. The yields for REITs are below levels required for single asset real
estate investments, however, due (in part) to liquidity issues and the diversity
and management levels of multi-property portfolios.
The most recently published Cushman & Wakefield survey of investors' return
requirements was published in Winter, 1995, and a copy is included in the
Addenda. The Summer, 1996 survey has been completed but is not yet published. A
copy of the return requirements reported by investors for the 1996 survey is
also included in the Addenda. We reviewed current reported return requirements
for a cross section of retail and office investors. The data is summarized in
the following chart.
Weighted Average Ranges
Property Type Category(l) Going-in Cap Rates IRRs
CBD Office Class A-Leased 9.3%-9.8% 11.8%-12.3%
Suburban Office Class A-Leased 8.8%-9.6% 11.2%-11.7%
"Value Added" denotes properties which require more active management due
to leasing issues and/or additional capital investment for physical issues.
We concluded within the range bracketed by the respondents for the Class B
asset categories, with most emphasis to the low end of the range for the
suburban "leased asset" category, which considers the subject's percent
occupancy level, and estimated a 12.0 percent discount rate is appropriate for
the subject cash flow projections. This conclusion results in the following
value indication for the property:
Discounted Cash Flow Conclusion: $7,500,000
Direct Capitalization
In the direct capitalization method we estimated a value by dividing the
subject's net operating income by an overall capitalization rate. This overall
rate (OAR) is selected based on our analysis of market sales and reported
requirements from the category of investor most representative of the buyers for
this asset. The overall rate is calculated by dividing the net operating income
from the sales by their respective sales prices.
The chart below summarizes the overall rates for the comparable sales data
presented in the Sales Comparison Approach.
A significant portion of the variation in overall rates can be attributed
to the differences in occupancy levels and the proformas used as the basis for
capitalization, as well as the relationship between market and contract rental
rates.
We concluded a 10.0 percent overall capitalization rate is appropriate for
the subject. As shown on the accompanying exhibit the resulting rounded value
indication by direct capitalization is $7,700,000.
Income Approach Conclusion
The $7,700,000 indication by direct capitalization compares with the
discounted cash flow conclusion of $7,500,000. Each method is relevant for a
property of this type, and we concluded at $7,600,000 for the property by the
Income Approach.
Value indications for the subject property by the Approaches to Value are
indicated as follows:
Cost Approach Not Used
Sales Comparison Approach $9,000,000
Income Approach $7,600,000
In the reconciliation, each approach to value is considered in order to
determine the reliability of the data in each and to weigh which approach best
represents the actions of typical users and investors in the market.
The Sales Comparison Approach is based on the principle of substitution
which implies that a prudent person will not pay more to buy or rent a property
than it would cost to buy a comparable substitute property. In this approach,
the subject property was compared with six office building sales or escrows. We
analyzed the sales using the sales price per square foot. Although various
dissimilarities between the sales and the subject were noted, the general
analysis is believed to provide reasonable support for our value conclusion. As
such, the Sales Comparison Approach is afforded appropriate weight in the final
conclusion.
The Income Approach is based upon investor expectations for the income
stream generated by an income producing property. After estimating gross income,
deductions were made for vacancy and collection losses, and variable, fixed and
other expenses. The resulting net operating income was then converted into an
indication of value by means of discounted cash flow model, and direct
capitalization.
Since investment properties are generally bought and sold based upon their
income generating ability, all sources of pertinent data were carefully
researched. It is our opinion that the Income Approach is the most reliable
indicator of the value of the subject since the intent of our analysis was to
mirror investor expectations.
Therefore, giving primary weight to the indication of value via the Income
Approach, but recognizing the validity of the Sales Comparison Approach and the
comparability of the data, 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 August 5, 1996, was:
Appraisal means the appraisal report and opinion of value stated therein; or the
letter opinion of value, to which these Assumptions and Limiting Conditions are
annexed.
Property means the subject of the Appraisal.
C&W means Cushman & Wakefield, Inc. or its subsidiary which issued the
Appraisal.
Appraiser(s) means the employee(s) of C&W who prepared and signed the Appraisal.
The Appraisal has been made subject to the following assumptions and limiting
conditions:
1) No opinion is intended to be expressed and no responsibility is assumed for
the legal description or for any matters which are legal in nature or
require legal expertise or specialized knowledge beyond that of a real
estate appraiser. Title to the Property is assumed to be good and
marketable and the Property is assumed to be free and clear of all liens
unless otherwise stated. No survey of the Property was undertaken.
2) The information contained in the Appraisal or upon which the Appraisal is
based has been gathered from sources the Appraiser assumes to be reliable
and accurate. Some of such information may have been provided by the owner
of the Property. Neither the Appraiser nor C&W shall be responsible for the
accuracy or completeness of such information, including the correctness of
estimates, opinions, dimensions, sketches, exhibits and factual matters.
3) The opinion of value is only as of the date stated in the Appraisal.
Changes since that date in external and market factors or in the Property
itself can significantly affect property value.
4) The Appraisal is to be used in whole and not in part. No part of the
Appraisal shall be used in conjunction with any other appraisal.
Publication of the Appraisal or any portion thereof without the prior
written consent of C&W is prohibited. Except as may be otherwise stated in
the letter of engagement, the Appraisal may not be used by any person other
than the party to whom it is addressed or for purposes other than that for
which it was prepared. No part of the Appraisal shall be conveyed to the
public through advertising, or used in any sales or promotional material
without C&W's prior written consent. Reference to the Appraisal Institute
or to the MAI designation is prohibited.
5) Except as may be otherwise stated in the letter of engagement, the
Appraiser shall not be required to give testimony in any court or
administrative proceeding relating to the Property or the Appraisal.
6) The Appraisal assumes (a) responsible ownership and competent management of
the Property; (b) there are no hidden or unapparent conditions of the
Property, subsoil or structures that render the Property more or less
valuable (no responsibility is assumed for such conditions or for arranging
for engineering studies that may be required to discover them); (c) full
compliance with all applicable federal, state and local zoning and
environmental regulations and laws, unless noncompliance is stated, defined
and considered in the Appraisal; and (d) all required licenses,
certificates of occupancy and other governmental
consents have been or can be obtained and renewed for any use on which the
value estimate contained in the Appraisal is based.
7) The physical condition of the improvements considered by the Appraisal is
based on visual inspection by the Appraiser or other person identified in
the Appraisal. C&W assumes no responsibility for the soundness of
structural members nor for the condition of mechanical equipment, plumbing
or electrical components.
8) The forecasted potential gross income referred to in the Appraisal may be
based on lease summaries provided by the owner or third parties. The
Appraiser assumes no responsibility for the authenticity or completeness of
lease information provided by others. C&W recommends that legal advice be
obtained regarding the interpretation of lease provisions and the
contractual rights of parties.
9) The forecasts of income and expenses are not predictions of the future.
Rather, they are the Appraiser's best estimates of current market thinking
on future income and expenses. The Appraiser and C&W make no warranty or
representation that these forecasts will materialize. The real estate
market is constantly fluctuating and changing. It is not the Appraiser's
task to predict or in any way warrant the conditions of a future real
estate market; the Appraiser can only reflect what the investment
community, as of the date of the Appraisal, envisages for the future in
terms of rental rates, expenses, supply and demand.
10) Unless otherwise stated in the Appraisal, the existence of potentially
hazardous or toxic materials which may have been used in the construction
or maintenance of the improvements or may be located at or about the
Property was not considered in arriving at the opinion of value. These
materials (such as formaldehyde foam insulation, asbestos insulation and
other potentially hazardous materials) may adversely affect the value of
the Property. The Appraisers are not qualified to detect such substances.
C&W recommends that an environmental expert be employed to determine the
impact of these matters on the opinion of value.
11) Unless otherwise stated in the Appraisal, compliance with the requirements
of the Americans With Disabilities Act of 1990 (ADA) has not been
considered in arriving at the opinion of value. Failure to comply with the
requirements of the ADA may adversely affect the value of the Property. C&W
recommends that an expert in this field be employed.
We certify that, to the best of our knowledge and belief:
1) James W. Myers and Miles Loo have inspected the property, James W.
Myers, MAI, have reviewed the report and concur with the findings
contained herein.
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, James W. Myers, MAI, has completed the
requirements of the continuing education program of the Appraisal
Institute.
/s/ Miles Loo, Jr.
Miles Loo, Jr.
Los Angeles Valuation Advisory Services
/s/ James W. Myers
James W. Myers, MAI
Senior Director
Los Angeles Valuation Advisory Services
Certification No. AG002662
TENANT SQUARE FEET BEGIN DATE END DATE
--------------------------------------- ----------- ---------- --------
1 - SUITE 101 COAST FED SAVINGS 6,154 4/1983 3/2003
2 - SUITE 102 THE DESIGNORY 3,492 5/1996 1/2000
3 - SUITE 200 ESPIRIT JONES 16,797 9/1996 8/2001
4 - SUITE 310 EAGLE PACIFIC INS 7,730 4/1989 11/1996
5 - SUITE 360 COMPASS PRODUCT. 2,919 7/1991 7/1998
6 - SUITE 400 LA TORRACA & GOE.. 11,698 2/1995 1/2001
7 - SUITE 405 PACIFIC CRANE 2,444 6/1995 5/1998
8 - SUITE 500 CITY OF LONG BCH 15,369 1/1995 12/1999
9 - SUITE 600 THE DESIGNORY 24,574 2/1995 1/2000
10 - SUITE varies LEASE-UP (5-yr) 1,796 10/1996 9/2001
11 - SUITE varies REP 01 OF TEN #10 1,796 1/1997 12/2001
12 - SUITE varies REP 02 OF TEN #10 1,796 4/1997 3/2002
13 - SUITE varies REP 03 OF TEN #10 1,797 7/1997 6/2002
-----------
13 TENANTS 98,362
===========
TENANT SQUARE FEET BEGIN DATE END DATE
--------------------------------------- ----------- ---------- --------
1 - 5-Yr Tenant
2 - SUITE 102 THE DESIGNORY 3,492 5/1996 1/2000
3 - SUITE 200 ESPIRIT JONES 16,797 9/1996 8/2001
4 - SUITE 310 EAGLE PACIFIC INS 7,730 4/1989 11/1996
5 - SUITE 360 COMPASS PRODUCT. 2,919 7/1991 7/1998
6 - SUITE 400 LA TORRACA & GOE.. 11,698 2/1995 1/2001
7 - SUITE 405 PACIFIC CRANE 2,444 6/1995 5/1998
8 - SUITE 500 CITY OF LONG BCH 15,369 1/1995 12/1999
9 - SUITE 600 THE DESIGNORY 24,574 2/1995 1/2000
10 - SUITE varies LEASE-UP (5-yr) 1,796 10/1996 9/2001
11 - SUITE varies REP 01 OF TEN #10 1,796 1/1997 12/2001
12 - SUITE varies REP 02 OF TEN #10 1,796 4/1997 3/2002
13 - SUITE varies REP 03 OF TEN #10 1,797 7/1997 6/2002
-----------
12 TENANTS 92,208
DOWNTOWN PLAZA
PROJECT ASSUMPTIONS REPORT
EXCLUDING TENANTS
BUILDING PROLOGUE
LEASEHOLD ANALYSIS OF DOWNTOWN PLAZA BEGINNING 8/1996
??R 15 YEARS ON A FISCAL YEAR BASIS
AREA MEASURES
DESCRIBED AS Net rentable area
1996 VALUE - 100,146
THEREAFTER - CONSTANT
OCCA
DESCRIBED AS Occupied area
1996 VALUE - 78,620
1997 VALUE - 96,370
1998 VALUE - 97,468
1999 VALUE - 96,362
2000 VALUE - 91,123
2001 VALUE - 93,314
2002 VALUE - 96,176
2003 VALUE - 94,391
2004 VALUE - 98,362
2005 VALUE - 91,123
2006 VALUE - 93,463
2007 VALUE - 96,026
2008 VALUE - 97,711
2009 VALUE - 98,119
2010 VALUE - 91,123
THEREAFTER - CONSTANT
GROWTH RATES
RNTG
DESCRIBED AS Market growth rate
1996 VALUE - 3.50
THEREAFTER - CONSTANT
CPIG
DESCRIBED AS Consumer price index growth rate
RTXR
DESCRIBED AS Real estate tax rate
1996 VALUE - 1.00
THEREAFTER - GROWING AT GROWTH RATE EXPG
PKIR
DESCRIBED AS Parking income rate
1996 VALUE - 1.70
THEREAFTER - GROWING AT GROWTH RATE MKTG
RSVR
DESCRIBED AS Reserve allowance rate
1996 VALUE 0.15
THEREAFTER - GROWING AT GROWTH RATE CPIG
PKXR
DESCRIBED AS Parking expense rate
1996 VALUE - 0.40
THEREAFTER - GROWING AT GROWTH RATE EXPG
MISCELLANEOUS INCOMES
PARKING INCOME
MARKET RATE PKIR MULTIPLIED BY AREA MEASURE OCCA
OTHER INCOME
1996 VALUE - 40,000
THEREAFTER - GROWING AT GROWTH RATE MKTG
EXPENSES
FIXED UTILITIES , REFERRED TO AS FUTX
DESCRIBED AS Fixed utility expenses
CHARGED AGAINST NET OPERATING INCOME
MARKET RATE FUTR MULTIPLIED BY AREA MEASURE NRA
VARIABLE UTILITIES, REFERRED TO AS VUTX
DESCRIBED AS Variable utility expenses
CHARGED AGAINST NET OPERATING INCOME
MARKET RATE VUTR MULTIPLIED BY AREA MEASURE OCCA
FIXED CLEANING , REFERRED TO AS FCLX
DESCRIBED AS Fixed cleaning expenses
CHARGED AGAINST NET OPERATING INCOME
VARIABLE CLEANING, REFERRED TO AS VCLX
DESCRIBED AS Variable cleaning expenses
CHARGED AGAINST NET OPERATING INCOME
MARKET RATE VCLR MULTIPLIED BY AREA MEASURE OCCA
REPAIRS & MAINTNCE, REFERRED TO AS R&M
DESCRIBED AS Repairs & maintenance expenses
CHARGED AGAINST NET OPERATING INCOME
MARKET RATE R&MR MULTIPLIED BY AREA MEASURE NRA
ADMINISTRATION , REFERRED TO AS ADMX
DESCRIBED AS Administration expenses
CHARGED AGAINST NET OPERATING INCOME
MARKET RATE ADMR MULTIPLIED BY AREA MEASURE NRA
GENERAL BUILDING , REFERRED TO AS GBLX
DESCRIBED AS General building expenses
CHARGED AGAINST NET OPERATING INCOME
MARKET RATE GBLR MULTIPLIED BY AREA MEASURE NRA
MANAGEMENT FEE , REFERRED TO AS MFEX
DESCRIBED AS Management fee expenses
CHARGED AGAINST NET OPERATING INCOME
MARKET RATE MGTR MULTIPLIED BY AREA MEASURE NRA
INSURANCE , REFERRED TO AS INSX
DESCRIBED AS Property insurance expenses
CHARGED AGAINST NET OPERATING INCOME
MARKET RATE INSR MULTIPLIED BY AREA MEASURE NRA
REAL ESTATE TAXES , REFERRED TO AS RTXX
DESCRIBED AS Real estate tax expenses
CHARGED AGAINST NET OPERATING INCOME
MARKET RATE RTXR MULTIPLIED BY AREA MEASURE NRA
EXPNSE RECOVERIES , REFERRED TO AS REC
DESCRIBED AS Total operating expense recoveries
??? INFORMATIONAL EXPENSE
+ 100.0% OF FUTX+100.0% OF VUTX
+ 100.0% OF FCLX+100.0% OF VCLX
+ 100.0% OF R&MX+100.0% OF ADHX
+ 100.0% OF GBLX+100.0% OF MFEX
+ 100.0% OF INSX+100.0% OF RTXX
+ 100.0% OF PKXX
PERCENT OF RELATIVE
MONTH ANNUAL SALES VOLUME
----- ------------ --------
JAN 8.33% 1.00
FEB 8.33% 1.00
MAR 8.33% 1.00
APR 8.33% 1.00
MAY 8.33% 1.00
JUN 6.33% 1.00
JUL 8.33% 1.00
AUG 8.33% 1.00
SEP 8.33% 1.00
OCT 6.33% 1.00
NOV 6.33% 1.00
DEC 8.33% 1.00
------- -------
RENTALS 100.00% 12.00
GLOBAL RECOVERIES
EXPNSE RECOVERIES , REFERRED TO AS BSYR
DESCRIBED AS Base year recoveries
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASE OF THE EXPENSE VALUE IN THE OCCUPANCY YEAR
EXPNSE RECOVERIES , REFERRED TO AS 1995
DESCRIBED AS 1995 recoveries
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASE AMOUNT OF 774,779
DESCRIBED AS 1994 recoveries
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASE AMOUNT OF 907,789
EXPNSE RECOVERIES , REFERRED TO AS 1993
DESCRIBED AS 1993 recoveries
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASS AMOUNT OF 810,882
EXPNSE RECOVERIES , REFERRED TO AS 1992
DESCRIBED AS 1992 recoveries
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASE AMOUNT OF 804,788
EXPNSE RECOVERIES , REFERRED TO AS 1991
DESCRIBED AS 1991 recoveries
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASE AMOUNT OF 760,975
EXPNSE RECOVERIES , REFERRED TO AS 1990
DESCRIBED AS 1990 recoveries
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASE AMOUNT OF 774,920
TENANT PROLOGUE
MINIMUM RENTS:
SPECIFIED AMOUNTS INTERPRETED AS AMOUNTS/SQUARE FOOT/YEAR
MARKET RATES INTERPRETED AS AMOUNTS/SQUARE FOOT/YEAR
RENEWAL PERCENTAGE RENT:
SALES AND OVERAGE PERCENTAGE(S) WILL CONTINUE FROM BASE LEASE
RENEWAL RECOVERIES:
EXPNSE RECOVERIES
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
A BASE OF THE EXPENSE VALUE IN THE OCCUPANCY YEAR
RENEWAL COMMISSIONS: GROWTH RATE CM5W
RENEWAL PAYOUT: CASHED OUT
RENEWAL ALTERATIONS: MARKET RATE TI5W
RENEWAL PAYOUT: CASHED OUT
--------------------------------------------------------------------------------
# 2 - SUITE varies , 10-YR RETAIL
LEASE DATES: 10/1996 TO 9/2006
TYPE OF TENANT: RETAIL
SQUARE FOOTAGE: 1,000
PRIMARY CODE: 2 - 10-Yr Tenant
SECONDARY CODE: 3 - Retail
SUBJECT TO VACANCY ALLOWANCE
MINIMUM RENT:
INITIAL RENT - MARKET RATE MKTR
PERCENTAGE RENT:
INITIAL SALES - O/YEAR
THEREAFTER - GROWING AT 0.00%
A NATURAL BREAKPOINT PLUS MINIMUM RENT
RECAPTURES: NONE
RECOVERIES: NONE
COMMISSIONS: NONE
ALTERATIONS: NONE
SPECULATIVE RENEWALS:
LENGTH VACANT SQ FT MONTHS OF
TERM YEARS.MONTHS MONTHS INCREASE FREE RENT COMMISSIONS ALTERATIONS
---- ------------ ------ -------- --------- ----------- -----------
RENEWAL MINIMUM RENT:
MARKET RATE MKTR MULTIPLIED BY 1.000
WITH PERCENTAGE STEPS OF
10.00 AFTER MONTH 60
RENEWAL PERCENTAGE RENT:
SALES AND OVERAGE PERCENTAGE(S) WILL CONTINUE FROM BASE LEASE
RENEWAL RECOVERIES:
EXPNSE RECOVERIES
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASE OF THE EXPENSE VALUE IN THE OCCUPANCY YEAR
RENEWAL COMMISSIONS: GROWTH RATE CMlW
RENEWAL PAYOUT: CASHED OUT
RENEWAL ALTERATIONS: MARKET RATE TI1N
RENEWAL PAYOUT: CASHED OUT
# 3 - SUITE varies , 5-YR OFFICE
LEASE DATES: 10/1996 TO 9/2001
TYPE OF TENANT: OFFICE
SQUARE FOOTAGE: 1,000
PRIMARY CODE: 1 - 5-Yr Tenant
SECONDARY CODE: 4 - Office
RENEWAL MINIMUM RENT:
MARKET RATE MKTR MULTIPLIED BY 1.000
RENEWAL RECOVERIES:
EXPNSE RECOVERIES
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASE OF THE EXPENSE VALUE IN THE OCCUPANCY YEAR
RENEWAL COMMISSIONS: GROWTH RATE CM5W
RENEWAL PAYOUT: CASHED OUT
RENEWAL ALTERATIONS: MARKET RATE TI5W
RENEWAL PAYOUT: CASHED OUT
# 4 - SUITE Varies , 10-YR OFFICE
BASE LEASE DATES: 10/1996 TO 9/2006
TYPE OF TENANT: OFFICE
SQUARE FOOTAGE: 1,000
PRIMARY CODE: 2 - 10-Yr Tenant
SECONDARY CODE: 4 - Office
SUBJECT TO VACANCY ALLOWANCE
MINIMUM RENT:
INITIAL RENT - MARKET RATE MKTR
RECOVERIES: NONE
COMMISSIONS: NONE
ALTERATIONS: NONE
SPECULATIVE RENEWALS:
LENGTH VACANT SQ FT MONTHS OF
TERM YEARS.MONTHS MONTHS INCREASE FREE RENT COMMISSIONS ALTERATIONS
---- ------------ ------ -------- --------- ----------- -----------
CUSHMAN &
WAKEFIELD (R)
---------------------------
VALUATION ADVISORY SERVICES
PAGE 15
1 10.00 6 NONE FRlW YES YES
RENEWAL MINIMUM RENT:
MARKET RATE MKTR MULTIPLIED BY 1.000
WITH PERCENTAGE STEPS OF
10.00 AFTER MONTH 60
RENEWAL RECOVERIES:
EXPNSE RECOVERIES
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASE OF THE EXPENSE VALUE IN THE OCCUPANCY YEAR
DOWNTOWN PLAZA
PROJECT ASSUMPTIONS REPORT
FOR TENANTS ONLY
INCLUDING ALL TENANTS
TENANTS
THERE ARE A TOTAL OF 13 LEASEHOLD TENANT(S):
--------------------------------------------------------------------------------
# 1 - SUITE 101 , COAST FED SAVINGS
BASE LEASE DATES: 4/1983 TO 3/2003
TYPE OF TENANT: OFFICE
SQUARE FOOTAGE: 6,154
ALTERNATE MEASURE: 7,729
PRIMARY CODE: 2 - 10-Yr Tenant
SECONDARY CODE: 4 - Office
SUBJECT TO VACANCY ALLOWANCE
MINIMUM RENT:
INITIAL RENT - 24.00/SF/YR
CHANGING TO - 28.50/SF/YR ON 4/1988 ( 60 MONTHS)
CHANGING TO - 33.85/SF/YR ON 4/1993 (120 MONTHS)
CHANGING TO - 40.21/SF/YR ON 4/1998 (180 MONTHS)
RECOVERIES:
EXPNSE RECOVERIES
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASE OF THE EXPENSE VALUE IN THE OCCUPANCY YEAR
COMMISSIONS: NONE
ALTERATIONS: NONE
SPECULATIVE RENEWALS:
LENGTH VACANT SQ FT MONTHS OF
TERM YEARS.MONTHS MONTHS INCREASE FREE RENT COMMISSIONS ALTERATIONS
---- ------------ ------ -------- --------- ----------- -----------
1 10.00 6 NONE FRlW YES YES
RENEWAL MINIMUM RENT:
MULTIPLIED BY 1.000
WITH PERCENTAGE STEPS OF
EXPNSE RECOVERIES
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASE OF THE EXPENSE VALUE IN THE OCCUPANCY YEAR
RENEWAL COMMISSIONS: GROWTH RATE CMlW
RENEWAL PAYOUT: CASHED OUT
RENEWAL ALTERATIONS: MARKET RATE TI1W
RENEWAL PAYOUT: CASHED OUT
--------------------------------------------------------------------------------
# 2 - SUITE 102 , THE DESIGNORY
BASE LEASE DATES: 5/1996 TO 1/2000
TYPE OF TENANT: OFFICE
SQUARE FOOTAGE: 3,492
PRIMARY CODE: 1 - 5-Yr Tenant
SECONDARY CODE: 4 - Office
SUBJECT TO VACANCY ALLOWANCE
MINIMUM RENT:
INITIAL RENT - 15.60/SF/YR
CHANGING TO - 17.40/SF/YR ON 6/1998 (
25 MONTHS)
WITH 3 MONTHS OF FREE RENT
RENEWAL MINIMUM RENT:
MARKET RATE MKTR MULTIPLIED BY 1.000
RENEWAL RECOVERIES:
EXPNSE RECOVERIES
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASE OF THE EXPENSE VALUE IN THE OCCUPANCY YEAR
RENEWAL COMMISSIONS: GROWTH RATE CM5W
RENEWAL PAYOUT: CASHED OUT
RENEWAL ALTERATIONS: MARKET RATE TI5W
RENEWAL PAYOUT: CASHED OUT
--------------------------------------------------------------------------------
# 3 - SUITE 200 , ESPIRIT JONES
BASE LEASE DATES: 9/1996 TO 8/2001
TYPE OF TENANT: OFFICE
SQUARE FOOTAGE: 16,797
ALTERNATE MEASURE: 17,717
PRIMARY CODE: 1 - 5-Yr Tenant
SECONDARY CODE: 4 - Office
SUBJECT TO VACANCY ALLOWANCE
MINIMUM RENT:
INITIAL RENT - 7.80/SF/YR
CHANGING TO - 12.00/SF/YR ON 4/1997 ( 7 MONTHS)
CHANGING TO - 13.80/SF/YR ON 10/1997 ( 13 MONTHS)
CHANGING TO - 15.00/SF/YR ON 10/1998 ( 25 MONTHS)
CHANGING TO - 15.60/SF/YR ON 10/1999 ( 37 MONTHS)
CHANGING TO - 18.00/SF/YR ON 10/2000 ( 49 MONTHS)
RENEWAL MINIMUM RENT:
MARKET RATE MKTR MULTIPLIED BY 1.000
RENEWAL RECOVERIES:
EXPNSE RECOVERIES
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASE OF THE EXPENSE VALUE IN THE OCCUPANCY YEAR
RENEWAL COMMISSIONS: GROWTH RATE CM5W
RENEWAL PAYOUT: CASHED OUT
RENEWAL ALTERATIONS: MARKET RATE TI5W
RENEWAL PAYOUT: CASHED OUT
--------------------------------------------------------------------------------
# 4 - SUITE 310 , EAGLE PACIFIC INS
BASE LEASE DATES: 4/1989 TO 11/1996
TYPE OF TENANT: OFFICE
SQUARE FOOTAGE: 7,730
ALTERNATE MEASURE: 7,560
PRIMARY CODE: 1 - 5-Yr Tenant
SECONDARY CODE: 4 - Office
SUBJECT TO VACANCY ALLOWANCE
MINIMUM RENT:
INITIAL RENT - 19.80/SF/YR
CHANGING TO - 21.00/SF/YR ON 5/1991 ( 25 MONTHS)
CHANGING TO - 22.20/SF/YR ON 5/1992 ( 37 MONTHS)
RECOVERIES:
RENEWAL MINIMUM RENT:
MARKET RATE MKTR MULTIPLIED BY 1.000
RENEWAL RECOVERIES:
EXPNSE RECOVERIES
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASE OF THE EXPENSE VALUE IN THE OCCUPANCY YEAR
RENEWAL COMMISSIONS: GROWTH RATE CM5W
RENEWAL PAYOUT: CASHED OUT
RENEWAL ALTERATIONS: MARKET RATE TI5W
RENEWAL PAYOUT: CASHED OUT
--------------------------------------------------------------------------------
# 5 - SUITE 360 , COMPASS PRODUCT
BASE LEASE DATES: 7/1991 TO 7/1998
TYPE OF TENANT: OFFICE
SQUARE FOOTAGE: 2,919
ALTERNATE MEASURE: 2,873
PRIMARY CODE: 1 - 5-Yr Tenant
SECONDARY CODE: 4 - Office
SUBJECT TO VACANCY ALLOWANCE
MINIMUM RENT:
INITIAL RENT - 15.00/SF/YR
CHANGING TO - 15.60/SF/YR ON 7/1994 ( 36 MONTHS)
RECOVERIES:
CUSHMAN &
WAKEFIELD (R)
---------------------------
VALUATION ADVISORY SERVICES
---------------------------
RENEWAL MINIMUM RENT:
MARKET RATE MKTR MULTIPLIED BY 1.000
RENEWAL RECOVERIES:
EXPNSE RECOVERIES
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA,
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASE OF THE EXPENSE VALUE IN THE OCCUPANCY YEAR
RENEWAL COMMISSIONS: GROWTH RATE CM5W
RENEWAL PAYOUT: CASHED OUT
RENEWAL ALTERATIONS: MARKET RATE TI5W
RENEWAL PAYOUT: CASHED OUT
--------------------------------------------------------------------------------
# 6 - SUITE 400 , LA TORRACA & GOE..
BASE LEASE DATES: 2/1995 TO 1/2001
TYPE OF TENANT: OFFICE
SQUARE FOOTAGE: 11,698
ALTERNATE MEASURE: 11,182
PRIMARY CODE: 1 - 5-Yr Tenant
SECONDARY CODE: 4 - Office
SUBJECT TO VACANCY ALLOWANCE
MINIMUM RENT:
INITIAL RENT - 16.20/SF/YR
CHANGING TO - 18.00/SF/YR ON 3/1997 ( 25 MONTHS)
RENEWAL MINIMUM RENT:
MARKET RATE MKTR MULTIPLIED BY 1.000
RENEWAL RECOVERIES:
EXPNSE RECOVERIES
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASE OF THE EXPENSE VALUE IN THE OCCUPANCY YEAR
RENEWAL COMMISSIONS: GROWTH RATE CM5W
RENEWAL PAYOUT: CASHED OUT
RENEWAL ALTERATIONS: MARKET RATE TI5W
RENEWAL PAYOUT: CASHED OUT
--------------------------------------------------------------------------------
# 7 - SUITE 405 , PACIFIC CRANE
BASE LEASE DATES: 6/1995 TO 5/1998
TYPE OF TENANT: OFFICE
SQUARE FOOTAGE: 2,444
ALTERNATE MEASURE: 2,453
PRIMARY CODE: 1 - 5-Yr Tenant
SECONDARY CODE: 4 - Office
SUBJECT TO VACANCY ALLOWANCE
CUSHMAN &
WAKEFIELD (R)
---------------------------
VALUATION ADVISORY SERVICES
---------------------------
PAGE 8
MINIMUM RENT:
INITIAL RENT - 15.00/SF/YR
CHANGING TO - 16.20/SF/YR ON 1/1997 ( 19 MONTHS)
RECOVERIES:
RENEWAL MINIMUM RENT:
MARKET RATE MKTR MULTIPLIED BY 1.000
RENEWAL RECOVERIES:
EXPENSE RECOVERIES
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASE OF THE EXPENSE VALUE IN THE OCCUPANCY YEAR
RENEWAL COMMISSIONS: GROWTH RATE CM5W
RENEWAL PAYOUT: CASHED OUT
RENEWAL ALTERATIONS: MARKET RATE TI5W
RENEWAL PAYOUT: CASHED OUT
--------------------------------------------------------------------------------
# 8 - SUITE 500 , CITY OF LONG BCH
BASE LEASE DATES: 1/1995 TO 12/1999
TYPE OF TENANT: OFFICE
SQUARE FOOTAGE: 15,369
ALTERNATE MEASURE: 14,992
RENEWAL CODE: 1- 5-Yr Tenant
CUSHMAN &
WAKEFIELD (R)
---------------------------
VALUATION ADVISORY SERVICES
---------------------------
PAGE 9
SECONDARY CODE: 4 - office
SUBJECT TO VACANCY ALLOWANCE
MINIMUM RENT:
INITIAL RENT - 15.00/SF/YR
CHANGING TO - 16.20/SF/YR ON 1/1997 ( 24 MONTHS)
CHANGING TO - 17.40/SF/YR ON 1/1996 ( 36 MONTHS)
RECOVERIES:
GLOBAL GROUPING
GLOBAL RECOVERY 1994
COMMISSIONS: NONE
ALTERATIONS: NONE
RENEWAL MINIMUM RENT:
MARKET RATE MKTR MULTIPLIED BY 1.000
RENEWAL RECOVERIES:
EXPNSE RECOVERIES
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASE OF THE EXPENSE VALUE IN THE OCCUPANCY YEAR
RENEWAL COMMISSIONS: GROWTH RATE CM5W
RENEWAL PAYOUT: CASHED OUT
RENEWAL ALTERATIONS: MARKET RATE TI5W
RENEWAL PAYOUT: CASHED OUT
--------------------------------------------------------------------------------
#9 SUITE 600 , THE DESIGNORY
BASE LEASE DATES: 2/1995 TO 1/2000
CUSHMAN &
WAKEFIELD (R)
---------------------------
VALUATION ADVISORY SERVICES
---------------------------
PAGE 10
TYPE OF TENANT: OFFICE
SQUARE FOOTAGE: 24,574
ALTERNATE MEASURE: 24,963
PRIMARY CODE: 1 - 5-Yr Tenant
SECONDARY CODE: 4 - Office
SUBJECT TO VACANCY ALLOWANCE
MINIMUM RENT:
INITIAL RENT - 11.68/SF/YR
CHANGING TO 15.00/SF/YR ON 9/1996 ( 19 MONTHS)
CHANGING TO - 17.40/SF/YR ON 2/1998 ( 36 MONTHS)
RECOVERIES:
RENEWAL MINIMUM RENT:
MARKET RATE MKTR MULTIPLIED BY 1.000
WITH /SF/YR STEPS OF
RENEWAL RECOVERIES:
EXPNSE RECOVERIES
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASE OF THE EXPENSE VALUE IN THE OCCUPANCY YEAR
RENEWAL COMMISSIONS: GROWTH RATE CM5W
RENEWAL PAYOUT: CASHED OUT
RENEWAL ALTERATIONS: MARKET RATE TI5W
RENEWAL PAYOUT: CASHED OUT
RENEWAL MINIMUM RENT:
MARKET RATE MKTR MULTIPLIED BY 1.000
RENEWAL RECOVERIES:
EXPNSE RECOVERIES
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASE OF THE EXPENSE VALUE IN THE OCCUPANCY YEAR
RENEWAL MINIMUM RENT:
MARKET RATE MKTR MULTIPLIED BY 1.000
RENEWAL RECOVERIES:
EXPENSE RECOVERIES
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
AND A BASE OF THE EXPENSE VALUE IN THE OCCUPANCY YEAR
RENEWAL MINIMUM RENT:
MARKET RATE MKTR MULTIPLIED BY 1.000
RENEWAL RECOVERIES:
EXPNSE RECOVERIES
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
A BASE OF THE EXPENSE VALUE IN THE OCCUPANCY YEAR
RENEWAL MINIMUM RENT:
MARKET RATE MKTR MULTIPLIED BY 1.000
RENEWAL RECOVERIES:
EXPNSE RECOVERIES
PRO RATA SHARE RECOVERY OF EXPENSE REC
PRO RATED ON TENANT SQUARE FOOTAGE OVER AREA MEASURE NRA
CALCULATED ON AN ACCRUAL BASIS WITH A CALENDAR YEAR EXPENSE
WITH NO CAP
Cushman & Wakefield - Senior Director
March 1994 to Present
Professional Affiliations
Member of the Appraisal Institute (MAI Designation No. 09296)
Certified Real Estate Appraiser - (ID# AG002662)
Real Estate Experience
Cushman & Wakefield - Director
May 1992 - April 1994
Cushman & Wakefield - Associate Director
January 1989 - May 1992
Cushman & Wakefield - Appraiser October 1986 to January 1989. Property
types appraised include office, retail, and industrial developments,
hotels, residential income, and special purpose properties.
Donahue and Company, Inc. - Newport Beach - Appraiser January, 1985 - 1986.
Appraiser emphasis on eminent domain litigation, special purpose and
problem properties, easement valuation, and full and partial property
damages.
Experience includes appraisal of the following types of property:
Office Buildings Medical Buildings
Apartment Buildings Residential Subdivisions
Shopping Centers Vacant Land
Hotels Industrial Warehouses
Department Stores Industrial Parks
Auto Sales Facilities Condominium Complexes
Multi-Use Buildings
Primary area of specialization has been major office buildings throughout
southern California, with particular emphasis on appraising office
buildings located along the Wilshire Boulevard corridor, extending from
downtown Los Angeles to West Los Angeles.
Education
Bachelor of Arts (English Literature), 1975
Kenyon College, Gambier, Ohio
American Institute of Real Estate Appraisers Courses:
Real Estate Appraisal Principles
Basic Valuation Procedures
Capitalization Theory and Techniques, Parts A & B
Standards of Professional Practice
Valuation Analysis and Report Writing
Case Studies in Real Estate Valuation
State of California Provisional Real Estate Appraiser (ID #AP 023313)
Associate Member of the Appraisal Institute (ID# M950226)
State of California Real Estate Broker License (ID #01115873)
Real Estate Experience
Associate Real Estate Appraiser - Cushman & Wakefield of California, Inc.,
Los Angeles Valuation Advisory Services
May 1995 to Present
Real Estate Broker - Good Land Realty Corporation, Los Angeles
August 1991 to Present
Experience includes appraisal of the following types of property:
Office Buildings Medical Buildings
Regional Shopping Centers Commercial Land
Neighborhood Shopping Centers Subdivision Lots
Specialty Retail Centers Special Purpose
Education
California State University of Los Angeles, Los Angeles, CA
Bachelor of Science, Business Administration 1995
Emphasis in Business Arts / Pre-Legal
University Programs, Inc., Oxnard, CA
Certificate for Real Estate Broker License 1994
Certificate for Real Estate Appraisal License 1993
Glendale Community College, Glendale, CA
Associate Arts Degree 1991
Graduated with a Business Curriculum
Real Estate Courses:
Real Estate Appraisal I Real Estate Finance
Real Estate Appraisal II Real Estate Law
Real Estate Escrow Real Estate Principles
Appraisal Institute Courses:
I-310 - Basic Income Capitalization
I-410 - Standards of Professional Practice, Part A
I-510 - Advanced Income Capitalization
This CD ROM contains an electronic version of appraisals for the Mortgaged
Properties in PDF format and forms part of the paper version of the Prospectus
Supplement. The information contained in this CD ROM does not appear elsewhere
in paper form in this Prospectus Supplement and must be considered as part of,
and together with, the information contained elsewhere in this Prospectus
Supplement and the Prospectus. The information contained in this CD ROM has
been filed by the Seller with the Securities and Exchange Commission as part
of a Current Report on Form 8-K, which is incorporated by reference in this
Prospectus Supplement, and is also available through the public reference
branch of the Securities and Exchange Commission. Defined terms used in this CD
ROM but not otherwise defined therein shall have the respective meanings
assigned to them in the paper portion of the Prospectus Supplement and the
Prospectus. All of the information contained in this CD ROM is subject to the
same limitations and qualifications contained in this Prospectus Supplement and
the Prospectus. Prospective investors are strongly urged to read the paper
portion of this Prospectus Supplement and the Prospectus in its entirety prior
to accessing this CD ROM. If this CD ROM was not received in a sealed package,
there can be no assurances that it remains in its original format and should
not be relied upon for any purpose. Prospective investors may contact J.
Theodore Borter of Goldman, Sachs Co. at (212)902-3857 to receive an original
copy of the CD ROM.
COMPLETE APPRAISAL OF REAL PROPERTY
The Esplanade Shopping Mail
West Esplanade Avenue
Kenner, Jefferson Parish, Louisiana
Cushman & Wakefield of Connecticut, Inc.
Valuation Advisory Services
Four Stamford Plaza, 8th Floor
107 Elm Street
Stamford, Connecticut 06902
Cushman & Wakefield of Connecticut, Inc. CUSHMAN &
Valuation Advisory Services WAKEFIELD(R)
Four Stamford Plaza, 8th Floor
107 Elm Street
Stamford, CT 06902
Tel: (203) 326-5845
Fax: (203) 348-6203
May 24, 1996
Mr. John MacDonald
Cadillac Fairview U.S., Inc.
20 Queen Street West, 4th Floor
Toronto, Ontario M5H3R4
Re: Complete Appraisal Of Real Property
Self-Contained Format
The Esplanade Shopping Mail
Town of Kenner
Jefferson Parrish, Louisiana
Dear Mr. MacDonald:
In fulfillment of our agreement as outlined in the Letter of Engagement,
Cushman & Wakefield of Connecticut, Inc. is pleased to transmit our
self-contained appraisal report estimating the market value of the leased fee
estate in the Esplanade Mall.
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 Cadillac Fairview and is intended only for
its specified use. It may not be distributed to or relied upon by other persons
or entities without written permission of Cushman & Wakefield of Connecticut,
Inc.
This appraisal report has been prepared in accordance with our
interpretation of your institution's guidelines, the regulations of OCC and the
Uniform Standards of Professional Appraisal Practice, including the Competency
Provision.
The property was inspected by and the report was prepared by Vincent S.
Maniscalco under the supervision of Richard W. Latella, MAI.
Mr. John MacDonald
Cadillac Fairview U.S., Inc.
June 24,1996
Page 2
Based on our complete appraisal as defined by the Uniform Standards of
Professional Appraisal Practice, 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 April 25, 1996, was:
EIGHTY MILLION DOLLARS
($80,000,000)
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 OF CONNECTICUT, INC.
/s/ Vincent S. Maniscalco /s/ Richard W. Latella, MAI
------------------------- ---------------------------
Vincent S. Maniscalco Richard W. Latella, MAI
Associate Director Senior Director
Valuation Advisory Services Valuation Advisory Services
Reviewed and Approved
Without Inspection
Mr. John MacDonald
Cadilac Fairview U.S., Inc.
June 24, 1996
Page 2
Based on our complete appraisal as defined by the Uniform Standards of
Professional Appraisal Practice, 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 April 25, 1996, was:
EIGHTY MILLION DOLLARS
($80,000,000)
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 OF CONNECTICUT, INC.
Vincent S. Maniscalco Richard W. Latella, MAI
Associate Director Senior Director
Valuation Advisory Services Valuation Advisory Services
Reviewed and Approved
Without Inspection
Property Name: The Esplanade
Location: West Esplanade Avenue
Town of Kenner
Jefferson Parish, Louisiana
Assessor's Parcel Number: B-1-Al-lA-D Mail & Underlying land
B-1-A1-1A Vacant Land
B-1-Al-1A Vacant Land
B-1-A1-1A-5D Vacant Pad Site
B-1-Al-lA-6D Vacant Pad Site
B-1-Al-2 Dillard's
B-1-Al-3 Mervin's
B-1-Al-4 Macy's
Interest Appraised: Leased fee estate
Date of Value: April 25, 1996
Date of Inspection: April 25, 1996
Ownership: CF Kenner Associates
Land Area: The subject property is located on a
80.23+/- acre site, of which 54.2+/-
acres is owned by the CK Kenner
Associates. The remainder of the site is
owned by the three anchor tenant stores.
Zoning: PUD, Planned Urban Development
Highest and Best Use:
If Vacant: Build-to-suit retail development
As Improved: Continued retail use
Improvements
Type: Two-story regional shopping mall with three
anchor tenant stores.
Date of Construction: 1985-1986
Building Area:
Anchor Tenants
Dillard's(1): 177,940+/- sf
Mervin's: 235,518+/- sf
Macy's: 84,082+/- sf
Dillard's Men's Shop 46,000+/- sf
----------
Total Anchor GLA: 544,140+/- sf
----------
(1) The Dillard's, Mervin's and Macy's stores are all owned by the respective
retailer and are not part of subject of this appraisal. Dillard's Men's
Shop is owned by the developer and is part of the subject.
Summary of Salient Facts and Conclusions
================================================================================
Vacancy between Leases: 8 months
Renewal Probability: 70%
Terminal Capitalization Rate: 9.25%
Cost of Sale at Reversion: 2.0%
Discount Rate: 11.75%
Indicated Value: $80,200,000
Value Conclusion: $80,000,000
Resulting Indicators
Calendar Year 1996 Net Income: $7,250,461
Implicit Overall Rate: 9.06%
Price Per Square Foot of Mail GLA: $218.33
Price Per Square Foot of Owned GLA: $193.70
Exposure Time Implicit In
Market Value Conclusion: Not more than 12 months
Special Risk Factors: None
Special Assumptions:
1. Throughout this analysis, we have relied upon information provided by
ownership and management which we assume to be accurate. All tenant
specific assumptions are identified within the body of this report.
2. We have been provided with a rent roll and lease abstracts for all leases
in the mall. We have reviewed a sampling of actual lease documents and
found no meaningful discrepancies. We have reviewed all anchor lease
documents, as well as the abstracts provided by ownership which we assume
are accurate. Furthermore, we assume that any existing REAs and operating
covenants as portrayed herein are in full force and effect.
3. The existing operating covenants with Dillard's and Macy's will expire in
October 2005 and September 2001, respectively. It is an assumption of this
report that the operating covenants are renewed at terms similar to the
existing agreements. The anchor tenants are not obligated to report sales
and as such the performance of these tenants is not known, however the
overall performance of the center would suggest that continued operation of
the anchors is economically feasible. The existing operating covenants
require the anchors to make contributions to common area maintenance of
$0.30 to $0.51 per square foot, which is supported by market parameters.
Therefore renewal of the existing covenants appears reasonable.
4. The forecasts of income, expenses, and absorption of vacant space included
herein 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.
5. 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 places 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 businesses 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% 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.
6. We are not aware of any current environmental hazards or conditions on or
about the property that would detract from its market value. Our physical
inspection gave us no reason to suspect that such conditions might exist.
However, we are not experts in the detection of environmental contaminants,
or the cost to cure them if they do exist. We recommend that appropriate
experts be consulted regarding these issues. Our analysis assumes that
there are no environmental hazards or conditions affecting the property.
7. Please refer to the complete list of assumptions and limiting conditions
included at the end of this report. We believe, based on the assumptions
employed in our cash flow analysis and based on our section of investment
parameters, for the subject, the value conclusion represents a market price
achievable within one year's exposure time on the open market.
Page
PHOTOGRAPHS OF THE SUBJECT PROPERTY 1
INTRODUCTION.
Identification of the Subject Property 3
Property Ownership and Recent History 3
Operating Covenants 3
Purpose, Function, and Scope of the Appraisal 3
Extent of the Appraisal Process 3
Date of Value and Property Inspection 5
Property Rights Appraised 6
Definitions of Value, Interest Appraised, and Other Pertinent Terms 6
Legal Description 7
REGIONAL ANALYSIS 8
NEIGHBORHOOD ANALYSIS 17
RETAIL MARKET ANALYSIS 19
PROPERTY DESCRIPTION
Site Description 47
Improvements Description 48
REAL PROPERTY TAXES AND ASSESSMENTS 52
ZONING 53
HIGHEST AND BEST USE 54
VALUATION PROCESS 56
VALUATION PROCESS
Sales Comparison Approach
Income Approach
The subject property is the Esplanade Shopping Mall, an enclosed regional
shopping center located along West Esplanade Avenue in the City of Kenner,
Jefferson Parish, Louisiana. Developed in 1985 by Cadillac Fairview, the subject
contains a total gross leasable area (GLA) of 910,555+/- square feet and is
situated on a 80.23+/- acre site. Anchor stores occupy 544,140+/- square feet or
59.8 percent of the center's total area. The Dillard's, Mervin's and Macy's
stores are individually owned and excluded from this appraisal. The only anchor
tenant store included in this appraisal is the Dillard's Men's Store (46,600 SF)
which is owned by Cadillac Fairview. Mall stores, inclusive of kiosks, amount to
366,415+/- square feet or 40.24 percent of the center's total area. The total
GLA appraised is therefore 413,015+/- square feet.
The Esplanade Mall is the focal point of regional retail activity for a
trade area extending for approximately 25 miles around the subject. Occupancy
levels have fluctuated but tend to fall in the 85 to 90 percent range. As of the
date of inspection, the mail was 81.67 percent occupied based upon 67,149+/-
square feet of vacant space and a mall GLA of 366,415+/- square feet.
Property Ownership and Recent History
The subject property was developed by Cadillac Fairview of Kennesaw,
Georgia from 1985 to 1986. The Cadillac Fairview has owned the center since that
time. We are not aware of any ownership transfers over the last three years.
According to representatives of the owners, the subject property is not
presently under contract or listed for sale.
Operating Covenants
According to information provided by Cadillac Fairview, each of the anchor
tenants is encumbered by an operating covenant which requires them to
continuously operate as a department store. The expiration of each operating
covenant is provided in the following table:
=======================================
Store Expiration
=======================================
Dillard's October 31, 2005
Mervin's October 31, 2010
Macy's September 30, 2001
=======================================
Purpose, Function, and Scope 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 April 25, 1996, our date of
inspection. The appraisal is to be used to establish asset value for mortgage
collateralization.
Extent of the Appraisal Process
In the process of preparing this appraisal, we performed the following
tasks:
o Inspected the exterior of all buildings and site improvements and a
representative sample of shops.
o Interviewed a representative of the Cadillac Fairview and Urban Retail
Properties (Leasing Agent)
o Reviewed leasing policy, concessions, tenant build-out allowances, and
history of recent occupancy with the leasing manager.
o Reviewed a detailed history of income and expense (1994-1995 as well as
Budget 1996) including the budget for planned capital expenditures.
o Conducted market research of occupancies, asking rents, concessions and
operating expenses at similar complexes which involved interviews with
on-site managers and a review of our own data base from previous appraisal
files.
o Prepared a ten-year projected cash flow (for the purpose of discounting net
income to a present value).
o Reviewed trade area specific data for the property as prepared by Equifax
National Decision Systems.
o Conducted market inquiries into recent sales of similar regional malls to
ascertain sales price per square foot, net income multipliers and
capitalization rates.
o Reviewed lease documents, and a representative sample of actual tenant
leases. We are also provided with lease abstracts, a current rent roll and
forecasted sales for the tenants.
o Estimated market rental rates, absorption, and stabilized income and
expenses for the subject based on available market data and the current
market thinking relative to growth in market rents and market absorption.
o Developed a value estimate of the mall through direct sales comparison.
o Prepared a detailed discount cash flow (DCF) analysis using Pro-Ject + Plus
software for the purpose of discounting the forecasted net income stream to
a present value of the leased fee estate for the mall in its "as is"
condition.
o Prepared a forecast of income and expenses in connection with preparing an
estimate of stabilized net income for direct capitalization purposes.
o Reconciled the value indications and concluded a final value estimate for
the subject in its "as is" condition.
o For this assignment, a complete appraisal of the subject property was
performed with the results conveyed in this self-contained report. A
complete appraisal involves an estimate of market value without any
departure from the Uniform Standards of Professional Appraisal Practice
maintained by the Appraisal Foundation. A self-contained report makes a
comprehensive presentation of the data and analyses which serve as the
basis of our conclusion of value for the subject property.
Date of Value and Property Inspection
The subject property was personally inspected by Vincent S. Maniscalco on
April 25, 1996. This date will form the effective date of appraisal. Richard W.
Latella, MAI did not inspect the property but has reviewed and approved the
report.
Definitions of Value, Interest Appraised, and Other Pertinent Terms
Market Value
The definition of market value utilized in this report is taken from the
Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation
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.
The definition of the interest appraised which is utilized in this report
is taken from The Dictionary of Real Estate Appraisal, Third Edition (1993),
published by the Appraisal Institute (formerly the American Institute of Real
Estate Appraisers), as follows:
Leased Fee Estate
An ownership interest held by a landlord with the rights of use and
occupancy conveyed by lease to others. The rights of the lessor (the leased
fee owner) and the leased fee are specified by contract terms contained
within the lease.
Market Rent
The rental income that a property would most probably command on the open
market, indicated by the current rents paid and asked for comparable space
as of the date of appraisal.
Cash Equivalent
A price expressed in terms of cash, as distinguished from a price expressed
totally or partly in terms of the face amounts of notes or other securities
that cannot be sold at their face amounts.
Finally, the definition of other pertinent terms taken from another source
for this report is as follows:
Estimate of the market value of a specified interest in the property in the
condition observed upon inspection and as it physically and legally exists
without hypothetical conditions, assumptions, or qualifications as of the
date of inspection.
Legal Description
A legal description of the subject property is included for reference
purposes among the Addenda to this report.
The New Orleans metropolitan area encompasses 4,190+/- square miles and is
situated in the southeastern part of the United States. New Orleans is located
on the Mississippi River, 90 miles upstream from the Gulf of Mexico; about 350
miles east of Houston, Texas; 400 miles south of Memphis, Tennessee; and 150
miles west of Mobile, Alabama. New Orleans has a topography of coastal plains
with large areas of the city below sea level and protected by levees. The City
of New Orleans serves as the region's primary metropolitan center, and is the
largest city in the State of Louisiana.
The New Orleans metropolitan statistical area (MSA) is the 41st largest MSA
in the country based a total population according to Sales & Marketing
Management 1995 Survey of Buying Power and includes the eight parishes of
Orleans, Jefferson, St. Bernard, St. Charles, St. John, St. James, St. Tammany
and Plaquemines.
Population
The New Orleans Metropolitan Statistical Area (MSA) has experienced some
erratic population changes over the past few decades.
===============================================================================================================
Population Trends
===============================================================================================================
Percent Percent
Area 1980 1990 1996 2001* Change Change
1980-1996 1990-1996
===============================================================================================================
City of Kenner 66,372 72,033 74,262 75,556 8.53% 3.09%
---------------------------------------------------------------------------------------------------------------
New Orleans MSA 1,308,800 1,285,270 1,310,241 1,324,271 -1.42% 1.94%
---------------------------------------------------------------------------------------------------------------
Louisiana 4,205,901 4,219,973 4,334,057 4,398,029 0.33% 2.70%
---------------------------------------------------------------------------------------------------------------
* Projected Sources: Equifax Marketing Decision Systems, U.S Bureau of the Census
===============================================================================================================
As presented in the preceding chart, the New Orleans MSA as a whole
experienced a declining population base during the 1980s. This trend has
reversed itself during the first part of the 1990s with modest gains in
population. In contrast, the City of Kenner has experienced a steadily
increasing population base. During the 1980s the population of Kenner increased
by 5,661 or 8.53% followed by a 3.09% increase during the first half of the
1990s. These rates of growth exceed that of the state as a whole which increased
by 0.33% during the 1980s and 2.70% during the 1990s. Projections by Equifax
Marketing Decision Systems suggest a continuation of this trend with a 2001
population projection of 75,556 for the City of Kenner.
The preceding table also illustrates the fact that the New Orleans MSA is
the most populous portion of the state representing 30% of the state's total
population.
Income
Both the City of Kenner's and the New Orleans MSA's residents are slightly
more affluent than those of the State of Louisiana. The New Orleans MSA's 1995
median household Effective Buying Income (EBI) of $34,152 ranks 174th among the
nation's largest 315 metropolitan statistical areas, according to Sales and
Marketing Management's 1995 Survey of Buying Power.
New
City of Orleans Sate of
Kenner MSA Louisiana
--------------------------------------------------------------------------------
$150,000 or more 4.76% 3.71% 2.80%
$100,000 to $149,999 3.60% 4.06% 3.06%
$ 75,000 to $ 99,999 6.96% 5.87% 4.55%
$ 50,000 to $ 74,999 19.78% 16.75% 14.81%
$ 35,000 to $ 49,999 19.15% 15.47% 15.23%
$ 25,000 to $ 34,999 13.28% 13.01% 13.09%
$ 15,000 to $ 24,999 13.15% 14.91% 15.96%
$ 5,000 to $ 15,000 13.93% 16.98% 20.31%
Under $5,000 5.40% 9.24% 10.18%
--------------------------------------------------------------------------------
1996 Est. Average HH Income $49,933 $44,419 $39,259
1996 Est. Median HH Income $38,324 $31,819 $27,716
1996 Est. Per Capita Income $18,455 $16,990 $14,653
================================================================================
As can be seen from the chart above, the income levels in the City of
Kenner and the New Orleans MSA are clustered in the $35,000 to $75,000 brackets
with 38.93% and 32.22% of the area's population in these categories,
respectively.
Despite fluctuations, New Orleans' residents are generally more affluent
today than they were three years ago. Income levels shifted upward significantly
(14.61 percent) between 1993 and 1995, which is reflective of the diversified
economic base of the New Orleans MSA. As the national economy slowly improves
from its stagnant position, the prospects for continued growth in income levels
within the MSA remains positive.
Retail Sales
Inconsistent with the decline in population, retail sales within the New
Orleans MSA have increased. According to Sales & Marketing Management retail
sales have increased by 4.19% per annum between 1991 and 1995 and are now
reported at $11.529 billion.
Economic Base and Employment
Rich natural resources, excellent transportation access, and a skilled
labor force contribute to a strong economic base in the New Orleans Region.
Variety in business, industry and support systems continues to keep the regional
financially stable even in times of high national unemployment or a depressed
economy.
Four distinct areas of economic strength include:
o Maritime/Port-Related Industries
o Oil/Gas and Related Industries
o Tourism
o Ship/Boat-Building & Aerospace Manufacturing
The strong presence of education service industries and
nationally-recognized universities; health services and administration;
professional services; federal government offices and military operations also
strengthen the economic base.
Oil, Gas and Related Industries, such as oil refining and chemical
production, and maritime-related industries are the largest economic sectors
when measured in terms of basic employment. Each accounts for approximately 19
percent of the area's job base.
Tourism accounts for about 16 percent followed by 11 percent in
shipbuilding and aerospace (transportation equipment manufacturing). Educational
services accounts for slightly less than 11 percent of employment; business and
professional services represent about 9 percent; the utilities industry
(electricity and natural gas) accounts for 6 percent; Federal and State
Government generate about 4 percent. The balance of the area's job base, about 5
percent, is supported by various other industries (health services, wholesale
trade, etc.).
Based on the 1991-1994 employment growth rate, the New Orleans Region ranks
25th among all metropolitan areas in the United States with 1 million or more
population. Employment opportunities increased during this three-year period by
4.24 percent (average of 1.4 percent per year). Total employment in the U.S.
during this same period increased by 4.78 percent. From 1993 to 1994, the area's
job growth rate rose to 2.6 percent, ranking 22nd among all metropolitan areas
of 1 or more million and exceeding the growth rates of other southern
metropolitan areas such as Houston, Miami, and Memphis.
Preliminary reports for 1995 (the most recent information available)
indicate that the Metropolitan Area will have experienced an approximate 1.4 to
1.6 percent employment growth over 1994. A breakdown of the 1990-1995 employment
growth patterns by major industry group is presented in the following table.
Over the past four years, the New Orleans Metropolitan Area has experienced
almost $10 billion in capital investments and $3.3 billion in new contracts
awarded to area companies. For the nine-parish region, this is the highest level
of investment activity recorded in its history (based on dollar values alone).
The total direct employment impact created or anticipated as a result of the
capital investment exceeds 25,300 new permanent jobs. While much of the
employment impact will be realized over an extended period, the recent
accelerated growth rate in the Region's total job base reflects the first impact
stages of the $10 billion in business investment and $3.3 billion in contract
awards.
CAPITAL INVESTMENTS & CONTRACTS AWARDED* 1991-1994
New Orleans Region
--------------------------------------------------------------------------------
Capital New Permanent
Investment ($000's) Direct Jobs
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Tourism/Entertainment/Gaming $ 3,372,089.3 13,502
Gaming/Entertainment $ 1,374,606.5 10,200
Tourism $ 1,997,482.8 3,300
Transportation Infrastructure** $ 1,566,572.0 566
Petroleum/Petrochem Mfg. $ 1,323,902.0 515
Research & Development $ 995,220.0 3,329
Environmental-Related Projects $ 877,877.5 32
Communications $ 429,832.3 356
Health Services $ 404,765.5 1,676
Other Manufacturing $ 259,244.8 4,296
Warehousing & Distribution $ 97,637.3 610
Museums/Cultural Facilities $ 77,100.0 47
All Other Sectors $ 280,955.5 374
Totals, All Sectors $ 9,685,196.2 25,303
Contracts Awarded to Region Firms $ 3,330,500.0 4,950
Totals, Cap. Investment & Contract Awards $ 13,015,696.2 30,253
===============================================================================
Source: Complied by Metro Vision Research Department
* Investment and jobs data are for projects completed, under way, and planned
in the 9-Parish Region of Orleans, Jefferson, St. Bernard, St. Charles, St.
John, St. James, Plaquemines, St. Tammany, and Tangipahoa Parishes.
*** Includes port, airport and highway/roadway improvements.
Labor Force
The labor force of the nine-parish region is estimated at some 654,400, up
by 5 percent over 1990 (see facing page). For the eight-parish metropolitan
area, the labor force is estimated at approximately 613,000, up by 4.1 percent
from 1990. Unemployment rates have declined since 1994, and are closely in line
with the national average. The unemployed labor force, estimated at 40,000 to
45,000 for the metropolitan area and at 45,000 to 50,000 for the nine-parish
region represents a large pool of available workers for new and expanding
business operations.
A breakdown of the area labor force by major occupational groups is
presented in the following table which also compares its relative distribution
to the national labor force distribution by occupation.
================================================================================
EMPLOYMENT BY OCCUPATION
NEW ORLEANS MSA* 1994
MSA U.S.
Number % of Total % Of Total
------ ---------- ----------
Managerial/Prof. Specialty 154,033 26.1% 25.2%
Exective/Admin./Managerial 66,863 11.3% 11.8%
Professional Specialty 87,170 14.8% 13.4%
Technical/Sales/Admin. Support 201,612 34.2% 31.1%
Technicians & Related Support 21,828 3.7% 3.5%
Sales Occupations 77,732 13.2% 11.6%
Admin. Support include. Clerical 102,053 17.3% 15.9%
Service Occupations 90,153 15.3% 13.4%
Farming/Fishing/Forestry 8,062 1.4% 2.5%
Precision Production/Crafts/Repair 63,069 10.7% 11.3%
Operatives/Fabricators/Laborers 72,806 12.3% 16.6%
Total, All Occupations 589,735 100.0% 100.0%
--------------------------------------------------------------------------------
Source: LA. Dept. of Labor: U.S. Dept. of Commerce
* Figures are estimates by LA Dept. of Labor for 1994; % distribution for
U.S. is from 1990 census.
The above average concentration of workers in professional specialties,
technicians, administrative support, and service occupations reflects the
structure and industrial characteristics of the economy. These patterns also
represent many of the strengths of the labor force in attracting and supporting
business investment and expansion.
Transportation
The New Orleans metropolitan area is well served by the Interstate Highway
System. Interstate 10, which traverses the southern portion of the United States
and the State of Louisiana, travels west/east through the New Orleans area. Both
Interstate 55 and 59 lead into Interstate 10 within the greater New Orleans
area. Interstate 55 travels south from Nashville, Tennessee through Jackson,
Mississippi to Interstate 10. Interstate 59 travels south from Birmingham,
Alabama to Interstate 10.
The metropolitan area is also well served by a number of U.S. Highways,
State and Local Routes. U.S. Highway 90 - Westbank Expressway travels east/west
through the New Orleans metropolitan area. Another major U.S. route that
services the City is U.S. Highway 60 - Airline Highway which travels east/west.
Major local state highways that serve the metropolitan area include State
Highway 428 - General DeGaulle Drive; State Highway 23 - Belle Chasse Highway,
and State Highway 48 - Jefferson Highway. The various Interstate Highways, U.S.
Highways and the state and local routes combine to provide an efficient highway
network service in the metropolitan area.
The New Orleans International Airport offers passengers direct air service
to 37 major U.S. cities and 29 foreign countries. Approximately seven million
domestic and international passengers arrive and depart annually on an average
of 428 daily flights. New concourse construction now underway will increase the
number of airline boarding gates from 40 to 45. Domestic and international air
freight services are provided by 22 airlines. A $500 million capital expansion
program is underway at New Orleans International, including new and extended
runways, taxiway, temperature-controlled air cargo facilities, access roads, and
other major improvements.
In addition, the New Orleans Lakefront Airport, serves general aviation,
corporate, and private aircraft, while other general aviation facilities serve
outlying communities in the Region. Alvin Callender Naval Air Station serves as
a joint use training facility for the reserve units of the various military
services.
The Port of New Orleans has deep water access and is located at the
confluence of two inland waterway systems, the Mississippi River and the Gulf
Intracoastal Waterway. The combined tonnage of public and private port terminals
in the area exceeds that of all other United States ports. Additionally, the
Port of New Orleans operates a Foreign Trade Zone, and a similar facility is
planned by the South Louisiana Port Commission (St. Charles, St. John the
Baptist and St. James Parishes). These zones enable foreign goods to be brought
into the area without formal customs entry and the payment of duty and taxes
until and unless they leave the zone for a United States destination. No duties
are paid on merchandise exported from the zone. While in the zone, the goods may
be consolidated, processed, reassembled, repackaged, and commingled with
domestic goods, used in manufacturing, repaired or simply stored until such time
as they are needed.
The region's port is among world leaders in terms of cargo tonnage handled
both in foreign trade and domestic shipping. More than 4,000 ships call at
deep-water ports in the region each year. Access to the Mississippi River
waterway system and to the Gulf Intracoastal Waterway provides low-cost per
ton-mile barge transportation. As the principal seaport of the vast U.S.
mid-continent manufacturing and agricultural heartland, the region's port
terminals link major U.S. industries and markets to Europe, Asia, Africa and
Latin America.
A five-year $200 million capital improvement program is underway at the
Port of New Orleans, creating new super terminals, heavy-duty docks, and
wharves. The adjoining Port of South Louisiana is developing a new intermodal
cargo terminal on the Mississippi River known as "Globalplex." These capital
expansions will ensure the status of the New Orleans region as a leader among
world ports.
Six major truckline railroads serve the region's industries and ports,
providing single carrier access to virtually all of America's major markets. The
Southern Pacific and Union Pacific link the region to the western United States.
The Illinois Central and Kansas City Southern serve the central United States.
CSX Transportation and Norfolk Southern serve the eastern United States. These
railroads receive and deliver cargo from port terminals and industrial plants,
and interchange both domestic and international cargo for distribution
throughout the U.S. The New Orleans Public Belt Railroad links all six truckline
railroads With maritime terminals and industrial facilities. More than 400
trains arrive and depart weekly over these six trucklines railroads; the number
of railcars moving through the New Orleans gateway averages about 8,800 per day.
In addition to the extensive rail freight services, each week 34 Amtrak
trains carry passengers to and from the metropolitan area.
Railroads, cars, trucks, ships, and planes provide an effective
transportation system that links the people and businesses of metropolitan New
Orleans within a 500 miles radius of 10.5 percent of the U.S. metropolitan
population.
The region has private and state run colleges and universities in addition
to many vocational technical and career-oriented schools. New Orleans has 146
schools serving 84,609 students. Colleges include Tulane University (11,241),
Loyola University (4,952) and the University of New Orleans (16,076).
Culture & Recreation
New Orleans is a historically rich city and is world renown for its Cajun
and Creole cuisine, Dixieland jazz, the French Quarter and Mardi Gras. The most
famous is probably the French Quarter. The French Quarter was founded in 1718,
and the 10 by 15-block area comprises the original city of New Orleans. Today,
it is a popular tourist destination, as well as being an important residential
area and commercial area. It abounds with historic structures such as St. Louis
Cathedral and the Pontalba Apartments (dating from 1850 and said to be the
oldest apartment in North America).
The "Jax" brewery festival marketplace is located in the French Quarter and
represents a $70 million restoration of the former Jax (beer) Brewery. It
contains in excess of 245,000 square feet and now houses specialty shops and
restaurants.
The newest addition to the French Quarter is the $40 million, 16-acre
Aquarium of the Americas. This consists of a 117,000+/- square foot, three story
building containing 82 tanks. Other attractions in the French Quarter include
Jackson Square, the French Market, Cafe Du Monde, numerous antique shops, and of
course Bourbon Street. In addition, many festivals are staged throughout the
year in the French Quarter.
Mardi Gras is a pre-Lenten celebration held annually in New Orleans. It is
characterized by parades, balls and, in general, unrestrained merry-making. It
draws people from all over the world and may be aptly described as "the greatest
free show on earth."
Future projects for the city include the construction of a 20,000-seat
enclosed stadium to be located near the New Orleans Superdome. Government and
business leaders hope that the proposed arena would attract a National
Basketball Association or National Hockey League franchise. This facility would
also be well suited for concerts and annual events such as the circus.
Construction is estimated to cost $85 million and would be paid for by
refinancing the Superdome bonds. It is hoped that a 20,000-seat arena would fill
a gap in entertainment facilities and be better suited for events too small for
the Superdome or the Convention Center. This new facility is projected to
generate approximately $200 million in spending after construction. However,
opponents believe that much of the projected revenues would be taken away from
the Superdome or other local arenas. The new arena has political support and
construction funds could be available. This project, however, may be
overshadowed by the extremely profitable casino and riverboat gambling which has
recently been approved for New Orleans by both the state and city. No
construction schedule has been established for the proposed arena.
Gambling
The City of New Orleans is on the brink of the most dynamic economic and
social change in its recent history. The State Legislature legalized casino
gambling during the summer of 1992 and New Orleans, with the French Quarter and
a major portion of its economy oriented toward tourism, has the potential to be
the most prominent gambling city in the South. Louisiana has had
legal horse-racing for years; however, the potential of monumental economic gain
from casino gambling for the state, city and casino developers has attracted the
attention of most major casino operators from Las Vegas and Atlantic City. New
Orleans business and government leaders see the proposed casino as an
alternative to the struggling oil production and exploration business, which has
been an important part of the New Orleans economy for years. Most New Orleans
officials are optimistic about the economic influence of gambling; however,
there are factions opposed because of the possible negative effects of the
monumental economic and social influences of a New Orleans casino.
Conclusions
New Orleans is showing continuing signs of emerging from a recessionary
period which began in the latter part of the 1980s. The overall real estate
market has improved slightly over the last few years with improving occupancy
levels and higher rental rates. The oil-related business, which has been New
Orleans' mainstay, is still depressed and it is not likely that it will recover
to the healthy economic levels of a decade ago. Tourism, hospitality, convention
and sporting events are now more important parts of the local economy.
The New Orleans economy is being re-ordered around casino and riverboat
gambling. The State of Louisiana and City of New Orleans have legalized and
permitted a 200,000 square foot casino and approximately four gaming riverboats.
Government and business leaders hope that gambling revenue will revitalize the
city and create new jobs for city residents. Construction is to begin during
1994, and the casino is scheduled to open in 1995. Major business and economic
changes will undoubtedly occur as the city shifts from a more traditional
economy centered around oil and gas to a gambling-oriented economy.
As we foresee a slow economic growth condition, it is our opinion that the
long-term prospect for net appreciation in commercial and residential real
estate values remain good. The long-term prospects for the New Orleans regional
area is promising as its economic base continues to diversify and expand. The
New Orleans metropolitan area should be able to sustain growth in the future by
attracting major industries and retailers and maintaining a strong labor force.
A neighborhood is defined in terms of characteristics, trends and groupings
of similar or complimentary land uses. As a regional center, the subject serves
a much larger market than its immediate neighborhood. Essentially, the subject
can be defined as one of the principal retail destination centers for an area
that encompasses the western portion of the New Orleans MSA. It has excellent
regional accessibility by virtue of its location near Interstate 10 and is
located approximately fifteen miles west of the New Orleans Central Business
District in the City of Kenner. Nonetheless, a discussion of the local environs
is an important element in a total analysis of the subject property.
Neighborhood Characteristics
The subject enjoys extensive frontage along West Esplanade Avenue and is
also accessible from Williams Boulevard via 32nd Street. Both West Esplanade
Avenue and Williams Boulevard are commercial arterials that are primarily
developed with retail, professional office and other service type uses. The New
Orleans International Airport is located approximately 1/4 mile south of the
subject and is considered the dominant land use in the neighborhood. Due to the
presence of the airport, several hotels and restaurants are located in the area.
The secondary arteries are primarily residential in nature. Development
along these arteries ranges from high density multi-family complexes to
single-family homes. The area south of the subject, between Veterans Memorial
Highway and the airport is currently being purchased on a home by home basis by
the airport as a concession to the residents for the increased noise levels
generated by the greater airport traffic. This will reduce the population base
in the immediate area, however, these residents will mostly likely be displaced
to other locations in the subject's trade area. As such the overall impact on
the subject property will be minimal.
The subject's neighborhood is generally an older established area which has
been densely developed for numerous years. As such land is not readily available
for new development. In exception to this, our discussions with City officials
indicated two new developments in the City. A 266 unit, luxury apartment complex
is planned for the intersection of West Esplanade Avenue and Loyola Drive. While
a 147 lot single-family subdivision is under construction near Lake
Pontchartrain.
Neighborhood Access
The neighborhood is afforded good local and regional access. West Esplanade
Avenue is a four-lane primary roadway which facilitates east/west traffic
through the City of Kenner and neighboring Metaire. The subject property has
extensive frontage along this artery, the majority of which has been developed
with outparcels. However, during the development of the center, care was taken
not to obstruct the visibility of the center and in particular the Macy's store.
As such visibility of the center from West Esplanade Avenue is rated good.
Williams Boulevard is a major traffic bearer, which traverses the City of
Kenner in a north/south direction. The subject property has no direct frontage
along Williams Boulevard, but is accessible via 32nd Street. As such the
subject's exposure along Williams Boulevard is limited to a sign pylon located
at the intersection of 32nd Street and William's Boulevard. Williams Boulevard
intersects with I-10 approximately three blocks south of the subject and as such
all areas of metropolitan New Orleans become readily accessible.
The subject neighborhood is an older established area which has seen little
new development due to the scarcity of available land. The main arteries are
developed with a variety of commercial uses which appear well tenanted and
adequately maintained. The surrounding secondary roads provide a solid
population base to support the commercial development and the area's
accessibility lends itself to use as a regional hub.
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.
The subject can be described as a regional shopping center.
A regional shopping center (1) provides for extensive variety of goods,
including a wide selection of general merchandise, apparel, and home
furnishings, as well as a variety of services and recreational facilities.
The major occupants of a regional center include a least one, but no more
than two, full line department stores. Each full-line department store
generally has an area of not less than 75,000+/- square feet. In many
instances, the department stores are physically a part of the center but
are independently owned. In theory, its typical size for definitive
purposes is 450,000 square feet of gross leasable area; it practice it may
range from 300,000 to 850,000 square feet. The regional center is the
second largest type of shopping center. As such, it provides services
typical of a business district yet not as extensive of those of the super
regional center.
In order to define and analyze the market potential for The Esplanade, it
is important to first establish the boundaries of the trade area from which the
subject will draw its customers. In some cases, defining the trade area may be
complicated by the existence of other retail facilities on main thoroughfares
within trade areas that are not clearly defined or whose trade areas overlap
with that of the subject.
Within both its primary and effective trade areas, the subject competes
directly with the Lakeside Shopping Center, a 1+/- million square foot regional
mall located approximately six miles from the subject. Lakeside Shopping Center
is considered a formidable competitor within the subject's trade area,
benefiting from a more diverse mall shop tenant base in larger store formats and
superior proximity to the affluent communities located within Metairie and the
western quadrant of New Orleans. To a far lesser degree, competition with the
trade area includes the Clearview Mall, a 500,000+/- square foot enclosed
regional center. While this mall presents a limited, highly local mall shop
tenant base, neither of its anchors, Maison Blanche or Sears, are duplicated at
the subject or at Lakeside Shopping Center, and reportedly exhibit a strong draw
within the trade area.
Competition in the immediate area is limited to traditional strip centers.
These centers are anchored by discount department stores, supermarkets and
specialty/category killer stores. While some cross-shopping does occur, these
stores act more as a draw to the area, creating an image for the area as an
established shopping district and generating more retail traffic to the area
than would exist in their absence. We recognize and mention these stores and
centers to the extent that they provide a complete understanding of the area's
retail structure.
(1) Urban Land Institute Dollars and Cents of Shopping Centers - 1996
We note that big box and category killer type tenants appear to be less of
a market force within the New Orleans MSA relative to other markets throughout
the country which exhibit similar demographic profiles. It is the consensus of
several market participants that this is the result of a true scarcity of
development sites within the more populated areas of the MSA, including the City
of Kenner.
Scope of Trade Area
Traditionally, a retail center's sales are principally generated from
within its primary trade area, which is typically within reasonably close
geographic proximity to the center itself. Generally, between 55 and 65 percent
of a center's sales are generated within its primary trade area. The secondary
trade area generally refers to more outlying areas which provide less frequent
customers to the center. Residents within the secondary trade area would be more
likely to shop closer to home due to time and travel constraints. Typically, an
additional 20 to 25 percent of a center's sales will be generated from within
the secondary area. The tertiary or peripheral trade area refers to more distant
areas from which occasional customers to the mail reside. These residents may be
drawn to the center by a particular service or store which is not found locally.
Industry experience shows that between 10 and 15 percent of a center's sales are
derived from customers residing outside of the trade area. This potential is
commonly referred to as inflow.
Before the trade area can be defined, it is necessary that we thoroughly
review the retail market and the competitive structure of the general
marketplace, with consideration given as to the subjects position therein.
Subsequent to our discussion of the area's retail structure, a profile of the
department stores which anchor the subject is presented in order to fully
acquaint the reader with its overall market position therein.
Retail Structure
In order to examine the subject property in its proper context, we must
first examine the nature of the competition. With respect to regional mall
competition, the subject appears to be well positioned, although the Lakeside
Shopping Center, which benefits from a more central location within the trade
area, provides formidable competition to The Esplanade. The subject is clearly
superior to the Clearview Mall, a 500,000+/- square foot regional mall located
approximately 5 miles from the subject. These competitive properties are cited
on the following pages.
Competition
The following table identifies the larger alternative retail properties in
the area. While there are additional regional malls within the New Orleans MSA,
only those highlighted below are considered to be competitive to The Esplanade.
Retail Market Analysis
================================================================================
Subject Retail Center
Name: The Esplanade
Location: 1401 West Esplanade Avenue
Kenner, Louisiana
Owner: The Cadillac Fairview Corporation
Distance and Time from Subject: NA
Year Opened: 1985
Year(s) Expanded/Renovated: 1986
Total GLA: 910,555+/- SF
Mall GLA: 366,415+/- SF
Mall Shop Ratio: 40%
Anchor Tenants: Dillard's I 177,940 SF
Dillard's II 46,600 SF
Macy's 235,518 SF
Mervyn's 84,082 SF
-------
Total Anchor GLA 544,140 SF
Number of Mall Shops: 140+/-
Occupancy (Mall GLA): 82+/-%
Average Market Rent (Mall GLA): $15-$40/SF
Land Area: 80+/- AC
Parking/Ratio 6,705; 7.3 spaces per 1,000 SF of GLA
Demographics:
Effective Trade Area Population: 341,258
Average Household Income: $50,509
While subject offers competitive anchor alignment and mall shop tenant base, its
strongest competitor, Lakeside Shopping Center, is considered to benefit from a
more diverse mall shop tenant base and superior proximity to the affluent
communities located within Metairie and the western quadrant of New Orleans.
Conversely, The Esplanade is better-positioned to service those shoppers
residing in the outlying areas of the MSA to the west and northwest
Additionally, the diverse merchandise mix of Macy's is considered a formidable
draw for the subject.
Overall, the mall shop tenant base has exhibited a trend of increasing sales per
square foot over the last five years. For 1995, comparable mall shop tenants
posted per square foot sales of $263 per square foot, while all reporting mall
shop tenants posted sales of $257 per square foot.
Majority of vacancy concentrated near secondary entrances with poor proximity to
anchors.
Retail Market Analysis
================================================================================
Competitive Retail Center No. 1
Name: Lakeside Shopping Center
Location: 3301 Veterans Memorial
Metairie, Louisiana
Owner: The Feil Organization
Distance and Time from Subject: 6+/- miles northeast
(10+/- minute drive time)
Year Opened: 1960
Year(s) Expanded/Renovated: 1990
Total GLA: 990,000+/- SF
Mall GLA: 490,000+/- SF
Mall Shop Ratio: 49%
Anchor Tenants: JC Penney 200,000 SF
Dillard's 300,000 SF
-------
Total Anchor GLA: 500,000 SF
Number of Mall Shops: 120+/-
Occupancy (Mall GLA): 89%
Average Rent (Mall GLA): $20-50+/-/SF
(per Shopping Center Directory)
Land Area: 60+/- AC
Parking/Ratio: 5,500 +/- cars; 5.5 per 1,000+/- SF
Demographics: Primary Market Population: 525,000
Average Household Income: $39,000
(per Shopping Center Directory)
Retail Sales (Mall GLA): $375/SF
(per Directory of Major Malls)
Lakeside Shopping Cener is considered the subject's primary competitor within
its trade area. Relative to subject, Lakeside Shopping Center offers more
diverse mail shop tenant base in larger store formats, and enjoys better
proximity to the affluent communities located within Metairie and the western
quadrant of New Orleans. The center's leasing agent verified a mall shop
occupancy of 89 percent, stronger than that of The Esplanade, while mall
management has reported to shopping center industry publications sales of
$350-$375 per square foot.
Retail Market Analysis
================================================================================
Competitive Retail Center No. 3
Name: Clearview Mall
Location: 4436 Veteran's Memorial Boulevard
Metairie, Louisiana
Owner: Richards Clearview Partnership
Distance and Time from Subject: 5+/- miles
(10+/- minute drive time)
Year Opened: 1969
Year(s) Expanded/Renovated: 1989
Total GLA: 484,907+/- SF
Mall GLA: 112,907+/- SF
Mall Shop Ratio: 23%
Anchor Tenants: Maison Blanche 230,000 SF
Sears 142,000 SF
-------
Total Anchor GLA: 342,000 SF
Number of Mall Shops 27+/-
Occupancy (Mall GLA): 75%
Average Rent (Mall GLA): $15/SF
Land Area: 60+/- AC
Parking/Ratio: 3,000+/- cars; 6+/- per 1,000+/- SF
Demographics: Primary Market Population: NA
Average Household Income: NA
Retail Sales (Mall GLA): $200/SF (estimated)
Clearview Mall has the only Maison Blanche north of the Mississippi, and is
considered a strong draw for this center. Additionally, Sears is not duplicated
at either The Esplanade or Lakeside Shopping Center. The center's leasing agent
reports that for 1995, Maison Blanche posted sales of $46 million, or $200 per
square foot, while Sears posted $42 million in sales, or $296 per square foot,
making this unit one of Sears most productive in the country. Alternatively, the
small shop space is currently 25+/- percent vacant, with a high percentage of
local tenants. According to the leasing agent, current mall shop vacancy was of
the mall management's own doing, having chosen not to renew several local
tenants. The balance of local tenants have been given the mandate to renovate
their stores or not be renewed. The new mall management is aggressively pursuing
strong national and regional tenants for the center. Overall, given the center's
size, lack of anchor depth and highly local mall shop tenant base, this center
is considered secondary competition to the subject.
The mall properties cited above (inclusive of the subject) comprise
approximately 2.4+/- million square feet of mall space. The subject is
considered to compete directly with Lakeside Shopping Center, while the smaller
Clearview Mall is considered secondary competition, with its draw limited to its
anchor stores. We note that the New Orleans Centre, The Plaza and Oakwood Center
are all located within a twenty mile radius southeast of the subject, either
within or beyond the New Orleans city limits. Due to psychological and physical
barriers, such as the city itself and the Mississippi River, these centers are
considered to serve well defined markets which do not overlap with that of the
subject. The North Shore Square regional mall, while considered part of the New
Orleans MSA, is located 40+/- miles from the Esplanade across Lake
Pontchartrain, and is clearly not competitive to the subject.
Other Competition
In addition to the facilities described, the balance of the retail
inventory consists of certain neighborhood and community centers as well as
free-standing retail facilities. Overall, ancillary retail development is
extremely limited. Newer development has been inhibited by a scarcity of
development sites. It was the consensus of the market participants with whom we
spoke that the lack of development sites results from Kenner being "boxed in" by
Lake Ponchartrain to the north, the Mississippi River to the south, the City of
New Orleans to the east and a significant amount of undevelopable swamp land to
the west. The majority of surrounding development is therefore older, and
consists mainly of smaller scale and/or free-standing commercial properties. A
brief description of the retail centers in the immediate area will serve to
portray the balance of the neighborhood retail alignment.
o The Pavilion, located along West Esplanade proximate to The Esplanade,
is a 262,000+/- square foot community center anchored by Wal-mart and
Sav-A-Center. This center was constructed in 1989 and expanded during
1992. Other tenants include the Sound Warehouse, United Artists,
Walgreens and Cloth World. The center is 100 percent occupied, with
the center's leasing agent reporting an average lease rate of $15 per
square foot, triple net, for small shop tenants.
o Kenner Plaza, located along Williams Boulevard at West Esplanade
Avenue, is a 226,000+/- square foot community center anchored by
Burlington Coat Factory in 94,000+/- square feet and a Fifty Off store
in 30,000+/- square feet. Other major tenants include K&B Drugs and
Old American. This center was constructed in 1973 and last renovated
during 1993. The center is 100 percent leased, with small shop tenants
paying between $8.50 and $10.00 per square foot, triple net.
Burlington Coat Factory, which occupies a former Kmart store,
reportedly pays $4.00 per square foot, triple net.
Future Regional Competition
Jim Wilson & Associates, a Birmingham-based retail development company, has
recently commenced construction of The Mall of Louisiana, a 1.2+/- million
square foot super regional mall located in the southern quadrant of the Baton
Rogue MSA. along Interstate 10. The center will be anchored by McRae's, Maison
Blanche, Dillard's, Sears and JC Penney, and will include 352,000+/- square feet
of mall shop space. It is anticipated that the mall will open during the fourth
quarter of 1997.
The data presented summarizes the extent of existing regional mall
development inside the trade area. According to the National Research Bureau,
the GLA per capita for the United States and State of Louisiana were 5.5+/- and
6.1+/- square feet, respectively, in 1995. This statistic pertains to centers in
of 400,000 or greater square feet.
Inclusive of the subject, the New Orleans MSA contains seven enclosed
regional malls, as well as one power center, in excess of 400,000+/- square
feet. This results in a total of 6.3+/- million square feet of gross leasable
area contained in centers of 400,000+/- or greater square feet. With an
estimated 1996 population of 1,310,241 for the New Orleans MSA (see following
Trade Area population analysis), this results in approximately 4.8+/- square
feet of GLA per capita. This is below the composite state and national averages,
indicating that the market is not saturated and could potentially absorb some
additional regional mall space and still be within the average parameters for
the state and nation.
Anchor Alignment
The anchor alignment of the subject also helps to define the potential
boundaries of the subject's trade area. The subject property is anchored by
Dillard's, Macy's and Mervyn's. The following is a profile of each of these
anchor tenants.
Dillard's is one of the largest department store chains with divisions
based out of Arkansas, Texas, Florida and Arizona. In March 1996, Dillard's
announced an extensive realignment of its operating divisions along
geographic and climatic lines. Through this realignment, two operating
divisions were merged into the remaining five divisions. Dillard's has been
one of the most aggressive participants within the retail industry,
expanding from 158 stores in 1989 to 238 stores in 23 states at the end of
1995. In 1995, Dillard's opened 11 new stores, two of which were
replacement stores, and remodeled and expanded 8 stores, adding a total of
2,000,000 square feet to the company's selling space. Dillard's continues
to aggressively expand, with a 1996 expansion plan of 16 new stores, one of
which will be a replacement store. These new stores, along with the
remodeled and expanded stores, will add 3,000,000 square feet to the
company's store base. Total sales for 1995 were $5.9 billion, a 7 percent
increase over 1994, with comparable sales up 2 percent over 1994. Overall,
since 1985 sales have increased at nearly a 15 percent compound annual
rate. Increases for the past five years were as follows:
The stores feature brand name goods in the middle to upper-middle price
range. Over 87 percent of sales came from apparel, cosmetics, accessories
and shoes. Sales per square foot significantly increased from $147 in 1993
to $157 in 1994. Sales increased at a far more modest rate for 1995, to
$159 per square foot.
Dillard's strategy is to enter or further penetrate markets where it can
become the dominant conventional department store operator. Over the past
few years, much of their growth has been through acquisitions. Value Line
projects sales to climb 9 percent over the next fiscal year and rates its
financial strength A. Dillard's Private Label sales have increased to 20
percent of total sales. This strategy has allowed Dillard's to maintain a
highly desirable image position with national brands while offering Private
Brand pricing at savings of 25 percent or more. Standard & Poor's ranks the
company "A+".
Federated Department Stores, Inc. is one of the leading full-line
department store companies in the United States. The year 1994 was a major
acquisition year for the company. On December 19, 1994 the company
completed a $4.1 billion purchase of Macy's and it has recently
consolidated the A&S/Jordan Marsh division into Macy's East. On May 26,
1994 the company purchased Joseph Horne Co., a department store retailer
operating ten units in Pittsburgh and Erie, Pennsylvania for $116.0
million, including the assumption of $40.0 million in debt and acquisition
costs. Upon completion of this merger with Macy's, Federated operates 355
department stores in 35 states at urban or suburban sites, principally in
densely populated areas operating under the names of Bloomingdale's, The
Bon Marche, Bullocks, Burdines, Goldsmith's, Jordan Marsh, Lazarus, Rich's,
Sterns and Macy's. The company also operates more than 135 specialty and
clearance stores under the names of "Aeropostale," "Charter Club" and "MCO"
and a mail order catalog business under the name of "Bloomingdale by Mail."
The company recently announced the closure of the MCO stores.
The properties consist primarily of stores and related retail facilities
including warehouse and distribution centers. Of the 355 stores, 181 stores
were entirely or mostly owned and 174 stores were entirely or mostly
leased. The company owns or leases other properties including office space
in New York and Cincinnati. During 1994, the company added 142 department
stores and 135 specialty and clearance stores. Of the 142 department store
additions, 121 were a result of the acquisition of Macy's and 10 as a
result of the acquisition of Horne's. All 135 specialty and clearance
stores were added through the Macy's acquisition. Federated's net sales for
1994 increased by 15 percent to $8,315.9 million, compared to $7,229.4
million reported in 1993. On a comparable store basis net sales increased
by 3.1 percent. The company's retail operating division sales as of January
28, 1995 were as follows:
============================================================================================================
Federated Department Stores Company
============================================================================================================
Number Gross Average Sales
of Stores 1994 Sales Square Feet Per Square Foot
============================================================================================================
Abraham & Straus/Jordan Marsh 34 $1.441.1 8,999 $160
------------------------------------------------------------------------------------------------------------
Bloomingdale's 16 $1,297.5 * 4,439 $292 ($268.57)
------------------------------------------------------------------------------------------------------------
The Bon Marche 40 $ 873.0 4,892 $178
------------------------------------------------------------------------------------------------------------
Burdines 46 $1,248.5 7,648 $163
------------------------------------------------------------------------------------------------------------
Lazarus 51 $1,130.3 10,212 $111
------------------------------------------------------------------------------------------------------------
Rich's/Goldsmith's 25 $ 999.7 4,991 $200
------------------------------------------------------------------------------------------------------------
Sterns 22 $ 707.4 3,946 $179
------------------------------------------------------------------------------------------------------------
Macy's East 64 $3,447.7** 17,162 $201
------------------------------------------------------------------------------------------------------------
Macy's West/Bullocks 57 $2,334.8** 11,845 $197
------------------------------------------------------------------------------------------------------------
Macy's Specialty 122 $ 128.4** 420 $395
------------------------------------------------------------------------------------------------------------
MCO 14 $ 83.1** 704 $118
------------------------------------------------------------------------------------------------------------
Total 491 $8,315.9 75,228
============================================================================================================
* Includes $105.3 million in sales of the company's Bloomingdale's By Mail subsidiary. Net of this
allocation, sales were equal to $269 per square foot.
** Represents sales of divisions acquired pursuant to merger.
============================================================================================================
Federated has a C++ rating from Value Line. By fiscal 1996, savings from
the closure of Macy's corporate office (second half of 1995) and other
consolidation benefits may help boost Federated's share net to $2.00 to
$2.10. Value Line's earning projections to 1998-2000 is that excess cash
flow will enable Federated to reduce its long term debt by about $1 billion
between fiscal 1996 and the end of the decade, and the operating margin
will gradually widen following a market improvement in fiscal 1996.
Federated's historical and projected sales are as follows:
Federated's management believes the department store business will continue
to consolidate and accordingly, intends to consider the possible
acquisition of department store assets and companies from time-to-time.
Future acquisitions, if any, are expected to be financed through a
combination of cash on hand and from operations and possible long term debt
or other securities issuance. The company's budgeted capital expenditures
are approximately $2,800 million for 1995 to 1998, with approximately 68
percent budgeted for existing stores, 21 percent budgeted for new stores
and 11 percent for technology.
Dayton Hudson is one of the country's largest general merchandise retailers
with 1993 revenues of $19.2 billion. This represented an increase of 7
percent over 1992. The company's 893 stores span the entire retail spectrum
from discount (Target and Mervyn's) to mid-level and high end (Dayton's,
Hudson's and Marshall Fields). The company reports that more than 80
percent of its revenue are derived from its discount and moderate priced
divisions. Overall, over the last ten years revenues have grown by an
impressive rate of 10.2 percent per annum. Standard & Poors has forecasted
a continued rise in comparable store sales. They rate the company as "A". A
brief profile of each follows:
Target - Target is an upscale discounter which provides quality merchandise
at attractive prices. In 1993, the 554 stores accounted for revenues of
$11.743 billion or 61 percent of the company's total revenues. The units
are found in 35 states. Target's total revenues were up 13 percent over
1992, while comparable sales were up 5 percent. The average sales per
square foot were approximately $202. During 1993 Target added 50 new stores
including a successful entry in the Chicago market. Their superstore
concept "Target Greatland" has been very successful. Dayton Hudson expects
to open 70 new discount stores, expanding Targets selling space by 11
percent. This will include the long awaited move into the northeast.
Mervyn's - Mervyn's is a moderate priced family department store chain
specializing in soft goods. The division operates 276 stores in 15 states
in the northwest, west, southwest, southeast and Michigan. During the first
quarter of 1995, they will be moving into the Minneapolis market with the
purchase of eight Carson Pirie Scott stores. In 1993 Mervyn's sales were
disappointing, decreasing by 1.6 percent, while comparable sales were off
by 6 percent. Comparable sales were reported to be fiat in 1994. Average
sales per square foot were approximately $200. The division is aggressively
pursuing cost cutting measures to make it more profitable.
Department Store Division - The Department Store Division consists of
Daytons, Hudson's and Marshall Fields. The division operates 63 full
service units predominantly in nine midwestern states including 19 Daytons,
21 Hudson's and 23 Marshall Fields stores. Sales in 1993 increased slightly
to $3.054 billion (up 1 percent) however, operating profit was up 18
percent. The average sales per square foot were reported to be $221 per
square foot, inclusive of the flagship units for the respective chains.
Additions include new Daytons stores in Northbrook Court (Chicago - 1995)
and Somerset North (suburban Detroit - 1996).
Once the trade area is defined, the area's demographics and economic
profile can be analyzed. This will provide key insight into the area's dynamics
as it relates to the subject. The sources of economic and demographic data for
the trade are analysis are as follows: Equifax National Decision Systems (ENDS),
Sales and Marketing Management's Survey of Buying Power, The Urban Land
Institute's Dollars and Cents of Shopping Centers (1995),-CACI, The Sourcebook
of County Demographics, and The Census of Retail Trade - 1992. The subject's
primary and effective trade areas, profiled by Equifax Decision Systems, were
defined based on the results of a customer survey conducted by Urban Retail
Properties, Co., which included polling the mall's customers to determine the
zip code of the primary residence.
The Esplanade is well-located near Interstate-10, east of the City of New
Orleans. This location makes it one of the more accessible retail locations
within the area. The advantage of interstate proximity has the effect of
expanding the mall's trade area by virtue of reducing travel time for residents
in more distant locations. As such, the percentage of in-flow sales tends to be
greater for more dominant properties. Specifically, Interstate 10 is a major
route of travel for residents of outlying areas traveling to New Orleans, with
The Esplanade benefiting from being the nearest regional center for those
shoppers. The Esplanade also benefits from its proximity to the New Orleans
Airport, given that international travelers can shop tax-free in the State of
Louisiana. As the regional mail closest to the airport, The Esplanade is able to
attract a significant portion of the international shopping dollar.
As discussed in the previous section, the location and accessibility of
competing centers also has direct bearing on the formation and make-up of a
mall's trade area. Lakeside Shopping Center is located only 6+/- miles to the
northeast from the Esplanade. The GLA devoted to mall shop space is
significantly greater than that of the subject, and has resulted in a greater
depth of mall shop tenants in larger store formats. Geographically, Lakeside
out-positions the subject in serving the affluent community of Metairie, as
well as the more affluent enclaves of the western quadrant of the City of New
Orleans. Additionally, we note that inclusive of Lakeside Shopping Center and
the Clearview Mall, five of the regional malls within the New Orleans MSA are
located east of the subject, which has proven to effectively inhibit its
penetration to the east. Conversely, the subject is clearly the most convenient
regional mall for those shoppers who reside to the west in the outlying areas of
the MSA.
We believe that it is also important to note ancillary retail development
such as large community centers and free-standing "category killers" represent a
limited force in the market's competitive environment. As noted earlier in this
report, there has existed a dearth available development sites proximate to the
mall. Of those limited developments located near the subject, their primary
stores (groceries, discount department stores, and drugs) are generally
different from those which comprise the Esplanade. Certainly there is a place
for both in most retail environments, including the 1-10 corridor. This
phenomena of limited new retail development is not limited to the subject's
immediate trade area. We note that many of the big box retailers which have
expanded in similar markets throughout the country have not yet established a
strong presence in the New Orleans MSA. For those which have (Wal-mart and
Burlington Coat Factory proximate to the Esplanade; Toys 'R Us and Barnes &
Noble near Lakeside), they help balance out the retail infill and act as a
traffic generator that increases an area's status as a destination retail hub.
To summarize, the foundation of our analysis for delineation of the
subject's trade area may be summarized as follows:
1. The western quadrant of the City of New Orleans effectively defines the
subject trade area's western border. This is significantly influenced by
competition becoming much more intense east of the subject. Conversely,
both the subject's primary and effective trade areas are far more expansive
to the north and west given the relative scarcity of retail alternatives in
these areas.
2. The subject benefits from being the most conveniently located mail for
those shoppers residing in the northern and western quadrants of the MSA.
The Esplanade also benefits from its proximity to the New Orleans airport,
as international travelers can shop tax-free in the State of Louisiana. As
the regional mail closest to the airport, The Esplanade is able to attract
a significant portion of the international shopping dollar.
3. Highway accessibility including area traffic patterns, geographical
constraints and nodes of residential development.
4. The position and nature of the area retail structure including the location
of destination retail centers and the strength and composition of the
retail infill as discussed above.
5. The size, anchor tenancy and merchandising composition of the mall tenants
enhances its total market penetration.
6. Ancillary retail development has a limited impact on the subject. Adequate
cross shopping occurs with the nearby strip centers, whose tenants
compliment, rather than compete with the mall.
Urban Retail Properties, Co. conducted a survey of mall shoppers, which
included determining the zip code of their primary residence. This survey shows
that the effective trade area of the mall extends approximately 10+/- miles east
of the subject property, while to the northwest, the subject's trade area
boundaries extend to points 20+/- to 25+/- miles from the subject.
After reviewing this report in conjunction with our independent analysis of
the trade area, we are in concurrence with its findings. Specifically, we have
observed that within the northwestern quadrant of the MSA there are few retail
alternatives to the subject, while to the east and southeast, there are five
regional shopping centers, which serve to inhibit the subject's market
penetration into these areas. Of these centers, only Lakeside Shopping Center
and Clearview Mall are considered competitive to the subject. As such, we have
elected to rely the trade area definitions as identified by the Urban Retail
Properties survey. An analysis of key demographic indicators can then be
performed based upon this defined trade area.
Once the market area has been established, the focus of our analysis
centers on the trade area's population. Equifax National Decision Systems [ENDS]
provides historical, 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.
Comparisons have been made between the New Orleans MSA and Kenner county
and the trade area components lend some perspective to the dynamics of the trade
area. The chart on the Facing Page compares these statistics.
Between 1990 and 1996, ENDS reports that the population within the primary
trade area increased by 3,021 to 171,682. This 1.79 percent increase (0.30
percent per annum) has lagged that of the effective trade area's growth rate of
2.01 percent (0.33 percent per annum). Expanding to the effective trade area,
the current population increases to 341,528. The current projection is for
marginal growth over the next five years within all segments of the trade area,
specifically 0.13 and 0.12 percent per annum for the primary and effective trade
areas, respectively. On balance, we note that population growth throughout the
trade area has trailed that of the state and country.
Provided on the Following Pages are graphic representations of the current
population distribution and projected population growth. The first graphic
depicts that the more densely developed areas are found proximate to the mall to
the north, east and southeast. The second graphic shows that while areas east of
the subject and closer to New Orleans are not projected to experience noticeable
growth, areas west of the subject are expecting to grow at the highest rate of
the effective trade area.
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:
o The population in general is living longer on average. This results in
an increase of single and two person households.
o The divorce rate increased dramatically during the last decade, again
resulting in an increase in single person households.
o Many individuals have postponed marriage, thus also resulting in more
single person households.
Between 1990 and 1996, the primary trade area added 4,165 households,
increasing by 6.8 percent to 65,702 units. This growth is equivalent to a
compound annual increase of 1.10 percent. Alternatively, the secondary trade
area added 3,978 households to 72,975 indicating slightly slower 0.94 percent
annual rate of growth. Combined, the effective trade area is currently estimated
to contain 138,677 households.
Between 1996 and 2001, the primary trade area is expected to grow by 2.9
percent (0.56 percent per annum) to 67,578 households. This rate of growth is
slightly greater than that for the secondary area which is expected to grow by
2.28 percent. Overall, the total trade area is expected to grow by 2.55 percent
to 142,218 households.
Trade Area Income
A significant statistic for retailers is the income potential of a trade
area's population. 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 Equifax
National Decision Systems, average household income within the primary trade
area is currently $50,035.
Available data shows an identifiable pattern of income levels throughout
the total trade area as shown below along with comparisons to the state and
United States.
==================================================
Average Household Income
--------------------------------------------------
Area Average HH-Income
==================================================
Primary Trade Area $50,035
Secondary Trade Area $50,936
Effective Trade Area $50,509
New Orleans MSA $44,419
State of Louisiana $39,259
United States $49,031
==================================================
These statistics show that the primary trade area has an average household
income of $50,035 which increases slightly to $50,509 with the inclusion of the
higher income areas in the secondary market. The total trade area's average
household income is above that of the New Orleans MSA, state and country.
Provided on the Following Page is a graphic presentation of the household
income distribution throughout the total trade area. As can be seen, the subject
is relatively proximate to all income levels exhibited within its trade area.
Generally, the highest concentrations of wealth (average incomes of $60,000 and
higher) are found directly east and west of the center, but quite proximate to
the mall. We also note that average household income throughout the total trade
area is forecasted to increase at compound annual rate of 5.15 percent over the
next five years.
Another measure of the ability of a trade area to support retail business
is the area's effective buying income (EBI). This data is not measured by
specific trade area, but rather by both the metropolitan statistical area (MSA),
as well as on a county basis as reported in Sales and Marketing Management's
Survey of Buying Power. At the end of 1995, Jefferson County had an aggregate
EBI of $5.5 billion.
A comparison can be made to Kenner, Jefferson County and the New Orleans
metropolitan area.
====================================================================================================================================
Effective Buying Income
====================================================================================================================================
1990 1995 Compound Annual Change
------------------------------------------------------------------------------------------------------------------------------------
Total EBI (billions) Med HHEBI Total EBI (billions) Med HHEBI Total EBI Med HHEBI
====================================================================================================================================
Kenner $0.8 $27,436 $1.3 $41,889 8.74% 8.83%
------------------------------------------------------------------------------------------------------------------------------------
Jefferson County $5.5 $26,273 $7.9 $38,835 7.24% 8.13%
------------------------------------------------------------------------------------------------------------------------------------
New Orleans MSA $14.5 $22,425 $20.9 $34,152 7.67% 8.78%
------------------------------------------------------------------------------------------------------------------------------------
Source: Sales and Marketing Management, Survey of Buying Power
====================================================================================================================================
The data above shows that at $41,889, the median household effective buying
income for the Kenner area exceeds that of Jefferson County and the New Orleans
metropolitan area. Between 1990 and 1995, the total EBI for the Kenner area grew
at a compound annual rate of 8.74 percent, while the median household EBI grew
at an annual compound rate of 8.83 percent. In comparison, the total EBI for
Jefferson County grew at a compound annual rate of 7.2 percent while the median
household EBI has grew at a compound annual rate of 8.1 percent. These measures
have exceeded inflation over this year period.
Retail Sales
Retail sales growth for Kenner were compared to Jefferson County and the
New Orleans metropolitan area. The Kenner area has noticeably exceeded the
county's composite growth, as shown below.
====================================================================================================================================
Retail Sales
====================================================================================================================================
1990 1995 Compound Annual Change
------------------------------------------------------------------------------------------------------------------------------------
Total Retail Sales Med HH Total Retail Sales Med HH Total Med HH
(billions) Sales (billions) Sales Sales Sales
====================================================================================================================================
Kenner $611.3 $23,787 $863.8 $33,480 7.16% 7.08%
------------------------------------------------------------------------------------------------------------------------------------
Jefferson County $4,193.8 $24,020 $5,537.1 $32,533 5.71% 6.26%
------------------------------------------------------------------------------------------------------------------------------------
New Orleans MSA $9,055.6 $18,522 $11,529.3 $24,085 4.95% 5.39%
------------------------------------------------------------------------------------------------------------------------------------
Source: Sales and Marketing Management, Survey of Buying Power
====================================================================================================================================
With average annual growth rate of 7.16 percent since 1990, retail sales in
Kenner area grew dramatically by 41.3 percent by 1995 to $863.8 million.
Similarly, retail sales per household posted an annual growth rate of 7.08
percent, or 40.7 percent, to $33,480 per household. Expenditures by households
jumped in Jefferson County at a rate of 6.26 per annum over between 1990 and
1995. Households spent $8,513 more in 1995 than they did in 1990; resulting in a
significant 35.4 percent increase.
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 germane to our analysis.
We have been provided with a summary of comparable mall shop sales for the
years 1991 to 1995. Per square foot sales figures represent the weighted average
sales for the calendar year for small shop tenants in continuous occupancy of
the same suite for the previous twenty four months. These results are summarized
below.
As illustrated above, comparable per square foot sales increased in excess
of 6 percent between 1994 and 1995 to $263 per square foot. Overall, comparable
per square foot sales increased approximately 10 percent over the last five
years.
Total reporting mall shop sales for 1995 were $82.4 million. Based on a
reporting GLA of 321,728 square feet, this results in mall shop sales of $257
per square foot. This measure shows reporting tenant performance only, since
some tenants do not report sales by lease agreement or fail to report sales for
a particular sales period. While the aggregate sales amount is reflective of the
total sales generated by the mall shops, it is important to recognize that this
includes all sales including sales from partial year tenants. Furthermore, since
the unit rate is based upon a full reporting year, it has the effect of
understating the mall shop sales performance on a unit rate basis.
By comparison, the Urban Land Institutes Dollars and Cents of Shopping
Centers (1995) reports national and regional sales averages for regional and
super-regional shopping malls. Nationally, average sales at super-regional
centers is reported at $203.09 per square foot, down 1.4 percent from 1993. For
regional malls, average sales are reported to be $176.16, virtually even from
1993. A comparison of national and regional figures is shown on the following
chart.
----------------------------------------------------------------------------------------------------
Regional/Super-Regional Centers
----------------------------------------------------------------------------------------------------
Area Average Median Lower Decile Upper Decile
----------------------------------------------------------------------------------------------------
United States $176.16/ $163.54/ $125.88/ $285.40/
$203.09 $198.93 $140.46 $305.23
----------------------------------------------------------------------------------------------------
East $204.96/ $183.05/ $126.07/ $323.74/
$220.64 $183.81 $130.46 $379.81
----------------------------------------------------------------------------------------------------
West $188.63/ $167.46/ $124.00/ $264.89/
$190.51 $187.64 $143.01 $258.68
----------------------------------------------------------------------------------------------------
South $156.27/ $154.18/ $129.63/ $195.24/
$210.30 $207.99 $145.75 $293.70
----------------------------------------------------------------------------------------------------
Midwest $178.99/ $179.24/ $125.50/ $290.57/
$195.03 $192.42 $148.18 $261.09
----------------------------------------------------------------------------------------------------
Source: Urban Land Institute Dollars and Cents of Shopping Centers (1995)
----------------------------------------------------------------------------------------------------
As a regional mall in the southern part of the country, the subject's 1995
sales performance of $263 per square foot can be compared to its peers as shown
below.
----------------------------------------------------------------------
Average Subject Variance
----------------------------------------------------------------------
United States $176 $263 149%
----------------------------------------------------------------------
South $156 $263 169%
----------------------------------------------------------------------
On a relative basis, the subject is substantially outperforming its peer
group on average in terms of sales productivity, particularly when compared to
regional sales.
Anchor Store Sales
With the exception the Dillard's men's store, which in 47,000+/- square
feet is considered a junior anchor, the anchor stores are owned by their
occupants, and therefore are not required to report sales to mall management.
Our efforts to obtain specific sales included interviewing the mall manager and
individual store managers. Anecdotally, all of the anchor stores report
satisfactory performance. As noted earlier in this report, Dillard's, Federated
Department Stores and Dayton Hudson represent some of the nation's leading
department store companies.
While the specific individual anchor store sales of the subject are not
known, we provide the following department store sales information as provided
by Urban Land Institute, which tracks sales of owned and non-owned department
stores by selected affiliation and region. This information is summarized in the
following chart.
------------------------------------------------------------------------------------------------------------
Department Store Sales Data
------------------------------------------------------------------------------------------------------------
Category/Region Average Sales PSF Top 10% PSF Top 2% PSF
------------------------------------------------------------------------------------------------------------
Super-Regional U.S.
Owned Dept. Stores $144.99 $247.99 $505.13
National Chain $146.89 $271.91 $532.63
Non-Owned Dept. Stores $154.34 $243.28 $367.33
National Chain $154.34 $243.28 $367.33
Eastern Region $152.35 --- ---
Western Region $147.26 --- ---
Midwestern Region $131.12 --- ---
Southern Region $159.23 --- ---
------------------------------------------------------------------------------------------------------------
Average - All Super-Regional Centers $148.82 251.62 443.11
------------------------------------------------------------------------------------------------------------
Regional Malls U.S.
Owned Dept. Stores $149.26 $245.53 $352.79
National Chain $149.03 $237.27 $343.94
Non-Owned Dept. Stores $162.14 $215.20 $266.01
National Chain $163.08 $215.32 $266.09
Eastern Region $174.78 --- ---
Western Region $165.36 --- ---
Midwestern Region $151.49 --- ---
Southern Region $150.39 --- ---
------------------------------------------------------------------------------------------------------------
Average - All Regional Centers $158.19 $228.33 $307.21
------------------------------------------------------------------------------------------------------------
Source: Urban Land Institute Dollars & Cents of Shopping Centers (1995)
------------------------------------------------------------------------------------------------------------
Data from ULI shows that the mean sales level for department stores in
super-regional malls varies from $131.12 to $159.23 per square foot with an
overall average of $148.82 per square foot. Stores in the top 10 percent of
their peers average (unweighted) approximately $252 while the top 2 percent
average approximately $443 per square foot.
Data for department stores in regional malls shows that the mean ranges
from $149.03 to $174.78 per square foot with an overall average of $158.19 per
square foot. The unweighted average for the top 10 percent and 2 percent is
approximately $228 and $307 per square foot, respectively.
Summary
Within the shopping center industry, a trend toward specialization has
evolved so as to maximize sales per square foot by deliberately meeting customer
preferences rather than being all things to all people. This market segmentation
is implemented through the merchandising of the anchor stores and the tenant mix
of the mall stores. With anchor tenants of Macy's, Dillard's and Mervyn's, the
subject property is clearly positioned toward the broad center of the retail
market, with the more diverse merchandising of Macy's exhibiting a strong draw
for the center. While traditional merchandise is well-represented among mall
shop tenants, more unique mall shop tenants are not. A more diverse mix would
bring a balance of retail uses to the center which would include both familiar
and first time tenants to the trade area.
Conclusion
We have analyzed the retail trade history and profile of the New Orleans
MSA, the City of Kenner and Jefferson County in order to make reasonable
assumptions as to the continued performance of the subjects 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. We included a brief discussion of some of the
competitive retail centers in the market area as well as a profile of the anchor
tenants at the mall. The trade area profile discussed encompassed an MSA and zip
code based survey for the subject. Marketing information relating to these
sectors was presented and analyzed in order to determine patterns of change and
growth as it impacts the subject. Given that most of the anchors of The
Esplanade are not required to report sales, we were unable to provide extensive
mall sales analysis. Anecdotally, the subject's anchors perform at levels
considered average to above average when compared to department store sales on a
national and regional basis. The data is useful in giving quantitative
dimensions of the total trade area, while our comments serve to provide
qualitative insight into this area. The following summarizes our key
conclusions:
o The subject enjoys a visible and accessible location within the New
Orleans MSA. The subject is also well-positioned to benefit from the
stronger population growth projected for the western and northwest
quadrants of the MSA, as compared to its competitors which are
positioned farther to the east, where minimal growth is projected over
the next five years. Given the scarcity of retail alternatives west
and northwest of the subject, The Esplanade should benefit from the
growth projected for these quadrants.
o Its status as the regional mall farthest west of the City of New
Orleans both maximizes its position in servicing the northwestern
quadrant of the MSA, as well as inhibits its ability to draw customers
from the east. The Esplanade is well positioned geographically to
benefit from the continued growth of this quadrant of the MSA and its
environs, as it is clearly the most convenient mall for current and
future residents in these communities. Conversely, Lakeside Shopping
Center, together with several secondary competitors, have served to
limit the subject's market penetration to the east.
o The region's affluence as measured by average household income and
market expenditure potential has expanded substantially over the last
decade paralleling the population growth.
o Within its effective trade area, the subject competes directly with
the more upscale Lakeside Shopping Center. It is important for
ownership to focus on aggressively leasing the vacant space to
national and regional retailers that are considered unique to the
market. The high percentage of national and regional tenants is
important to the extent that these merchants have the benefit of
stronger name recognition and are more familiar to shoppers which
typically results in high sales levels.
o Peripheral retail development around the mall is minimal, with a
noticeable absence of many big box and category killer type retailers
which have expanded aggressively in similar markets.
On balance, it is our opinion that with competent management and aggressive
marketing, The Esplanade can fortify its position as a competitive regional mall
targeted to serve the growing northwestern quadrant of the New Orleans MSA. Our
outlook for the area continues to be positive with moderate to good prospects
for appreciating real estate values.
In this subsection, we consider the potential market appeal, marketability
and demand for a center like the subject in light of the current real estate
investment market. As discussed elsewhere in this report, the subject involves
an enclosed, regional mall containing 366,415+/- square feet of mall shop GLA
anchored by four anchor stores for a combined mall GLA of 910,555+/- square
feet.
We have considered the potential market demand and investor risk in our
analysis and valuation of the subject property through our selection of
investment parameters, growth rates, and various assumptions employed. In our
analysis, we have attempted to reflect current market conditions and investor
criteria. Most of the shopping center properties which have been offered for
sale at a "reasonable" price, have sold within twelve months exposure to the
open market or less. Properties for which seller expectations of value exceed
the market's perception have required more extended marketing periods and have
generally sold at below the initial asking price, or have been pulled off the
market. A "reasonable" price is defined as that price which offers a sufficient
return to the investor relative to the demand for and the risk associated with
the property. These returns vary widely in the current market depending on the
particular investment, its occupancy level, the surrounding demographics, and
upside or downside of the income stream.
The subject is characterized as a well-maintained and accessible mall which
is positioned to benefit from growth within the northwestern quadrant of its
effective trade area. The subject's effective trade area has a current
population of approximately 342,000+/- people, which is projected to experience
marginal population and household growth in the foreseeable future. We believe
that if the subject were offered for sale, it would represent an important
investment opportunity for a well positioned center with some upside through
lease rollover and continued efforts to upgrade the tenant mix. Based on the
above, it is our estimate that a market sale of the subject property should be
realized within twelve months exposure on the market.
Location: S/S of West Esplanade Avenue
City of Kenner
Jefferson Parish, Louisiana
Shape: The site is slightly irregular in shape.
Area: The subject property is located on a 80.23+/- acre
site, of which 54.2+/- acres is owned by the developer.
The remainder of the site is owned by the three anchor
tenant stores.
Topography: The mall site is relatively level. Portions of the site
have been graded to form a gradual mound, whereby the
second floor of the center is accessible.
Access: Principal access is from south side of West Esplanade
Avenue, were two entrances provide access to the ring
road. Secondary access is provided from William's
Boulevard via 32nd Street.
Utilities: The site is served by all utilities including municipal
water and sewer, electric, gas and telephone.
Soil Conditions: The subject property is located between Lake
Pontchartrain and the Mississippi River. This area
primarily consisted of low lying marsh land which was
infilled for development. As such the soil conditions
in the surrounding area are not ideal and many
properties including the subject are constructed on
pilings. No soil report of the subject parcel has been
filed or reviewed. However, it is assumed that the soil
is of sufficient load-bearing capacity to support the
existing structure. No evidence to the contrary was
observed upon our physical inspection of the property.
The parking lot has reportedly settled 18 - 24" since
construction. However the settling is consistent
throughout the property and has not required
remediation. Drainage of the tract appears to be
adequate.
Flood Hazard: According to Community Panel # 225199 035E, National
Flood Insurance Rate Map, effective March 23, 1995, the
subject site is in Flood Hazard Zone AE, areas
inundated by 100-year flood zone, and therefore
requires flood hazard insurance.
Property Description
================================================================================
Land Use Restrictions: Although an authoritative report of title was not
provided or reviewed, there do not appear to be any
easements, encroachments or restrictions that would
adversely affect the utilization of any portion of the
site. However, a survey is recommended for final
determination of any such adverse conditions.
Wetlands: We were not given a Wetlands survey. If subsequent
engineering data reveal the presence of regulated
wetlands, it could materially affect property value. We
recommended a wetlands survey by a competent
engineering firm.
Hazardous Substances: We observed no evidence of toxic or hazardous
substances during our inspection of the site. However,
we are not trained to perform technical environmental
inspections and recommend the services of a
professional engineer for this purpose.
Comments: Overall, the subject site is typical of other sites
developed to such a use. Access is good and it appears
to be functionally suitable for such a retail use.
Provided on the facing page is a plot plan which
depicts the location of the improvements on the subject
tract. Also, the plot plan identifies various potential
areas of expansion including two additional anchor
tenant pads and two remaining outparcels (5 and 6)
located at the 32nd Street access road.
Improvements Description
The subject site is improved with a two-level "cross-shaped" regional mall
containing 910,555+/- square feet of gross leasable area. Reference is made to
the plot plan on the facing page for the location of the improvements on the
subject tract. A complete description of these improvements follows:
General Description
Year Built: The property was constructed in two consecutive phases
between 1985 and 1986.
Building Area
Dillard's: 177,940+/- sf
Macy's 235,518+/- sf
Mervyn's: 84,082+/- sf
Dilliard's Men's Shop: 46.600+/- sf
Total Anchor Tenants(1): 544,140+/- sf
----------
(1) With the exception of the Dillard's Men's Shop, all of the anchor
stores are owned by the respective retailer
Property Description
================================================================================
Mall Stores: 366,415+/- sf
Total GLA: 910,555+/- sf
Total GLA Appraised: 413,015+/- sf
Construction Detail
Foundations: Poured reinforced concrete.
Framing: Structural steel columns and beams.
Floors: Poured reinforced concrete over compacted fill on the
first level and poured concrete over corrugated steel
pan on the second level.
Exterior Walls: Generally masonry with a mixture of brick and
decorative masonry block.
Roof Structure: Corrugated steel deck over steel bar joists
Roof Cover: Built-up composition roofing
Fenestration: Plate glass in aluminum frame. Skylights are provided
over center court, the food court, and side courts.
Doors: Plate glass in aluminum frame entrance doors with metal
rear access doors.
Loading: Most loading is via grade level metal pedestrian doors.
Some large tenants have depressed truck wells.
Mechanical Detail
Heating, Ventilating
and Air Conditioning: The property is heated and cooled by 20, roof-top,
electric fired package units. Each tenant space has its
own VAV box for climate control. In exception to this,
each of the anchor tenants have their own mechanical
systems.
Electrical: Standard quality service for this commercial occupancy.
Tenant electrical usage is separately metered.
Plumbing: Adequate commercial grade fixtures. Supply and waste
lines assumed to be of code conforming materials.
Vertical
Transportation: The property contains two sets of 36" wide escalators
and one 5,000 lb capacity passenger elevator. In
addition, the property contains five, 4000 lb capacity
freight elevators.
Life Safety: All tenant areas are sprinklered.
Layout: The subject is designed as a two-level, "cross-shaped"
mall. Mervyn's is located in the central portion of the
mall with its exterior entrance opening to the east
parking lot. Macy's and Dillard's are located at the
north and south ends of the mall, respectively.
Dillard's also has a second location within the center,
opposite the Mervyn's store and opens to the west
parking lot. This store (46,600 square feet) was
formerly Godchaux, but is currently utilized by
Dillard's for their men's department. A food court is
located slightly off-center along the west side of the
second level of the property. Two secondary courts
provide access to the east and west parking lots and
were designed to accommodate additional anchor tenant
stores.
The majority of the mall shops front along the main
corridor which varies in width from approximately 30 to
40 feet. Shops have varying frontages with depths of
100 to 110 feet being typical. Side court suites are
not as deep. Stores are finished in accordance with
individual tenant specifications.
Interior Detail
Flooring: Generally terrazzo tile in common areas. Restrooms are
tiled.
Ceilings: Generally acoustical tile with some plaster ceilings
above the center and side courts.
Walls: Painted sheetrock and painted concrete block.
Storefronts and
Signage: Finished in accordance with individual tenant
specifications.
Site Improvements
Parking: Asphalt paved and stripped parking for 4,477 cars is
provided. This equates to a parking ratio of 4.92
spaces per 1,000 square feet of GLA which is typical of
a center of this nature.
Landscaping: The parking lot and walkways have trees and low
maintenance plantings throughout.
Other: Other site improvements consist of concrete and asphalt
paving, curbing, yard lighting all underground and
overhead utilities, and signage.
Americans With
Disabilities Act: The Americans With Disabilities Act (ADA) became
effective January 26, 1992. We have not made, nor are
we qualified by training to make, a specific compliance
survey and analysis of this property to determine
whether or not it is in conformity with the various
detailed requirements of the ADA. It is possible that a
compliance survey and a detailed analysis of the
requirements of the ADA could reveal that the property
is not in compliance with one or more of the
requirements of the Act. If so, this fact could have a
negative effect upon the value of the property. Since
we have not been provided with the results of a survey,
we did not consider possible non-compliance with the
requirements of ADA in estimating the value of the
property.
Hazardous Substances: We are not aware of any potentially hazardous materials
(such as formaldehyde foam insulation, asbestos
insulation, radon gas emitting materials, or other
potentially hazardous materials) which may have been
used in the construction of the improvements. However,
we are not qualified to detect such materials and urge
the client to employ an expert in the field to
determine if such hazardous materials are thought to
exist
Design Features
and Functionality: The subject property is a modern, two-story
"cross-shaped" enclosed shopping center. The property
is functional and generally conforms to market
standards. In exception to this, the two side courts,
which were designed to accommodate future expansion, do
not benefit from a substantial draw and as a result
have had difficulty leasing.
Physical Condition: The subject property was constructed in two stages
between 1985 and 1986. The property appears to be
adequately maintained and our discussions with the
property management did not indicate otherwise. The
overall appearance of the center is consistent with
current market standards and allows the property to
successfully compete with the other properties in the
local market.
We did not inspect the roof of the center or make a
detailed inspection of the mechanical systems. The
appraisers, however, are not qualified to render an
opinion as to the adequacy or condition of these
components. The client is urged to retain an expert in
this field if detailed information is needed about the
adequacy and condition of mechanical systems.
The subject property is currently assessed for the purpose of taxation by
Jefferson Parish for the 1995/1996 tax year, the most recent available. The
following information summarizes the current assessments for the subject
property.
----------------------------------------------------------------------
Current Assessments
----------------------------------------------------------------------
Parcel ID Land Improvement Total
----------------------------------------------------------------------
B-1-A1-1A-D $1,282,380 $3,598,750 $4,881,130
B-1-A1-1A $ 14,210 -- $ 14,210
B-1-A1-1A $ 630 -- $ 630
B-1-A1-1A-5D $ 31,500 -- $ 31,500
B-1-A1-1A-6D $ 58,660 -- $ 58,550
----------------------------------------------------------------------
Total $1,387,380 $3,598,750 $4,986,020
======================================================================
1. No parcel number assigned to this property, represents a small
strip of land along the subject's eastern boundary.
2. No parcel number assigned to this property, represents a small
strip of land between Duncan Street & Duncan Canal.
The preceding assessments are applicable to the mall, underlying land and
two remaining outparcels. The anchor tenant stores as well as the five existing
out parcels are owned by the respective retailers and as such are separately
assessed. Jefferson Parish last underwent a reassessment in 1993. As such the
preceding land assessments represent 10% of 1993 fair market value, while the
building assessments represent 15% of 1993 fair market value. Properties in
Jefferson Parish are reassessed every three years, with a reassessment due for
1996.
The subject property is subject to the taxing jurisdiction of the City of
Kenner and Jefferson Parish. The combined tax rate for the two jurisdictions is
$97.66 per $1,000 of assessed value as presented in the following table:
----------------------------------------------
1995 Tax Rates
----------------------------------------------
City of Kenner: $23.36
Jefferson Parish: $74.30
----------------------------------------------
Combined Rate: $97.66
----------------------------------------------
Application of this rate to the assessment shown above results in a total
tax liability of approximately $486,934. In our analysis we have included a
fiscal 1997 tax liability of $500,000 and have projected real estate taxes to
increase at an average rate of 3.5 percent per year.
The subject property is designated as Planned Urban Development parcel 2-82
by the City of Kenner. This designation was granted to the subject property on
June 17, 1982 per City Ordinance 3239. The designation was granted to allow
development of the existing improvements and was based upon specific site plans.
The original proposals allowed for expansion of the center including two
additional anchor tenant stores and the development of the two remaining
outparcels. Our discussions with Zoning officials indicated that any future
expansion of the property would be subject to site plan review.
Our review of the zoning files on the subject property did not reveal any
mention of specific permitted or prohibited uses, however our discussions with
zoning officials indicated that permitted uses for the subject property included
most uses traditionally found in a regional shopping center including retail
shops, restaurants, theatres, game rooms, and limited office uses.
We are not experts in the interpretation of complex zoning ordinances but
the property appears to be a conforming use based on our review of public
information. The determination of compliance is beyond the scope of a real
estate appraisal.
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 exist.
According to The Dictionary of Real Estate Appraisal, Third Edition (1993),
a publication of the Appraisal Institute (formerly the American Institute of
Real Estate Appraisers), the highest and best use of real property is defined
as:
1. The reasonable and probable use that supports the highest present
value of vacant land or improved property, as defined, as of the
date of the appraisal.
2. The reasonably probable and legal use of land or sites as though
vacant, found to be physically possible, appropriately supported,
financially feasible, and that results in the highest present
land value.
3. The most profitable use.
We evaluated the site's highest and best use both as currently improved and
as if vacant. The highest and best use of this land must meet four criteria. The
use must be (1) physically possible, (2) legally permissible, (3) financially
feasible, and (4) maximally productive.
As Vacant
The first test is what is physically possible. As discussed in the
"Property Description", the site's size, soil, and topography do not physically
limit its use. A 80+/- acre site is large enough to accommodate almost all uses,
including office, retail, hotel, residential, or manufacturing. Development of
the site does not appear to be negatively impacted by soil conditions, nor by
topographical features. The site has fair-to-good visibility and accessibility,
by virtue of the infrastructure system serving it. Its physical location in
proximity to an interstate interchange strongly supports its regional
accessibility.
The second test concerns permitted uses. The subject property is designated
as PUD 2-82, which was granted specifically for the development of the existing
improvements. Prior to the PUD overlay, the subject property was located in the
R-1, single-family residential district. Our discussions with the City of Kenner
Zoning officials indicated that if the site were vacant today, a commercial
designation for the site would be likely. Under this premise, the most obvious
use would be for retail.
The third and fourth tests are, respectively, what is feasible and what
will produce the highest net return. As indicted in the Regional, Neighborhood,
and Trade Area Analyses within this report, the subject property is located in a
good suburban location in a major metropolitan area. The area is characterized
by macro economic conditions that, while having suffered during the most recent
recession, have begun a modest recovery. The retail market has not been as
negatively impacted by the over-building and concessions which have plagued
other commercial markets. In addition, we see no significant changes in the
local demographics which might threaten the economic viability of the subject
site. The subject property, along with Lakeside Plaza and to a lesser extent
Clearview Plaza service a trade area which encompasses over 170,000 persons with
an effective buying income of over $20.9 billion. The development of the new
center in Baton Rouge will limit the subject's penetration to the west, however
a sufficient market share will still exist to support large scale retail
development on the subject site.
It is therefore our opinion that the highest and best use of the subject
site as if vacant, is for large scale retail development.
The first constraint imposed on the possible use of the site is dictated by
the physical aspects of the parcel itself. As noted in our Property Description
section of the report, the mall site is of sufficient size to accommodate not
only the existing improvements, but also an expansion with a fourth and fifth
department store. It is generally level, paved and has all necessary utilities
available. Furthermore, the soil and topography do not physically limit its use.
The site has good visibility and excellent accessibility by virtue of the
extensive infrastructure system serving it. Its physical location proximate to a
good highway system as well as an interstate interchange strongly supports its
regional accessibility and concurrently, its use as a destination center. The
existing improvements display a two-level, regional mall whose design and layout
is considered to be quite conducive to a retail utilization.
Finally, compatibility with existing neighboring uses is also an important
consideration. In the case of the subject, the mall has acted as a catalyst for
growth that has transformed the area into a retail hub. With all of this in
mind, we are of the opinion that the current use of the site is physically
possible.
Legal restrictions, as they apply to the subject property, are private
restrictions and the public restrictions of zoning. As noted, there are no
private restrictions which are known to adversely affect the utilization of the
site, and the property complies with all of the zoning requirements as
established by the City of Kenner. Furthermore, we are not aware of any
environmental controls which may impact the property. Finally, it is recognized
that the property has received all permits and has been in operation as a retail
use for a number of years. As such, the existing leases which are in place
dictate a retail use for the property. Thus, retail utilization of the property
is a permissible use.
After analyzing the physically possible and legally permissible aspects of
the property, the highest and best use must be considered in light of financial
feasibility and maximum productivity. For a potential use to be seriously
considered, it must have the potential to provide a sufficient return to attract
investment capital over alternative forms of investment. A positive net income
or acceptable rate of return would indicate that a use is financially feasible.
As discussed in the various "Locational" and "Retail Market" sections of
this report, The Esplanade is considered to be one of the principal shopping
destinations for a substantial trade area. In the Income Approach to the
valuation of the subject property, we have provided a detailed analysis of the
subject's anticipated revenue producing ability as a shopping center. These
projections have relied upon certain market based assumptions that, in our
opinion, closely mirror the subject's position in the marketplace. Accordingly,
we find that the property, under the concept of continued use, will produce a
sufficient income stream to an investor. A conversion to an alternative use
would not be economically justifiable and, as a result, fail the test of
financial feasibility and maximum productivity. In our opinion, no other use of
the site would provide as great a return. Therefore, we have concluded that the
highest and best use of the site as improved is its continued retail use.
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 affect the
applicability of each approach in a specific appraisal situation.
The Cost Approach renders an estimate of value based upon the price of
obtaining a site and constructing improvements, both with equal desirability and
utility as the subject property. Historically, investors have not emphasized
cost analysis in purchasing investment grade properties. The estimation of
obsolescence for functional and economic conditions as well as depreciation on
improvements makes this approach difficult at best. Furthermore, the Cost
Approach fails to consider the value of department store commitments to regional
shopping centers and the difficulty of site assemblage for such properties. As
such, the Cost Approach will not be employed in this analysis due to the fact
that the marketplace does not rigidly trade leased shopping centers on a
cost/value basis.
The Sales Comparison Approach is based on an estimate of value derived from
the comparison of similar type properties which have recently been sold. Through
an analysis of these sales, efforts are made to discern the actions of buyers
and sellers active in the marketplace, as well as establish relative unit values
upon which to base comparisons with regard to the mall. This approach has a
direct application to the subject property. Furthermore, this approach has been
used to develop investment indices and parameters from which to judge the
reasonableness of our principal approach, the Income Approach.
By definition, the subject property is considered an income/investment
property. Properties of this type are historically bought and sold on the
ability to produce economic benefits, typically in the form of a yield to the
purchaser on investment capital. Therefore, the analysis of income capabilities
are particularly germane to this property since a prudent and knowledgeable
investor would follow this procedure in analyzing its investment qualities.
Therefore, the Income Approach has been emphasized as our primary methodology
for this valuation. This valuation concludes with a final estimate of the
subject's market value based upon the total analysis as presented herein.
The Sales Comparison Approach provides an estimate of market value by
comparing recent sales of similar properties in the surrounding or competing
area to the subject property. Inherent in this approach is the principle of
substitution, which holds that, when a property is replaceable in the market,
its value tends to be set at the cost of acquiring an equally desirable
substitute property, assuming that no costly delay is encountered in making the
substitution.
By analyzing sales that qualify as arms-length transactions between willing
and knowledgeable buyers and sellers, market value and price trends can be
identified. Comparability in physical, locational, and economic characteristics
is an important criterion when comparing sales to the subject property. The
basic steps involved in the application of this approach are as follows:
1. Research recent, relevant property sales and current offerings
throughout the competitive marketplace;
2. Select and analyze properties considered most similar to the
subject, giving consideration to the time of sale, change in
economic conditions which may have occurred since date of sale,
and other physical, functional, or locational factors;
3. Reduce the sale prices to a common unit of comparison, such as
price per square foot of gross leasable area sold;
4. Make appropriate adjustments between the comparable properties
and the property appraised;
5. Identify sales which include favorable financing and calculate
the cash equivalent price; and
6. Interpret the adjusted sales data and draw a logical value
conclusion.
The most widely-used, market-oriented units of comparison for properties
such as the subject are the sale price per square foot of gross leasable area
(GLA) purchased, and the overall capitalization rate extracted from the sale.
This latter measure will be addressed in the Income Approach which follows this
methodology. An analysis of the inherent sales multiple also lends additional
support to this methodology.
Market Overview
The typical purchaser of properties of the subject's caliber includes both
foreign and domestic insurance companies, large retail developers, pension
funds, and real estate investment trusts (REIT's). The large capital
requirements necessary to participate in this market and the expertise demanded
to successfully operate an investment of this type, both limit the number of
active participants and, at the same time, expand the geographic boundaries of
the marketplace to include the international arena. Due to the relatively small
number of market participants and the moderate amount of quality product
available in the current marketplace, strong demand exists for the nation's
quality retail developments.
Most institutional grade retail properties are existing, seasoned centers
with good inflation protection. These centers offer stability in income and are
strongly positioned to the extent that they are formidable barriers to new
competition. They tend to be characterized as having three to five department
store anchors, most of which are dominant in the market. Mall shop sales are at
least $300 per square foot and the trade area offers good growth potential in
terms of population and income levels. Equally important are centers which offer
good upside potential after face-lifting, renovations, or expansion. With new
construction down substantially, owners have accelerated their renovation and
remerchandising programs. Little competition from over-building is likely in
most mature markets within which these centers are located. Environmental
concerns and "no-growth" mentalities in communities continue to be serious
impediments to new retail developments.
Over the past 18 months we have seen real estate investment return to favor
as an important part of many of the institutional investors' diversified
portfolios. Banks are aggressively competing for business trying to regain
market share they lost to Wall Street and the more secure life insurance
companies have reentered the market. The re-emergence of real estate investment
trusts (REITs) has helped to provide liquidity within the real estate market,
pushing demand for well-tenanted, quality property, particularly regional malls.
Currently, REITs are one of the most active segments of the industry and are
particularly attractive to institutional investors due to their liquidity.
The market for dominant Class A institutional quality malls is tight, as
characterized by the limited amount of good quality product available. It is the
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.
o When analyzing an investment opportunity, some of the more important"
"hot buttons" as measured by the recurrence of the responses include:
1. Occupancy Costs - This "health ratio" measure is of fundamental
concern today. Investors like to see ratios under 13.0 percent
and become quite concerned when they exceed 15.0 percent. This
appears to be by far the most important issue to an investor
today. Investors are looking for long term growth in the cash
flow and want to realize this growth through real rent increases.
High occupancy costs limit the amount of upside through lease
rollovers.
2. Market Dominance - The mall should truly be the dominant mall in
the market, affording it a strong barrier to entry. Some
respondents feel this is more important than the size of the
trade area itself.
3. Strong Anchor Alignment - Having at least three department
stores, two of which are dominant in that market. The importance
of the traditional department store as an anchor tenant has
returned to favor after several years of weak performance and
confusion as to the direction of the industry. As a general rule,
most institutional investors would not be attracted to a
two-anchor mall.
4. Dense Marketplace - Several of the institutional investors favor
markets of 300,000 to 500,000 people (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 to 80 percent allocated to national tenants. Mall shop sales
of at least $250 per square foot with a demonstrated positive
trend in sales is also considered to be important.
8. Physical Condition - Malls that have good sight lines, an updated
interior appearance and a physical plant in good shape are looked
upon more favorably. While several developers are interested in
turn-around situations, the risk associated with large capital
infusions can add at least 200 to 300 basis points onto a cap
rate.
9. Environmental Issues - The impact of environmental problems
cannot be understated. There are several investors who won't even
look at a deal if there are any potential environmental issues no
matter how seemingly insignificant.
10. Operating Covenants - Some buyers indicated that they would not
be interested in buying a mall if the operating covenants were to
expire over the initial holding period. Others weigh each
situation on its own merit. If it is a dominant center with
little likelihood of someone coming into the market with a new
mall, they are not as concerned about the prospects of loosing a
department store. If there is a chance of loosing an anchor, the
cost of keeping them must be weighed against the benefit. In many
of their malls they are finding that traditional department
stores are not always the optimum tenant but that a category
killer or other big box use would be a more logical choice.
In the following section we will discuss trends which have become apparent
over the past several years involving sales of regional malls.
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 1980s a number of acquisitions, hostile takeovers 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 credit worthiness 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 (1991-95) presented in this
analysis show a wide variety of prices on a per unit basis, ranging from $59 per
square foot up to $556 per square foot of total GLA purchased. When expressed on
the basis of mall shop GLA acquired, the range is more broadly seen to be $93 to
$647 per square foot.
Alternatively, the overall capitalization rates that can be extracted from
each transaction range from 5.60 percent to rates in excess of 11.0 percent. One
obvious explanation for the wide unit variation is the inclusion or exclusion of
anchor store square footage which has the tendency to distort unit prices for
some comparables. Other sales include only mall shop area where small space
tenants have higher rents and higher retail sales per square foot. A shopping
center sale without anchors, therefore, gains all the benefits of anchor/small
space synergy without the purchase of the anchor square footage. This drives up
unit prices to over $250 per square foot, with most sales over $300 per square
foot of salable area. A brief discussion of historical trends in mall
transactions follows.
o The fourteen sales included for 1991 show an average price per
square foot sold of $282. On the basis of mall shop GLA sold,
these sales present a mean of $357. Sales multiples range from
.74 to 1.53 with a mean of 1.17. Capitalization rates range from
5.60 to 7.82 percent with an overall mean of 6.44 percent. The
mean terminal capitalization rate is approximately 100 basis
points higher, or 7.33 percent. Yield rates range between 10.75
and 13.00 percent, with a mean of 11.52 percent for those sales
reporting IRR expectancies.
o In 1992, the eleven transactions display prices ranging from $136
to $511 per square foot of GLA sold, with a mean of $259 per
square foot. For mall shop area sold, the 1992 sales suggest a
mean price of $320 per square foot. Sales multiples range from
.87 to 1.60 with a mean of 1.07. Capitalization rates range
between 6.00 and 7.97 percent with the mean cap rate calculated
at 7.31 percent for 1992. For sales reporting a going-out cap
rate, the mean is shown to be 7.75 percent. Yield rates again
range from 10.75 to around 12.00 percent with a mean of 11.56
percent.
o 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.
o 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 on behalf of the Pennsylvania Public School Employment
Retirement System for $175.0 million. The reported cap rate was
approximately 7.4 percent.
o Cushman & Wakefield has researched 14 mall transactions which
have occurred during 1995. With the exception of Sale No. 95-1
(Natick Mall) and 95-2 (Smith Haven Mall), by and large the
quality of malls which have sold are lower than what has been
shown for prior years. For example, the average transaction price
has been slipping. In 1993, the peak year, the average deal was
nearly $133.8 million. Currently, it is shown to be $90.7 million
which is even skewed upward by Sale Nos. 95-1 and 95-2. The
average price per square foot of total GLA is calculated to be
$152 per square foot. The range in values of mall GLA sold are
$93 to $607 with an average of $275 per square foot.
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.
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.
It is noted that in 1995 there were no 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. Rae 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
======================================================================================================
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.
Because the subject is theoretically selling both only mall shop GLA and
owned department stores (Dillard's Mens Shop), 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 NOI has been projected to be
$17.55 per square foot in the first full year of stabilized occupancy (FY 1997),
based upon 413,015+/- square feet of owned GLA. Derivation of the subject's
projected net operating income is presented in the "Income Approach" section of
this report as calculated by the Pro-Ject model. With projected NOI of $17.55
per square foot, the subject is slightly higher than the average established by
14 regional malls which sold in 1995.
Since the income that an asset will produce has direct bearing on the price
that a purchaser is willing to pay, it is obvious that a unit price which falls
toward the middle of the range indicated by the comparables would be applicable
to the subject. The subject's anticipated net income can be initially compared
to the composite mean of the annual transactions in order to place the subject
in a frame of reference. This is shown on the following chart.
------------------------------------------------------------------
Sales Year Mean NOI Subject Forecast Subject Ratio
------------------------------------------------------------------
1991 $14.25 $17.55 123.16%
------------------------------------------------------------------
1992 $16.01 $17.55 109.62%
------------------------------------------------------------------
1993 $15.51 $17.55 113.15%
------------------------------------------------------------------
1994 $15.62 $17.55 112.36%
------------------------------------------------------------------
1995 $12.35 $17.55 142.11%
------------------------------------------------------------------
With first year NOI forecasted at approximately 110 to 142 percent of the
mean of these sales in each year, the unit price which the subject property
would command should be expected to fall within a relative range.
Net Income Multiplier Method
Many of the comparables were bought on expected income, not gross leasable
area, making unit prices a somewhat subjective reflection of investment behavior
regarding regional malls. In order to quantify the appropriate adjustments to
the indicated per square foot unit values, we have compared the subject's first
year pro forma net operating income to the pro forma income of the individual
sale properties. In our opinion, a buyer's criteria for the purchase of a retail
property is predicated primarily on the property's income characteristics. Thus,
we have identified a relationship between the net operating income and the sales
price of the property. Typically, a higher net operating income per square foot
corresponds to a higher sales price per square foot. Therefore, this adjustment
incorporates factors such as location, tenant mix, rent levels, operating
characteristics, and building quality.
Provided below, we have extracted the net income multiplier from each of
the improved sales. We have included only the recent sales data (1995). The
equation for the net income multiplier (NIM), which is the inverse of the
equation for the capitalization rate (OAR), is calculated as follows:
Valuation of the subject property utilizing the net income multipliers
(NIM) from the comparable properties accounts for the disparity of the net
operating incomes ($NOI's) per square foot between the comparables and the
subject. Within this technique, each of the adjusted NIM's are multiplied by the
$NOI per square foot of the subject, which produces an adjusted value indication
for the subject. The net operating income per square foot for the subject
property is calculated for the first year of stabilized occupancy, as detailed
in the "Income Approach" section of this report.
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 $158 to $235 per square foot of owned GLA with a mean of $195 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 property is well positioned within a major metropolitan area.
The property competes directly with Lakeside Shopping Center within its primary
trade area but faces limited secondary competition. Future addition to the
existing inventory will be limited by the lack of available land for
development. However the proposed center in Baton Rouge will impact the subject,
limiting its draw from the west. The subject property contains a total G~LA of
910,555 square feet including three anchor tenant stores, which are owned by
their respective retailers. The property was constructed in 1985 and has been
maintained in good condition. Since its construction the property has maintained
strong occupancy levels (80 - 90%) and achieved sales in excess of $260 per
square foot.
Considering the preceding factors, we believe that a unit rate range of
$190 to $200 per square foot is appropriate. Applying this unit rate range to
413,015+/- square feet of owned GLA results in a value of approximately $78.5
million to $82.6 million for the subject as presented below:
413,015 SF 413,015 SF
x $190 x $200
----------- -----------
$78,472,850 $82,603,000
Rounded Value Estimate - Market Sales Unit Rate Comparison
$78,500,000 to $82,600,000
The Income Approach is based upon the economic principle that the value of
a property capable of producing income is the present worth of anticipated
future net benefits. The net income projected is translated into a present value
indication using the capitalization process. There are various methods of
capitalization that are based on inherent assumptions concerning the quality,
durability and pattern of the income projection.
Where the pattern of income is irregular due to existing leases that will
terminate at staggered, future dates, or to an absorption or stabilization
requirement on a newer development, the discounted cash flow analysis is the
most accurate.
Discounted Cash Flow Analysis (DCF) is a method of estimating the present
worth of future cash flow expectancies by individually discounting each
anticipated collection at an appropriate discount rate. The indicated market
value by this approach is the accumulation of the present worth of future
projected years' net income (before income taxes and depreciation) and the
present worth of the reversion of the estimated property value at the end of the
projection period. The estimated value of the reversion at the end of the
projection period is based on the capitalization of the next year's projected
net income. This is the more appropriate method to use in this assignment, given
the step-up in lease rates and the long term tenure of retail tenants.
A second method of valuation, using the Income Approach, is to directly
capitalize a stabilized net income based on rates extracted from the market or
built up through mortgage equity analysis. This is a valid method of estimating
the market value of a property which is operating at a stabilized level. In the
case of the subject, operations are considered to be reasonable close to
stabilization. Thus, the direct capitalization method will provide additional
support in the valuation process.
Discounted Cash Flow Analysis
The Discounted Cash Flow (DCF) produces an estimate of value through an
economic analysis of the subject property in which the net income generated by
the asset is converted to a capital sum at an appropriate rate. First, the
revenues which a fully informed investor can expect the subject to produce over
a specified time horizon are established through an analysis of the current rent
roll, as well as the rental market for similar properties. Second, the projected
expenses incurred in generating these gross revenues are deducted. Finally, the
residual net income is discounted into a capital sum at an appropriate rate
which is then indicative of the subject property's current value in the
marketplace.
In this Income Approach to the valuation of the subject, we have utilized a
10-year holding period for the investment with the cash flow analysis commencing
on June 1, 1996. Although an asset such as the subject has a much longer useful
life, an investment analysis becomes more meaningful if limited to a time period
considerably less than the real estate's economic life, but of sufficient length
for an investor. A 10-year holding period for this investment is long enough to
model the assets performance and benefit from its continued lease-up, but short
enough to reasonably estimate the expected income and expenses of the real
estate.
The revenues and expenses which an informed investor may expect to incur
from the subject property will vary, without a doubt, over the holding period.
Major investors active in the market for this type of real estate establish
certain parameters in the computation of these cash flows and criteria for
decision making which this valuation analysis must include if it is to be truly
market-oriented. These current computational parameters are dependent upon
market conditions in the area of the subject property as well as the market
parameters for this type of real estate which we view as being national in
scale.
By forecasting the anticipated income stream and discounting future value
at reversion to current value, the capitalization process may be applied to
derive a value that an investor would pay to receive that particular income
stream. Typical investors price real estate on their expectations of the
magnitude of these benefits and their 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 the property and examines the results mathematically is employed for
the discounted cash flow analysis. In this instance, it is the PRO-JECT Plus+
computer model. Since investors are the basis of the marketplace in which the
subject property will be bought and sold, this type of analysis is particularly
germane to the appraisal problem at hand. On the facing page is a summary of the
expected annual cash flows from the operation of the subject over the stated
investment holding period.
A general outline summary of the major steps involved may be listed as
follows:
1. Analysis of the income stream: establishment of an economic (market)
rent for the tenant space; projection of future revenues annually
based upon the existing and pending leases, probable renewals at
market rentals, and expected vacancy experience;
2. An estimate of a reasonable period of time to achieve stabilized
occupancy of the existing property and make all necessary improvements
for marketability (if necessary);
3. Analysis of projected escalation recovery income based upon an
analysis of the property's history as well as the experiences of
reasonably similar properties;
4. A derivation of the most probable net operating income and pre-tax
cash flow (net operating income) less reserves, tenant improvements,
leasing commissions and any extraordinary expenses to be generated by
the property by subtracting all property expenses from the effective
gross income;
5. Estimation of a reversionary sales price based upon a capitalization
of the net operating income (before reserves, tenant improvements and
leasing commissions or other capital items).
Following is a detailed discussion of the components which form the basis
of this analysis.
The total potential gross revenues generated by the subject property are
composed of a number of distinct elements; a minimum rent determined by lease
agreement, an additional overage rent based upon a percentage of retail sales, a
reimbursement of certain expenses incurred in the ownership and operation of the
real estate, and other miscellaneous revenues.
The minimum base rent represents a legal contract establishing a return to
the investors in the real estate, while the passing of certain expenses onto the
tenants serves to maintain this return in an era of continually rising costs of
operation. The additional rent based upon a percentage of retail sales
experienced at the subject property serves to preserve the purchasing power of
the residual income to an equity investor over time. In the initial year of the
investment, FY1997, it is projected that the subject property will generate
approximately $11,794,604 in potential gross revenues, equivalent to $28.56 per
square foot of total appraised GLA of 413,015 square feet. These forecasted
revenues may be allocated to the following components:
The Esplanade
Revenue Summary
Initial Year of Investment - Fiscal 1997
Revenue Component Amount Unit Income
Rate Ratio
-----------------------------------------------------------
Minimum Rent $7,053,887 $17.08 59.81%
Overage Rent $ 244,662 $ 0.59 2.07%
Expense Recoveries $4,470,742 $10.82 37.90%
Miscellaneous $25.313 $0.06 0.21%
-----------------------------------------------------------
Total $11,794,604 $28.56 100.00%
-----------------------------------------------------------
*Reflects total owned GLA of 413,015 SF, figure may not add
due to rounding.
Minimum Rental Income
The minimum rent produced by the subject property is derived from that paid
by the various tenant types. The projection utilized in this analysis is based
upon the actual rent roll and our projected leasing schedule in place as of the
date of appraisal, together with our assumptions as to the absorption of the
vacant space, market rent growth rates and renewal/turnover probability.
The rental income which an asset such as the subject property will generate
for an investor is analyzed as to its quality, quantity and durability. The
quality and probable duration of income will affect the amount of risk which an
informed investor may expect over the property's useful life. The segregation of
the income stream along these lines allows us to control the variables related
to the centers 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 one leased anchor store and mall tenant revenues
consisting of all in-line mall shops (As a sub-category of in-line shop rents,
we have segregated food court revenues).
In our investigation and analysis of the marketplace, we have surveyed, and
ascertained where possible, rent levels being commanded by competing centers.
However, it should be recognized that large retail shopping malls are generally
considered to be separate entities by virtue of age and design, accessibility,
visibility, tenant mix and the size and purchasing power their trade area.
Consequently, the best measure of minimum rental income is its actual rent roll
leasing schedule.
As such, our analysis of recently negotiated leases for new and relocation
tenants at the subject provides important insight into perceived market rent
levels for the mall. Inasmuch 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.
Mall Shops
Rent from all mall tenants comprises the majority of minimum rent.
Aggregate rent from these tenants is forecasted to be $6,876,237, or $18.77 per
square foot. Minimum rent may be allocated to the following components:
------------------------------------------------------------------------------
The Esplanade
Minimum Rent Allocation
Interior Mall Shops
------------------------------------------------------------------------------
FY97 Revenue Applicable GLA* Unit Rate (SF)
------------------------------------------------------------------------------
Mall Shops $6,496,140 357,829 SF $ 18.15
------------------------------------------------------------------------------
Food Court $ 382,997 8,586 SF $ 44.61
------------------------------------------------------------------------------
Total $6,876,237 366,415 SF $ 18.77
==============================================================================
* Represents leasable area as opposed to actual leased or occupied area
exclusive of non-owned space.
Our analysis of market rent levels for the in-line shops has resolved
itself to a variety of influencing factors. Although it is typical that larger
tenant spaces are leased at lower per square foot rates and lower percentages,
the type of tenant as well as the variable of location within the mall can often
distort this size/rate relationship. In the initial step of our analysis, we
will look at the actual achieved rents involving leased space only.
The following table presents an analysis of minimum rent levels achieved
within the subject property for in-line space as of the date of the appraisal.
The revenues reflect leased in-line mall shop spaces including major tenants
(over 10,000 square feet) and exclude kiosks, food court and department stores
(these tenant types are treated separately in a subsequent section of this
report). Note that these are achieved rents for all leases in place as of this
analysis.
Income Approach
================================================================================
------------------------------------------------------------------
Current Rent Achievements
------------------------------------------------------------------
Tenant Achieved Applicable Rent
Classification Rent GLA PSF
------------------------------------------------------------------
0 - 750 SF $221,255 4,299 $51.47
751 -1,200 SF $597,252 17,445 $34.24
1,201 - 2,000 SF $904,864 32,666 $27.70
2,001 - 3,500 SF $1,420,320 71,868 $19.76
3,501 - 5,000 SF $806,907 41,670 $19.36
5,000 - 1 0,000 SF $1,506,052 79,020 $19.06
10,001 & above $674,584 36,167 $18.65
------------------------------------------------------------------
Average Center $6,131,234 283,135 $21.65
==================================================================
From the chart, we would expect to see a general pattern of an inverse
relationship between suite size and rent per square foot. That is, as the suite
size increases, the average unit base rent achieved declines. Overall, for the
283,135 square feet of in-line shop tenants surveyed, the average attained base
rent for the mall is shown to be $21.65 per square foot. The objective here is
to demonstrate a reasonably quantifiable pattern between suite size and rent per
square foot. As such, a declining rent per square foot trend relative to suite
size is generally evidenced. Category 1 (less than 750 square feet) shows an
average of $51.47 per square foot, while Category 7 (greater than 10,000 square
feet) shows an average of $18.65 per square foot.
These leases transactions support the assumption that, typically, there is
an inverse correlation between unit rates and the amount of space being leased,
and they reflect average rates. We recognize that, in practice, there are unit
rate graduations within the tenant categories based on such attributes as
location within the center/building, unit frontage and depth, tenant type and
credit worthiness, concessions, tenant allowances, etc. However, as the tenant
mix and configuration may not be fixed over time, it is more appropriate to
estimate what the average base rental levels paid at the property would be for
the different tenant categories.
From reviewing the rent schedule, we found that lease terms typically range
from five to twenty years, with ten year leases being most typical. We also
found that most leases carry one or more steps in rent over the lease term.
Market Comparisons - Occupancy Cost Ratios
In further support of developing a forecast for market rent levels, we have
undertaken a comparison of minimum rent to projected sales and total occupancy
costs to sales ratios. Generally, our research and experience with other
regional malls shows that the ratio of minimum rent to sales falls within the 8
to 12 percent range in the initial year of the lease with 8 percent to 10
percent being most typical. By adding additional costs to the tenant, such as
real estate tax and common area maintenance recoveries, a total occupancy cost
may be derived. Expense recoveries and other tenant charges can add up to 100
percent of minimum rent and comprise the balance of total tenant costs.
The typical range for total occupancy cost-to-sales ratios falls between 12
and 15 percent. As a general rule, where sales exceed $250 to $275 per square
foot, 15 percent would be a reasonable cost of occupancy. Experience and
research show that most tenants will resist total occupancy costs that exceed 16
to 18 percent of sales. However, ratios of upwards to 20 percent are not
uncommon. Obviously, this comparison will vary from tenant to tenant and
property to property.
In higher end markets where tenants are able to generate sales above
industry averages, tenants can generally pay rents which fall toward the upper
end of the ratio range. Moreover, if tenants perceive that their sales will be
increasing at real rates that are in excess of inflation, they will typically be
more inclined to pay higher initial base rents. 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.
From this analysis we see that the ratio of base rent to sales ranges from
6.8 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
forty-one malls 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 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 6.8 to 8.0 percent and total
occupancy cost ratios of 10.1 and 12.3 percent, respectively.
In general, while the rental ranges and ratio of base rent to sales vary
substantially from mall to mall and tenant to tenant, they do provide general
support for the rental ranges and ratio which is projected for the subject
property.
Conclusion - Market Rent Estimate for In-Line Shops
Based upon the existing tenant profile we have conclude market rents for
the various in-line shop categories of $18.00 to $38.00 per square foot gross.
As presented in the following table:
-------------------------------------------------------------------------------------
Tenant Existing Market Applicable Pro Rata Weighted
Classification Rent Rent GLA Share Average
-------------------------------------------------------------------------------------
0 - 750 SF $51.47 $38.00 7,019 1.96% $0.74
751 -1,200 SF $34.24 $30.00 23,685 6.62% $1.99
1,201 - 2,000 SF $27.70 $27.00 47,789 13.36% $3.61
2,001 - 3,500 SF $19.76 $20.00 95,216 26.63% $5.33
3,501 - 5,000 SF $19.36 $20.00 62,843 17.57% $3.51
5,000 - 10,000 SF $19.06 $19.00 84,888 23.74% $4.51
10,001 & above $18.65 $18.00 36,167 10.11% $1.82
-------------------------------------------------------------------------------------
Average Total $21.65 357,607 100.00% $21.51
=====================================================================================
As presented in the preceding table, our concluded market rents are
generally in-line with the existing rent schedule of the subject property. In
exception to this we have lowered the rental applicable to stores of 750 square
feet or less. This was done as the average for this category is skewed upwards
by the inclusion of one tenant (Great American Company) which pays in excess of
$100 per square foot. The overall average rent is slightly lower than the
existing profile. This is a function of the weighted average for the existing
rent schedule which includes older leases. Given recent trends in the retail
market, we feel a market rent level slightly lower than the existing profiles is
warranted.
As a further test of the reasonableness of our concluded rentals, we have
compared the total occupancy costs for the in-line tenants with the 1995 average
sales levels.
--------------------------------------------------------------------------------
Total Base Total
Market Occupancy 1995 Rent Occ. Cost
Rent CAM Taxes HVAC Cost Sales Ratio Ratio
--------------------------------------------------------------------------------
$21.51 $7.76 $1.48 $4.83 $35.58 $263.00 8.18% 13.53%
================================================================================
The base rent to sales ratio is shown to be 8.18 percent for the subject
property. This percentage is slightly below our survey which is shown to be 8.3
percent. Total occupancy cost as a percentage of sales ranges are shown to be
13.53 percent for the subject. This average is slightly higher but generally
consistent with the average for the centers surveyed of 13.4 percent. Based on
these parameters our conclusions of market rent appear well supported.
In addition to size, we have also considered the effect of retail product
type on market rent. Industry statistics reveal that certain product types, such
as jewelry stores are able to achieve sales levels far in excess of the mall
average. Correspondingly these tenants are able to afford rentals significantly
higher than comparable space occupied by other types of retails. However, the
success of a mall is dependent upon the synergy of various product types and as
such we have based our projections on a typical tenant mix.
Food Court
It is considered appropriate to ascribe an individual unit rate to the food
court tenants. the leasing plan provides for a 8,586+/- square foot food court
with 8 units, indicating an average size of 1,073+/- square feet.
As of the date of inspection, 7 of the 8 food court spaces were occupied.
In aggregate the seven tenants pay $382,997 per annum and occupy 8,097 square
feet, indicating an average rental for the food court tenants of $47.30 per
square foot. In 1995, tenant sales approximated $529 per square foot,
indicating an occupancy cost ratio of 13.47%.
-------------------------------------------------------------------------------------------------------
Food Court Occupancy Ratio
-------------------------------------------------------------------------------------------------------
Market Food Other Total 1995 Base Rent Total Occ. Cost
Rent CAM Court Tax Charges Occ. Cost Sales Sales Ratio Sales Ratio
-------------------------------------------------------------------------------------------------------
$40.00 $7.76 $10.79 $1.48 $11.20 $71.23 $529 7.56% 13.47%
=======================================================================================================
Given the relative high cost of occupancy for this space, we believe a
market rental towards the lower end of that currently being achieved is
appropriate and we have therefore concluded a market rent of $40.00 per square
foot.
The final category of minimum rent at the subject property involves anchor
tenant stores. As previously noted, the only anchor tenant store included as
part of this appraisal is the Dillard's Men Shop. This store is encumbered by a
long term agreement which, including options, extends beyond our projection
period. The tenant is obligated to pay a nominal base rent amount ($3.75 per
square foot), percentage rent and a contribution towards both common area
maintenance (CAM) and real estate taxes. The reader is referred to the addenda
for complete summary of this tenant's obligations.
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 $10.00 per square foot to new (currently vacant) space and
turnover space. We have also ascribed a rate of $2.00 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 July 1999. We have identified
67,149 square feet of vacant space, net of newly executed leases. This is
equivalent to 18.33 percent of mall GLA and 7.37 percent overall. The majority
of the vacant space is located along the side courts which do not benefit from a
strong anchor draw and are thus considered less desirable. 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
5,596+/- square feet per quarter. Based on this lease-up assumption, the
following chart tracks occupancy through 2000, the first full year of stabilized
occupancy.
Market rent will, over the life of a prescribed holding period, quite
obviously follow an erratic pattern. A review of investor's expectations
regarding income growth shows that projections generally range between 3.00 and
4.00 percent for retail centers. Cushman & Wakefield's Winter 1995 survey of
pension 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. Our review of tenant sales
figures for The Esplanade indicates modest growth over the past three years.
However, the subject property contains a substantial amount of vacant space. In
addition future growth in sales could be impacted by the construction of a new
centers to the west of the subject. 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.
* 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 twenty years. Market practice dictates
that in longer lease terms, 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 tenants in 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 interior finish. Because of
the up-front costs incurred by the tenants, a ten-year lease term is usually
required to adequately amortize these costs. A review of the leasing structure
at the subject property suggests lease terms of approximately ten years. We have
incorporated this assumption into our analysis.
Upon lease expiration, it is our best estimate that there is a 70 percent
probability that existing tenants will renew their lease while the remaining 30
percent will vacate their space at this time.
As stated above, it is not uncommon to get increases in base rent over the
life of a lease. The subject's recent leasing activity attests to this
observation as presented in the addenda of this report. In our analysis we have
assumed that new tenants will sign ten-year lease terms at market rents. The
rent for each tenant is projected to remain flat for the first five years of the
lease and include a step of 10% for the second five years.
Upon lease rollover/turnover, the space is forecasted to be released at the
higher of the last effective rent (defined as minimum rent plus overage rent if
any) and the ascribed market rent as detailed previously increasing by our
market rent growth rate assumption.
Conclusion - Minimum Rent
In the initial full year of the investment (FY 1997), it is projected that
the subject property will produce approximately $7,053,887 in minimum rental
income. This estimate of base rental income is equivalent to $17.08 per square
foot of total owned GLA. Alternatively, minimum rental income accounts for 59.81
percent of all potential gross revenues. Further analysis shows that over the
holding period (FY 1997-2006), minimum rent advances at an average compound
annual rate of 3.59 percent. This increase is a synthesis of the mall's
lease-up, fixed rental increases as well as market rents from rollover or
turnover of space.
Overage Rent
In addition to the minimum base rent, many of the tenants of the subject
property have contracted to pay a percentage of their gross annual sales over a
pre-established base amount as overage rent. Many leases have a natural
breakpoint although an equal number do have stipulated breakpoints. The average
overage percentage for small space retail tenants is in a range of 5 to 6
percent.
Traditionally, it takes a number of years for a retail center to mature and
gain acceptance before generating any sizable percentage income. As a center
matures, the level of overage rents typically becomes a larger percentage of
total revenue. It is a major ingredient protecting the equity investor against
inflation.
In the "Retail Market Analysis" section of this report, we discussed the
historic and forecasted sales levels for the mall tenants.
Because of the dynamics of the economy and marketplace, it is difficult to
predict with accuracy what sales will be on an individual tenant level. As such,
we have employed the following methodology.
o For existing tenants who report sales, we have forecasted that sales
will continue at our projected sales growth rate as discussed herein.
o 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.
o 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 $265 per square foot.
Thus, in the initial full year of the investment holding period, overage
revenues are estimated to amount to $244,662 (net of recaptures) equivalent to
$0.59 per square foot of owned GLA and 2.07 percent of potential gross revenues.
A large portion of this percentage rent ($61,780) is attributable to Banana
Republic, who pays 5% of gross sales in lieu of base rent. Beginning in August
1997, this tenant reverts to a more typical lease structure and as a result
percentage rent declines.
On balance, our forecasts are deemed to be conservative. In addition, over
the ten year projection period income from this source is not anticipated to
appreciate significantly.
Sales Growth Rates
In the "Retail Market Analysis" section of this report, we discussed that
retail sales in the New Orleans MSA have been increasing at a compound annual
rate of 4.2 percent per annum since 1991, 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 tenant sales to
remain flat through 1997 and increase at an annual rate of 3.0% beginning in
1998.
In all, we believe we have been conservative in our sales forecast for new
and turnover tenants upon the expiration of an initial lease. At lease
expiration, we have forecasted a 30 percent probability that a tenant will
vacate. For new tenants, sales are established based on the mall's average sales
level. Generally, for existing tenants we have assumed that sales continue
subsequent to lease expiration at their previous level unless they were
under-performers that prompted a 100 percent turnover probability then sales are
reset to the corresponding mall overage. In most instances, no overage rent is
generated from new tenants.
Expense Reimbursement Structure
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 electric. 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 these expenses plus a 15 percent
administrative fee.
Department stores have specified expense obligations. Summaries of the
various operating covenants are provided in the addenda for each department
store. Below is a summary of some of the pertinent terms of each of the anchor
stores:
Under the standard lease, the mall tenants will pay their pro-rata share of
the balance of the CAM expense plus an administrative charge of 15 percent after
the anchor contribution.
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 Amortization of Capital Items
--------------------------------------------------------------------------------
Add 15% Administration fee
--------------------------------------------------------------------------------
Less Contributions from department stores, restaurant & temporary
tenants
--------------------------------------------------------------------------------
Equals: Net pro-ratable CAM billable to mall tenants
--------------------------------------------------------------------------------
Amongst the existing tenancy, pro rata share is determined both on the
basis of gross leasable area (GLA) and leased occupied area (LOA) without an
apparent preference for either formula. Discussions with management indicated
that the standard lease for the center is based on a leased occupied area and
that most new tenants are based on this formula. We have this formula into our
projections for all new tenants.
Real Estate Taxes
Each of the anchor tenants s separately assessed and as such pays real
estate taxes directly to the City and parish. In exception to this Dillard's Men
Shop is assessed as part of the shopping center and contributes their full pro
rata share of taxes.
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 major tenant, restaurant and
temporary tenant contributions.
Other reimbursable expenses include HVAC, water, sewer and trash removal.
The standard lease form at the subject property calls for the tenant to conduct
an energy audit to determine the cost of heating and cooling their particular
unit. An allocation for common area HVAC as well as water, sewer and trash
removal are added to this figure to determine the tenants total contribution.
Until the energy audit is conducted the mall tenants are charged $5.00 per
square foot and the food court tenants are charged $12.00 per square foot.
Discussions with the mall manager indicated that many tenants elect not to
conduct an audit and continue to pay the base amounts. Our review of the 1996
budget indicated that tenant contributions ranged from $0.06 to $13.84 per
square foot for mall tenants and $2.86 to $22.15 for food court tenants. The
average contribution was $4.83 and $11.20 by mall tenants and food court
tenants, respectively. In our analysis we have included existing tenants based
upon actual 1995 contributions and have included new tenants at the mall
averages.
Miscellaneous Income
The final revenue category consists of a number of sources including:
temporary leasing of in-line space, kiosks and push carts and other
miscellaneous income. We have assumed these revenues are net of our credit loss
provision and will increase by 3% per annum.
Specialty Leasing
Specialty leasing is typically related to tenants that temporarily occupy
vacant in-line space as well as seasonal kiosks. In the subject property the
permanent kiosks are all leased on a short term basis (generally 12 months) and
as such are also treated as specialty leasing. Management has been relatively
successful with this procedure. Tenants are given either straight fixed rent
deals or are put on a percentage deal until management can better gauge their
potential. Typically, the leases are written on a gross basis and tenants are
not assessed any mall charges. Bump backs which consists of shallow temporary
demising walls are generally written as percentage only leases. Seasonal kiosks
are the push carts or displays that are typically brought in around Christmas
time. Our experience has shown that the typical rate for push carts ranges from
approximately $6,000 to $10,000 for the two month Christmas period and $1,200 to
$1,500 per month thereafter.
In the initial year of the investment we have forecasted specialty leasing
revenues of $250,000. We project that temporary leasing will grow by 3.0 percent
per year throughout the remainder of the analysis.
Allowance for Vacancy and Credit Loss
The investor of an income producing property is primarily interested in the
cash revenues that an income-producing property is likely to produce annually
over a specified period of time rather than what it could produce if it were
always 100 percent occupied and all the tenants were actually paying rent in
full and on time. It is normally a prudent practice to expect some income loss,
either in the form of actual vacancy or in the form of turnover, non-payment or
slow payment by tenants. Over the past five years, the subject property has been
operating between 80% and 90% occupancy. We have reflected a 10 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.
In this analysis, we have also forecasted that there is a 70 percent
probability that an existing tenant will renew their lease. Upon turnover, we
have forecasted that rent loss equivalent to eight 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 10.77 percent of total potential gross revenues to a high
of 22.81 percent. On average, the total allowance for vacancy and credit loss
over the 10-year projection period averages 14.05 percent of these revenues.
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, FY 1997, effective gross
revenues are forecasted to amount to approximately $11,694,651, equivalent to
$28.32 per square foot of total owned GLA.
--------------------------------------------------------------------------------
Effective Gross Revenue Summary
Initial Year of Investment - FY1997
--------------------------------------------------------------------------------
Aggregate Sum Unit Rate Income Ratio
--------------------------------------------------------------------------------
Potential Gross Income $12,0470729 $29.17 100.00%
Less: Vacancy and Credit Loss $ 353,078 $ 0.85 2.93%
--------------------------------------------------------------------------------
Effective Gross Income $11,694,651 $28.32 97.07%
================================================================================
The total expenses incurred in the production of income from the subject
property are divided into two categories: reimbursable and non-reimbursable
items. The major expenses which are reimbursable include real estate taxes,
common area maintenance and electric. The non-reimbursable expenses associated
with the subject property include certain general and administrative expenses,
ownership's contribution to the merchant's 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 the 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 owner's 1996 budget for these expense items. This information is provided in
the Addenda. We have compared this information to published data which are
available, as well as comparable expense information. Finally, this information
has been tempered by our experience with other regional shopping centers.
Expense Growth Rates
Expense growth rates are generally forecasted to be more consistent with
inflationary trends than competitive market forces. The Winter 1995 Cushman &
Wakefield survey of regional malls found the low and high mean from each
respondent to be 3.75 percent. The Fourth Quarter 1995 Korpacz survey reports
that the range in expense growth rates was from 3.0 percent to 5.0 percent with
an average of 3.98 percent, down 13 basis points from one year ago. Unless
otherwise cited, expenses are forecasted to grow by 3.0 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. It is noted that the following discussion of expense
is on a calendar year basis. In our cash flow projection all expenses have been
converted to a fiscal year based upon our projected growth rate.
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 malls where the CAM
budget is high, discretion must be exercised in not trying to pass along
every charge as the 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. Tenants are subject to a 15 percent
administrative surcharge. Anchor tenant contributions are then deducted for
billing purposes.
Provided on the facing page are actual CAM expense comparables for mall
which we have recent information. This data shows CAM budgets which
typically range from $5.00 to $8.00 per square foot. This is also
consistent with data provided in many of the recent publications of
industry operating statistics. After considering all of the above, we have
estimated common area maintenance to be approximately $2,220,000 on an
annualized basis in calendar year 1996. This is equal to $5.38 per square
foot of owned GLA (413,015 square feet). This figure is in-line with
management's forecast and national averages.
Real Estate Taxes - The projected taxes to be incurred in calendar year
1996 are equal to $500,000 or $1.21 per square foot of owned GLA. As
discussed, the standard recovery for the mall 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 major tenant, restaurant and
temporary tenant contributions which are estimated at $68,508 (net of
direct payments) in 1996.
Utilities - This expense covers the cost of heating and cooling the center.
As discussed in the Property Description section of this report, the
subject property is heated and cooled by 20 roof-top package units and is
distributed to each tenant space via VAV boxes. The tenants are assessed a
charge for utilities which is based upon an energy of their individual
space. We have estimated a calendar year 1996 utility expense of $990,000
or $2.40 per square foot of owned GLA.
Contract Services - This expense category covers the cost of trash removal,
water and sewer. This expense are pass through to the tenants along with
HVAC charges as other reimbursements. In 1996 management has estimated the
cost of this expense at $89,830 which we have rounded to $90,000 for our
analysis.
Food Court Expense - The food court expense is broken out separately from
CAM and recovered from food court tenants by separate billing. Included in
this expense are the additional expenses associated with maintaining the
common seating area, including janitorial, security and utilities. For
1996, an expense of $54,676 has been projected, which we have rounded to
$55,000.
Non-Reimbursable Expenses
The total annual non-reimbursable expenses of the subject property are
projected from accepted practices and industry standards. Again, we have
analyzed each item of expenditure in an attempt to project what the typical
investor in a property similar to the subject would consider reasonable, based
upon actual operations, informed opinion and experience. The following is a
detailed summary and discussion of non-reimbursable expenses incurred in the
operation of the subject property for the initial year. Unless otherwise stated,
it is our assumption that these expenses will increase by 3.0 percent per annum
thereafter.
General and Administrative - Expenses related to the administrative aspects
of the mall include 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 $183,000.
Merchant's Association - Merchant's 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 $90,000.
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 nonrecurring expenses, expenses associated with
maintaining the vacant space and bad debts in excess of our credit loss
provision would be included here. In the initial year, these miscellaneous
items are forecasted to amount to approximately $36,500.
Management - The annual cost of managing the subject property is projected
to be 3.5 percent of minimum and percentage rent. In the initial year of
our analysis, this amount is shown to be $218,956. Alternatively, this
amount is equivalent to approximately 1.87 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 lower
end 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 $10.00 per square foot for turnover
space (initial cost growing at expense growth rate) weighted by our
turnover probability of 30 percent. We have forecasted a rate of $2.00 per
square foot for renewal (rollover) tenants, based on a renewal probability
of 70 percent. The blended rate based on our 70/30 turnover probability is
therefore $4.40 per square foot. The provision made here for tenant work
lends additional conservatism our analysis. These costs are forecasted to
increase at our implied expense growth rate.
Leasing Commissions - Many owners now charge leasing commissions
internally. A typical structure is either a flat amount per square foot or
a percentage of the rent payment. We have chosen a rate of $3.50 per square
foot for new tenants and $1.50 per square foot for renewal tenants. This
structure implies a layout up front at the start of a lease. We have
elected to model this formula as it is within the range of charges we have
seen for these services. The cost is weighted by our 70/30 percent
renewal/turnover probability. Thus, upon lease expiration, a leasing
commissions charge of $2.10 per square foot would be incurred.
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. We feel that over a holding
period, some repairs or replacements will be needed that will not be passed
on to the tenants. 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.
The total expenses of the subject property including alterations,
commissions, capital expenditures, and reserves are annually deducted from total
income, thereby leaving a residual net operating income or net cash flow to the
investors in each year of the holding period before debt service. In the initial
year of investment, the net income is forecasted to be equal to approximately
$7.25 million which is equivalent to 62 percent of effective gross income.
Deducting other expenses including capital items results in a net cash flow
before debt service of approximately $6.85 million.
------------------------------------------------------------------------------------------
The Esplanade
Operating Summary
Initial Year of Investment - FY1997
------------------------------------------------------------------------------------------
Aggregate Sum Unit Rate* Operating Ratio
------------------------------------------------------------------------------------------
Effective Gross Income $11,694,651 $28.32 100.0%
Operating Expenses $4,444.190 $10.76 38.0%
Net Income $7,250,461 $17.55 62.0%
Other Expenses $397,273 $0.96 3.4%
Cash Flow $6,853,188 $16.59 58.6%
------------------------------------------------------------------------------------------
* Based on total owned GLA of 413,015 square feet
------------------------------------------------------------------------------------------
Our cash flow model has forecasted the following compound annual growth
rates over the thirteen year holding period 1997-2006.
Net Income: 2.57%
Cash Flow: 2.43%
Growth rates are shown to be 2.57 and 2.43 percent, respectively, which is
a reasonable forecast for a real estate investment of the subject's caliber.
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 poised for expansion or
remerchandising. With fewer buyers for the top performing assets, sales have
been somewhat limited.
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
77 basis points. For the year, 1994 transactions were a mix of quality ranging
from premier, institutional grade centers (Biltmore Fashion Park, Riverchase
Galleria) to B-centers such as Corte Madera Town Center and Crossroads Mall. The
continuation of this trend into 1995 is in evidence as owners of the better
quality malls are either aggressively pricing them or keeping them off of the
market until it improves further. Also, the beating that REIT stocks took has
forced up their yields thereby putting pressure on the pricing levels they can
justify.
Much of the buying over the past 18 to 24 months has been opportunistic
acquisitions involving properties selling near or below replacement cost. Many
of these properties have languished due to lack of management focus or expertise
as well as a limited ability to make the necessary capital commitments for
growth. As these opportunities become harder to find, we believe that investors
will again begin to focus on the stable returns of the dominant Class A product.
The Cushman & Wakefield's Winter 1995 survey reveals that going-in cap
rates for regional shopping centers range between 7.0 and 9.0 percent with a low
average of 7.47 and high average of 8.25 percent, respectively; a spread of 78
basis points. Generally, the change in average capitalization rates over the
Spring 1995 survey shows that the low average decreased by 3 basis points, while
the upper average increased by 15 points. Terminal, or going-out rates are now
averaging 8.17 and 8.83 percent, representing an increase of 22 basis points and
23 basis points, from Spring 1995 averages.
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 Quarter Last Quarter Year Ago
----------------------------------------------------------------------------------------------
Free & Clear Equity IRR
----------------------------------------------------------------------------------------------
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 liquidation's. (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 owner's 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.
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