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Midwest Real Estate Shopping Center LP · 10-Q · For 3/31/96 · EX-99

Filed On 5/15/96   ·   Accession Number 928790-96-129   ·   SEC File 1-09331

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  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 5/15/96  Midwest RE Shopping Center LP     10-Q        3/31/96    3:314K                                   LP Administration/FA

Quarterly Report   —   Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                       9±    43K 
 2: EX-27       Financial Data Schedule for First Quarter 10-Q         1      6K 
                          Midwest Real Estate Shopping Center,                   
                          L.P.                                                   
 3: EX-99       Brookdale Center Appraisal                           123±   458K 


EX-99   —   Brookdale Center Appraisal
Exhibit Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Sales Comparison Approach
"Income Approach
"Retail Market Analysis


COMPLETE APPRAISAL OF REAL PROPERTY ------------------------- Brookdale Center N/E/C of Routes 100 and 152 Brooklyn Center Hennepin County, Minnesota IN A SUMMARY REPORT As of January 1, 1996 Equitable Real Estate Shopping Centers L.P. 3 World Financial Center, 29th Floor New York, New York 10013 Cushman & Wakefield, Inc. Advisory Services 51 West 52nd Street, 9th Floor New York, NY 10019 March 4, 1996 Equitable Real Estate Shopping Centers L.P. 3 World Financial Center, 29th Floor New York, New York 10013 Re: Complete Appraisal of Real Property Brookdale Center N/E/C of Routes 100 and 152 Brooklyn Center Hennepin County, Minnesota Gentlemen: In fulfillment of our agreement as outlined in the Letter of Engagement, Cushman & Wakefield, Inc. is pleased to transmit our report estimating the market value of the leased fee estate in the referenced real property. As specified in the Letter of Engagement, the value opinion reported below is qualified by certain assumptions, limiting conditions, certifications, and definitions, which are set forth in the report. This report was prepared for Equitable Real Estate Shopping Center L.P. ("Client") and it is intended only for the specified use of the Client. It may not be distributed to or relied upon by other persons or entities without written permission of the Appraiser. The property was inspected by and the report was prepared by Brian J. Booth. Richard W. Latella, MAI has reviewed and approved the report. This is a Summary Appraisal Report which is intended to comply with the reporting requirements set forth under Standards Rule 2- 2)b) of the Uniform Standards of Professional Appraisal Practice for a Summary Appraisal Report. As such, it presents only summary discussions of the data, reasoning, and analyses that were used in the appraisal process to develop the appraiser's opinion of value. Supporting documentation concerning the data, reasoning, and analyses is retained in the appraiser's file. The depth of discussion contained in this report is specific to the needs of the client and for the intended use stated below. The appraiser is not responsible for unauthorized use of this report. We are providing this report as an update to our last analysis which was prepared as of January 1, 1995. As such, we have primarily reported only changes to the property and its environs over the past year. As a result of our analysis, we have formed an opinion that the market value of the leased fee estate in the referenced property, subject to the assumptions, limiting conditions, certifications, and definitions, as of January 1, 1996, was: TWENTY FIVE MILLION DOLLARS $25,000,000 This letter is invalid as an opinion of value if detached from the report, which contains the text, exhibits, and an Addenda. Respectfully submitted, Cushman & Wakefield, Inc. Brian J. Booth Retail Valuation Group Richard W. Latella, MAI Senior Director Retail Valuation Group Certified General Real Estate Appraiser License No. 20026517 BJB:RWL:emf C&W File No. 96-9039 SUMMARY OF SALIENT FACTS AND CONCLUSIONS ------------------------------------------- Property Name: Brookdale Center Location: N/E/C of Routes 100 and 152 Brooklyn Center Hennepin County, Minnesota Assessor's Parcel Numbers: A complete listing of the various parcel numbers is contained in the Real Property Taxes and Assessments section of this report. Interest Appraised: Leased Fee Estate Date of Value: January 1, 1996 Date of Inspection: January 19, 1996 Ownership: Equitable Real Estate Shopping Center, L.P. Land Area: Owned by Partnership: 58.02+/- Acres Owned by Anchors: 30.00+/- Acres Total: 88.02+/- Acres Zoning: C2, Commercial District Highest and Best Use If Vacant: Retail use built to its maximum feasible FAR As Improved: Continued retail use as a super-regional shopping center. Improvements Type: Single story super-regional mall with two-level department stores. Year Built Original Construction 1962 3rd Dept. Store (Dayton's) and Mall Shop Expansion 1966 4th Dept. Store (Carson Pirie Scott) 1967 Retenanting & Refurbishing 1970 Retenanting & Refurbishing 1983 Kohl's 1988 Carson Throat Take Back 1994 Carson's to Mervyn's 1995 Type of Construction: Steel frame and masonry exterior facility. GLA Summary * Owned GLA Mall Shops 194,756 SF Kiosks 5,166 SF Total Owned Mall GLA 199,922 SF Non-Owned Anchor Store Space Sears 180,669 SF Dayton's 195,368 SF Mervyn's 140,336 SF JC Penney ** 140,320 SF Kohl's ** 75,000 SF Anchor Owned TBA Stores 40,604 SF Midas Muffler *** 8,254 SF Total Anchor Area 780,551 SF Total Occupancy Area 980,473 SF * Primary space only (excludes secondary storage space). ** The land under the JC Penney and Kohl's is owned by the partnership and leased to anchors. *** Outparcel Operating Data and Forecasts Current Vacant Space 46,154 square feet Current Occupancy Level 77% based on mall GLA; 93.7% overall. Forecasted Stabilized Occupancy (Mall Shops): 94% (exclusive of downtime provisions) Forecasted Date of Stabilized Occupancy: January 1, 2000 1996 Operating Expenses: (Budget): $5,656,300 (Appraisers' Forecast): $5,333,399 Value Indicators Cost Approach: N/A  Sales Comparison Approach: $24,800,000 - $28,800,000  Income Approach Discounted Cash Flow: $25,000,000 Investment Assumptions Rental Growth Rate: 1996-1998 Flat 1999 +1.5% 2000 +2.0% 2001-2005 +2.5% Expense Growth Rate (General): 1996-2005 +3.5% Tax Growth Rate: 1996-2005 +4.0% Sales Growth Rate: 1996 -2.0% 1997 Flat 1998 +1.0% 1999 +2.0% Other Income 2000-2005 +2.5% Tenant Improvement Allowance Raw Space: $40.00/SF Currently Vacant (Second Generation Space): $15.00/SF Future Turnover Space: $10.00/SF Renewing Tenants: $ 1.00/SF Vacancy between Tenants: 6 months Renewal Probability: 70% Terminal Overall Rate: 11.25% Cost of Sale at Reversion: 2.0% Discount Rate: 13.50% Value Conclusion: $25,000,000 Exposure Time Implicit in Value Conclusion: Not more than 12 months Resulting Indicators Going-In Overall Rate: 17.61% Price Per Square Foot of Owned GLA: $125.05 Special Assumptions 1. Throughout this analysis we have relied on information provided by ownership and management which we assume to be accurate. We have been provided with summary information only for new leases in the form of a rent roll or lease abstracts. We have not been provided with actual lease documents. Negotiations are currently underway with additional mall tenants that will enhance the mall's overall appeal and merchandising strategy. In addition, we are advised that a few existing tenants will be leaving the mall as a result of parent company bankruptcies and remerchandising efforts. All tenant specific assumptions are identified within the body of this report. 2. Our cash flow analysis and valuation has recognized that all signed as well as any pending leases with a high probability of being consummated are implemented according to the terms presented to us by General Growth Management. Such leases are identified within the body of this report. Special Assumptions (cont'd.) 3. Dayton Hudson's operating covenant expires in 1996. Management has been negotiating with Dayton's to extend the agreement. We have made a financial contingency in our cash flow assumptions as compensation to Dayton's to induce them to extend the agreement. Should Dayton's vacate the mall, it would have a severe impact on the property. 4. During 1990, the Americans With Disabilities Act (ADA) was passed by Congress. This is Civil Rights legislation which, among other things, provides for equal access to public placed for disabled persons. It applied to existing structures as of January 1992 and new construction as of January 1993. Virtually all landlords of commercial facilities and tenants engaged in business that serve the public have compliance obligations under this law. While we are not experts in this field, our understanding of the law is that it is broad-based, and most existing commercial facilities are not in full compliance because they were designed and built prior to enactment of the law. We noticed no additional "readily achievable barrier removal" problems but we recommend a compliance study be performed by qualified personnel to determine the extent of non- compliance and cost to cure. We understand that, for an existing structure like the subject, compliance can be accomplished in stages as all or portions of the building are periodically renovated. The maximum required cost associated with compliance-related changes is 20 percent of total renovation cost. A prudent owner would likely include compliance-related charges in periodic future common area and tenant area retrofit. We consider this in our future projections of capital expenditures and retrofit allowance costs to the landlord. At this time, most buyers do not appear to be reflecting future ADA compliance costs for existing structures in their overall rate or price per square foot decisions. This is recent legislation and many market participants are not yet fully aware of its consequences. We believe that over the next one to two years, it will become more of a value consideration. It is important to realize that ADA is a Civil Rights law, not a building code. Its intent is to allow disabled persons to participate fully in society and not intended to cause undue hardship for tenants or building owners. 5. We note that the asbestos has been identified in the property and ownership has initiated a program of removal as will be discussed in further detail herein. 6. The forecasts of income, expenses and absorption of vacant space are not predictions of the future. Rather, they are our best estimates of current market thinking on future income, expenses and demand. We make no warranty or representation that these forecasts will materialize. 7. Please refer to the complete list of assumptions and limiting conditions included at the end of this report. TABLE OF CONTENTS Page PHOTOGRAPHS OF SUBJECT PROPERTY 1 INTRODUCTION 4 Identification of Property 4 Property Ownership and Recent History 4 Purpose and Function of the Appraisal 5 Extent of the Appraisal Process 5 Date of Value and Property Inspection 5 Property Rights Appraised 5 Definitions of Value, Interest Appraised, and Other Pertinent Terms 6 Legal Description 7 REGIONAL ANALYSIS 8 NEIGHBORHOOD ANALYSIS 15 RETAIL MARKET ANALYSIS 16 THE SUBJECT PROPERTY 28 REAL PROPERTY TAXES AND ASSESSMENTS 30 ZONING 31 HIGHEST AND BEST USE 32 VALUATION PROCESS 33 SALES COMPARISON APPROACH 34 INCOME APPROACH 51 RECONCILIATION AND FINAL VALUE ESTIMATE 87 ASSUMPTIONS AND LIMITING CONDITIONS 89 CERTIFICATION OF APPRAISAL 91 ADDENDA 92 PHOTOGRAPH SHOWING VIEW OF CENTRAL MALL AREA PHOTOGRAPH LOOKING AT THE NEW SEARS ENTRANCE FACING THE CENTRAL MALL PHOTOGRAPH SHOWING VIEW OF THE ENTRANCE TO DAYTON'S PHOTOGRAPH LOOKING AT THE MERVYN'S THROAT AREA PHOTOGRAPH OF A TYPICAL IN-LINE TENANT INTRODUCTION --------------- Identification of Property Brookdale Center is a single level super-regional shopping mall located in the northwest quadrant of the Minneapolis MSA. It contains 980,473 square feet and is anchored by five department stores. Brookdale was originally constructed in 1962 and included Sears and JC Penney with Dayton's being added in 1966. In 1967, Donaldson's (then Carson Pirie Scott, now Mervyn's) was constructed as Brookdale became the nation's first enclosed four anchor mall. The fifth anchor was added as an outparcel in 1988. Main Street department stores (a division of Federated) built a 75,000 square foot free-standing unit on leased land. Later that year, Federated sold its Main Street division to Kohl's who continues to operate the store today. Brookdale Center is located immediately east of the intersection of County Road 10 and Brooklyn Boulevard (Route 152), adjacent to State Highway 100 and approximately five miles northwest of the Minneapolis Central Business District. The area surrounding Brookdale is characterized by intensive retail development, making Brookdale a strong retail draw in the northwest quadrant of the MSA. Brookdale's market continues to experience average growth with the three fastest growing suburbs in the Twin Cities in its target market (Coon Rapids, Maple Grove, and Plymouth). The center's dated appearance has made it increasingly difficult to compete with its three principle competitors, namely Ridgedale, Rosedale, and Northtown, all of which have undergone major renovations and/or expansions. Based on mall shop GLA, Brookdale Mall is currently about 77 percent occupied with continuing plans for remerchandising and remodeling efforts. Property Ownership and Recent History Fee title to the subject is held by Equitable Real Estate Shopping Centers, L.P. The partnership has owned the mall since acquiring it from the Equitable Life Insurance Company in October, 1986. Carson's, Sears and Dayton's all own their own buildings and pads. JC Penney and Kohl's are both ground tenants. JC Penney's ground lease is for a 50 year term that expires on January 31, 2015. They pay a base rent of $20,930 per year. Kohl's operates under a lease which expires January 31, 2010. They pay a base rent of $175,000 per year. Both of the ground tenants also have percentage rent clauses. The operating covenant for Dayton's expires in 1996, while Carson's and Sears run until 1999. Dayton Hudson has acquired the Carson Pirie Scott store. It was converted to a Mervyn's store during the spring of 1995. We are also advised that ownership has been marketing the property for some time. We are not aware of any serious offers to purchase the property at this writing. Purpose and Function of the Appraisal The purpose of this limited appraisal report is to estimate the market value of the leased fee estate in the property, as of January 1, 1996. Our analysis reflects conditions prevailing as of that date. Our last appraisal was completed on January 1, 1995 and we have focused on changes to the property and market conditions since that time. The function of this appraisal is to provide an independent valuation analysis to our client, which will be used to monitor ownership's investment in the property. Extent of the Appraisal Process In the process of preparing this appraisal, we: - Inspected the exterior of the building and the site improvements and a representative sample of tenant spaces with Ronald Thomas, the mall manager. - Interviewed representatives of the property management company, General Growth Management. - Reviewed leasing policy, concessions, tenant build-out allowances and history of recent rental rates and occupancy with the mall manager. - Reviewed a detailed history of income and expense and a budget forecast for 1996 including the budget for planned capital expenditures and repairs. - Conducted market research of occupancies, asking rents, concessions and operating expenses at competing retail properties including interviews with on-site managers and a review of our own data base from previous appraisal files. - Prepared a detailed discounted cash flow analysis for the purpose of discounting a forecasted net income stream to a present value. - Conducted market inquiries into recent sales of similar regional malls to ascertain sales price per square foot, net income multipliers and capitalization rates. This process involved telephone interviews with sellers, buyers and/or participating brokers. - Prepared a Sales Comparison and Income Approach to value, and reconciled to a final conclusion of value. Date of Value and Property Inspection On January 22, 1996 Brian J. Booth inspected the subject property and its environs. Richard W. Latella, MAI did not inspect the property but provided significant assistance in the preparation of the report and the cash flows and has reviewed and approved the report. Property Rights Appraised Leased fee estate. Definitions of Value, Interest Appraised, and Other Pertinent Terms The definition of market value taken from the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation, is as follows: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: 1. Buyer and seller are typically motivated; 2. Both parties are well informed or well advised, and acting in what they consider their best interests; 3. A reasonable time is allowed for exposure in the open market; 4. Payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto; and 5. The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. Exposure Time Under Paragraph 3 of the definition of market value, the values estimate presumes that "a reasonable time is allowed for exposure in the open market." Exposure time is defined as the estimated length of time the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at the market value on the effective date of the appraisal. Exposure time is presumed to precede the effective date of the appraisal. Definitions of pertinent terms taken from the Dictionary of Real Estate Appraisal, Third Edition (1993), published by the Appraisal Institute, are as follows: Leased Fee Estate An ownership interest held by a landlord with the rights of use and occupancy conveyed by lease to others. The rights of the lessor (the leased fee owner) and the leased fee are specified by contract terms contained within the lease. Market Rent The rental income that a property would most probably command on the open market; indicated by the current rents paid and asked for comparable space as of the date of the appraisal. Definitions of other terms taken from various other sources are as follows: Market Value As Is on Appraisal Date Value of the property appraised in the condition observed upon inspection and as it physically and legally exists without hypothetical conditions, assumptions, or qualifications on the effective date of appraisal. Legal Description A legal description is retained in our files. MAP OF GREATER MINNEAPOLIS AREA REGIONAL ANALYSIS ------------------- Introduction The regional analysis section evaluates general demographic and economic trends in the property's county and MSA to determine the outlook for the overall market and industries based upon comparison of projected population and employment trends with actual historical data. The subject property is located in Brooklyn Center within the metropolitan area of Minneapolis, Minnesota. It is approximately 5 miles north of the Minneapolis Central Business District. Geographic Boundaries Minnesota lies near the geographic center of North America and is the northern-most state in the continental United States. Minneapolis and St. Paul, the state's capital, comprise the nucleus of the seven-county Twin Cities metropolitan area. The Twin Cities metropolitan area extends east to the Wisconsin border and includes the following seven counties: Hennepin, Ramsey, Dakota, Anoka, Scott, Washington, and Carver. The Twin Cities are one of the primary financial, commercial, and industrial centers for the Upper Midwest and have one of the finest educational and instructional systems in the country. Transportation Minneapolis is advantageously located in southeast Minnesota at the head of the Mississippi River and within close proximity to major interstate routes, shipping passages and railroad service. Minneapolis is strategically located to serve a large midwest market with Omaha located 378 miles to the south, Chicago 410 miles southeast; Milwaukee 337 miles southeast and Kansas City 443 miles south. The Greater Minneapolis-St. Paul area's location and wide variety of transportation options has enabled it to be an important transportation hub of the midwest. The Minneapolis-St. Paul metropolitan area is accessible by several major expressways and interstate highways. Interstate 94 and Interstate 35 are the two primary interstate highways serving the metropolitan area. Interstate 94 travels east-west from the Wisconsin border, through the downtown area and continues west towards St. Cloud. Interstate 35 runs west and north-south providing access from Duluth to Fairbult. In addition, the three belt-line freeways, Interstate 494, Interstate 694 and Interstate 394 facilitate travel in and around the first and second ring suburbs. Interstate 35 East runs north-south providing transportation from Burnsville to Duluth. Minnesota has 127,500 miles of street and highway, ranking it fifth in the nation in miles of roadways. Within the metropolitan area, commuter transportation is facilitated by the Metropolitan Transit Commission (MTC), a public agency which owns and operates the second largest bus system in the United States. The MTC annually serves over 70 million passengers in Minneapolis, St. Paul, and the surrounding suburbs. Five additional private operators provide bus route service to the metropolitan area. Due to its strategic location at the head of the Mississippi River, the Twin Cities are the home of six barge lines and are served by over 72 barge carriers. The ports of Minneapolis and St. Paul handle more than eleven million tons of waterborne commodities for domestic and foreign markets each year. The Twin Cities comprise the nation's seventh largest wholesale distribution center and the third largest trucking distribution center, with over 150 first class carriers. The Minneapolis-St. Paul metropolitan area is served by six railroad companies, with the three dominant lines being Burlington Northern, Inc., Chicago and Northwestern Transportation Company, and Soo Line Railroad (CP Rail System). The six truck line railroads have over 5,400 miles of rail trackage. Railroads within the area provide service which is integrated with the national U.S. railway system, as well as the Canadian national railway system. Passenger service is provided by Amtrak. The Minneapolis-St. Paul International Airport is the major airline gateway for the Twin Cities and the Upper Midwest. Population The Twin Cities Metropolitan Area, located in the southeastern quadrant of Minnesota, is home to over half of the state's population. For perspective, the Twin Cities Metropolitan Area, as defined by Sales & Marketing Management, includes eleven counties in Minnesota and two counties in Wisconsin. The regional planning organization, the Metropolitan Council, has prepared population estimates and projections for the area. The historical and projected population growth trends for the seven primary counties in the Twin Cities metropolitan area are summarized in the following table. Twin Cities Metropolitan Area Population Statistics - 1980 Through 2000 Average Average Annual % Annual % Estimated Change Projected Change County 1980 1994 1980-1994 2000 1994-2000 Hennepin 941,411 1,052,800 0.75% 1,109,820 1.06% Anoka 195,998 273,600 2.25% 285,190 0.83% Carver 37,046 57,500 2.97% 62,920 1.82% Dakota 194,279 310,600 3.18% 346,130 2.19% Ramsey 459,784 482,700 0.32% 504,110 0.87% Scott 43,784 68,800 3.06% 77,410 2.39% Washington 113,571 177,300 3.01% 180,180 0.32% Total 1,985,873 2,423,300 1.34% 2,565,760 1.15% Source: U.S. Census and estimates of the Metropolitan Council The population of the metropolitan area increased by a simple average annual rate of 1.3 percent between 1980 and 1994. Dakota, Scott and Carver Counties, which geographically comprise the southern half of the metropolitan area, continue to lead the other counties in rate of population growth through 1994. Population rate of growth in these counties will continue to lead the metro area through the year 2000. Currently, the population of the Twin Cities MSA comprises nearly 60 percent of the total for the State of Minnesota. According to the Metropolitan Council, the metropolitan area is the 12th fastest growing metro area in terms of population among the largest 25 in the United States. However this rate of growth is expected to decrease slightly between 1994 and the year 2000, when population in the metropolitan area is projected to reach 2,566,000. As shown on the following table, the population in the area is also moving from the city toward the suburbs, as has been common among the nation's metropolitan areas. TABLE B Population Census and Forecast Twin Cities Metropolitan Area (as a percentage of the total population) County 1980 1994 2000* 2010* Hennepin: 47% 43% 43% 42% Anoka 10% 11% 11% 11% Carver 2% 2% 2% 3% Dakota 10% 13% 13% 14% Ramsey 23% 20% 20% 19% Scott 2% 30% 3% 3% Washington 6% 7% 7% 8% Source: U.S. Census and Metropolitan Council The preceding table shows a gradual shift of population outward from the city toward the suburbs. The trend is projected to continue, although at a more moderate rate. The collar counties of Anoka, Carver, Dakota, Scott and Washington increased their share of the regional population from 30 percent in 1980 to 36 percent in 1994. Their share of the population is expected to increase to 39 percent by the year 2010. The population shift from the city to suburban areas, is common among most major cities located throughout the Great Lakes and Northeastern regions, and is expected to continue for the foreseeable future. Economic Base The Twin Cities economy, like most major metropolitan areas, began as a manufacturing center. However, today the Twin Cities' economic base is less dependent on the manufacturing sector, and is distributed among many industry groups. Table C summarizes the diversity of employment for the eleven county Twin Cities metropolitan area as of 1995. TABLE C Nonagricultural Wage and Salary Employment Eleven County Area: 1994 Annual Averages Industry Group 1993 % of Total 1994 % Change 1993-94 Manufacturing 270,200 18.0% 265,500 +1.8% Construction 51,800 3.4% 49,000 +5.7% TCU* 82,800 5.5% 78,500 +4.5% Trade 356,800 23.7% 343,400 +3.9% FIRE 111,000 7.4% 107,100 +3.6% Services 423,100 28.2% 405,600 +4.3% Government 207,900 13.8% 201,200 +3.3% Total 1,502,800 100% 1,450,300 +3.6% * Transportation, Communications & Utilities Source: WEFA Manufacturing employment in the Twin Cities has experienced a decline, reducing its share of the market from 23 percent in 1980 to 18 percent in 1994. The greatest improvements were predictably in the services and trade industries which, combined, employed 51.9 percent of the labor market in 1994. Manufacturing had been the Twin Cities' major employer up to the early 1980's, when employment in the trade and service industries matched that of manufacturing, and subsequently surpassed it. The Twin Cities' service industries produced substantial growth in employment from 1980 to 1994. Employment growth during this time period generated 184,150 new service jobs. The most recent addition to the Twin Cities service sector is the 4.2 million square foot Mall of America located in Bloomington, Minnesota. This $625 million retail/entertainment complex has created 11,000 new permanent jobs and has substantially boosted the tourism and service industries. According to reports published in the Twin Cities Star Tribune, 35.0 to 40.0 million visits were made to the Mall of America during its first year of operation. During the forecast period from 1994 to 2000, the service industry in the Twin Cities is expected to continue to lead other employment sectors. The financial service sector is one of the growth prospects in Minneapolis. After suffering financial difficulties during the early 1980's, Norwest Corporation, for example, one of the region's largest banking companies, has broadened and strengthened its portfolio. Norwest is now one of the strongest banking corporations in the Midwest, continuing to expand through the purchase of regional banks. With over 1,300 technology intensive firms, this metropolitan area has one of the largest concentrations of high technology businesses in the nation. It is the nation's largest producer of main frame computers and related equipment. Despite the prominence of this sector, high tech industries in Minnesota, in general, have suffered in recent years. The computer has not been solely responsible for job losses in the manufacturing industries, defense related manufacturing has also had an effect on the local economy. While Minnesota's expenditures have historically ranked high for defense related manufacturing, and research and development, governmental cuts have had an impact on this area of the local economy. In the Twin Cities area, health services are projected to add nearly 2,000 jobs annually through 1996, while companies that provide services to other businesses will add another 3,000 new jobs each year to the local employment base. The Twin Cities will remain a center for professional sports, the arts and other forms of recreation and cultural activities, providing new jobs in these fields. A number of Native American tribal casinos have been constructed in both the metropolitan area and statewide since 1989. Employment in this part of the entertainment industry has expanded rapidly since 1989, and is expected to be a continued source of new employment opportunities in the foreseeable future. Seventeen Fortune 500 industrial firms are headquartered in the metropolitan area in 1994. Some of the nation's largest service firms and private firms are also located in Minneapolis/St. Paul. The presence of these firms is generally indicative of the strength of the local support network and outlook for the business client. Unemployment The region's unemployment rate, according to the Metropolitan Council, has historically outperformed the state and national rates For 1995, the region's unemployment rate was reported at 2.7 percent, well below the U.S. average rate of 5.5 percent. The selected average annual unemployment rates for the seven- county metropolitan area are summarized below in Table D. TABLE D Selected Average Annual Unemployment Rate Seven County Twin Cities Metropolitan Area Year TCMA U.S. 1982 4.2% 6.4% 1986 3.4% 7.2% 1988 4.1% 8.1% 1989 4.1% 5.4% 1990 4.0% 5.5% 1991 4.4% 6.7% 1992 4.4% 7.4% 1993 4.2% 6.8% 1994 3.3% 5.6% 1995 2.7% 5.5% Source: Minnesota Dept. of Economic Security Income Greater Minneapolis-St. Paul's residents are slightly more affluent than those of the Minnesota. The MSA's 1994 median household Effective Buying Income (EBI) of $44,377 ranked 29th among the nation's largest 316 metropolitan statistical areas, according to Sales and Marketing Management's 1995 Survey of Buying Power. The median EBI for the top 316 MSAs in 1994 was $39,443. For the State of Minnesota, the comparable number was $38,076. The distribution of incomes over the last four years in the Minneapolis-St. Paul metropolitan area is illustrated on the following page. Minneapolis-St.Paul MSA Median Household Income 1989-1994 Year $10,000 to $20,000 to $35,000 to $50,000 and $19,999 $34,999 $46,999 Over 1989 17.1% 25.5% 21.3% 24.3% 1990 16.4% 24.6% 21.4% 26.5% 1991 13.4% 24.2% 23.1% 31.0% 1992 12.7% 22.7% 22.5% 34.2% 1993 12.0% 20.9% 21.8% 37.9% 1994 11.0% 19.4% 20.6% 42.3% Source: Sales and Marketing Management's Survey of Buying Power, 1990-1995 As can be seen from the chart above, the number of households with an EBI over $50,000 per year has increased since 1989 while the number of households with EBIs between $10,000 and $20,000 has decreased during the same time period. This growth trend is forecasted to continue. According to Equifax National Decision Systems (ENDS), the MSA is decidedly more affluent than the state as a whole as is shown below. All data is through 1995 Minneapolis MSA State of Minnesota Average Hosehold Income $55,212 $46,744 Median Household Income $43,571 $35,657 Per Capita Income $21,834 $18,579 Culture and Education Minnesota has developed excellent primary and secondary educational systems which rank among the nation's highest in percent of graduating high school seniors. Minnesota also has consistently been in the top ten states in percent of population with college degrees. There are twenty-five colleges and universities in the Twin Cities Metropolitan Area, including the University of Minnesota with about 45,000 full time students. About 39 percent of the Minnesota tax dollar is spent on educational support. Cultural facilities include several dozen theaters, the famous Tyrone Gutherie Theater, a science museum, two art museums, the well known Minnesota Symphony Orchestra and the Ordway Music Theater. Conclusion The Minneapolis-St. Paul metropolitan area remains a vital place of business. The outlook for the Minneapolis-St. Paul metropolitan area is generally positive. While population has increased over the past decade, the projection figures reflect additional gains over the next five years at reasonably good levels. In addition, continued gains in median household income and a diversified economy support the relative stability of the area. Disposal personal income has grown by 4.9 annually since 1985 which has been in excess of the inflation rate. Overall, employment levels have been improving and the area enjoys a low cost of living. The diversified employment base has enabled the greater Minneapolis-St. Paul area to remain competitive on a national level. As we foresee a modest short term economic growth condition, it is our opinion that the long-term prospect for net appreciation in commercial and residential real estate values remains good. Minneapolis-St. Paul should be able to sustain and continue growth in the future while remaining desirable to the major industries and maintaining a strong labor force. NEIGHBORHOOD ANALYSIS ------------------------ Brookdale Center is located immediately east of the intersection of County Road 10 and Brooklyn Boulevard (Route 152), adjacent to State Highway 100, and about five miles northwest of the Minneapolis Central Business District. There is intensive retail development along County Road 10, Brooklyn Boulevard, Xerxes Avenue, and Shingle Creek Parkway, which are the major streets in this area. The surrounding neighborhood is predominantly single-family residential in character. The primary growth period of this area occurred prior to 1970. On balance, Brooklyn Center is a mature, relatively attractive community. While many of its residents are employed in downtown Minneapolis and its environs, Brooklyn Center is an employment center in its own right. Brookdale Center is bounded by State Highway 100 to the southeast, a four-lane, limited access thoroughfare with interchanges at County Road 10 and Brooklyn Boulevard. Beyond State Highway 100, there lies a residential area. Directly north of the subject, across County Road 10, are commercial properties including bank branch offices, a seven-story multi-tenant office building, and automobile dealerships. Directly west, across Xerxes Avenue, are several community and neighborhood centers including Brookdale Square, Brookview Plaza and Brookdale Court. There are also numerous free-standing "big box" retailers in the neighborhood. New construction includes Circuit City which took over the former Children's Place and Office Depot which opened in December 1994. Access to Brooklyn Center is excellent. It is adjacent to Highway 100, a limited access freeway with interchanges at Brooklyn Boulevard and Route 10. Highway 100 connects with Interstate 94/694 one mile northeast, a major east/west route. Brooklyn Boulevard is a major four-lane thoroughfare located only one-fourth mile west of Brooklyn Center. Xerxes Avenue is a four- lane street that serves as a perimeter roadway for the mall as well as providing secondary access for the commercial properties along the east side of Brooklyn Boulevard. Route 10 (also known as Bass Lake Road and 57th Avenue) is a four-lane, east/west thoroughfare. There are two access driveways each from Xerxes Avenue and Route 10; those on Xerxes are stop sign-controlled; those on Route 10 are traffic-signal controlled. We are advised that negative press as of late citing changing demographics, deterioration of the immediate area and safety issues has impacted consumer's perception of the subject and its environs. Nonetheless, our observations indicate that there has been some new construction and investment in the market. We are advised that residential values have been relatively stable. Our demographic survey shows that the primary market area for the subject is expected to see moderate population, household and income growth. As such, we remain cautiously optimistic about the outlook for the immediate area.  RETAIL MARKET ANALYSIS ------------------------- Trade Area Analysis Overview A retail center's trade area contains people who are likely to patronize that particular retail center. These customers are drawn by a given class of goods and services from a particular tenant mix. A center's fundamental drawing power comes from the strength of the anchor tenants as well as the regional and local tenants which complement and support the anchors. A successful combination of these elements creates a destination for customers seeking a variety of goods and services while enjoying the comfort and convenience of an integrated shopping environment. In order to define and analyze the market potential for the Brookdale Center, it is important to first establish the boundaries of the trade area from which the subject will draw its customers. In some cases, defining the trade area may be complicated by the existence of other retail facilities on main thoroughfares within trade areas that are not clearly defined or whose trade areas overlap with that of the subject. The subject's potential trade area partially overlaps with other retail facilities along major retail thoroughfares. The subject's potential trade area partially overlaps with its principal competitors, Rosedale, Ridgedale, and Northtown. The subject's capture rate of area expenditure potential is also influenced to a lesser extent by other regional and super- regional centers in the Minneapolis MSA such as Mall of America. Finally, there are several large strip centers anchored by discount department and specialty stores in the market. While some cross-shopping does occur, these stores act more as a draw to the area, creating an image for the area as a prime destination shopping district and generating more retail traffic than would exist in their absence. Nonetheless, we do recognize and mention these centers to the extent that they provide a complete understanding of the area's retail structure. Scope of Trade Area Traditionally, a retail center's sales are principally generated from within its primary trade area, which is typically within reasonably close geographic proximity to the center itself. Generally, between 55 and 65 percent of a center's sales are generated within its primary trade area. The secondary trade area generally refers to more outlying areas which provide less frequent customers to the center. Residents within the secondary trade area would be more likely to shop closer to home due to time and travel constraints. Typically, an additional 20 to 25 percent of a center's sales will be generated from within the secondary area. The tertiary or peripheral trade area refers to more distant areas from which occasional customers to the mall reside. These residents may be drawn to the center by a particular service or store which is not found locally. Industry experience shows that between 10 and 15 percent of a center's sales are derived from customers residing outside of the trade area. This potential is commonly referred to as inflow. In areas that are benefited by an excellent interstate highway system such as the Minneapolis MSA, the percentage of sales generated by inflow patrons can often run upwards to 25 percent or higher. Once the trade area is defined, the area's demographics and economic profile can be analyzed. This will provide key insight into the area's dynamics as it relates to the subject. The sources of economic and demographic data for the trade are analysis are as follows: Equifax National Decision Systems (ENDS), Sales and Marketing Management's Survey of Buying Power 1985-1994, The Urban Land Institute's Dollars and Cents of Shopping Centers (1995), CACI, The Sourcebook of County Demographics, and The Census of Retail Trade - 1992. We have also been provided with a specific retail study of the mall's trade area and remerchandising recommendations by General Growth Research, which has relied upon shopper surveys and department store receipts in determining the extent of the mall's draw. Before the trade area can be defined, it is necessary that we thoroughly review the retail market and the competitive structure of the general marketplace, with consideration given as to the subject's position. Existing Competition By virtue of its location, Brookdale Center has historically served the near - northwest suburbs of Minneapolis. The growth of development has been, and continues to be in a northwesterly direction emanating from the Central Business District. The expansion of the suburban malls to the north, northwest and west have been in direct response to the nature of population migration patterns. The subject's principal competitors are seen in the Northtown Mall at Highway 10 and University Avenue; the Ridgedale Shopping Center at Highway 12 and Plymouth Road in Minnetonka and Rosedale Shopping Center at Highway 36 and Fairview in Roseville. These three centers have been identified through customer surveys as well as management personnel as being the most directly competitive. Ridgedale was cited in the 1994 Customer Intercept Study as being Brookdale's strongest competitor. The study shows they capture 27 percent of Brookdale's customers and 8 percent of their dollars. Table 1, shown below, identifies the various regional centers found within the general area that compete most directly with the subject. Table 1 Principal Competitive Regional Shopping Centers Distance Property Developer/ Location Year GLA Anchors From Owner Built (sq.ft.) Subject Northtown Mall Angeles Blaine, 1972 800,000 Carson 8-10 Highway 10 & Corp. MN Pirie Scott miles University Avenue 0 Kohl's north Montgomery 15+/-min. Ward Woolworth Ridgedale Shopping Ridgedale Minnetonka, 1975 1,042,100 Carson 10 miles Center Joint MN Pirie Scott southwest Highway 12 & Venture Dayton's 15+min. Plymouth Road JC Penney Sears Rosedale Shopping Equitable Roseville, 1969 1,400,000 Carson 10 miles Center Real MN Pirie Scott east Highway 36 & Estate Dayton's 15+/-min. Fairview Investment JC Penney Managers Montgomery Ward The chart above summarizes the subject's three principal competitors. In addition to the above, we should discuss the threat of new competition. Both Rouse and General Growth (formerly Homart) have announced potential sites in Maple Grove for a regional center within 7 to 10 miles from Brookdale Center. Homart's parcel is part of a 2,000+/- acre master plan development at the northwest quadrant of Interstate 94 and Route 169. The Rouse parcel is a 100 acre site at the intersection of Interstate 94 and the planned highway 610. This site is owned by the Osseo Area school district and is adjacent from two existing schools. Obviously, either one of these sites would have to overcome a number of hurdles in order to proceed. Speculation has it that a number of department stores could serve as anchors including JC Penney, Sears, Montgomery Ward, Macy's, Nordstrom and Dayton's. Should Dayton's decide to locate at the Homart site, it would likely close the Brookdale store due to the distance (7 miles) from the center. At this early juncture, it is difficult to assess the impact of either project. Should one be approved, it will likely be three to five years before it comes on line. It is clear, however, that the subject will need to be renovated at some point in order to maintain its current market position. Trade Area Definition Brookdale is located in Brooklyn Center in the central portion of the Minneapolis MSA approximately 5 miles northwest of the Minneapolis Central Business District. This location makes it one of the more accessible retail locations within the Minneapolis MSA. The advantage of interstate proximity has the effect of expanding the mall's trade area by virtue of reducing travel time for residents in more distant locations. As discussed in the previous section, the location and accessibility of competing centers also has direct bearing on the formation and make-up of a mall's trade area. Principal competition is seen in Northtown, Ridgedale Center and Rosedale Center. The renovation of the latter center has strongly positioned it in its market and has drawn a larger percentage of the subject's shoppers over the past year. Ridgedale is most closely aligned with the subject from a merchandising standpoint and Northtown has probably slipped in its competitive standing over the past year. The downtown Central Business District is probably less of a factor than it was, although it has been, and will always continue to be, more of a force in serving the downtown Central Business District's workforce. The Mall of America, to some extent, impacts Brookdale Center by drawing certain weekend shoppers away from the subject. While we expect that there will continue to be some shakeout at the subject, particularly as tenants close marginally profitable stores and consolidate, we feel that the long term outlook is positive for the subject. Most of its patrons come to the mall for its convenience, as evidenced by the size and depth of its primary market. The convenience factor was cited in the 1994 Intercept Study as being important to the typical shopper. We don't expect that significant changes will occur in terms of the shopping patterns of these groups. Finally, we believe that it is important to note that key community centers and free-standing "category killers" represent a strong force in the market's competitive environment. However, their primary stores (groceries, drugs, home improvement and discounters) are different from those which comprise Brookdale Center. Certainly there is a place for both in most retail environments, including the Shingle Creek Road and general Brookdale Center area. Collectively, they balance out the retail infill and act as a traffic generator that increases the area's status as a destination retail hub. To summarize, the foundation of our analysis in the delineation of trade area of Brookdale Center may be summarized as follows: 1. Highway accessibility including area traffic patterns, geographical constraints and nodes of residential development. 2. The position and nature of the area retail structure including the location of destination retail centers and the strength and composition of the retail infill. 3. The size, anchor tenancy and merchandising composition of the mall tenants, both as existing and as proposed. Ownership has provided us with a survey by General Growth Research which has identified shopping patterns based upon origin by zip codes. We have analyzed this data and find it to be reasonable based upon our examination of the area's retail structure. The report cites that the primary trade area contains 80 percent of the mall's shoppers. The zip codes and corresponding communities that form the basis for this analysis are provided on the following page. Throughout the text, we will discuss the components of the trade area (primary and secondary) along with their individual characteristics. Often we will refer to the total trade area by the collective term "trade area". In essence, the total trade area encompasses the following communities: Brookdale Center ------------------- Primary Secondary ---------- ------------ Zip Code Community Zip Code Community 55429* Minneapolis 55449 Minneapolis 55443* Minneapolis 55418 Minneapolis 55430* Minneapolis 55448 Minneapolis 55369* Osseo 55434 Minneapolis 55428* Minneapolis 55413 Minneapolis 55412* Minneapolis 55422 Minneapolis 55444* Minneapolis 55411 Minneapolis 55445 Minneapolis 55316 Champlin 55442 Minneapolis 55311 Osseo 55374* Rogers 55432 Minneapolis 55303 Minneapolis 55433 Minneapolis 55427 Minneapolis 55330 Elk River 55421 Minneapolis 55441 Minneapolis 55327 Dayton * Most effective markets Source: General Growth Research TABLE ILLUSTRATING DEMOGRAPHIC STATISTICS IN BROOKDALE MALL'S TRADE AREA, MINNEAPOLIS MSA AND STATE OF MINNESOTA Population Once the market area has been established, the focus of our analysis centers on the trade area's population. ENDS provides historic, current and forecasted population estimates for the total trade area. Patterns of development density and migration are reflected in the current levels of population estimates. The report provided on the facing page utilizes the statistics on the basis of the total trade area (primary and secondary) citing the communities as segregated by zip code which are identified in the Addenda. In the Addenda, we have provided detailed profiles of both the primary and secondary components. Between 1980 and 1995, ENDS reports that the population within the total trade area increased by 112,764 residents to 589,608 reflecting a 23.65 percent increase or 1.43 percent per annum. Through 2000, the trade area is expected to continue to increase to 619,379 residents which is equal to an additional 5.05 percent increase or 0.99 percent per annum. Further analysis shows that the primary trade area contains a range of relatively slow growth immediately around the mall as well as communities to the south and southeast, to areas of moderate and high growth in the north and west. Population patterns show these specific areas which ownership should aggressively target in its promotion of the mall. Both historical and projected population growth in both components of the trade area coincide with past and projected growth for the MSA of 1.43 percent and 1.04 percent per annum for the respective periods of 1980 through 1995 and 1995 through 2000. Provided on the following page is a graphic representation of the population change forecasted for the trade area. Note that communities forecasted to have the most significant growth are found to the north and west. Households A household consists of all the people occupying a single housing unit. While individual members of a household purchase goods and services, these purchases actually reflect household needs and decisions. Thus, the household is a critical unit to be considered when reviewing market data and forming conclusions about the trade area as it impacts the retail center. National trends indicate that the number of households are increasing at a faster rate than the growth of the population. Several noticeable changes in the way households are being formed have caused the acceleration in this growth, specifically: - The population in general is living longer on average. This results in an increase of single and two person households. - The divorce rate increased dramatically during the 1980s, again resulting in an increase in single person households. - Many individuals have postponed marriage, thus also resulting in more single person households. According to ENDS, the total trade area gained 57,402 households between 1980 and 1995, an increase of 34.68 percent or 1.98 per annum. Between 1995 and 2000 the area is expected to grow, but at a slower pace of 1.51 percent per year. We see that the secondary area is growing slightly faster than the primary market area. Consistent with the national trend, the trade area is experiencing household growth at rates in excess of population changes primarily due to the factors mentioned above. Correspondingly, a greater number of smaller households with fewer children generally indicates more disposable income. In 1980, there were 2.88 persons per household in the total trade area and by 1995, it is estimated to have decreased to 2.64. MAP ILLUSTRATING PROJECTED POPULATION GROWTH FROM 1995 - 2000 IN BROOKDALE CENTER'S TRADE AREA Trade Area Income One of the most significant statistics for retailers is the trade area's income potential. Income levels, either on a per capita, per family, or household basis, indicate the economic level of the residents of the market area and form an important component of this total analysis. More directly, average household income, when combined with the number of households, is a major determinant of an area's retail sales potential. The trade area income figures support the profile of a broad-based middle income market. According to ENDS, average household income within the primary trade area is approximately $52,716. A comparison to the Minneapolis MSA is shown below: Average Household Income Comparison Primary Total Minneapolis Area Area MSA Average Hosehold Income $52,716 $51,753 $55,212 Median Household Income $43,712 $43,294 $43,571 Per Capita Income $20,063 $19,787 $21,834 Source: Equifax Marketing Decision Systems The subject's trade area is shown to be slightly less affluent than the MSA as a whole. However, areas directly to the west and the northwest of the subject are shown to be affluent suburbs of the MSA. Provided on the following page is a graphic presentation of the average household income distribution throughout the trade area. As can be seen, the subject is adjacent to some of the higher income areas. Retail Sales Another significant statistic for retailers is the total retail sales expended in a given area. According to Sales and Marketing Management, retail sales in the Minneapolis MSA have grown at a compound annual rate of 5.7 percent between 1985 and 1994. This was greater than the State of Minnesota's composite growth over the same period of 5.0 percent. Retail Sales State of Minnesota/ Hennepin Year Minnesota St. Paul County MSA 1985 $27,241,195 $16,187,101 $8,255,326 1986 $28,044,123 $16,837,510 $8,689,408 1987 $28,903,224 $17,640,652 $9,184,604 1988 $31,320,221 $19,092,209 $9,739,271 1989 $32,208,001 $19,998,198 $9,784,828 1990 $33,314,988 $20,446,928 $10,005,141 1991 $35,159,987 $21,358,004 $10,349,106 1992 $35,685,984 $21,919,344 $10,332,167 1993 $39,582,998 $24,336,416 $11,555,647 1994 $42,137,001 $26,742,318 $12,945,510 Compound Annual +5.0% +5.7% +5.1% Growth 1985-94 Source: Sales & Marketing Management Survey of Buying Power (1986-1995). MAP ILLUSTRATING 1995 AVERAGE HOUSEHOLD INCOME IN BROOKDALE CENTER'S TRADE AREA As can be seen, retail sales in Hennepin County have grown at rates below the MSA and consistent with State levels with a compound annual change of 5.1 percent since 1985. While retail sales trends within the MSA and region lend insight into the underlying economic aspects of the market, it is the subject's sales history and potential that is most germane to our analysis. Management has provided us with historical sales for the subject. The sales trends for the specialty stores in the mall are shown in the following table. Brookdale Center Retail Sales Trends Specialty Stores Comparison Year Sales Reporting GLA* Unit Rate (SF) Change * (Millions) 1986 $ 44.1 171,600 $257.00 - 1987 $ 46.1 177,240 $260.10 + 1.2% 1988 $ 49.1 184,400 $266.30 + 2.4% 1989 $ 54.3 191,200 $284.00 + 6.6% 1990 $ 55.1 193,130 $285.30 + .5% 1991 $ 53.1 187,900 $282.60 - .9% 1992 $ 50.3 190,260 $280.04 - .9% 1993 $ 41.7 152,340 $273.73 - 2.2% 1994 $ 38.03 143,028 $265.91 - 2.9% 1995 $ 35.96 142,584 $252.20 - 5.2% Compound Annual - 1.83% Change 1986-95 * Change reported is for unit rate performance. Source: General Growth Company The data above shows that mall shop sales have continued to fall since 1990. December 1995 sales for tenants open for the past thirteen months were $35,959,700, equivalent to $252.00 per square foot. This was down nearly 11.6 percent in terms of aggregate dollars and 5.2 percent on a reporting unit rate basis. The decline was largely contributed to the renovation that was in process within the Mervyn's Throat area as well as a change in consumer perception of the mall related to safety issues and loitering teenagers. By comparison, the Urban Land Institute's Dollars and Cents of Shopping Centers (1995) reports national and regional sales averages for regional and super-regional shopping malls. Nationally, average sales at super-regional centers were reported at $203.09 per square foot in 1994, down 1.4 percent from 1993. For regional malls, average sales are reported to be $176.16, virtually even from 1993. A comparison of national and regional figures is shown on the following chart. Regional/Super-Regional Centers Area Average Median Lower Upper Decile Decile United States $176.16/ $163.54/ $125.88/ $285.40/ $203.09 $198.93 $140.46 $305.23 East $204.96/ $183.05/ $126.07/ $323.74/ $220.64 $183.81 $130.46 $379.81 West $188.63/ $167.46/ $124.00/ $264.89/ $190.51 $187.64 $143.01 $258.68 South $156.27/ $154.18/ $129.63/ $195.24/ $210.30 $207.99 $145.75 $293.70 Midwest $178.99/ $179.24/ $125.50/ $290.57/ $195.03 $192.42 $148.18 $261.09 Source: Urban Land Institute Dollars and Cents of Shopping Centers (1995) As a regional mall in the midwest, the subject's 1995 sales performance of $252 per square foot can be compared to its peers as shown below. Average Subject United States $203.09 $252 Midwest $195.03 $252 As can be seen, the subject is outperforming both its national peer group and regional centers on average in terms of sales productivity. Department Store Sales The Urban Land Institute also tracks sales for owned and non- owned department stores. ULI reports that median sales per square foot for non-owned department stores (national chains) is $186 with the top 10 percent hitting the $315 mark. Owned stores report a median of $128 per square foot with the top 10 percent at $217. General Growth reports that overall department store sales at Brookdale Center for 1994 were approximately $142,328,700 (store by store comparisons for all department stores were not available at this writing). This suggests a .87 percent increase over $141,100,000 in 1993. On a per square foot basis, the department store average was $194.52 per square foot in 1994 and $191.74 in 1993. We have been provided with 1994 sales information for Kohl's and JC Penney. The mall manager, has estimated the sales for the remaining majors. 1994 Anchor Store Sales Store Area(SF) Sales Unit Rate Change from 1993 JC Penney 140,320 $28,073,400 $200.07 -3.10% Kohl's 75,000 $17,355,300 $231.40 +9.60% Dayton's 195,368 $45,000,000* $230.33 Flat Sears 180,669 $35,200,000* $194.83 + .57% Carson/Mervyn's 140,336 $16,700,000 $119.00 +1.18% Total 731,709 $142,328,700 $194.52 + .87% Approximate amount - non-reporting store Sales for the department stores were mixed in 1994. JC Penney's sales down 3.1 percent to $28,073,400 or approximately $200 per square foot. Kohl's saw the most dramatic increase with a sales jump of nearly 10 percent. At $231 per square foot, they were the most productive store last year on a unit rate basis. General Growth Management has supplied estimates only for Dayton's, Sears, and Carson's. At $45.0 million, Dayton's is clearly the highest grossing anchor at the mall. Sales in 1994 were estimated to be flat. Sears and Carson's saw modest increases of .57 percent and 1.18 percent, respectively. Overall, the department store sales were estimated at $142,328,700, up .87 percent over 1993. November 1995 sales have been provided for JC Penney and Kohl's. For year-to-date 1995, Kohl's sales were tracking approximately 5 percent above 1994, and sales at JC Penney were down 5 percent from the same period the prior year. According to the mall manager, Ron Thomas, sales at Sears and Dayton's have remained consistent with 1994 sales. The new Mervyn's store has reportedly had a slow start at the mall. The manager believes sales at Mervyn's are below the former Carson Pirie Scott store. Summary Within the shopping center industry, a trend toward specialization has evolved so as to maximize sales per square foot by deliberately meeting customer preferences rather than being all things to all people. This market segmentation is implemented through the merchandising of the anchor stores and the tenant mix of the mall stores. The subject property reflects this trend toward market segmentation. A review of the existing as well as the proposed tenant mix shows that it has clearly positioned itself at the broad middle of the market. Conclusion We have analyzed the retail trade history and profile of the Minneapolis MSA and in order to make reasonable assumptions as to the continued performance of the subject's trade area. A metropolitan and locational overview was presented which highlighted important points about the study area and demographic and economic data specific to the trade area were presented. The trade area profile discussed encompassed a zip code based analysis that was established based upon a thorough study of the competitive retail structure. Marketing information relating to these sectors was presented and analyzed in order to determine patterns of change and growth as it impacts Brookdale Center. Next we discussed the subject's retail sales history along with its forecasted performance over the near term. The given data is useful in giving quantitative dimensions of the total trade area, while our comments serve to provide qualitative insight into this market. A compilation of this data provides the basis for our projections and forecasts particular to the subject property. The following summarizes our key conclusions. - The subject is benefited by its location in one of the Country's largest metropolitan areas. Within this component of the MSA, the subject is the dominant destination retail center for a primary trade area of nearly 480,000. It is also well positioned to serve the population base which is expected to see continued increases. - The MSA has excellent inter and intra-regional accessibility. The subject is benefited by excellent regional accessibility being located approximately one mile from Interstate 94/694. - The subject offers a diverse merchandising mix with a modest allocation of regional and national tenants. These merchants have the benefit of stronger advertising budgets and are more familiar to shoppers which typically results in higher sales levels. Furthermore, the existing anchor mix has been proven to work in the Minneapolis marketplace by virtue of their duplication found in many area malls. - Brookdale is attracting an older, middle to lower income shopper. These customers reflect national trends of making fewer shopping trips and spending less time at the mall per trip. - While the basic demographics appear to be healthy, the subject's physical plant is somewhat dated and in need of upgrading. There also exists a level of uncertainty with respect to the long term effect of the two proposed malls in Maple Grove and the expansions/renovations at other area malls. To the extent that Brookdale continues its efforts of remerchandising and renovation, we expect that it will remain one of the area's competitive centers. - Concerns at the mall include high occupancy costs, increasing vacancy and declining sales. In addition, through its first six months of operations, the new Mervyn's department store has not had the positive material difference on the mall that was expected. In conclusion, 1995 was a troublesome year for retail in general with Brookdale Center being particularly affected. Management needs to make some hard decisions about its future merchandising philosoply. Quite obviously, the prospect of new competition is of concern. Efforts need to be made to get Dayton's to extend its operating covenant. In addition, Sears and Mervyn's operating agreements expire in 1999 so efforts to extend them should begin shortly. THE SUBJECT PROPERTY ------------------------ The Brookdale Center Mall contains a gross occupancy area of 939,4869 square feet including five anchor tenants. Anchor tenants comprise a total of 731,709 square feet. All own their own buildings while two (JC Penney and Kohl's) lease the land. There is one outparcel tenant (Midas Muffler) which totals 8,254 square feet. A current leasing plan is provided on the facing page. Since our previous report, the major changes in the mall have mainly involved the remodeling of the Sears department store. At the beginning of 1995, Sears completed the remodeling of its entry. Previously, access to the store was gained through the west mall portion of the center. After the remodel, the entry to Sears now faces the central mall area. This change has diminished foot traffic through the west mall area and has initially had a negative impact on the mall in this area. Tenants formerly located within the west mall such as Burger King, Kay Bee Toys, and Baskin & Robins, vacated their spaces in 1995. In order to stop this trend, management needs to find a destination type tenant for the west mall which would increase foot traffic. We are not aware of any interested tenants at this writing. Other changes center around new tenant lease transactions, existing lease renewals, and tenants who have been terminated. As a result, some remodeling and renovation of tenant stores has occurred. Further discussion of these activities is included in the Income Approach of this report. During 1996 no major structural changes have been approved. It is noted that the center has several structural problem such as roof repair, asbestos removal, and the replacement of the main chiller that will have to be considered. Ownership has made some modest efforts to upgrade the mall and improve its appearance. During 1996 a number of capital projects are proposed but as of this writing, none are approved. Some of the larger projects are summarized in the following table. Capital Items Category Description Budget ACM Abatement Retail Merchandising Units $ 144,000 Structure Remove baffless and repaint ceiling $ 110,000 Bump backs $ 25,000 Roof Reroof areas according to IRCA recommendations $ 212,000 Parking Lot Chip/seal and replacement according to Zimmer Consultant $ 175,000 Lighting Upgrade $ 600,000 Lot Signs $ 45,000 Landscaping $ 20,000 Systems Chiller replacement $ 325,000 Energy Conservation Interior Lighting Retrofit $ 90,000 Leasing Five specialty leasing units $ 75,000 Amenities New planters, benches, ash/trash $ 75,000 Code Upgrades to electrical and physical plant $ 50,000 Total Capital Items $1,946,000 Items FLOOR PLAN FOR BROOKDALE CENTER, BROOKLYN CENTER, MINNESOTA We would also note that structurally and mechanically the improvements appear to be in average condition. However, this type of analysis is beyond our expertise and is best made by a professional engineer. Occupancy at Brookdale Center is currently 76 percent. This represents a four percent decline from a year ago. The majority of this space is within the previously discussed West Mall area. In the spring of 1995 Carson's was converted to a Mervyn's department store. Management was optimistic about Mervyn's having a positive impact on the mall. However, through its first six months of operations, the new store has not had the positive material difference that was expected. REAL PROPERTY TAXES AND ASSESSMENTS The subject property is assessed by Hennepin County for the 1995 calendar year. The assessed values and tax liabilities for the property are shown below. Tax Schedule 1995 1995 Assessed Tax Parcel No. Description Value Liabilities 02-118-21-32-0008 Main Mall $49,019,700 $3,027,011 02-118-21-31-0055 Main Mall $ 2,124,600 $ 143,443 Parking 02-118-21-23-0021 Main Mall $ 3,000 $ 193 Parking 02-118-21-31-0056 Kohl's $ 2,753,800 $ 185,923 (land only) 02-118-21-32-0009 JC Penney $ 737,100 $ 47,456 (land only) 02-118-21-32-0010 JC Penney $ 147,800 $ 9,515 (land only) Total $3,413,541 Taxes in 1995 were reported to be approximately 8 percent lower than 1994. Of the $3,413,541 in tax liability in 1995, the majority or approximately $3.56 million is allocated to the mall and Kohl's. We are advised by management that negotiations with taxing authorities and a restructuring of assessments of Hennepin County should result in a reduction in tax liability for 1996 of nearly 30 percent. They have budgeted $2,471,000 for the coming calendar year. In view of the property's declining financial condition and the fact that tenants are not able to support tax obligations in excess of $15.00 per square foot, we believe that it is a reasonable assumption that tax relief will be granted. Thus, we have reflected the budgeted amount of $2,471,000 in our first year expense projection. ZONING -------- The subject site is zoned C2, Commercial District by the City of Brooklyn Center. According to the ordinance, this district is designed to provide for a large concentration of comparison shopping, office, and service needs for persons residing in a densely settled suburban area. This district will allow for an intense use of land to service regional needs and will be located adjacent to high volume major thoroughfares. We are not experts in the interpretation of complex zoning ordinances but the property appears to be a generally conforming use based on our review of public information. The determination of compliance is beyond the scope of a real estate appraisal. However, the City of Brooklyn Center has permitted the construction of the subject to its present configuration. We know of no deed restrictions, private or public, that further limit the subject property's use. The research required to determine whether or not such restrictions exist, however, is beyond the scope of this appraisal assignment. Deed restrictions are a legal matter and only a title examination by an attorney or title company can usually uncover such restrictive covenants. Thus, we recommend a title search to determine if any such restrictions do exist. HIGHEST AND BEST USE HIGHEST AND BEST USE ------------------------ According to the Dictionary of Real Estate Appraisal, Third Edition (1993), a publication of the American Institute of Real Estate Appraisers, the highest and best use is defined as: The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum profitability. We evaluated the site's highest and best use both as currently improved and as if vacant in our original report. In both cases, the highest and best use must meet the aforementioned criteria. After considering all the uses which are physically possible, legally permissible, financially feasible and maximally productive, it is our opinion that a concentrated retail use built to its maximum feasible FAR is the highest and best use of the mall site as vacant. Similarly, we have considered the same criteria with regard to the highest and best use of the site as improved. After considering all pertinent data, it is our conclusion that the highest and best use of the site as improved is for its continued retail/ commercial use. We believe that such a use will yield to ownership the greatest return over the longest period of time. VALUATION PROCESS --------------------- Appraisers typically use three approaches in valuing real property: The Cost Approach, the Income Approach and the Sales Comparison Approach. The type and age of the property and the quantity and quality of data effect the applicability in a specific appraisal situation. The Cost Approach renders an estimate of value based upon the price of obtaining a site and constructing improvements, both with equal desirability and utility as the subject property. Historically, investors have not emphasized cost analysis in purchasing investment grade properties. The estimation of obsolescence for functional and economic conditions as well as depreciation on improvements makes this approach difficult at best. Furthermore, the Cost Approach fails to consider the value of department store commitments to regional shopping centers and the difficulty of site assemblage for such properties. As such, the Cost Approach will not be employed in this analysis due to the fact that the marketplace does not rigidly trade leased shopping centers on a cost/value basis. The Sales Comparison Approach is based on an estimate of value derived from the comparison of similar type properties which have recently been sold. Through an analysis of these sales, efforts are made to discern the actions of buyers and sellers active in the marketplace, as well as establish relative unit values upon which to base comparisons with regard to the mall. This approach has a direct application to the subject property. Furthermore, this approach has been used to develop investment indices and parameters from which to judge the reasonableness of our principal approach, the Income Approach. By definition, the subject property is considered an income/ investment property. Properties of this type are historically bought and sold on the ability to produce economic benefits, typically in the form of a yield to the purchaser on investment capital. Therefore, the analysis of income capabilities are particularly germane to this property since a prudent and knowledgeable investor would follow this procedure in analyzing its investment qualities. Therefore, the Income Approach has been emphasized as our primary methodology for this valuation. This valuation concludes with a final estimate of the subject's market value based upon the total analysis as presented herein.  SALES COMPARISON APPROACH ----------------------------- Methodology The Sales Comparison Approach provides an estimate of market value by comparing recent sales of similar properties in the surrounding or competing area to the subject property. Inherent in this approach is the principle of substitution, which holds that, when a property is replaceable in the market, its value tends to be set at the cost of acquiring an equally desirable substitute property, assuming that no costly delay is encountered in making the substitution. By analyzing sales that qualify as arms-length transactions between willing and knowledgeable buyers and sellers, market value and price trends can be identified. Comparability in physical, locational, and economic characteristics is an important criterion when comparing sales to the subject property. The basic steps involved in the application of this approach are as follows: 1. Research recent, relevant property sales and current offerings throughout the competitive marketplace; 2. Select and analyze properties considered most similar to the subject, giving consideration to the time of sale, change in economic conditions which may have occurred since date of sale, and other physical, functional, or locational factors; 3. Reduce the sale prices to a common unit of comparison, such as price per square foot of gross leasable area sold; 4. Make appropriate adjustments between the comparable properties and the property appraised; 5. Identify sales which include favorable financing and calculate the cash equivalent price; and 6. Interpret the adjusted sales data and draw a logical value conclusion. The most widely-used, market-oriented units of comparison for properties such as the subject are the sale price per square foot of gross leasable area (GLA) purchased, and the overall capitalization rate extracted from the sale. This latter measure will be addressed in the Income Approach which follows this methodology. An analysis of the inherent sales multiple also lends additional support to this methodology. Market Overview The typical purchaser of properties of the subject's caliber includes both foreign and domestic insurance companies, large retail developers, pension funds, and real estate investment trusts (REIT's). The large capital requirements necessary to participate in this market and the expertise demanded to successfully operate an investment of this type, both limit the number of active participants and, at the same time, expand the geographic boundaries of the marketplace to include the international arena. Due to the relatively small number of market participants and the moderate amount of quality product available in the current marketplace, strong demand exists for the nation's quality retail developments. Most institutional grade retail properties are existing, seasoned centers with good inflation protection. These centers offer stability in income and are strongly positioned to the extent that they are formidable barriers to new competition. They tend to be characterized as having three to five department store anchors, most of which are dominant in the market. Mall shop sales are at least $300 per square foot and the trade area offers good growth potential in terms of population and income levels. Equally important are centers which offer good upside potential after face-lifting, renovations, or expansion. With new construction down substantially, owners have accelerated their renovation and remerchandising programs. Little competition from over-building is likely in most mature markets within which these centers are located. Environmental concerns and "no-growth" mentalities in communities continue to be serious impediments to new retail developments. Over the past 18 months we have seen real estate investment return to favor as an important part of many of the institutional investors' diversified portfolios. Banks are aggressively competing for business trying to regain market share they lost to Wall Street and the more secure life insurance companies have reentered the market. The re-emergence of real estate investment trusts (REITs) has helped to provide liquidity within the real estate market, pushing demand for well-tenanted, quality property, particularly regional malls. Currently, REITs are one of the most active segments of the industry and are particularly attractive to institutional investors due to their liquidity. The market for dominant Class A institutional quality malls is tight, as characterized by the limited amount of good quality product available. It is the overwhelming consensus that Class A property would trade in the 7.0 to 8.0 percent capitalization rate range. Conversely, there are many second tier and lower quality malls offered on the market at this time. With limited demand from a much thinner market, cap rates for this class of malls are felt to be in the much broader 8.5 to 15.0 percent range. Reportedly, there are 50+/- malls on the market currently. Pessimism about the long term viability of many of these lower quality malls has been fueled by the recent turmoil in the retail industry. It is felt that the subject fits into this latter category. - When analyzing an investment opportunity, some of the more important "hot buttons" as measured by the recurrence of the responses include: 1. Occupancy Costs - This " health ratio " measure is of fundamental concern today. Investors like to see ratios under 13.0 percent and become quite concerned when they exceed 15.0 percent. This appears to be by far the most important issue to an investor today. Investors are looking for long term growth in the cash flow and want to realize this growth through real rent increases. High occupancy costs limit the amount of upside through lease rollovers. 2. Market Dominance - The mall should truly be the dominant mall in the market, affording it a strong barrier to entry. Some respondents feel this is more important than the size of the trade area itself. 3. Strong Anchor Alignment - Having at least three department stores, two of which are dominant in that market. The importance of the traditional department store as an anchor tenant has returned to favor after several years of weak performance and confusion as to the direction of the industry. As a general rule, most institutional investors would not be attracted to a two-anchor mall. 4. Dense Marketplace - Several of the institutional investors favor markets of 300,000 to 500,000 people or greater within a 5 to 7 mile radius. Population growth in the trade area is also very important. One advisor likes to see growth 50.0 percent better than the U.S. average. Another investor cited that they will look at trade areas of 200,000+/- but that if there is no population growth forecasted in the market, a 50+/- basis point adjustment to the cap rate at the minimum is warranted. 5. Income Levels - Household incomes of $50,000+ which tends to be limited in many cases to top 50 MSA locations. 6. Good Access - Interstate access with good visibility and a location within or proximate to the growth path of the community. 7. Tenant Mix - A complimentary tenant mix is important. Mall shop ratios of 35+/- percent of total GLA are considered average with 75 to 80 percent allocated to national tenants. Mall shop sales of at least $250 per square foot with a demonstrated positive trend in sales is also considered to be important. 8. Physical Condition - Malls that have good sight lines, an updated interior appearance and a physical plant in good shape are looked upon more favorably. While several developers are interested in turn-around situations, the risk associated with large capital infusions can add at least 200 to 300 basis points onto a cap rate. 9. Environmental Issues - The impact of environmental problems cannot be understated. There are several investors who won't even look at a deal if there are any potential environmental issues no matter how seemingly insignificant. 10. Operating Covenants - Some buyers indicated that they would not be interested in buying a mall if the operating covenants were to expire over the initial holding period. Others weigh each situation on its own merit. If it is a dominant center with little likelihood of someone coming into the market with a new mall, they are not as concerned about the prospects of loosing a department store. If there is a chance of loosing an anchor, the cost of keeping them must be weighed against the benefit. In many of their malls they are finding that traditional department stores are not always the optimum tenant but that a category killer or other big box use would be a more logical choice. In the following section we will discuss trends which have become apparent over the past several years involving sales of regional malls. Regional Mall Property Sales Evidence has shown that mall property sales which include anchor stores have lowered the square foot unit prices for some comparables, and have affected investor perceptions. In our discussions with major shopping center owners and investors, we learned that capitalization rates and underwriting criteria have become more sensitive to the contemporary issues affecting department store anchors. Traditionally, department stores have been an integral component of a successful shopping center and, therefore, of similar investment quality if they were performing satisfactorily. During the 1980's a number of acquisitions, hostile take- overs and restructuring occurred in the department store industry which changed the playing field forever. Weighted down by intolerable debt, combined with a slumping economy and a shift in shopping patterns, the end of the decade was marked by a number of bankruptcy filings unsurpassed in the industry's history. Evidence of further weakening continued into 1991-1992 with filings by such major firms as Carter Hawley Hale, P.A. Bergner & Company, and Macy's. In early 1994, Woodward & Lothrop announced their bankruptcy involving two department store divisions that dominate the Philadelphia and Washington D.C. markets. Recently, most of the stores were acquired by the May Department Stores Company effectively ending the existence of the 134 year old Wanamaker name, the nation's oldest department store company. More recently, however, department stores have been reporting a return to profitability resulting from increased operating economies and higher sales volumes. Sears, once marked by many for extinction, has more recently won the praise of analysts. Federated Department Stores has also been acclaimed as a text book example on how to successfully emerge from bankruptcy. They have merged with Macy's and more recently acquired the Broadway chain to form on of the nation's largest department store companies. With all this in mind, investors are looking more closely at the strength of the anchors when evaluating an acquisition. Most of our survey respondents were of the opinion that they were indifferent to acquiring a center that included the anchors versus stores that were independently owned if they were good performers. However, where an acquisition includes anchor stores, the resulting cash flow is typically segregated with the income attributed to anchors (base plus percentage rent) analyzed at a higher cap rate then that produced by the mall shops. However, more recent data suggests that investors are becoming more troubled by the creditworthiness of the mall shops. With an increase in bankruptcies, store closures and consolidations, we see investors looking more closely at the strength and vulnerabilities of the in-line shops. As a result, there has been a marked trend of increasing capitalization rates. TABLE SHOWING 1995 REGIONAL MALL SALES TABLE SHOWING 1994 REGIONAL MALL SALES Cushman & Wakefield has extensively tracked regional mall transaction activity for several years. In this analysis we will show sales trends since 1991. Summary charts for the older sales (1991-1993) are provided in the Addenda. The more recent sales (1994/1995) are provided herein. These sales are inclusive of good quality Class A or B+/- properties that are dominant in their market. Also included are weaker properties in second tier cities that have a narrower investment appeal. As such, the mall sales (1991-95) presented in this analysis show a wide variety of prices on a per unit basis, ranging from $59 per square foot up to $556 per square foot of total GLA purchased. When expressed on the basis of mall shop GLA acquired, the range is more broadly seen to be $93 to $647 per square foot. Alternatively, the overall capitalization rates that can be extracted from each transaction range from 5.60 percent to rates in excess of 11.0 percent. One obvious explanation for the wide unit variation is the inclusion or exclusion of anchor store square footage which has the tendency to distort unit prices for some comparables. Other sales include only mall shop area where small space tenants have higher rents and higher retail sales per square foot. A shopping center sale without anchors, therefore, gains all the benefits of anchor/small space synergy without the purchase of the anchor square footage. This drives up unit prices to over $250 per square foot, with most sales over $300 per square foot of salable area. A brief discussion of historical trends in mall transactions follows. - The fourteen sales included for 1991 show an average price per square foot sold of $282. On the basis of mall shop GLA sold, these sales present a mean of $357. Sales multiples range from .74 to 1.53 with a mean of 1.17. Capitalization rates range from 5.60 to 7.82 percent with an overall mean of 6.44 percent. The mean terminal capitalization rate is approximately 100 basis points higher, or 7.33 percent. Yield rates range between 10.75 and 13.00 percent, with a mean of 11.52 percent for those sales reporting IRR expectancies. - In 1992, the eleven transactions display prices ranging from $136 to $511 per square foot of GLA sold, with a mean of $259 per square foot. For mall shop area sold, the 1992 sales suggest a mean price of $320 per square foot. Sales multiples range from .87 to 1.60 with a mean of 1.07. Capitalization rates range between 6.00 and 7.97 percent with the mean cap rate calculated at 7.31 percent for 1992. For sales reporting a going-out cap rate, the mean is shown to be 7.75 percent. Yield rates again range from 10.75 to around 12.00 percent with a mean of 11.56 percent. - For 1993, a total of sixteen transactions have been tracked. These sales show an overall average sale price of $242 per square foot based upon total GLA sold and $363 per square foot based solely upon mall GLA sold. Sales multiples range from .65 to 1.82 and average 1.15. Capitalization rates continued to rise in 1993, showing a range between 7.00 and 10.10 percent. The overall mean has been calculated to be 7.92 percent. For sales reporting estimated terminal cap rates, the mean is also equal to 7.92 percent. Yield rates for 1993 sales range from 10.75 to 12.50 percent with a mean of 11.53 percent for those sales reporting IRR expectancies. On balance, the year was notable for the number of dominant Class A malls which transferred. - Sales data for 1994 shows fourteen confirmed transactions with an average unit price per square foot of $197 per square foot of total GLA sold and $288 per square foot of mall shop GLA. Sales multiples range from .57 to 1.43 and average .96. The mean going-in capitalization rate is shown to be 8.37 percent. The residual capitalization rates average 8.13 percent. Yield rates range from 10.70 to 11.50 percent and average 11.17 percent. During 1994 many of the closed transactions involved second and third tier malls. This accounted for the significant drop in unit rates and corresponding increase in cap rates. Probably the most significant sale involved the Riverchase Galleria, a 1.2 million square foot center in Hoover, Alabama. LaSalle Partners purchased the mall of behalf of the Pennsylvania Public School Employment Retirement System for $175.0 million. The reported cap rate was approximately 7.4 percent. - Cushman & Wakefield has researched 14 mall transactions which have occurred during 1995. The chart in the Addenda summarizes the pertinent facts regarding each sale. With the exception of Sale No. 95-1 (Natick Mall) and 95-2 (Smith Haven Mall), by and large the quality of malls which have sold are lower than what has been shown for prior years. For example, the average transaction price has been slipping. In 1993, the peak year, the average deal was nearly $133.8 million. Currently, it is shown to be $90.7 million which is even skewed upward by Sale Nos. 95-1 and 95-2. The average price per square foot of total GLA is calculated to be $152 per square foot. The range in values of mall GLA sold are $93 to $607 with an average of $275 per square foot. Characteristics of these lesser quality malls would be higher initial capitalization rates. The range for these transactions is 7.47 to 11.1 percent with a mean of 9.14 percent, the highest average over the past five years. Most market participants feel that continued turmoil in the retail industry will force cap rates to move higher. While these unit prices implicitly contain both the physical and economic factors affecting the real estate, the statistics do not explicitly convey many of the details surrounding a specific property. Thus, this single index to the valuation of the subject property has limited direct application. The price per square foot of mall shop GLA acquired yields one common form of comparison. However, this can be distorted if anchor and/or other major tenants generate a significant amount of income. The following chart summarizes the range and mean for this unit of comparison by year of sale. Transaction Unit Rate Mean Sales Year Range * Multiple 1991 $203 - $556 $357 1.17 1992 $226 - $511 $320 1.07 1993 $173 - $647 $363 1.15 1994 $129 - $502 $288 .96 1995 $ 93 - $607 $264 .98 * Includes all sales by each respective year. As discussed, one of the factors which may influence the unit rate is whether or not anchor stores are included in the total GLA which is transferred. Thus, a further refinement can be made between those malls which have transferred with anchor space and those which have included only mall GLA. Chart A, shown below makes this distinction. CHART A Regional Mall Sales Involving Mall Shop Space Only 1991 1992 1993 1994 Sale Unit NOI Sale Unit NOI Sale Unit NOI Sale Unit NOI No. Rate Per SF No. Rate Per SF No. Rate Per SF No. Rate Per SF 91-1 $257 $15.93 92-2 $348 $25.27 93-1* $355 $23.42 94-1 $136 $11.70 91-2 $232 $17.65 92-9 $511 $33.96 93-4 $471 $32.95 94-3 $324 $22.61 91-5 $203 $15.89 92-11 $283 $19.79 93-5 $396 $28.88 94-12 $136 $14.00 91-6 $399 $24.23 93-7 $265 $20.55 94-14 $241 $18.16 91-7 $395 $24.28 93-14 $268 $19.18 91-8 $320 $19.51 91-10 $556 $32.22 Mean $337 $21.39 Mean $381 $26.34 Mean $351 $25.00 Mean $209 $16.62 * Sale included peripheral GLA. From the above we see that the mean unit rate for sales involving mall shop GLA only has ranged from approximately $209 to $381 per square foot. We recognized that these averages may be skewed somewhat by the size of the sample. To date, there have been no 1995 transactions involving only mall shop GLA. Alternately, where anchor store GLA has been included in the sale, the unit rate is shown to range widely from $53 to $410 per square foot of salable area, indicating a mean of $227 per square foot in 1991, $213 per square foot in 1992, $196 per square foot in 1993, $193 per square foot in 1994 and $145 per square foot in 1995. Chart B following depicts this data. CHART B Regional Mall Sales Involving Mall Shops and Anchor GLA 1991 1992 1993 Sale Unit NOI Sale Unit NOI Sale Unit NOI No. Rate Per SF No. Rate Per SF No. Rate Per SF 91-3 $156 $11.30 92-1 $258 $20.42 93-2 $225 $17.15 91-4 $228 $16.50 92-3 $197 $14.17 93-3 $135 $11.14 91-9 $193 $12.33 92-4 $385 $29.43 93-6 $224 $16.39 91-11 $234 $13.36 92-5 $182 $14.22 93-7 $ 73 $ 7.32 91-12 $287 $17.83 92-6 $203 $16.19 93-9 $279 $20.66 91-13 $242 $13.56 92-7 $181 $13.60 93-10 $ 97 $ 9.13 91-14 $248 $14.87 92-8 $136 $ 8.18 93-11 $289 $24.64 92-10 $161 $12.07 93-12 $194 $13.77 93-13 $108 $ 9.75 93-14 $322 $24.10 93-15 $214 $16.57 Mean $227 $14.25 Mean $213 $16.01 Mean $196 $15.51 CHART B Regional Mall Sales Involving Mall Shops and Anchor GLA 1994 1995 Sale Unit NOI Sale Unit NOI No. Rate Per SF No. Rate Per SF SF 94-2 $296 $23.12 95-1 $410 $32.95 94-4 $133 $11.69 95-2 $272 $20.28 94-5 $248 $18.57 95-3 $ 91 $ 8.64 94-6 $112 $ 9.89 95-4 $105 $ 9.43 94-7 $166 $13.86 95-5 $ 95 $ 8.80 94-8 $ 83 $ 7.63 95-6 $ 53 $ 5.89 94-9 $ 95 $ 8.57 95-7 $ 79 $ 8.42 94-10 $155 $13.92 95-8 $ 72 $ 7.16 94-11 $262 $20.17 95-9 $ 96 $ 9.14 94-13 $378 $28.74 95-10 $212 $17.63 95-11 $ 56 $ 5.34 95-12 $ 59 $ 5.87 95-13 $143 $11.11 95-14 $287 $22.24 Mean $193 $15.62 Mean $145 $12.35 * Sale included peripheral GLA. Analysis of Sales Within Chart B, we have presented a summary of recent transactions (1991-1995) involving regional and super-regional- sized retail shopping malls from which price trends may be identified for the extraction of value parameters. These transactions have been segregated by year of acquisition so as to lend additional perspective on our analysis. Comparability in both physical and economic characteristics are the most important criteria for analyzing sales in relation to the subject property. However, it is also important to recognize the fact that regional shopping malls are distinct entities by virtue of age and design, visibility and accessibility, the market segmentation created by anchor stores and tenant mix, the size and purchasing power of the particular trade area, and competency of management. Thus, the "Sales Comparison Approach", when applied to a property such as the subject can, at best, only outline the parameters in which the typical investor operates. The majority of these sales transferred either on an all cash (100 percent equity) basis or its equivalent utilizing market-based financing. Where necessary, we have adjusted the purchase price to its cash equivalent basis for the purpose of comparison. As suggested, sales which include anchors typically have lower square foot unit prices. In our discussions with major shopping center owners and investors, we learned that capitalization rates and underwriting criteria have become more sensitive to the contemporary issues dealing with the department store anchors. As such, investors are looking more closely than ever at the strength of the anchors when evaluating an acquisition. As the reader shall see, we have attempted to make comparisons of the transactions to the subject primarily along economic lines. For the most part, the transactions have involved dominant or strong Class A centers in top 50 MSA locations which generally have solid, expanding trade areas and good income profiles. Some of the other transactions are in decidedly inferior second tier locations with limited growth potential and near term vacancy problems. These sales tend to reflect lower unit rates and higher capitalization rates. Value "As Is" Because the subject is theoretically only selling mall shop GLA and no owned department stores, we will look at the recent sales involving both types in Chart A more closely. As a basis for comparison, we will analyze the subject based upon projected NOI. The first year NOI has been projected to be $22.02 per square foot (CY 1996), based upon 199,922+/- square feet of owned GLA. Derivation of the subject's projected net operating income is presented in the "Income Approach" section of this report as calculated by the Pro-Ject model. With projected NOI of $22.02 per square foot, the subject falls within the range exhibited by the comparable sales. Since the income that an asset will produce has direct bearing on the price that a purchaser is willing to pay, it is obvious that a unit price which falls toward the middle of the range indicated by the comparables would be applicable to the subject. The subject's anticipated net income can be initially compared to the composite mean of the annual transactions in order to place the subject in a frame of reference. This is shown on the following chart. Sales Mean Subject Subject Year NOI Forecast Ratio 1991 $21.39 $22.02 103% 1992 $26.34 $22.02 84% 1993 $25.00 $22.02 88% 1994 $16.62 $22.02 132% With first year NOI forecasted at approximately 84 to 132 percent of the mean of these sales in each year, the unit price which the subject property would command should be expected to fall within a relative range. Net Income Multiplier Method Many of the comparables were bought on expected income, not gross leasable area, making unit prices a somewhat subjective reflection of investment behavior regarding regional malls. In order to quantify the appropriate adjustments to the indicated per square foot unit values, we have compared the subject's first year pro forma net operating income to the pro forma income of the individual sale properties. In our opinion, a buyer's criteria for the purchase of a retail property is predicated primarily on the property's income characteristics. Thus, we have identified a relationship between the net operating income and the sales price of the property. Typically, a higher net operating income per square foot corresponds to a higher sales price per square foot. Therefore, this adjustment incorporates factors such as location, tenant mix, rent levels, operating characteristics, and building quality. Provided below, we have extracted the net income multiplier from each of the improved sales. We have included only the recent sales data (1993-1994). The equation for the net income multiplier (NIM), which is the inverse of the equation for the capitalization rate (OAR), is calculated as follows: NIM = Sales Price ------------ Net Operating Income Net Income Multiplier Calculation Sale No. NOI/SF Price/SF Net Income Multiplier 93- 1 $23.42 $355 13.38 93- 4 $32.95 $471 14.29 93- 5 $28.88 $396 13.71 93- 7 $20.55 $265 9.90 93- 14 $19.18 $268 13.36 94- 1 $11.70 $136 11.62 94- 3 $22.61 $324 14.32 94- 12 $14.00 $136 9.72 94- 14 $18.16 $241 13.28 Mean $21.38 $288 12.62 Valuation of the subject property utilizing the net income multipliers (NIM) from the comparable properties accounts for the disparity of the net operating incomes ($NOI's) per square foot between the comparables and the subject. Within this technique, each of the adjusted NIM's are multiplied by the $NOI per square foot of the subject, which produces an adjusted value indication for the subject. The net operating income per square foot for the subject property is calculated as the first year of the holding period, as detailed in the "Income Approach" section of this report. Adjusted Unit Rate Summary Sale Net Income Subject Indicated No. Multiplier NOI/SF Price $/SF 93- 1 13.38 $22.02 $294.63 93- 2 14.29 $22.02 $314.67 93- 3 13.71 $22.02 $301.89 93- 4 9.90 $22.02 $218.00 93- 5 13.36 $22.02 $294.19 94- 6 11.62 $22.02 $255.87 94- 7 14.32 $22.02 $315.33 94- 8 9.72 $22.02 $214.03 94- 9 13.28 $22.02 $292.43 Mean 12.62 $22.02 $277.89 From the process above, we see that the indicated net income multipliers range from 9.72 to 14.32 with a mean of 12.62. The adjusted unit rates range from $218.00 to $315.33 per square foot of owned GLA with a mean of $277.89 per square foot. We further recognize that the sale price per square foot of gross leasable area, including land, implicitly contains both the physical and economic factors of the value of a shopping center. Such statistics by themselves, however, do not explicitly convey many of the details surrounding a specific income producing property like the subject. Nonetheless, the process we have undertaken here is an attempt to quantify the unit price based upon the subject's income producing potential. We recognize that most of these transactions involved dominant, Class A malls with good income growth potential. Arguably, this income potential is reflected in the higher unit rates these properties tend to achieve. Over the holding period, we forecast that net income growth will slightly lag inflation. Finally, the subject's net income figure of $22.29 per square foot does not recognize the substantial capital expenditures that we forecast are necessary for the long term viability of the mall. On balance, we would characterize the subject as less desirable than these sales which would warrant a unit rate below the adjusted mean and near the low end of the range. Considering the above average characteristics of the subject relative to the above, we believe that a unit rate range of $220 to $230 per square foot is appropriate. Applying this unit rate range to 199,922+/- square feet of owned GLA results in a value of approximately $44.0 million to $46.0 million for the subject as shown on the following page. 199,922 SF 199,922 SF x $220 x $230 ----------- ----------- $43,982,840 $45,982,060 Rounded Value Estimate - Market Sales Unit Rate Comparison $44,000,000 to $46,000,000 Sales Multiple Method Arguably, it is the mall shop GLA sold and its intrinsic economic profile that is of principal concern in the investment decision process. A myriad of factors influence this rate, perhaps none of which is more important than the sales performance of the mall shop tenants. Accordingly, the abstraction of a sales multiple from each transaction lends additional perspective to this analysis. The sales multiple measure is often used as a relative indicator of the reasonableness of the acquisition price. As a rule of thumb, investors will look at a sales multiple of 1.0 as a benchmark, and will look to keep it within a range of .75 to 1.25 times mall shop sales performance unless there are compelling reasons why a particular property should deviate. The sales multiple is defined as the sales price per square foot of mall GLA divided by average mall shop sales per square foot. As this reasonableness test is predicated upon the economics of the mall shops, technically, any income (and hence value) attributed to anchors that are acquired with the mall as tenants should be segregated from the transaction. As an income (or sales) multiple has an inverse relationship with a capitalization rate, it is consistent that, if a relatively low capitalization rate is selected for a property, it follows that a correspondingly above-average sales (or income) multiple be applied. In most instances, we are not privy to the anchor's contributions to net income. As such, the sales multiples reported may be slightly distorted to the extent that the imputed value of the anchor's contribution to the purchase price has not been segregated. Sales Multiple Summary Sale Going-In Sales No. OAR Multiple 93-1 7.47% 0.92 93-4 7.00% 1.16 93-5 7.29% 1.16 93-7 10.10% 0.65 93-14 7.48% 0.99 94-1 8.60% 0.68 94-3 8.81% 0.81 94-12 10.29% 0.72 94-14 7.53% 0.93 Mean 8.29% 0.89 The sales that are being compared to the subject show sales multiples that range from 0.65 to 1.16 with a mean of about 0.89. As is evidenced, the more productive malls with higher sales volumes on a per square foot basis tend to have higher sales multiples. Based upon forecasted 1996 performance, as well as anticipated changes to the market area, the subject is projected to produce comparable sales of $250 per square foot for all reporting tenants. This is a 1% reduction from 1995 sales. In the case of the subject, the overall capitalization rate being utilized for this analysis is considered to be substantially higher than the mean exhibited by the comparable sales. As such, we would be inclined to utilize a multiple below the mean indicated by the sales. As such, we will utilize a lower sales multiple to apply to just the mall shop space. Applying a ratio of say, 0.75 to 0.80 to the forecasted sales of $250 per square foot, the following range in value is indicated. Unit Sales Volume (Mall Shops) $250 $250 Sales Multiple x 0.75 x 0.80 ------- ------- Adjusted Unit Rate $187.50 $200.00 Mall Shop GLA x 199,922 x 199,922 ------- ------- Value Indication $37,485,375 $39,984,400 The analysis shows an adjusted value range of approximately $37.5 to $40.0 million. Inherent in this exercise are mall shop sales which are projections based on our investigation into the market which might not fully measure investor's expectations. It is clearly difficult to project with any certainty what the mall shops might achieve in the future, particularly as the lease-up is achieved and the property brought to stabilization. While we may minimize the weight we place on this analysis, it does, nonetheless, offer a reasonableness check against the other methodologies. We have also considered in this analysis the fact that the owned anchors are forecasted to contribute approximately $364,579 in revenues in 1996 (base rent obligations and overage). If we were to capitalize this revenue separately at a 10.5 percent rate, the resultant effect on value is approximately $3.5 million. Arguably, department stores have qualities that add certain increments of risk over and above regional malls, wherein risk is mitigated by the diversity of the store types. A recent Cushman & Wakefield survey of free-standing retail building sales consisting of net leased discount department stores, membership warehouse clubs, and home improvement centers, displayed a range in overall capitalization rates between 8.8 and 10.9 percent with a mean of approximately 9.6 percent. All of the sales occurred with credit worthy national tenants in place. The buildings ranged from 86,479 to 170,000 square feet and were located in high volume destination retail areas. Trends indicate that investors have shown a shift in preference to initial return and, as will be discussed in a subsequent section, overall capitalization rates have been showing increases over the past several years. Moreover, when the acquisition of a shopping mall includes anchor department stores, investors will typically segregate income attributable to the anchors and analyze these revenues with higher capitalization rates than those revenues produced by the mall shops. Therefore, based upon the preceding discussion, it is our opinion that overall capitalization rates for department stores are reasonably reflected by a range of 9.5 to 11.0 percent. We have chosen the lower end of the range due to the locational attributes of the subject's trade area and characteristics of the subject property including a lease with contractual rent increases. Therefore, adding the anchor income's implied contribution to value of $3.5 million, the resultant range is shown to be approximately $41 to $43.5 million. Giving consideration to all of the above, the following value range is warranted for the subject property based upon the sales multiple analysis. Estimated Value - Sales Multiple Method Rounded to $41,000,000 to $43,500,000 Conclusion "As Is" We have considered all of the above relative to the physical and economic characteristics of the subject. It is difficult to relate the subject to comparables that are in such widely divergent markets with different cash flow characteristics. The subject does best fit the profile of an older mall that is merchandised reasonably well to meet the needs of its trade area. We do note that the subject's upside potential appears modest as the lease-up of the vacant space and the repositioning of tenants continues. Much of the vacancy is attributed to the space within the Mervyn's throat area. As will be seen in the Income Approach, NOI in the first full year of investment, 1996, is approximately 6 percent below 1997 levels. Furthermore, NOI is projected to increase by an additional 6 percent in 1998. We recognize that an investor may view the subject's position as being vulnerable to new competition. The subject is located in an area that has declined somewhat in recent years in terms of demographics. While its principal trade area cites continued population, household and income growth, the positive changes are occurring in the more outlying communities where new competition is proposed. Furthermore, the physical condition of the mall is nearing the stage when some significant capital expenditures are needed to maintain its market share at the minimum. Finally, Dayton's operating covenant expires in 1996 and there will likely be some expenditure on the ownership's part in order to induce them to stay. Not far beyond this date is the expiration of both Sears and Mervyn's in 1999. After considering all of the available market data in conjunction with the characteristics of the subject property, the indices of investment that generated our value ranges are as follows: Unit Price Per Square Foot Salable SF: 199,922+/- Price Per SF of Salable Area: $220 to $230 Indicated Value Range: $44,000,000 to $46,000,000 Sales Multiple Analysis Indicated Value Range $41,000,000 to $43,500,000 The parameters above show a value range of approximately $41.0 to $46.0 million for the subject with $41.0 to $45.0 million being a more defined conclusion. This range does not account for the expenditures that are forecasted to be necessary to maintain the forecasted net income over the life of the investment holding period. These expenses are discussed in more detail in the Income Approach section of this report but included here would be various physical improvement projects as well as asbestos removal. As the lease-up is forecasted to continue over the next four years, a prospective buyer would incur leasing commissions and tenant improvement allowances. Finally, we have also accounted for costs with respect to extending Dayton's operating covenant, a mall-wide renovation in 1997, as well as considerable capital improvements over the next three years. It is our opinion that a prudent buyer would take these expenses into consideration when viewing the property in its full context. We have calculated the present value (1996) of these expenditures to be approximately $16.2 million. By deducting this amount from the estimates above, a range in value between $24,800,000 and $28,800,000 is indicated for the subject property by the Sales Comparison Approach, as of January 1, 1996.  INCOME APPROACH ----------------- Introduction The Income Approach is based upon the economic principle that the value of a property capable of producing income is the present worth of anticipated future net benefits. The net income projected is translated into a present value indication using the capitalization process. There are various methods of capitalization that are based on inherent assumptions concerning the quality, durability and pattern of the income projection. Where the pattern of income is irregular due to existing leases that will terminate at staggered, future dates, or to an absorption or stabilization requirement on a newer development, the discounted cash flow analysis is the most accurate. Discounted Cash Flow Analysis (DCF) is a method of estimating the present worth of future cash flow expectancies by individually discounting each anticipated collection at an appropriate discount rate. The indicated market value by this approach is the accumulation of the present worth of future projected years' net income (before income taxes and depreciation) and the present worth of the reversion of the estimated property value at the end of the projection period. The estimated value of the reversion at the end of the projection period is based on the capitalization of the next year's projected net income. This is the more appropriate method to use in this assignment, given the step up in lease rates and the long term tenure of retail tenants. A second method of valuation, using the Income Approach, is to directly capitalize a stabilized net income based on rates extracted from the market or built up through mortgage equity analysis. This is a valid method of estimating the market value of the property as of the achievement of stabilized operations. In the case of the subject, operations are not forecasted to achieve stabilization for several years. Thus, the direct capitalization method has been omitted from the valuation process. Discounted Cash Flow Analysis The Discounted Cash Flow (DCF) produces an estimate of value through an economic analysis of the subject property in which the net income generated by the asset is converted to a capital sum at an appropriate rate. First, the revenues which a fully informed investor can expect the subject to produce over a specified time horizon are established through an analysis of the current rent roll, as well as the rental market for similar properties. Second, the projected expenses incurred in generating these gross revenues are deducted. Finally, the residual net income is discounted into a capital sum at an appropriate rate which is then indicative of the subject property's current value in the marketplace. In this Income Approach to the valuation of Brookdale Center, we have utilized a 10 year holding period for the investment with the cash flow analysis commencing on January 1, 1996. Although an asset such as the subject has a much longer useful life, an investment analysis becomes more meaningful if limited to a time period considerably less than the real estate's economic life, but of sufficient length for an investor. A 10-year holding period for this investment is long enough to model the asset's performance and benefit from its continued lease-up and remerchandising, but short enough to reasonably estimate the expected income and expenses of the real estate. TABLE SHOWING PROJECTED ANNUAL CASH FLOW FOR BROOKDALE MALL FROM 1996 TO 2006 The revenues and expenses which an informed investor may expect to incur from the subject property will vary, without a doubt, over the holding period. Major investors active in the market for this type of real estate establish certain parameters in the computation of these cash flows and criteria for decision making which this valuation analysis must include if it is to be truly market-oriented. These current computational parameters are dependent upon market conditions in the area of the subject property as well as the market parameters for this type of real estate which we view as being national in scale. By forecasting the anticipated income stream and discounting future value at reversion to current value, the capitalization process may be applied to derive a value that an investor would pay to receive that particular income stream. Typical investors price real estate on their expectations of the magnitude of these benefits and their judgment of the risks involved. Our valuation endeavors to reflect the most likely actions of typical buyers and sellers of property interest similar to the subject. In this regard we see Brookdale Center as a long term investment opportunity for a competent owner/developer. An analytical real estate computer model that simulates the behavioral aspects of the property and examines the results mathematically is employed for the discounted cash flow analysis. In this instance, it is the PRO-JECT Plus+ computer model. Since investors are the basis of the marketplace in which the subject property will be bought and sold, this type of analysis is particularly germane to the appraisal problem at hand. On the facing page is a summary of the expected annual cash flows from the operation of the subject over the stated investment holding period. A general outline summary of the major steps involved may be listed as follows: 1. Analysis of the income stream: establishment of an economic (market) rent for the tenant space; projection of future revenues annually based upon the existing and pending leases, probable renewals at market rentals, and expected vacancy experience; 2. An estimate of reasonable period of time to achieve stabilized occupancy of the existing property and make all necessary improvements for marketability; 3. Analysis of projected escalation recovery income based upon an analysis of the property's history as well as the experiences of reasonably similar properties; 4. A derivation of the most probable net operating income and pre-tax cash flow (net operating income) less reserves, tenant improvements, and any extraordinary expenses (such as asbestos removal) to be generated by the property by subtracting all property expenses from the effective gross income; 5. Estimation of a reversionary sales price based upon a capitalization of the net operating income (before reserves, tenant improvements and leasing commissions or other capital items). Following is a detailed discussion of the components which form the basis of this analysis. Potential Gross Revenues The total potential gross revenues generated by the subject property are composed of a number of distinct elements; a minimum rent determined by lease agreement, an additional overage rent based upon a percentage of retail sales, a reimbursement of certain expenses incurred in the ownership and operation of the real estate, and other miscellaneous revenues. The minimum base rent represents a legal contract establishing a return to the investors in the real estate, while the passing of certain expenses onto the tenants serves to maintain this return in an era of continually rising costs of operation. The additional rent based upon a percentage of retail sales experienced at the subject property serves to preserve the purchasing power of the residual income to an equity investor over time. Finally, miscellaneous and temporary tenant income adds an additional important source of revenue in the complete operation of the subject property. In the initial year of the investment, 1996, it is projected that the subject property will generate approximately $9,948,767 in potential gross revenues, equivalent to $49.76 per square foot of total appraised (owned) GLA of 199,922 square feet. Mall GLA as used herein refers to the total of in-line shops area and kiosks. These forecasted revenues may be allocated to the following components: Brookdale Center Revenue Summary Initial Year ofInvestment - 1996 Revenue Amount Unit Income Component Rate * Ratio Minimum Rent $4,348,039 $21.75 43.7% Overage Rent $ 260,838 $ 1.30 2.6% Expense Recoveries $4,864,890 $24.33 48.9% Miscellaneous Income $ 475,000 $ 2.38 4.8% Total $9,948,767 $49.76 100.0% * Reflects total owned GLA of 199,922 SF Minimum Rental Income The minimum rent produced by the subject property is derived from that paid by the various tenant types. The projection utilized in this analysis is based upon the actual rent roll and our projected leasing schedule in place as of the date of appraisal, together with our assumptions as to the absorption of the vacant space, market rent growth rates and renewal/turnover probability. We have also made specific assumptions regarding the re-tenanting of the mall based upon deals that are in progress and have a strong likelihood of coming to fruition. In this regard, we have worked with General Growth management and leasing personnel and analyzed each pending deal on a case by case basis. We have incorporated all executed leases in our analysis. For those pending leases that are substantially along in the negotiating process and are believed to have a reasonable likelihood of being completed, we have reflected those terms in our cash flow. These transactions represent a reasonable and prudent assumption from an investor's standpoint. The rental income which an asset such as the subject property will generate for an investor is analyzed as to its quality, quantity and durability. The quality and probable duration of income will affect the amount of risk which an informed investor may expect over the property's useful life. The segregation of the income stream along these lines allows us to control the variables related to the center's forecasted performance with greater accuracy. Each tenant type lends itself to a specific weighting of these variables as the risk associated with each varies. The minimum rents forecasted at the subject property are essentially derived from various tenant categories: major tenant revenue consisting of ground rent obligations of JC Penney and Kohl's; mall tenant revenues consisting of all in-line mall shops. As a sub-category of in-line shop rents, we have segregated kiosk revenues. In our investigation and analysis of the marketplace, we have surveyed, and ascertained where possible, rent levels being commanded by competing centers. However, it should be recognized that large retail shopping malls are generally considered to be separate entities by virtue of age and design, accessibility, visibility, tenant mix and the size and purchasing power of its trade area. Consequently, the best measure of minimum rental income is its actual rent roll leasing schedule. As such, our a analysis of recently negotiated leases for new and relocation tenants at the subject provides important insight into perceived market rent levels for the mall. Insomuch as a tenant's ability to pay rent is based upon expected sales achievement, the level of negotiated rents is directly related to the individual tenant's perception of their expected performance at the mall. Interior Mall Shops Rent from all interior mall tenants comprise the majority of minimum rent. Aggregate rent from the mall shops in the calendar year 1996 is shown to be $4,005,323. Minimum rent may be allocated to the following components: Brookdale Center Minimum Rent Allocation 1996 Revenue Applicable GLA* Unit Rate(SF) Mall Shops $3,809,393 194,756 SF $19.56 Kiosks $ 342,716 5,166 SF $66.34 Total $4,005,323 199,922 SF $20.03 * Represents leasable area as opposed to actual leased or occupied area exclusive of non-owned space. Our analysis of market rent levels for the in-line shops has resolved itself to a variety of influencing factors. Although it is typical that larger tenant spaces are leased at lower per square foot rates and lower percentages, the type of tenant as well as the variable of location within the mall can often distort this size/rate relationship. Typically, we would view the rent attainment levels in the existing mall as being representative of the total property. However, the center is characterized by many older leases, some of which date back over 10 years. In addition, because of the reconfiguration of the Sears court in 1993 through 1994, management had pursued a leasing strategy that has kept certain leases on short terms that will enable them to selectively terminate a tenant, relocate or expand others and generally allow for greater flexibility to accommodate the needs of more desirable tenants. 1995 Leasing Activity 1995 was a relatively slow year in terms of leasing activity, considering the large amount of vacant space which was created with the completion of the Mervyn's throat area. The space was completed at a cost of approximately $1 million and was available for tenant leasing throughout the year. Provided below is a summary of some of the new leasing activity for 1995 throughout the mall. - Foot Locker formerly occupied 2,038 square feet in suite 145. In July they expanded into suite 140 which was formerly occupied by Bachmans. The new suite 140 now totals 3,626 square feet. Foot Locker signed a ten year lease at a flat rate of $37.00 per square foot per year. Foot Locker was responsible for all costs involved with creating the new space. - Piercing Pagoda leased a new 250 square foot kiosk space for four years at $32,000 per annum. - Champs took space 183, a prime suite of 5,134 square feet on the center concourse. The lease commenced in January, 1995 and is for ten years at a flat rent of $18.00 per square foot. The tenant received a tenant improvement allowance of $128,750, equivalent to approximately $25.00 per square foot which was funded in 1995. - Carlton Cards took Space 145 totaling 1,470 square feet for approximately ten years. The initial annual rent is $28.00 per square foot and includes two dollar step-ups in rent every two years with the final rent per square foot ending at $36.00. - Gordon's Jewelers signed a ten year lease extension for space 164 which totals 1,328 square feet. The lease commenced in November and has an initial annual rent of $60.00 per square foot. The rent increases to $65.00 per square foot in February 1999 and to $70.00 per square foot in February 2003. - Magic Nails took space 275 totaling 796 square feet. The four year lease commenced in October and has a flat rent of $30.00 per square foot over the entire term. - Five tenants whom vacated their spaces in 1995 were Sbarro's, Glamour Shots, Burger King, and Kay Bee Toys. - Arby's signed a three year renewal for their existing suite 290. The three year agreement has a flat annual rent of $8.00 per square foot, which reflects an approximate 50% decrease from the previous rent. TABLE ILLUSTRATING RECENT LEASING ACTIVITY - MALL SHOP TENANTS BY SIZE - BROOKDALE CENTER (MINNEAPOLIS, MN) On the facing page we have summarized and allocated the recent leasing (in-line shops only) to the respective size categories which seem reasonable size breaks for analysis purposes. These leases include new deals and tenant renewals within the mall. Since the bulk of the recent leasing has been by smaller tenants (under 3,500 square feet), we have broadened the scope to include several larger transactions. The 21 leases show weighted averages ranging from $15.20 to $50.00 per square foot. As can be seen, the weighted average lease rate is $21.69 per square foot. Brookdale Center Recent Leasing Activity In-Line Shops Only Allocated by Size Category No. of Weighted Leases Average Category 1: Less Than 750 SF 2 $50.00 Category 2: 751 1,200 SF 5 $30.81 Category 3: 1,201 - 2,000 SF 4 $27.75 Category 4: 2,001 3,500 SF 4 $20.50 Category 5: 3,501 - 5,000 SF 3 $25.87 Category 6: 5,001 - 10,000 SF 3 $15.20 First Year Rent Total Average 21 $21.69 Our experience has generally shown that there is typically an inverse relationship between size and rent. That is to say that the larger suites will typically command a lower rent per square foot. The previous chart tends to loosely confirm this observation. Category 1 (less than 750 SF) shows an average rent of $50.00 per square foot. The average then declines to $15.20 per square foot for Category 6 (5,001 - 10,000 SF). The only anomaly appears to be Category 5 (3,501 - 5,000 SF) wherein the lease rate of $25.87 per square foot exceeds Category 4. This is due to the small sample size (three leases) which are skewed by the Foot Locker deal. Market Comparisons - Occupancy Cost Ratios In further support of developing a forecast for market rent levels, we have undertaken a comparison of minimum rent to projected sales and total occupancy costs to sales ratios. Generally, our research and experience with other regional malls shows that the ratio of minimum rent to sales falls within the 8 to 12 percent range in the initial year of the lease with 8 percent to 10 percent being most typical. By adding additional costs to the tenant, such as real estate tax and common area maintenance recoveries, a total occupancy cost may be derived. Expense recoveries and other tenant charges can add up to 100 percent of minimum rent and comprise the balance of total tenant costs. The typical range for total occupancy cost-to-sales ratios falls between 12 and 15 percent. As a general rule, where sales exceed $250 to $275 per square foot, 15 percent would be a reasonable cost of occupancy. Experience and research show that most tenants will resist total occupancy costs that exceed 16 to 18 percent of sales. However, ratios of upwards to 20 percent are not uncommon. Obviously, this comparison will vary from tenant to tenant and property to property. In higher end markets where tenants are able to generate sales above industry averages, tenants can generally pay rents which fall toward the upper end of the ratio range. Moreover, if tenants perceive that their sales will be increasing at real rates that are in excess of inflation, they will typically be more inclined to pay higher initial base rents. In this context, we have provided an occupancy cost analysis for several regional malls with which we have had direct insight over the past year. This information is provided on the following page. On average, these ratio comparisons provide a realistic check against projected market rental rate assumptions. TABLE COMPARING OCCUPANCY COSTS FOR VARIOUS MSAs AROUND THE UNITED STATES TABLE CALCULATING AVERAGE MALL SHOP RENT AT BROOKDALE CENTER From this analysis we see that the ratio of base rent to sales ranges from 7.1 to 10.6 percent, while the total occupancy cost ratios vary from 9.6 to 17.3 percent when all recoverable expenses are included. The surveyed mean for the eighteen malls analyzed is 8.7 percent and 13.4 percent, respectively. Some of the higher ratios are found in older malls situated in urban areas that have higher operating structures due to less efficient layout and designs, older physical plants, and higher security costs, which in some malls can add upwards of $2.00 per square foot to common area maintenance. These relative measures can be compared with two well known publications, The Score by the International Council of Shopping Centers and Dollars & Cents of Shopping Centers (1995) by the Urban Land Institute. The most recent publications indicate base rent to sales ratios of approximately 6.8 to 8.0 percent and total occupancy cost ratios of 12.0 and 12.3 percent, respectively. In general, while the rental ranges and ratio of base rent to sales vary substantially from mall to mall and tenant to tenant, they do provide general support for the rental ranges and ratio which is projected for the subject property. Conclusion - Market Rent Estimate for In-Line Shops Previously, in the "Retail Market Analysis" section of the appraisal, we discussed the subjects' sales potential. Comparable mall sales in calendar year 1995 are projected to be $255 per square foot, a four percent decline from 1994 sales. Sales are projected to decline slightly (2 percent) in 1996 to approximately $250 per square foot. Most of the decline is attributed to the large number of vacant suites within the Mervyn's Throat area. As these suites begin to be absorbed the mall will become more attractive to potential shoppers and sales should begin to increase. In the previous discussions, the overall attained rent was shown to be $21.69 per square foot on average. After considering all of the above, we have developed a weighted average rental rate of approximately $20.00 per square foot based upon a relative weighting of a tenant space by size. We have tested this average rent against total occupancy cost. Since total occupancy costs are projected to be at the high end for a mall of the subject's calibre, we feel that base rent should not exceed an 8.0 percent ratio (to sales) on average. Furthermore, this average of approximately $20.00 per square foot is believed to be reasonable in light of the average rent attained by the recent leasing activity which has slightly exceeded this level. The average rent is a weighted average rent for all in-line mall tenants only. This average market rent has been allocated to space as shown on the facing page chart. Occupancy Cost - Test of Reasonableness Our weighted average rent of approximately $20.00 can next be tested against total occupancy costs in the mall based upon the standard recoveries for new mall tenants. Our total occupancy cost analyses can be found on the following chart. Brookdale Center Total Occupancy Cost Analysis - 1996 Tenant Cost Estimated Expenses/SF Economic Base Rent $ 20.00 (Weighted Average) Occupancy Costs (A) Common Area Maintenance (1) $ 6.37 Real Estate Taxes (2) $ 12.35 Other Expenses (3) $ 2.00 Total Tenant Costs $ 40.82 Projected Average Sales (1996) $250.00 Rent to Sales Ratio 8.04% Cost of Occupancy Ratio 16.32% (1) CAM expense is based on average occupied area (GLOA) of mall shop GLA. Generally, the standard lease clause provides for a 15 percent administrative factor less certain exclusions. including anchor contributions. The standard denominator is based on occupied (leased) versus leasable area. A complete discussion of the standard recovery formula is presented later in this report. (2) Tax estimate is based upon an average occupied area (GLOA) which is the recovery basis for taxes. It is exclusive of majors contributions (department stores) and reflects the reduction in taxes in accordance with the budget. (3) Other expenses include tenant contributions for water and sewer, and other miscellaneous items. Total costs, on average, are shown to be 16.32 percent of projected average 1996 retail sales which we feel is high. This is due primarily to the fact that real estate taxes at Brookdale Center are projected to be $12.35. Although this is a $3.00 per square foot decline from 1995, it is still high compared with national averages and would be a concern to any potential tenant. However, the high average costs are occupancy sensitive should decline as some of the vacancy is absorbed. As cited earlier, much of the vacancy has to do with the large amount of in-line GLA which was taken back with the Mervyn's Throat strategy. For instance, the average occupied GLA is projected to increase from 159,912 square feet in 1996 to 184,866 square feet in 1998. As the lease-up and remerchandising continues, we would expect that sales have a good chance to increase to levels in excess of our conservative growth rate assumption. It is emphasized that these rent categories provided a rough approximation of market rent levels for a particular suite. This methodology is given more credence when projecting rent levels for vacant space where a potential tenant is unknown and their sales performance is difficult to forecast. Also guiding our analysis were the tenants location in the mall, (i.e. side court vs. center court) its merchandise category and sales history. This is of particular importance with the subject since its older layout with multiple side courts results in rents which would tend to fall below the average. Since most of the newer leasing activity has involved suites along the center concourse or higher visibility areas, we would be inclined to consider lower rents for certain side court locations. Therefore, in many cases our assumed market rent would deviate from the range indicated above in many instances. Kiosks We have also segregated permanent kiosks within our analysis since they typically pay a much higher unit rent. There are currently a total of 14 permanent kiosks, including two bank ATM machines. Among the remaining 12, a range in size from 220 square feet to 842 square feet are shown. Some of the more recent leases can be summarized as follows: Kiosk Rentals Annual Suite# Tenant Size(SF) Term Rent Unit Rate 3501 Piercing Pagoda 250 5/95 -4/99 $32,000 $128.00 3513 Auntie Anne's 294 11/94 -1/05 $25,000 $ 85.02 3511 Coopers Watchworks 228 3/91 -1/96 $26,000 $114.04 3507 Things Remembered 325 10/92 -1/02 $33,000 $101.54 3512 The Eye Guys 220 3/91 -1/96 $25,000 $113.64 3510 Baskin Robins 378 2/90 -1/95 $25,742 $ 68.10 It is difficult to ascribe a unit rate ($ per square foot) to the kiosks at Brookdale since they vary so much in size. In the aggregate, we see that permanent kiosks command $25,000 to $33,000. The most recent lease is with Piercing Pagoda at $32,000 per annum. In this analysis we have forecasted a market rent of $27,500 for kiosks under 400 square feet and $30,000 for those in excess of $400 per square foot. Bank machines are ascribed a market rent of $12,000 per annum. Our analysis assumes five (5) year terms with a 10 percent increase in rent after the third lease year. It is noted that it is not uncommon for some kiosk tenants to pay mall charges, as they do at Brookdale. Concessions Free rent is an inducement offered by developers to entice a tenant to locate in their project over a competitor's. This marketing tool has become popular in the leasing of office space, particularly in view of the over-building which has occurred in many markets. As a rule, most major retail developers have been successful in negotiating leases without including free rent. Our experience with regional malls shows that free rent is generally limited to new projects in marginal locations without strong anchor tenants that are having trouble leasing, as well as older centers that are losing tenants to new malls in their trade area. Management reports that free rent has been a relative non- issue with new retail tenants. A review of the most recent leasing confirms this observation. It has generally been limited to one or two months to prepare a suite for occupancy when it has been given. Accordingly, we do not believe that it will be necessary to offer free rent to retail tenants at the subject. It is noted that while we have not ascribed any free rent to the retail tenants, we have, however, made rather liberal allowances for tenant workletters which acts as a form of inducement to convince a tenant to locate at the subject. These allowances are liberal to the extent that ownership has been relatively successful in leasing space "as is" to tenants. As will be explained in a subsequent section of this appraisal, we have made allowances of $15.00 per square foot to new (currently vacant) and $10.00 per square foot for future turnover space. We have also ascribed a rate of $1.00 per square foot to rollover space. Furthermore, we have used an allowance of $25.00 per square foot for any "raw" space presently located in the former Carson's Throat area. This assumption offers further support for the attainment of the rent levels previously cited. Absorption Finally, our analysis concludes that the current vacant retail space will be absorbed over a four year period through January 2000. We have identified 46,154 square feet of vacant space, net of newly executed leases and pending deals which have good likelihood of coming to fruition. This is equivalent to 23.09% percent of mall GLA and 4.7 percent overall. Of this total approximately 19,689 square feet or 43 percent of the vacant space is space comprising the former Carson's Throat area which was taken back and reconstructed in order to accommodate mall shop space during 1994. During the past year, two leases for 2,972 square feet were signed in the throat area: Regis Hair Style (1,103 square feet) and Radio Shack (1,869 square feet). During 1995, four in-line suites and one kiosk were vacated totaling 11,415 square feet. The following table summarized the vacated tenants. Tenant Suit Area (SF) Baskin Robins 3510 378 Burger King 250 2,407 Kay-Bee Toys 270 3,883 Lechters 246 2,946 Sbarro 245 1,801 Total 11,415 It is noted that all of these tenants were located within the west mall portion of the center. This is the court area that led to the former Sears entrance. Since the reconfiguration of the Sears entrance towards the central mall area, foot traffic within the west mall has slowed and sales for in-line tenants has reportedly suffered. In order to stop this trend, management needs to find a destination type tenant for the west mall which would increase foot traffic. TABLE ILLUSTRATING LEASE-UP/ABSORPTION PROJECTIONS FOR BROOKDALE CENTER The chart on the facing page details our projected absorption schedule. The absorption of the in-line space over a four year period is equal to 2,885 square feet per quarter. We have conservatively assumed that the space will all lease at the 1996 base date market rent estimate as previously referenced which implies no rent inflation for this absorption space. Anchor Tenants The final category of minimum rent is derived by the contractual ground lease obligations among the two anchor tenants. In 1996, these revenues total $195,930. The following schedule details the major tenant rent obligations. Schedule of Anchor Tenant Revenues Demised Lease Expiration Annual Tenant Area With Options Rent JC Penney 140,320 SF* 12/2015 $ 20,930 Kohl's 75,000 SF* 1/2010 $ 175,000 Total 215,320 SF* - $ 195,930 * Represents building area and not necessarily the pad area subject to ground lease. Rent Growth Rates Market rent will, over the life of a prescribed holding period, quite obviously follow an erratic pattern. A review of investor's expectations regarding income growth shows that projections generally range between 3.00 and 4.00 percent for retail centers. Cushman & Wakefield's Winter 1995 survey of pension fund, REITs, bank and insurance companies, and institutional advisors reveals that current income forecasts are utilizing average annual growth rates between zero and 5.0 percent. The low and high mean is shown to be 2.8 and 3.9 percent, respectively. (see Addenda for survey results). The Peter F. Korpacz Investor Survey (Fourth Quarter 1995) shows slightly more conservative results with average annual rent growth of 3.16 percent. The Minneapolis metropolitan area in general has been negatively impacted by the recession. Sales at many retail establishments have been down for the past few years. The impact of Mall of America will likely continue to be felt as some shakeout will inevitably continue. Sales at Brookdale have been down as a result of the renovation to the Mervyn's Throat area as well as the general economy around the mall and heightened competition from its primary competitors. The tenants' ability to pay rent is closely tied to its increases in sales. However, rent growth can be more impacted by competition and management's desire to attract and keep certain tenants that increase the mall's synergy and appeal. As such, we have been conservative in our rent growth forecast. Our market rent growth rate forecast is summarized in the following chart. Market Rent Growth Rate Forecast Period Annual Growth Rate * 1996-1998 0.0% 1999 +1.5% 2000 +2.0% 2001-2005 +2.5% * Indicated growth rate over the previous year's rent Releasing Assumption The typical lease term for new in-line retail leases in centers such as the subject generally ranges from five to twelve years. Market practice dictates that it is not uncommon to get rent bumps throughout the lease terms either in the form of fixed dollar amounts or a percentage increase based upon changes in some index, usually the Consumer Price Index (CPI). Often the CPI clause will carry a minimum annual increase and be capped at a higher maximum amount. For new leases in the regional malls, ten year terms are most typical. Essentially, the developer will deliver a "vanilla" suite with mechanical services roughed in and minimal interior finish. This allows the retailer to finish the suite in accordance with their individual specifications. Because of the up-front costs incurred by the tenants, they require a ten year lease term to adequately amortize these costs. In certain instances, the developer will offer some contribution to the cost of finishing out a space over and above a standard allowance. Upon lease expiration, it is our best estimate that there is a 70 percent probability that an existing tenant will renew their lease while the remaining 30 percent will vacate their space at this time. While the 30 percent may be slightly high by some historic measures, we think that it is a prudent assumption. Furthermore, the on-going targeted remerchandising will result in early terminations and relocations that will likely result in some expenditures by ownership. An exception to this assumption exists with respect to existing tenants who, at the expiration of their lease, have sales that are substantially below the mall average and have no chance to ever achieve percentage rent. In these instances, it is our assumption that there is a 100 percent probability that the tenant will vacate the property. This is consistent with ownership's philosophy of carefully and selectively weeding out under-performers. As stated, it is not uncommon to get increases in base rent over the life of a lease. The subject's recent leasing activity attests to this observation. Our global market assumptions for non-anchor tenants may be summarized as shown on the following page. Brookdale Center Renewal Assumptions Lease Free Tenant Tenant Type Term Rent Steps Rent Alterations In-Line Mall Shops 10 years 10% in lease year 6 No Yes Kiosks 5 years No rent step No No yrs. The rent step schedule upon lease expiration applies in most instances. However, there is one exception to this assumption with respect to tenants who are forecasted to be in a percentage rent situation during the onset renewal period. This could occur due to the fact that a tenant's sales were well above its breakpoint at the expiration of the base lease. In these instances, we have assumed a flat rent during the ensuing lease term. This conservative assumption presumes that ownership will not achieve rent steps from a tenant who is also paying overage rent from day one of the renewal term. Nonetheless, we do note that ownership has been successful in some instances in achieving rent steps when a tenant's sales place him in a percentage rent situation from the onset of a new lease. Upon lease rollover/turnover, the space is forecasted to be released at the higher of the last effective rent (defined as minimum rent plus overage rent if any) and the ascribed market rent as detailed previously increasing by our market rent growth rate assumption. Conclusion - Minimum Rent In the initial full year of the investment (CY 1996), it is projected that the subject property will produce approximately $4,348,039 in minimum rental income. This estimate of base rental income is equivalent to $21.74 per square foot of total owned GLA. Alternatively, minimum rental income accounts for 45.0 percent of all potential gross revenues. Further analysis shows that over the holding period (CY 1996-2005), minimum rent advances at an average compound annual rate of 3.6 percent. This increase is a synthesis of the mall's lease-up, fixed rental increases as well as market rents from rollover or turnover of space. Overage Rent In addition to the minimum base rent, many of the tenants of the subject property have contracted to pay a percentage of their gross annual sales over a pre-established base amount as overage rent. Many leases have a natural breakpoint although an equal number do have stipulated breakpoints. The average overage percentage for small space retail tenants is in a range of 5 to 6 percent with food court and kiosk tenants generally at 7 to 10 percent. Anchor tenants typically have the lowest percentage clause with ranges of 1.5 to 3 percent which is common. Traditionally, it takes a number of years for a retail center to mature and gain acceptance before generating any sizable percentage income. As a center matures, the level of overage rents typically becomes a larger percentage of total revenue. It is a major ingredient protecting the equity investor against inflation. In the "Retail Market Analysis" section of this report, we discussed the historic and forecasted sales levels for the mall tenants. Because the mall has been involved in a number of changes, it is difficult to predict with accuracy what sales will be on an individual tenant level. As such, we have employed the following methodology. - For existing tenants who report sales, we have forecasted that sales will continue at our projected sales growth rate as discussed below. - For tenants who do not report sales or who do not have percentage clauses, we have assumed that a non- reporting tenant will always occupy that particular space. - For new tenants, we have projected sales at the forecasted average for the center at the start of the lease. In 1996 this would be approximately $250 per square foot. On balance, our forecasts are deemed to be conservative. Generally, most percentage rent is deemed to come from existing tenants with very little forecasted from new tenants. From our experience we know that a significant number of new tenants will be into a percentage rent situation by at least the midpoint of their leases. Furthermore, it should be noted that JC Penney supplies a large percentage of the mall's overage rent. Our conservative posture warrants that there exists some upside potential through a reasonable likelihood of overage revenues above our forecasted level. Thus, in the initial full year of the investment holding period, overage revenues are estimated to amount to $260,838 (net of recaptures) equivalent to $1.30 per square foot of total GLA and 2.6 percent of potential gross revenues. Sales Growth Rates In the "Retail Market Analysis" section of this report, we discussed that retail specialty store sales at the subject property have been declining in recent years. Retail sales in the Minneapolis MSA have been increasing at a compound annual rate of 5.7 percent per annum since 1985, according to Sales and Marketing Management. According to both the Cushman & Wakefield and Korpacz surveys, major investors are looking at a range of growth rates of 0 percent initially to a high of 6 percent in their computational parameters. Most typically, growth rates of 4 percent to 5 percent are seen in these surveys. Nationally, retail sales (excluding automotive sales) have been increasing at a compound annual rate of 6.2 percent since 1980, and 4.9 percent per annum since 1990. After considering all of the above, we have forecasted that sales for existing tenants will decline by 2.0 percent in 1996. This is consistent with recent performance at the mall as well as budgetary projections. Subsequently, we have forecasted no growth for 1997, an increase of 1 percent in 1998 and 2.0 percent in 1999, followed by a more normalized increase of 2.5 percent per annum thereafter. Sales Growth Rate Forecast Period Annual Growth Rate 1996 - 2.0% 1997 Flat 1998 + 1.0% 1999 + 2.0% 2000-2005 + 2.5% In all, we believe we have been conservative in our sales forecast for new and turnover tenants upon the expiration of an initial lease. At lease expiration, we have forecasted a 30 percent probability that a tenant will vacate. For new tenants, sales are established either based on ownership's forecast for the particular tenant or at the mall's average sales level. Generally, for existing tenants we have assumed that sales continue subsequent to lease expiration at their previous level unless they were under-performers that prompted a 100 percent turnover probability then sales are reset to the corresponding mall overage. In most instances, no overage rent is generated from new tenants due to our forecasted rent steps which serve to change the breakpoint. Expense Reimbursement and Miscellaneous Income By lease agreement, tenants are required to reimburse the lessor for certain operating expenses. Included among these operating items are real estate taxes, common area maintenance (CAM) and energy for a few tenants. Miscellaneous income is essentially derived from specialty leasing for temporary tenants, Christmas kiosks and other charges including special pass- throughs. In the first full year of the investment, it is projected that the subject property will generate approximately $4,864,890 in reimbursements for operating expenses and $475,000 in other miscellaneous income. Common area maintenance and real estate tax recoveries are generally based upon the tenants pro-rata share of the expense item. Because it is an older center, there exists numerous variations to the calculation procedure of each. We have relied upon ownership's calculation for the various recovery formula's for taxes and CAM. Generally for most mall tenants, there are three types of CAM calculations. At rollover, all of the tenants are assumed to be subject to the Type D recovery which is the standard lease currently in effect. This recovery calculation includes part of the management expense; indoor and outdoor common area maintenance; depreciation and a portion of the mall's general and administrative costs. Approximately 58 percent of the management fee is recoverable. The standard lease provides for the recovery of these expenses plus a 15 percent administrative fee. Common Area Maintenance Provided below is a summary of the standard CAM clause that exists for a new tenant. Common Area Maintenance Recovery Calculation CAM Expense Actual for year (inclusive of portion of management fee) Less: Contributions from department stores Add: 15% Administration Fee Equals: Net pro-ratable CAM billable to mall tenants on the basis of gross leasable occupied area (GLOA). All department stores pay varying amounts for CAM. Their contributions, are collectively detailed under MAJOR'S CAM CONTRIBUTION on the cash flow. The formulas are generally quite complicated, having evolved over the years through additions and deletions to the expense structure. The 1996 budgeted CAM billings for the majors can be detailed as follows: CAM 1996 Obligation Budget Mervyn's $ 341,604 JC Penney $ 232,032 Sears $ 382,248 Dayton's $ 315,816 Total $1,271,700 Real Estate Taxes Generally, real estate tax recoveries are based upon a mall tenant's pro-rata share (defined on the basis of GLOA). The majors have varying contribution amounts that are first deducted from the gross expense before allocating the balance to the mall shops. JC Penney pays taxes on its building separately. They do make a contribution based upon its allocated share of certain land taxes. Dayton's pay taxes on its allocated portion of the enclosed mall and parking area land taxes. Mervyn's (formerly when it was Carson's) had been paying taxes but we are advised that there was a change to their deal and they no longer contribute. The 1996 budgeted major's tax recoveries are estimated as follows: Tax 1996 Obligation Budget JC Penney $194,748 Dayton's $283,680 Total $478,428 Energy Energy recoveries are related to HVAC charges for that portion of the mall that uses the central plant. Generally, Dayton's is responsible for all of the recovery. Central plant charges are passed through with a profit of 15 percent. Kiosk tenants had been paying for energy but management had stopped billing them for this expense. Miscellaneous Income Miscellaneous revenues are derived from a number of sources. One of the more important is specialty leasing. The specialty leasing is related to temporary tenants that occupy vacant in- line space. General Growth has been relatively successful with this procedure at many of their malls. Other sources of miscellaneous revenues included forfeited security deposits, temporary kiosk (Christmas) rentals, phone revenues, lottery commissions, and income from the renting of strollers and the community room. The budget for 1996 projects miscellaneous revenues of $212,000. A portion of this ($30,000) was for interest which we typically do not include. Thus, we have forecasted miscellaneous income of $175,000 in 1996. In addition, management is projecting $300,000 from temporary tenants in 1996. We have used $300,000 in our first year forecast. On balance, we have forecasted these aggregate other revenues at $475,000 which we project will grow by 3 percent per annum. Our forecast for these additional revenues is net of provision for vacancy and credit loss. Allowance for Vacancy and Credit Loss The investor of an income producing property is primarily interested in the cash revenues that an income-producing property is likely to produce annually over a specified period of time rather than what it could produce if it were always 100 percent occupied and all the tenants were actually paying rent in full and on time. It is normally a prudent practice to expect some income loss, either in the form of actual vacancy or in the form of turnover, non-payment or slow payment by tenants. We have reflected a 7.0 percent contingency for both stabilized and unforeseen vacancy and credit loss. Please note that this vacancy and credit loss provision is applied to all mall tenants equally and is exclusive of all revenues generated by anchor stores. We have phased in the 7 percent factor as the mall leases up based upon the following schedule. 1996 3% 1997 4% 1998 5% 1999 6% 2000-2005 7% In this analysis we have also forecasted that there is a 70 percent probability that an existing tenant will renew their lease. Upon turnover, we have forecasted that rent loss equivalent to six months would be incurred to account for the time and/or costs associated with bringing the space back on line. Thus, minimum rent as well as overage rent and certain other income has been reduced by this forecasted probability. We have calculated the effect of the total provision of vacancy and credit loss on the in-line shops (inclusive of the kiosks). Through the 10 years of this cash flow analysis, the total allowance for vacancy and credit loss, including provisions for downtime, ranges from a low of 7.77 percent of total potential gross revenues to a high of 23.01 percent in the initial year of the holding period in the mall. On average, the total allowance for vacancy and credit loss over the 10 year projection period is 11.42 percent of these revenues. Total Rent Loss Forecast (%) CY Year Physical Vacancy Global Vacancy Total Vacancy* 1996 20.01 3.00 23.01 1997 15.78 4.00 19.78 1998 7.53 5.00 12.53 1999 1.87 6.00 7.87 2000 1.48 7.00 8.48 2001 1.43 7.00 8.43 2002 0.87 7.00 7.87 2003 0.77 7.00 7.77 2004 3.27 7.00 10.27 2005 1.16 7.00 8.16 Mean 5.42 6.00 11.42 * Includes provision for unforeseen vacancy and credit loss as well as provision for weighted downtime. As discussed, if an existing mall tenant is a consistent under-performer with sales substantially below the mall average then the turnover probability applied is 100 percent. This assumption, while adding a degree of conservatism to our analysis, reflects the reality that management will continually strive to replace under performers. On balance, the aggregate deductions of all gross revenues reflected in this analysis are based upon overall long-term market occupancy levels and are considered what a prudent investor would conservatively allow for credit loss. The remaining sum is effective gross income which an informed investor may anticipate the subject property to produce. We believe this is reasonable in light of overall vacancy in this subject's market area as well as the current leasing structure at the subject. Effective Gross Income In the initial full year of the investment, CY 1996, effective gross revenues ("Total Income" line on cash flow) are forecasted to amount to approximately $9,735,680, equivalent to $48.70 per square foot of total owned GLA. Brookdale Center Effective Gross Revenue Summary Initial Year of Investment - 1996 Aggregate Sum Unit Rate Income Ratio Potential Gross Income $9,948,767 $49.76 100.0% Less: Vacancy and Credit Loss $ 213,087 $ 1.07 2.1% Effective Gross Income $9,735,680 $48.70 97.9% Expenses The total expenses incurred in the production of income from the subject property are divided into two categories: reimbursable and non-reimbursable items. The major expenses which are reimbursable include real estate taxes, common area maintenance, and certain energy expenses. As mentioned, some general and administrative expenses as well as a portion of the management fee is recoverable. The non-reimbursable expenses associated with the subject property include certain general and administrative expenses, ownership's contribution to the marketing fund, management charges (a portion is recovered as part of CAM), miscellaneous expenses, a reserve for the replacement of short-lived capital components, alteration costs associated with bringing the space up to occupancy standards, leasing commissions and a provision for capital expenditures. Unless otherwise cited, expenses are forecasted to grow by 3.5 percent per annum over the holding period. The various expenses incurred in the operation of the subject property have been estimated from information provided by a number of sources. We have reviewed the subject's component operating history for prior years as well as the owner's 1996 budget for these expense items. This information is provided in the Addenda. We have compared this information to published data which are available, as well as comparable expense information. Finally, this information has been tempered by our experience with other regional shopping centers. Expense Growth Rates Expense growth rates are generally forecasted to be more consistent with inflationary trends than necessarily with competitive market forces. The Winter 1995 Cushman & Wakefield survey of regional malls found the low and high mean from each respondent to be 3.75 percent. The Fourth Quarter 1995 Korpacz survey reports that the range in expense growth rates was from 3.0 percent to 5.0 percent with an average of 3.98 percent, down 13 basis points from one year ago. Unless otherwise cited, expenses are forecasted to grow by 3.5 percent per annum over the holding period. Reimbursable Operating Expenses We have analyzed each item of expense individually and attempted to project what the typical investor in a property like the subject would consider reasonable, based upon informed opinion, judgment and experience. The following is a detailed summary and discussion of the reimbursable operating expenses incurred in the operation of the subject property during the initial year of the investment holding period. Common Area Maintenance - This expense category includes the annual cost of miscellaneous building maintenance contracts, recoverable labor and benefits, security, insurance, landscaping, snow removal, cleaning and janitorial, exterminating, supplies, trash removal, exterior lighting, common area energy, gas and fuel, equipment rental, interest and depreciation, and other miscellaneous charges. A portion of the management fee is recoverable as part of CAM as is a portion of certain general and administrative expenses. In addition, ownership can generally recoup the cost of certain extraordinary capital items from the tenants. Typically, this is limited to certain miscellaneous capital expenditures. In malls like the subject where the CAM budget is high, discretion must be exercised in not trying to pass along every charge as the tenants will resist. Historically, the annual CAM expense (before anchor contributions) can be summarized as follows: Brookdale Center Unit CAM Billings "D" Lease Year Aggregate Amount 1990 $1,652,300 1991 $1,911,600 1992 $1,650,200 1993 $1,767,800 1994 $1,868,000 1995 Forecast $1,927,700 1996 Budgeted $1,882,700 The 1996 CAM budget is shown to be $1,822,700. An allocation of this budget by line item is as follows: 1995 CAM Expense Allocation Administrative, Payroll and Office $ 242,800 Security $ 475,900 Maintenance $ 696,300 Liability Insurance $ 219,500 Utilities $ 248,200 Total $ 1,822,700 Over the past five years, management has been capable of maintaining the expense under $2,000,000. In our analysis, we have reflected a first year expense of $1,900,000 (before inclusion of the management fee). Billable CAM is determined after adding in 58 percent of the management fee and depreciation, deducting major's contributions and adding the 15 percent administrative fee. Real Estate Taxes - The projected taxes to be incurred in 1996 are equal to $2,471,000. As discussed, the standard recovery for this expense is charged on the basis of average occupied area of non-major mall tenant GLA. Taxes are charged to the mall tenants after first deducting department store contributions. This expense item is projected to increase by 4 percent per annum over the balance of the investment holding period. TABLE COMPARING COMMON AREA MAINTENANCE EXPENSE FOR VARIOUS MSAs AROUND THE UNITED STATES Energy - Energy costs consist of the cost to run the central plant as it provides HVAC services to certain tenants. Energy costs have been historically reported as follows: Year Amount 1990 $216,500 1991 $215,600 1992 $210,300 1993 $261,200 1994 $282,100 1995 $245,700 1996(Budget) $217,200 We have estimated the 1996 expense at $220,000. The only department store who contributes to this energy cost is Dayton's, whose 1995 contribution is estimated at $249,800. We are advised that ownership can charge a 15 percent administrative fee for their costs in administrating this program. Energy expenses are forecasted to grow by 3.5 percent per annum throughout the holding period. TABLE ANALYZING OPERATING INCOME & EXPENSE FOR BROOKDALE CENTER 1992 TO 1994 ACTUAL, 1995 FORECAST, 1996 BUDGET Non-Reimbursable Expenses The total annual non-reimbursable expenses of the subject property are projected from accepted practices and industry standards. Again, we have analyzed each item of expenditure in an attempt to project what the typical investor in a property similar to the subject would consider reasonable, based upon actual operations, informed opinion and experience. The following is a detailed summary and discussion of non- reimbursable expenses incurred in the operation of the subject property for the initial year. Unless otherwise stated, it is our assumption that these expenses will increase by 3.5 percent per annum thereafter. General and Administrative (Non-CAM) - Expenses related to the administrative aspects of the mall include costs particular to the operation of the mall including salaries, travel and entertainment, and dues and subscriptions. A provision is also made for professional services including legal and accounting fees and other professional consulting services. In 1996, we reflect general and administrative expenses of $300,000. Promotion - We have ascribed a 1996 expense of $200,000 for ownership's contribution to the Merchants Association. This expense is considered high, however in our opinion is required to aid in the lease-up of vacant spaces. Promotional expenses are decreased to $150,000 in 1997, and to $100,000 in 1998, and then grown by the expense growth rate. Miscellaneous - This catch-all category is provided for various miscellaneous and sundry expenses that ownership will typically incur. Such items as unrecovered repair costs, non-recurring expenses, expenses associated with maintaining the vacant space and bad debts in excess of our credit loss provision would be included here. In the initial year, these miscellaneous items are forecasted to amount to approximately $35,000. Management - The annual cost of managing the subject property is projected to be 4.5 percent of minimum and percentage rent. In the initial year of our analysis, this amount is shown to be $207,399. Alternatively, this amount is equivalent to approximately 2.1 percent of effective gross income. Our estimate is reflective of a typical management agreement with a firm in the business of providing professional management services. This amount is considered typical for a retail complex of this size. Our investigation into the market for this property type indicates an overall range of fees of 3 to 5 percent. Since we have reflected a structure where we separately charge leasing commissions, we have used the mid-point of the range as providing for compensation for these services. In addition, a portion of the management fee is deducted before passing on the balance to the mall tenants as part of CAM. Alterations - The principal component of this expense is ownership's estimated cost to prepare a vacant suite for tenant use. At the expiration of a lease, we have made a provision for the likely expenditure of some monies on ownership's part for tenant improvement allowances. In this regard, we have forecasted a cost of $10.00 per square foot for turnover space (initial cost growing at expense growth rate) weighted by our turnover probability of 30 percent. We have forecasted a rate of $1.00 per square foot for renewal (rollover) tenants, based on a renewal probability of 70 percent. The blended rate based on our 70/30 turnover probability is therefore $3.10 per square foot. It is also noted that ownership has been relatively successful in releasing space in its "as is" condition. Evidence of this is seen in our previously presented summary of recent leasing activity at the mall. In order to facilitate the lease-up of the Mervyn's throat area space which is in raw condition, we have forecasted a workletter of $25.00 per square foot. For all other currently vacant second generation space, we have used a rate of $15.00 per square foot in order to expedite the lease-up. All alteration costs are forecasted to increase at our implied expense growth rate. Capital Expenditures - Ownership has budgeted for certain capital expenditures which represent items outside of the normal repairs and maintenance budget. As of this writing, the capital expenditure budget has not been approved but we can make some provisions with reasonable certainty for certain repairs. Capital projects on-going at Brookdale Center include the building systems upgrades, lot lighting and signage, roof and parking lot replacement and seal coating, and other capital items identified within General Growth's 1996 Annual Budget. We have also made a provision for an interior renovation during 1997 and 1998. It was our opinion that a prudent investor would make some provision for necessary repairs and upgrades. To this end, we have reflected expenditures of $650,000 in 1996, $450,000 in 1997, $350,000 in 1998, $250,000 in 1999, and $100,000 per annum thereafter. In addition, the property is in need of general upgrading. We have reflected a cost of $4,500,000 equivalent to approximately $22.50 per square foot of mall GLA to be split up between 1997 and 1998. ACM Abatement - General Growth has also budgeted for asbestos abatement in the mall as tenant space is turned over and abatement is required during renovation. We have therefore included abatement as a capital expenditure in our cash flow. In 1996, asbestos abatement is scheduled to total $150,000. This expense decreases to $100,000 for 1997, and $50,000 in 1998 and 1999. Dayton's Operating Agreement - As discussed, Dayton's operating covenant expires in 1996. In order to keep this important anchor tenant at the mall, ownership should prudently expect to contribute toward a retrofit of the store. Based on conversations with management, we have budgeted $10,000,000 which is equivalent to approximately $51.20 per square foot. Renovation - Another expense that will be necessary to keep Dayton's at the mall, as well as attract new tenants, will be a complete renovation of the property. Based on conversations with management, this expense is estimated at $5,000,000 and is incurred in 1997. Replacement Reserves - It is customary and prudent to set aside an amount annually for the replacement of short- lived capital items such as the roof, parking lot and certain mechanical items. The repairs and maintenance expense category has historically included some capital items which have been passed through to the tenants. This appears to be a fairly common practice among most malls. However, we feel that over a holding period some repairs or replacements will be needed that will not be passed on to the tenants. Due to the inclusion of many of the capital items in the maintenance expense category, the reserves for replacement classification need not be sizable. This becomes a more focused issue when the CAM expense starts to get out of reach and tenants begin to complain. For purposes of this report, we have estimated an expense of $0.15 per square foot of owned GLA during the first year, thereafter increasing by our expense growth rate throughout our cash flow analysis. Net Income/Net Cash Flow The total expenses of the subject property including alterations, commissions, capital expenditures, and reserves are annually deducted from total income, thereby leaving a residual net operating income or net cash flow to the investors in each year of the holding period before debt service. In the initial year of investment, the net income is forecasted to be equal to $4,402,281 which is equivalent to 45.2 percent of effective gross income. Deducting other expenses including capital items results in a net cash flow loss of ($6,634,144). Brookdale Center Operating Summary Initial Year of Investment - 1996 Aggregate Sum Unit Rate* Operating Ratio Effective Gross Income $ 9,735,680 $48.70 100.0% Operating Expenses $ 5,333,399 $26.68 54.8% Net Income $ 4,402,281 $22.02 45.2% Other Expenses $11,036,425 $55.20 113.0% Cash Flow ($ 6,634,144) ($33.18) (68.1%) * Based on total owned GLA of 199,922 square feet. Our cash flow model has forecasted the following compound annual growth rates over the ten year holding period 1996-2005. Net Operating Income 2.74% Overall, this is a reasonable forecast for a property of the subject's calibre and growth pattern which should attract some investor interest. Investment Parameters After projecting the income and expense components of the subject property, investment parameters must be set in order to forecast property performance over the holding period. These parameters include the selection of capitalization rates (both initial and terminal) and application of the appropriate discount or yield rate, also referred to as the internal rate of return (IRR). Selection of Capitalization Rates Overall Rate The overall capitalization rate bears a direct relationship between net operating income generated by the real estate in the initial year of investment (or initial stabilized year) and the value of the asset in the marketplace. Overall rates are also affected by the existing leasing schedule of the property, the strength or weakness of the local rental market, the property's position relative to competing properties, and the risk/return characteristics associated with competitive investments. The trend has been for rising capitalization rates. We feel that much of this has to do with the quality of the product that has been selling. Sellers of the better performing dominant Class A malls have been unwilling to waver on their pricing. Many of the malls which have sold over the past 18 to 24 months are found in less desirable second or third tier locations or represent turnaround situations with properties that are posed for expansion or remerchandising. With fewer buyers for the top performing assets, sales have been somewhat limited. Overall Capitalization Rates Regional Mall Sales Year Range Mean Basis Point Change 1988 5.00% - 8.00% 6.16% - 1989 4.58% - 7.26% 6.05% -11 1990 5.06% - 9.11% 6.33% +28 1991 5.60% - 7.82% 6.44% +11 1992 6.00% - 7.97% 7.31% +87 1993 7.00% -10.10% 7.92% +61 1994 6.98% -10.29% 8.37% +45 1995 7.47% -11.10% 9.14% +79 The data above shows that, with the exception of 1989, the average cap rate has shown a rising trend each year. Between 1988 and 1989, the average rate declined by 11 basis points. This was partly a result of dramatically fewer transactions in 1989 as well as the sale of Woodfield Mall at a reported cap rate of 4.58 percent. In 1990, the average cap rate jumped 28 basis points to 6.33 percent. Among the 16 transactions we surveyed that year, there was a marked shift of investment criteria upward with additional basis point risk added due to the deteriorating economic climate for commercial real estate. Furthermore, the problems with department store anchors added to the perceived investment risk. 1992 saw owners become more realistic in their pricing as some looked to move product because of other financial pressures. The 87 basis point rise to 7.31 percent reflected the reality that, in many markets, malls were not performing as strongly as expected. A continuation of this trend was seen in 1993 as the average rate increased by 61 basis points. The trend in deals over the past two year period shows a respective rise in average cap rates of 45 and 59 basis points. For the year, 1994 transactions were a mix of quality ranging from premier, institutional grade centers (Biltmore Fashion Park, Riverchase Galleria) to B-centers such as Corte Madera Town Center and Crossroads Mall. The continuation of this trend into 1995 is in evidence as owners of the better quality malls are either aggressively pricing them or keeping them off of the market until it improves further. Also, the beating that REIT stocks took has forced up their yields thereby putting pressure on the pricing levels they can justify. Much of the buying over the past 18 to 24 months has been opportunistic acquisitions involving properties selling near or below replacement cost. Many of these properties have languished due to lack of management focus or expertise as well as a limited ability to make the necessary capital commitments for growth. As these opportunities become harder to find, we believe that investors will again begin to focus on the stable returns of the dominant Class A product. The Cushman & Wakefield's Winter 1995 survey reveals that going-in cap rates for regional shopping centers range between 7.0 and 9.0 percent with a low average of 7.47 and high average of 8.25 percent, respectively; a spread of 78 basis points. Generally, the change in average capitalization rates over the Spring 1995 survey shows that the low average decreased by 3 basis points, while the upper average increased by 15 points. Terminal, or going-out rates are now averaging 8.17 and 8.83 percent, representing a decrease of 22 basis points and 23 basis points, from Spring 1995 averages. Cushman & Wakefield Valuation Advisory Services National Investor Survey - Regional Malls (%) Investment Winter 1994 Spring 1995 Winter 1995 Parameters Low High Low High Low High OAR/Going-In 6.50-9.50 7.50-9.50 7.00-8.50 7.50-8.50 7.00-8.00 7.50-9.00 7.6 8.4 7.50 8.1 7.47 8.25 OAR/Terminal 7.00-9.50 7.50-10.50 7.50-8.75 8.00-9.25 7.00-9.00 8.00-10.00 8.0 8.8 7.95 8.6 8.17 8.83 IRR 10.00-11.5 10.00-13.0 10.00-11.5 11.00-12.0 10.00-11.5 10.50-12.0 10.5 11.5 10.70 11.4 10.72 11.33 The Fourth Quarter 1995 Peter F. Korpacz survey finds that cap rates have remained relatively stable. They recognize that there is extreme competition for the few premier malls that are offered for sale which should exert downward pressure on rates. However, most of the available product is B or C quality which are not attractive to most institutional investors. The survey did, however, note a dramatic change for the top tier investment category of 20 to 30 true "trophy" assets in that investors think it is unrealistic to assume that cap rates could fall below 7.0 percent. NATIONAL REGIONAL MALL MARKET FOURTH QUARTER 1995 KEY INDICATORS CURRENT LAST YEAR AGO Free & Clear Equity IRR QUARTER QUARTER RANGE 10.00%-14.00% 10.00%-14.00% 10.00%-14.00% AVERAGE 11.55% 11.55% 11.60% CHANGE (Basis Points) - 0 - 5 Points) Free & Clear Going-In Cap Rate RANGE 6.25%-11.00% 6.25%-11.00% 6.25%-11.00% AVERAGE 7.86% 7.84% 7.73% CHANGE (Basis Points) - + 2 +13 Residual Cap Rate RANGE 7.00%-11.00% 7.00%-11.00% 7.00%-11.00% AVERAGE 8.45% 8.45% 8.30% CHANGE (Basis Points) - 0 +15 Source: Peter Korpacz Associates, Inc. - Real Estate Investor Survey Fourth Quarter - 1995 As can be seen from the above, the average IRR has decreased by 5 basis points to 11.55 percent from one year ago. However, it is noted that this measure has been relatively stable over the past three months. The quarter's average initial free and clear equity cap rate rose 13 basis points to 7.86 percent from a year earlier, while the residual cap rate increased 15 basis points to 8.45 percent. Most retail properties that are considered institutional grade are existing, seasoned centers with good inflation protection that offer stability in income and are strongly positioned to the extent that they are formidable barriers to new competition. Equally important are centers which offer good upside potential after face-lifting, renovations, or expansion. With new construction down substantially, owners have accelerated renovation and re-merchandising programs. Little competition from over-building is likely in most mature markets within which these centers are located. Environmental concerns and "no- growth" mentalities in communities are now serious impediments to new retail development. Finally, investors have recognized that the retail landscape has been fundamentally altered by consumer lifestyles changes, industry consolidations and bankruptcies. This trend was strongly in evidence as the economy enters 1996 in view of the wave of retail chains whose troublesome earnings are forcing major restructures or even liquidations. (The reader is referred to the National Retail Overview in the Addenda of this report). Trends toward more casual dress at work and consumers growing pre- occupation with their leisure and home lives have created the need for refocused leasing efforts to bring those tenants to the mall that help differentiate them from the competition. As such, entertainment, a loosely defined concept, is one of the most common directions malls have taken. A trend toward bringing in larger specialty and category tenants to the mall is also in evidence. The risk from an owners standpoint is finding that mix which works the best. Nonetheless, the cumulative effect of these changes has been a rise in rates as investors find it necessary to adjust their risk premiums in their underwriting. Based upon this discussion, we are inclined to group and characterize regional malls into the general categories following: Cap Rate Range Category 7.0% to 7.5% Top 20 to 25+/- malls in the country. 7.5% to 8.5% Dominant Class A investment grade property, high sales levels, relatively good health ratios, excellent demographics (top 50 markets), and considered to present a significant barrier to entry within its trade area. 8.5% to 10.5% Somewhat broad characterization of investment quality properties ranging from primary MSAs to second tier cities. Properties at the higher end of the scale are probably somewhat vulnerable to new competition in their market. 10.5% to 12.0% Remaining product which has limited appeal or significant risk which will attract only a smaller, select group of investors. Conclusion - Initial Capitalization Rate Brookdale Center is an older property that has been impacted by its competition, changing demographics, and aging physical plant. In addition, the threat of competition has intensified and the possibility exists that Dayton's could leave should one of the proposed malls be built. We do not believe that the conversion of the former Carson's store to a Mervyn's will have a material impact on the center's investment appeal. While new to the region, Dayton's is making a major commitment to the Twin Cities area by converting seven units to this new store format. Although through its first six months Mervyn's has not had so much of a positive impact as expected, the lower price points offered by Mervyn's compliment the higher priced apparel found at the traditional Dayton's. Mervyn's market niche is more representative of Brookdale's trade area. While it will compete with Kohl's, the two stores should act as a more cohesive draw to the mall and enhance its total trade area draw. We do recognize that management has been addressing the physical issues and continues to be modestly successful in attracting new tenants to the mall. The renovation of the Mervyn's throat area will be a long term benefit to the property. However, due to the uncertainty of Dayton's, the overall physical state of the mall, as well as increased competition, any investor would view the subject as an investment risk and would require the potential for high returns. On balance, a property with the characteristics of the subject would potentially trade at an overall rate between 10.75 and 11.25 percent based on first year income if it were operating on a stabilized operating income basis. Terminal Capitalization Rate The residual cash flows annually generated by the subject property comprise only the first part of the return which an investor will receive. The second component of this investment return is the pre-tax cash proceeds from the resale of the property at the end of a projected investment holding period. Typically, investors will structure a provision in their analyses in the form of a rate differential over a going-in capitalization rate in projecting a future disposition price. The view is that the improvement is then older and the future is harder to visualize hence a slightly higher rate is warranted for added risks in forecasting. On average, our rate survey shows a 38 basis point differential. Therefore, to the range of stabilized overall capitalization rates, we have added 25 basis points to arrive at a projected terminal capitalization rate ranging from 11.00 to 11.50 percent. This provision is made for the risk of lease up and maintaining a certain level of occupancy in the center, its level of revenue collection, the prospects of future competition, as well as the uncertainty of maintaining the forecasted growth rates over such a holding period. In our opinion, this range of terminal rates would be appropriate for the subject. Thus, this range of rates is applied to the following year's net operating income before reserves, capital expenditures, leasing commissions and alterations as it would be the first received by a new purchaser of the subject property. Applying a rate of say 11.25 percent for disposition, a current investor would dispose of the subject property at the end of the investment holding period for an amount of approximately $51,246,053 based on 2006 net income of approximately $5,765,181. From the projected reversionary value to an investor in the subject property, we have made a deduction to account for the various transaction costs associated with the sale of an asset of this type. These costs consist of 2.0 percent of the total disposition price of the subject property as an allowance for transfer taxes, professional fees, and other miscellaneous expenses including an allowance for alteration costs that the seller pays at final closing. Deducting these transaction costs from the computed reversion renders pre-tax the net proceeds of sale to be received by an investor in the subject property at the end of the holding period. Net Proceeds at Reversion Less Costs of Sale and Net Income 2006 Gross Sale Price Miscellaneous Expenses Net Proceeds Expenses @ 2.0% $5,765,181 $51,246,053 $1,024,921 $50,221,132 Selection of Discount Rate The discounted cash flow analysis makes several assumptions which reflect typical investor requirements for yield on real property. These assumptions are difficult to directly extract from any given market sale or by comparison to other investment vehicles. Instead, investor surveys of major real estate investment funds and trends in bond yield rates are often cited to support such analysis. A yield or discount rate differs from an income rate, such as cash-on-cash (equity dividend rate), in that it takes into consideration all equity benefits, including the equity reversion at the time of resale and annual cash flow from the property. The internal rate of return is the single-yield rate that is used to discount all future equity benefits (cash flow and reversion) into the initial equity investment. Thus, a current estimate of the subject's present value may be derived by discounting the projected income stream and reversion year sale at the property's yield rate. Yield rates on long term real estate investments range widely between property types. As cited in Cushman & Wakefield's Winter 1995 survey, investors in regional malls are currently looking at broad rates of return between 10.0 and 12.00 percent, down slightly from our last two surveys. The indicated low and high means are 10.72 and 11.33 percent, respectively. Peter F. Korpacz reports an average internal rate of return of 11.55 percent for the Fourth Quarter 1995, down 5 basis points from the year ago level. The yield rate on a long term real estate investment can also be compared with yield rates offered by alternative financial investments since real estate must compete in the open market for capital. In developing an appropriate risk rate for the subject, consideration has been given to a number of different investment opportunities. The following is a list of rates offered by other types of securities. Market Rates and Bond Yields (%) February, 1996 Reserve Bank Discount Rate 5.00 Prime Rate (Monthly Average) 8.25 3-Month Treasury Bills 4.86 U.S. 10-Year Notes 6.06 U.S. 30-Year Bonds 6.47 Telephone Bonds 7.70 Municipal Bonds 5.68 Source: New York Times This compilation of yield rates from alternative investments reflects varying degrees of risk as perceived by the market. Therefore, a riskless level of investment might be seen in a three month treasury bill at 4.86 percent. A more risky investment, such as telephone bonds, would currently yield a much higher rate of 7.70 percent. The prime rate is currently 8.25 percent, while the discount rate is 5.00 percent. Ten year treasury notes are currently yielding around 5.06 percent, while 30-year bonds are at 6.47 percent. Real estate investment typically requires a higher rate of return (yield) and is much influenced by the relative health of financial markets. A retail center investment tends to incorporate a blend of risk and credit based on the tenant mix, the anchors that are included (or excluded) in the transaction, and the assumptions of growth incorporated within the cash flow analysis. An appropriate discount rate selected for a retail center thus attempts to consider the underlying credit and security of the income stream, and includes an appropriate premium for liquidity issues relating to the asset. There has historically been a consistent relationship between the spread in rates of return for real estate and the "safe" rate available through long-term treasuries or high-grade corporate bonds. A wider gap between return requirements for real estate and alternative investments has been created in recent years due to illiquidity issues, the absence of third party financing, and the decline in property values. Investors have suggested that the regional mall market has become increasingly "tiered" over the past two years. The country's premier malls are considered to have the strongest trade areas, excellent anchor alignments, and significant barriers of entry to future competitive supply. These and other "dominant" malls will have average mall shop sales above $300 per square foot and be attractive investment vehicles in the current market. It is our opinion that the subject would attract high interest from institutional investors if offered for sale in the current marketplace. There is not an abundance of regional mall assets of comparable quality currently available, and many regional malls have been included within REITs, rather than offered on an individual property basis. However, we must further temper our analysis due to the fact that there remains some risk that the inherent assumptions employed in our model come to full fruition. Finally, application of these rate parameters to the subject should entail some sensitivity to the rate at which leases will be expiring over the projection period. Provided on the following page is a summary of the forecasted lease expiration schedule for the subject. A complete expiration report is included in the Addenda. Lease Expiration Schedule Calendar Year No. of Leases GLA(SF) Cumulative % 1996 -- --- --- 1997 10 22,738 11.4% 1998 6 9,701 16.2% 1999 5 3,662 18.1% 2000 8 17,783 27.0% 2001 9 17,114 35.5% 2002 6 10,436 40.7% 2003 7 8,073 44.8% 2004 16 39,246 64.4% 2005 6 13,958 71.4% * Includes mall shops and kiosks From the above, we see that a large percentage (27 percent) of the GLA will expire by 2000 and that by the end of 2003, approximately 45 percent of mall shop GLA will expire. The largest expiration year is 2004 when leases totaling 39,246 square feet of the center will expire. Over the total projection period, over 71 percent will expire. Overall, consideration is given to this in our selection of an appropriate risk rate. We would also note that much of the risk factored into such an analysis is reflected in the assumptions employed within the cash flow model, including rent and sales growth, turnover, reserves, and vacancy provisions. We have briefly discussed the investment risks associated with the subject. On balance, it is our opinion that an investor in the subject property would require an internal rate of return between 13.00 and 14.00 percent. Present Value Analysis Analysis by the discounted cash flow method is examined over a holding period that allows the investment to mature, the investor to recognize a return commensurate with the risk taken, and a recapture of the original investment. Typical holding periods usually range from 10 to 20 years and are sufficient for the majority of institutional grade real estate such as the subject to meet the criteria noted above. In the instance of the subject, we have analyzed the cash flows anticipated over a ten year period commencing on January 1, 1996. A sale or reversion is deemed to occur at the end of the 10th year (December 31, 2005), based upon capitalization of the following year's net operating income. This is based upon the premise that a purchaser in the 10th year is buying the following year's net income. Therefore, our analysis reflects this situation by capitalizing the first year of the next holding period. The present value is formulated by discounting the property cash flows at various yield rates. The yield rate utilized to discount the projected cash flow and eventual property reversion has been based on an analysis of anticipated yield rates of investors dealing in similar investments. The rates reflect acceptable expectations of yield to be achieved by investors currently in the marketplace shown in their current investment criteria and as extracted from comparable property sales. Cash Flow Assumptions Our cash flows forecasted for the mall have been presented. To reiterate, the formulation of these cash flows incorporated into our computer model the following general assumptions. 1. The pro forma is presented on a calendar year basis commencing on January 1, 1996. The present value analysis is based on a 10 year holding period commencing from January 1, 1996. This period reflects 10 years of operations and follows an adequate time for the property to proceed through an orderly lease-up and continue to benefit from any remerchandising. In this regard, we have projected that the investment will be sold at the year ending December 31, 2005. 2. Existing lease terms and conditions remain unmodified until their expiration. At expiration, it has been assumed that there is an 70.0 percent probability that the existing retail tenants will renew their lease. Executed and high probability pending leases have been assumed to be signed in accordance with negotiated terms as of the date of valuation. 3. 1996 base date market rental rates for existing tenants have been established according to tenant size with consideration given to location within the mall, the specific merchandise category, as well as the tenants sales history. Lease terms throughout the total complex vary but for new in-line mall tenants are generally 5 to 12 years. While some have been flat, others have one or two step-ups over the course of the term. Upon renewal, it is assumed that new leases are written for an average of 10 years with a step of 10 percent in year 6. An exception exists in the instance where a tenant is determined to be paying base rent which is above market, or where percentage rent is being generated in the base lease and is forecasted to continue over the ensuing period. In these instances, we have assumed that a flat lease will be written. Kiosk leases are written for 5 year terms with no rent increase. 4. Market rents have been established for 1996 based upon an overall average of about $20.00 per square foot for in-line mall shop space. Subsequently, it is our assumption that market rental rates for mall tenants will remain flat through 1998, increase by 1.5 percent in 1999, 2.0 percent in 2000, and 2.5 percent per year thereafter. 5. Most tenants have percentage rental clauses providing for the payment of overage rent. We have relied upon average sales data as provided by management. Sales for 1996 are forecasted at 2.0% below 1995 sales or approximately $250 per square foot. In our analysis, we have forecasted that sales will be flat in 1997 and then grow by 1.0 percent in 1998, 2.0 percent in 1999, and 2.5 percent per year throughout the balance of the holding period. 6. Expense recoveries are based upon terms specified in the various lease contracts. The standard lease contract for real estate taxes and common area maintenance billings for interior mall tenants is based upon a tenants pro rata share with the latter carrying an administrative surcharge of 15 percent. Pro-rata share is generally calculated on leased (occupied) area as opposed to leasable area. Department store contributions are deducted before pass through to the mall shops. Energy (HVAC) is recoverable from Dayton's with a 15 percent administrative fee. 7. Income lost due to vacancy and non- payment of obligations has been based upon our turnover probability assumption as well as a global provision for credit loss. Upon the expiration of a lease, there is 30.0 percent probability that the retail tenant will vacate the suite. At this time we have forecasted that rent loss equivalent to 6 months rent would be incurred to account for the time associated with bringing the space back on-line. In addition, we have forecasted an annual global vacancy and credit loss of gross rental income which we have stepped-up to a stabilized level of 6.0 percent. This global provision is applied to all tenants excluding anchor department stores. 8. Specialty leasing and miscellaneous income consists of several categories. Specialty leasing is generated by the mall's successful cart program as well as the temporary in-line tenants which fill in during periods of downtime between permanent in-line tenants. Miscellaneous income is generated by chargebacks for tenant work, forfeited security deposits, stroller rentals, telephones, etc. We have grown all miscellaneous revenues by 3.0 percent per annum. 9. Operating expenses have been developed from management's budget from which we have recast certain expense items. Expenses have also been compared to industry standards as well as our general experience in appraising regional malls throughout the country. Operating expenses are generally forecasted to increase by 3.5 percent per year except for management which is based upon 4.5 percent of minimum and percentage rent annually. Taxes are forecasted to grow at 4.0 percent per year. Alteration costs are assumed to escalate at our forecasted expense inflation rate. 10. A provision for capital reserves of $30,000 equal to approximately $0.15 per square foot of total owned GLA. An alteration charge of either $10.00 or $15.00 per square foot has been utilized for new mall tenants. Renewal tenants have been given an allowance of $1.00 per square foot. Raw space associated with the Mervyn's Throat area has been allocated a $40.00 per square foot workletter. Provision for other capital expenditures have been made for deferred maintenance, asbestos removal, and interior renovation and the remodel of the Dayton's store. TABLES SHOWING REVERSION CALCULATION AND SALE YIELD MATRIX ANALYSIS FOR BROOKDALE CENTER For a property such as the subject, it is our opinion that an investor would require an all cash discount rate in the range of 13.00 to 14.00 percent. Accordingly, we have discounted the projected future pre-tax cash flows to be received by an equity investor in the subject property to a present value so as to yield 13.00 to 14.00 percent at 50 basis point intervals on equity capital over the holding period. This range of rates reflects the risks associated with the investment. Discounting these cash flows over the range of yield and terminal rates now being required by participants in the market for this type of real estate places additional perspective upon our analysis. A valuation matrix for the subject appears on the facing page. Through such a sensitivity analysis, it can be seen that the present value of the subject property varies from approximately $23.6 to $26.4 million. Giving consideration to all of the characteristics of the subject previously discussed, we feel that a prudent investor would require a yield which falls near the middle of the range outlined above for this property. Accordingly, we believe that based upon all of the assumptions inherent in our cash flow analysis, an investor would look toward as IRR around 13.50 percent and a terminal rate around 11.25 percent as being most representative of the subject's value in the market. In view of the analysis presented here, it becomes our opinion that the discounted cash flow analysis indicates a market value of $25.0 million for the subject property as of January 1, 1996. The indices of investment generated through this indicated value conclusion are shown on the following page. DISCOUNTED CASH FLOW ANALYSIS Brookdale Center (Minneapolis, MN) Cushman & Wakefield, Inc. Year Net Discount Present Value Composition Annual Cash No. Cash Flow Factor @ 13.5% of Cash Flows of Yield on Cash Returns One ($6,634,144) x 0.881057 = ($5,845,061) -23.44% -26.54% Two ($1,630,019) x 0.776262 = ($1,265,322) -5.08% -6.52% Three $4,258,700 x 0.683931 = $2,912,658 11.68% 17.03% Four $4,619,275 x 0.602583 = $2,783,495 11.16% 18.48% Five $4,931,330 x 0.530910 = $2,618,091 10.50% 19.73% Six $5,015,389 x 0.467762 = $2,346,008 9.41% 20.06% Seven $5,205,153 x 0.412125 = $2,145,174 8.60% 20.82% Eight $5,321,425 x 0.363106 = $1,932,240 7.75% 21.29% Nine $5,042,702 x 0.319917 = $1,613,246 6.47% 20.17% Ten $5,447,247 x 0.281865 = $1,535,389 6.16% 21.79% Total Present Value of Cash Flows: $10,775,917 43.22% 12.63% Avg Reversion: Eleven $5,765,181 (1) / 11.25% = $51,246,053 Less: Cost of Sale @ 2% $ 1,024,921 Net Reversion $50,221,132 x Discount Factor 0.281865 Total Present Value of Reversion $14,155,587 56.78% Total Present Value $24,931,504 100.00% ROUNDED: $25,000,000 Owned GLA (SF): 199,922 Per Square Foot of Owned GLA: $125 Implicit Going-In Capitalization Rate: Year One NOI $4,402,281 Going-In Cap Rate 17.61% CAGR Concluded Value to Reversion 6.74% Note: (1) Net Operating Income We note that the computed equity yield is not necessarily the true rate of return on equity capital. This analysis has been performed on a pre-tax basis. The tax benefits created by real estate investment will serve to attract investors to a pre-tax yield which is not the full measure of the return on capital. RECONCILIATION AND FINAL VALUE ESTIMATE Application of the Sales Comparison Approach and Income Approach used in the valuation of the subject property has produced results which fall within a reasonably acceptable range. Restated, these are: Methodology Market Value Conclusion Sales Comparison Approach $24,800,000  Income Approach Discounted Cash Flow $28,800,000 This is considered a narrow range in possible value given the magnitude of the value estimates. Both approaches are well supported by data extracted from the market. There are, however, strengths and weaknesses in each of these two approaches which require reconciliation before a final conclusion of value can be rendered.  Sales Comparison Approach The Sales Comparison Approach arrived at a value indicted for the property by analyzing historical arms-length transaction, reducing the gathered information to common units of comparison, adjusting the sale data for differences with the subject and interpreting the results to yield a meaningful value conclusion. The basis of these conclusions was the cash-on-cash return based on net income and the adjusted price per square foot of gross leasable area sold. An analysis of the subject on the basis of its implicit sales multiple was also utilized. The process of comparing historical sales data to assess what purchasers have been paying for similar type properties is weak in estimating future expectations. Although the unit sale price yields comparable conclusions, it is not the primary tool by which the investor market for a property like the subject operates. In addition, no two properties are alike with respect to quality of construction, location, market segmentation and income profile. As such, subjective judgment necessarily become a part of the comparative process. The usefulness of this approach is that it interprets specific investor parameters established in their analysis and ultimate purchase of a property. In light of the above, the writers are of the opinion that this methodology is best suited as support for the conclusions of the Income Approach. It does provide useful market extracted rates of return such as overall rates to simulate investor behavior in the Income Approach.  Income Approach Discounted Cash Flow Analysis The subject property is highly suited to analysis by the discounted cash flow method as it will be bought and sold in investment circles. The focus on property value in relation to anticipated income is well founded since the basis for investment is profit in the form of return or yield on invested capital. The subject property, as an investment vehicle, is sensitive to all changes in the economic climate and the economic expectations of investors. The discounted cash flow analysis may easily reflect changes in the economic climate of investor expectations by adjusting the variables used to qualify the model. In the case of the subject property, the Income Approach can analyze existing leases, the probabilities of future rollovers and turnovers and reflect the expectations of overage rents. Essentially, the Income Approach can model many of the dynamics of a complex shopping center. The writers have considered the results of the discounted cash flow analysis because of the applicability of this method in accounting for the particular characteristics of the property, as well as being the tool used by many purchasers. Conclusions We have briefly discussed the applicability of each of the methods presented. Because of certain vulnerable characteristics in the Sales Comparison Approach, it has been used as supporting evidence and as a final check on the value conclusion indicated by the Income Approach methodology. The value exhibited by the Income Approach is consistent with the leasing profile of the mall. It indicates complimentary results with the Sales Comparison Approach, the conclusions being supportive of each method employed, and neither range being extremely high or low in terms of the other. As a result of our analysis, we have formed an opinion that the market value of the leased fee estate in the referenced property, subject to the assumptions, limiting conditions, certifications, and definitions, as of January 1, 1996, was: TWENTY FIVE MILLION DOLLARS $25,000,000 ASSUMPTIONS AND LIMITING CONDITIONS ------------------------------------- "Appraisal" means the appraisal report and opinion of value stated therein; or the letter opinion of value, to which these Assumptions and Limiting Conditions are annexed. "Property" means the subject of the Appraisal. "C&W" means Cushman & Wakefield, Inc. or its subsidiary which issued the Appraisal. "Appraiser(s)" means the employee(s) of C&W who prepared and signed the Appraisal. This appraisal is made subject to the following assumptions and limiting conditions: 1. This is a Summary Appraisal Report which is intended to comply with the reporting requirements set forth under Standards Rule 2-2)b) of the Uniform Standards of Professional Appraisal Practice for a Summary Appraisal Report. As such, it presents only summary discussions of the data, reasoning, and analyses that were used in the appraisal process to develop the appraiser's opinion of value. Supporting documentation concerning the data, reasoning, and analyses is retained in the appraiser's file. The depth of discussion contained in this report is specific to the needs of the client and for the intended use stated below. The appraiser is not responsible for unauthorized use of this report. We are providing this report as an update to our last analysis which was prepared as of January 1, 1995. As such, we have primarily reported only changes to the property and its environs over the past year. 2. No opinion is intended to be expressed and no responsibility is assumed for the legal description or for any matters which are legal in nature or require legal expertise or specialized knowledge beyond that of a real estate appraiser. Title to the Property is assumed to be good and marketable and the Property is assumed to be free and clear of all liens unless otherwise stated. No survey of the Property was undertaken. 3. The information contained in the Appraisal or upon which the Appraisal is based has been gathered from sources the Appraiser assumes to be reliable and accurate. Some of such information may have been provided by the owner of the Property. Neither the Appraiser nor C&W shall be responsible for the accuracy or completeness of such information, including the correctness of estimates, opinions, dimensions, sketches, exhibits and factual matters. 4. The opinion of value is only as of the date stated in the Appraisal. Changes since that date in external and market factors or in the Property itself can significantly affect property value. 5. The Appraisal is to be used in whole and not in part. No part of the Appraisal shall be used in conjunction with any other appraisal. Publication of the Appraisal or any portion thereof without the prior written consent of C&W is prohibited. Except as may be otherwise stated in the letter of engagement, the Appraisal may not be used by any person other than the party to whom it is addressed or for purposes other than that for which it was prepared. No part of the Appraisal shall be conveyed to the public through advertising, or used in any sales or promotional material without C&W's prior written consent. Reference to the Appraisal Institute or to the MAI designation is prohibited. 6. Except as may be otherwise stated in the letter of engagement, the Appraiser shall not be required to give testimony in any court or administrative proceeding relating to the Property or the Appraisal. 7. The Appraisal assumes (a) responsible ownership and competent management of the Property; (b) there are no hidden or unapparent conditions of the Property, subsoil or structures that render the Property more or less valuable (no responsibility is assumed for such conditions or for arranging for engineering studies that may be required to discover them); (c) full compliance with all applicable federal, state and local zoning and environmental regulations and laws, unless noncompliance is stated, defined and considered in the Appraisal; and (d) all required licenses, certificates of occupancy and other governmental consents have been or can be obtained and renewed for any use on which the value estimate contained in the Appraisal is based. 8. The forecasted potential gross income referred to in the Appraisal may be based on lease summaries provided by the owner or third parties. The Appraiser assumes no responsibility for the authenticity or completeness of lease information provided by others. C&W recommends that legal advice be obtained regarding the interpretation of lease provisions and the contractual rights of parties. 9. The forecasts of income and expenses are not predictions of the future. Rather, they are the Appraiser's best estimates of current market thinking on future income and expenses. The Appraiser and C&W make no warranty or representation that these forecasts will materialize. The real estate market is constantly fluctuating and changing. It is not the Appraiser's task to predict or in any way warrant the conditions of a future real estate market; the Appraiser can only reflect what the investment community, as of the date of the Appraisal, envisages for the future in terms of rental rates, expenses, supply and demand. 10. Unless otherwise stated in the Appraisal, the existence of potentially hazardous or toxic materials which may have been used in the construction or maintenance of the improvements or may be located at or about the Property was not considered in arriving at the opinion of value. These materials (such as formaldehyde foam insulation, asbestos insulation and other potentially hazardous materials) may adversely affect the value of the Property. The Appraisers are not qualified to detect such substances. C&W recommends that an environmental expert be employed to determine the impact of these matters on the opinion of value. 11. Unless otherwise stated in the Appraisal, compliance with the requirements of the Americans With Disabilities Act of 1990 (ADA) has not been considered in arriving at the opinion of value. Failure to comply with the requirements of the ADA may adversely affect the value of the property. C&W recommends that an expert in this field be employed. CERTIFICATION OF APPRAISAL We certify that, to the best of our knowledge and belief: 1. Brian J. Booth inspected the property, and Richard W. Latella, MAI, has reviewed and approved the report but did not inspect the property. 2. The statements of fact contained in this report are true and correct. 3. The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and are our personal, unbiased professional analyses, opinions, and conclusions. 4. We have no present or prospective interest in the property that is the subject of this report, and we have no personal interest or bias with respect to the parties involved. 5. Our compensation is not contingent upon the reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value estimate, the attainment of a stipulated result, or the occurrence of a subsequent event. The appraisal assignment was not based on a requested minimum valuation, a specific valuation or the approval of a loan. 6. No one provided significant professional assistance to the persons signing this report. 7. Our analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation and the Code of Professional Ethics and the Standards of Professional Appraisal Practice of the Appraisal Institute. 8. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. 9. As of the date of this report, Richard W. Latella, MAI has completed the requirements of the continuing education program of the Appraisal Institute. /s/Brian J. Booth Brian J. Booth Retail Valuation Group /s/Richard W. Latella Richard W. Latella, MAI Senior Director Retail Valuation Group Certified General Real Estate Appraiser License No. 20026517 ADDENDA --------- NATIONAL RETAIL OVERVIEW OPERATING EXPENSE BUDGET (1996) TENANT SALES REPORT (1995) PRO-JECT LEASE ABSTRACT REPORT PRO-JECT PROLOGUE ASSUMPTIONS REPORT PRO-JECT TENANT REGISTER REPORT PRO-JECT LEASE EXPIRATION REPORT ENDS FULL DATA REPORT FOR PRIMARY AND TOTAL TRADE AREA REGIONAL MALL SALES (1991-1993) CUSHMAN & WAKEFIELD INVESTOR SURVEY APPRAISERS' QUALIFICATIONS PARTIAL CLIENT LIST CUSHMAN & WAKEFIELD, INC. NATIONAL RETAIL OVERVIEW Prepared by: Richard W. Latella, MAI NATIONAL RETAIL MARKET OVERVIEW Introduction Shopping centers constitute the major form of retail activity in the United States today. Approximately 55 percent of all non- automotive retail sales occur in shopping centers. It is estimated that consumer spending accounts for about two-thirds of all economic activity in the United States. As such, retail sales patterns have become an important indicator of the country's economic health. During the period 1980 through 1995, total retail sales in the United States increased at a compound annual rate of 6.16 percent. Data for the period 1990 through 1995 shows that sales growth has slowed to an annual average of 4.93 percent. This information is summarized on the following chart. The Commerce Department reports that total retail sales fell three-tenths of a percent in January 1996. Total U.S. Retail Sales(1) Year Amount Annual Change (Billions) 1980 $ 957,400 N/A 1985 $1,375,027 N/A 1990 $1,844,611 N/A 1991 $1,855,937 .61% 1992 $1,951,589 5.15% 1993 $2,074,499 6.30% 1994 $2,236,966 7.83% 1995 $2,346,577 4.90% Compound Annual Growth Rate +6.16% 1980-1995 CAGR: 1990 - 1995 +4.93% (1)1985 - 1995 data reflects recent revisions by the U.S. Department of Commerce: Combined Annual and Revised Monthly Retail Trade. Source: Monthly Retail Trade Reports Business Division, Current Business Reports, Bureau of the Census, U.S. Department of Commerce. The early part of the 1990s was a time of economic stagnation and uncertainty in the country. The gradual recovery, which began as the nation crept out of the last recession, has shown some signs of weakness as corporate downsizing has accelerated. But as the recovery period reaches into its fifth year and the retail environment remains volatile, speculation regarding the nation's economic future remains. It is this uncertainty which has shaped recent consumer spending patterns. Personal Income and Consumer Spending Americans' personal income advanced by six-tenths of a percent in December, which helped raise income for all of 1995 by 6.1 percent, the highest gain since 6.7 percent in 1990. This growth far outpaced the 2.5 percent in 1994 and 4.7 percent in 1993. Reports for February 1996 however, reported that income grew at an annual rate of eight-tenths of a percent, the biggest gain in thirteen months, and substantially above January's anemic growth rate of one-tenth of a percent. Consumer spending is another closely watched indicator of economic activity. The importance of consumer spending is that it represents two-thirds of the nation's economic activity. Total consumer spending rose by 4.8 percent in 1995, slightly off of the 5.5 percent rise in 1994 and 5.8 percent in 1993. These increases followed a significant lowering on unemployment and bolstered consumer confidence. The Commerce Department reported that Americans spent at an annual rate of $5.01 trillion in January 1996, a drop of five-tenths of a percent. It was the third drop in five months. Unemployment Trends The Clinton Administration touts that its economic policy has dramatically increased the number of citizens who have jobs. Correspondingly, the nation's unemployment rate continues to decrease from its recent peak in 1992. Selected statistics released by the Bureau of Labor Statistics are summarized as follows: Selected Employment Statistics Civilian Labor Force Employed Total Workers Total Workers Unemployment Year(1) (000) % Change (000) % Change Rate 1990 124,787 .7 117,914 .5 5.5 1991 125,303 .4 116,877 -.9 6.7 1992 126,982 1.3 117,598 .6 7.4 1993 128,040 .8 119,306 1.5 6.8 1994 131,056 2.4 123,060 3.1 6.1 1995 132,337 .98 124,926 1.5 5.6 CAGR 1.18 1.16 1990-1995 (1)Year ending December 31 Source: Bureau of Labor Statistics U.S. Department of Labor During 1995, the labor force increased by 1,281,000 or approximately 1.0 percent. Correspondingly, the level of employment increased by 1,866,000 or 1.5 percent. As such, the year end unemployment rate dropped by five-tenths of a percent to 5.6 percent. For 1995, monthly job growth averaged 144,000. On balance, over 8.0 million jobs have been created since the recovery began. Housing Trends Housing starts enjoyed a good year in 1994 with a total of 1.53 million starts; this up 13.0 percent from 1.45 million in 1993. Multi-family was up 60.0 percent in 1994 with 257,00 starts. However, the National Asociation of Homebuilders forsees a downshift in activity throughout 1995 resulting from the laggard effect of the Federal Reserves's policy of raising interest rates. The .50 percent increase in the federal funds rate on February 1, 1995 was the seventh increase over the past thirteen months, bringing it to its highest level since 1991. Sensing a retreat in the threat of inflation, the Fed reduced the Federal Funds rate by 25 basis points in July 1995 to 5.75 percent. Total housing starts rose by 6.0 percent to a seasonally adjusted annual rate of 1.42 million units. Since family housing starts in November were at 1,102,00 units while multi-family jumped by 77,000 at an annual rate. Applications for building permits rose by 3.2 percent to a rate of 1.28 million. The median new home price of new homes sold in the first nine months of 1995 was $132,000. The median was $130,000 for all of 1994. The Commerce Department reported that construction spending rose 2.9 percent in October to an annual rate of $207.7 billion, compared to $217.9 billion in all of 1994. The home ownership rate seems to be rising, after remaining stagnant over the last decade. For the third quarter of 1995, the share of households that own their homes was 65 percent, compared to 64.1 percent for a year earlier. Lower mortgage rates are cited as a factor. Gross Domestic Product The report on the gross domestic product (GDP) showed that output for goods and services expanded at an annual rate of just .9 percent in the fourth quarter of 1995. Overall, the economy gained 2.1 percent in 1995, the weakest showing in four years since the 1991 recession. The .9 percent rise in the fourth quarter was much slower than the 1.7 percent expected by most analysts. The Fed sees the U.S. economy expanding at a 2.0 to 2.25 percent pace during 1996 which is in-line with White House forecasts. The following chart cites the annual change in real GDP since 1990. Real GDP Year % Change 1990 1.2 1991 - .6 1992 2.3 1993 3.1 1994 4.1 1995 * 2.1 * Reflects new chain weighted system of measurement. Comparable 1994 measure would be 3.5% Source: Bureau of Economic Analysis Consumer Prices The Bureau of Labor Statistics has reported that consumer prices rose by only 2.5 percent in 1995, the fifth consecutive year in which inflation was under 3.0 percent. This was the lowest rate in nearly a decade when the overall rate was 1.1 percent in 1986. All sectors were down substantially in 1995 including the volatile health care segment which recorded inflation of only 3.9 percent, the lowest rate in 23 years. The following chart tracks the annual change in the CPI since 1990. Consumer Price Index(1) Year CPI % Change 1990 133.8 6.1 1991 137.9 3.0 1992 141.9 2.9 1993 145.8 2.7 1994 149.7 2.7 1995 153.5 2.5 (1) All Urban Workers Source: Dept. of Labor, Bureau of Labor Statistics Other Indicators The government's main economic forecasting gauge, the Index of Leading Economic Indicators shows that the vibrant 1994 economy continues to cool off. The index is intended to project econoic growth over the next six months. The Conference Board, an independent business group, reported that the index rose two-tenths of a percent in December 1995, breaking a string of three straight declines. It has become apparent that the Federal Reserve's conservative monetary policy has had an effect on the economy and some economists are calling for a further reduction in short term interest rates. The Conference Board also reported that consumer confidence rebounded in February 1996, following reports suggesting lower inflation. The board's index of consumer confidence rose 9 points to 97 over January when consumers worried about the government shutdown, the stalemate over the Federal budget and the recent flurry of layoff announcements by big corporations. In another sign of increasingly pinched household budgets, consumers sharply curtailed new installment debt in September 1995, when installment credit rose $5.4 billion, barely half as much as August. Credit card balances increased by $2.8 billion, the slimmest rise of the year. For the twelve months through September 1995, outstanding credit debt rose 13.9 percent, down from a peak of 15.3 percent in May. Still, installment debt edged to a record 18.8 percent of disposable income, indicating that consumers may be reaching a point of discomfort with new debt. The employment cost index is a measure of overall compensation including wages, salaries and benefits. In 1995 the index rose by only 2.9 percent, the smallest increase since 1980. This was barely ahead of inflation and is a sign of tighter consumer spending over the coming year. Economic Outlook The WEFA Group, an economic consulting company, opines that the current state of the economy is a "central bankers" dream, with growth headed toward the Fed's 2.5 percent target, accompanied by stable if not falling inflation. They project that inflation will remain in the 2.5 to 3.0 percent range into the foreseeable future. This will have a direct influence on consumption (consumer expenditures) and overall inflation rates (CPI). Potential GDP provides an indication of the expansion of output, real incomes, real expenditures, and the general standard of living of the population. WEFA estimates that real U.S. GDP will grow at an average annual rate between 2.0 and 2.5 percent over the next year and at 2.3 percent through 2003 as the output gap is reduced between real GDP and potential GDP. After 2003, annual real GDP growth will moderate, tapering to 2.2 percent per annum. Consumption expenditures are primarily predicated on the growth of real permanent income, demographic influences, and changes in relative prices over the long term. Changes in these key variables explain much of the consumer spending patterns of the 1970s and mid-1980s, a period during which baby boomers were reaching the asset acquisition stages of their lives; purchasing automobiles and other consumer and household durables. Increases in real disposable income supported this spending spurt with an average annual increase of 2.9 percent per year over the past twenty years. Real consumption expenditures increased at an average annual rate of 3.1 percent during the 1970s and by an average of 4.0 percent from 1983 to 1988. WEFA projects that consumption expenditure growth will slow to 2.0 percent per year by 2006 as a result of slower population growth and aging. It is also projected that the share of personal consumption expenditures relative to GDP will decline over the next decade. Consumer spending as a share of GDP peaked in 1986 at 67.4 percent after averaging about 63.0 percent over much of the post- war period. WEFA estimates that consumption's share of aggregate output will decline to 64.5 percent by 2003 and 62.7 percent by 2018. Retail Sales In their publication, NRB/Shopping Centers Today 1994 Shopping Center Census, the National Research Bureau reports that overall retail conditions continued to improve for the third consecutive year in 1994. Total shopping center sales increased 5.5 percent to $851.3 billion in 1994, up from $806.6 billion in 1993. The comparable 1993 increase was 5.0 percent. Retail sales in shopping centers (excluding automotive and gasoline service station sales) now account for about 55.0 percent of total retail sales in the United States. Total retail sales per square foot have shown positive increases over the past three years, rising by 8.7 percent from approximately $161 per square foot in 1990, to $175 per square foot in 1994. It is noted that the increase in productivity has exceeded the increase in inventory which bodes well for the industry in general. This data is summarized on the following table. Selected Shopping Center Statistics 1990-1994 % Compound 1990 1991 1992 1993 1994 Change Annual 1990-93 Growth Retail Sales in Shopping Centers * $706.40 $716.90 $768.20 $806.60 $851.30 20.5% 4.8% Total Leasable Area** 4.4 4.6 4.7 4.8 4.9 11.4% 2.7% Unit Rate $160.89 $157.09 $164.20 $169.08 $175.13 8.7% 2.1% *Billions of Dollars ** Billions of Square Feet Source: National Research Bureau To put retail sales patterns into perspective, the following discussion highlights key trends over the past few years. - As a whole, 1993 was a good year for most of the nation's major retailers. Sales for the month of December were up for most, however, the increase ranged dramatically from 1.1 percent at Kmart to 13.3 percent at Sears for stores open at least a year. It is noted that the Sears turnaround after years of slippage was unpredicted by most forecasters. - With the reporting of December 1994 results, most retailers posted same store gains between 2.0 and 6.0 percent. The Goldman Sachs Retail Composite Comparable Store Sales Index, a weighted average of monthly same store sales of 52 national retail companies rose 4.5 percent in December. The weakest sales were seen in women's apparel, with the strongest sales reported for items such as jewelry and hard goods. Most department store companies reported moderate increases in same store sales, though largely as a result of aggressive markdowns. Thus, profits were negatively impacted for many companies. - For 1994, specialty apparel sales were lackluster at best, with only .4 percent comparable sales growth. This is of concern to investors since approximately 30.0 percent of a mall's small shop space is typically devoted to apparel tenants. Traditional department stores experienced 3.4 percent same store growth in 1994, led by Dillard's 5.0 percent increase. Mass merchants' year-to-year sales increased by 6.7 percent in 1994, driven by Sears' 7.9 percent increase. Mass merchants account for 35.0 to 55.0 percent of the anchors of regional malls and their resurgence bodes well for increased traffic at these centers. - Sales at the nation's largest retailer chains rose tepidity in January, following the worst December sales figures since the 1990-91 recession in 1995. Same store sales were generally weak in almost all sectors, with apparel retailers being particularly hard hit. Some chains were able to report increases in sales but this generally came about through substantial discounting. As such, profits are going to suffer and with many retailers being squeezed for cash, 1996 is expected to be a period of continued consolidations and bankruptcy. The Goldman Sachs composite index of same store sales grew by 1.1 percent in January 1996, compared to a 4.7 percent for January 1995. Provided on the following chart is a summary of overall and same store sales growth for selected national merchants for the most recent period. Same Store Sales for the Month of January 1996 % Change From Previous Year Name of Retailer Overall Same Store Basis Wal-Mart +16.0% + 2.6% Kmart + 4.0% + 7.7% Sears, Roebuck & Company + 4.0% + 0.6% J.C. Penney - 3.0% - 4.3% Dayton Hudson Corporation + 8.0% + 2.0% May Department Stores + 7.0% + 0.7% Federated Department Stores + 3.0% + 5.1% The Limited Inc. + 6.0% - 2.0% Gap Inc. +48.0% + 6.0% Ann Taylor - 1.0% - 17.0% Source: New York Times According to the Goldman sachs index, department store sales fell by 1.1 percent during January, discount stores rose by 4.5 percent, and specialty hard goods retailers fell by 4.7 percent. The outlook for retail sales growth is one of cautious optimism. Some analysts point to the fact that consumer confidence has resulted in increases in personal debt which may be troublesome in the long run. Consumer loans by banks rose 13.9 percent in the twelve months that ended on September 30, 1995. But data gathered by the Federal Reserve on monthly payments suggest that debt payments are not taking as big a bite out of income as in the late 1980s, largely because of the record refinancings at lower interest rates in recent years and the efforts by many Americans to repay debts. GAFO and Shopping Center Inclined Sales In a true understanding of shopping center dynamics, it is important to focus on both GAFO sales or the broader category of Shopping Center Inclined Sales. These types of goods comprise the overwhelming bulk of goods and products carried in shopping centers and department stores and consist of the following categories: - General merchandise stores including department and other stores; - Apparel and accessory stores; - Furniture and home furnishing stores; and - Other miscellaneous shoppers goods stores. Shopping Center Inclined Sales are somewhat broader and include such classifications as home improvement and grocery stores. Total retail sales grew by 7.8 percent in the United States in 1994 to $2.237 trillion, an increase of $162 billion over 1993. This followed an increase of $125 billion over 1992. Automobile dealers captured $69+/- billion of total retail sales growth last year, while Shopping Center Inclined Sales accounted for nearly 40.0 percent of the increase ($64 billion). GAFO sales increased by $38.6 billion. This group was led by department stores which posted an $18.0 billion increase in sales. The following chart summarizes the performance for this most recent comparison period. Retail Sales by Major Store Type 1993-1994 ($MIL.) 1993-1994 Store Type 1994 1993 % Change GAFO: General Merchandise $282,541 $264,617 6.8% Apparel & Accessories 109,603 107,184 2.3% Furniture & Furnishings 119,626 105,728 13.1% Other GAFO 80,533 76,118 5.8% GAFO Subtotal $592,303 $553,647 7.0% Convenience Stores: Grocery $376,330 $365,725 2.9% Other 21,470 19,661 9.2% Subtotal $397,800 $385,386 3.2% Drug 81,538 79,645 2.4% Convenience Subtotal $479,338 $465,031 3.1% Other: Home Improvement & Building Supplies Stores $122,533 $109,604 11.8% Shopping Center-Inclined 1,194,174 1,128,282 5.8% Subtotal 526,319 456,890 15.2% Automobile Dealers 142,193 138,299 2.8% Gas Stations 228,351 213,663 6.9% Eating and Drinking Places 145,929* 137,365* 6.2% All Other Total Retail Sales $2,236,966 $2,074,499 7.8% * Estimated sales Source: U.S. Department of Commerce and Dougal M. Casey: Retail Sales and Shopping Center Development Through The Year 2000 (ICSC White Paper) GAFO sales grew by 7.0 percent in 1994 to $592.3 billion, led by furniture and furnishings which grew by 13.1 percent. From the above it can be calculated that GAFO sales accounted for 26.5 percent of total retail sales and nearly 50.0 percent of all shopping center-inclined sales. The International Council of Shopping Centers (ICSC) publishes a Monthly Mall Merchandise Index which tracks sales by store type for more than 400 regional shopping centers. The index shows that sales per square foot rose by 1.8 percent to $256 per square foot in 1994. The following chart identified the most recent year-end results. Index Sales per Square Foot 1993-1994 Percent Change Store Type 1994 1993 ICSC Index GAFO: Apparel & Accessories: Women's Ready-To-Wear $189 $196 - 3.8% Women's Accessories and 295 283 + 4.2% Specialties 231 239 - 3.3% Men's and Boy's Apparel 348 310 +12.2% Children's Apparel 294 292 + 0.4% Family Apparel 284 275 + 3.3% Women's Shoes 330 318 + 3.8% Men's Shoes 257 252 + 1.9% Family Shoes 340 348 - 2.2% Shoes (Misc.) $238 $238 - 0.2% SUBTOTAL Furniture & Furnishings: Furniture & Furnishings $267 $255 + 4.5% Home Entertainment & Electronics 330 337 - 2.0% Miscellaneous 291 282 + 3.3% SUBTOTAL $309 $310 - 0.3% Other GAFO: Jewelry $581 $541 + 7.4% Other 258 246 + 4.9% SUBTOTAL $317 $301 + 5.3% TOTAL GAFO $265 $261 + 1.6% NON-GAFO FOOD: Fast Food $365 $358 + 2.0% Restaurants 250 245 + 2.2% Other 300 301 - 0.4% SUBTOTAL $304 $298 + 1.9% OTHER NON-GAFO: Supermarkets $236 $291 -18.9% Drug/HBA 254 230 +10.3% Personal Services 264 253 + 4.1% Automotive 149 133 +12.2% Home Improvement 133 127 + 4.8% Mall Entertainment 79 77 + 3.2% Other Non-GAFO Misc. 296 280 + 5.7% SUBTOTAL $192 $188 + 2.4% TOTAL NON-GAFO $233 $228 + 2.5% TOTAL $256 $252 + 1.8% Note: Sales per square foot numbers are rounded to whole dollars. Three categories illustrated here have limited representation in the ICSC sample: Automotive, +12.2%; Home Improvement, +4.8%; and Supermarkets, -18.9%. Source: U.S. Department of Commerce and Dougal M. Casey. GAFO sales have risen relative to household income. In 1990 these sales represented 13.9 percent of average household income. By 1994 they rose to 14.4 percent. Projections through 2000 show a continuation of this trend to 14.7 percent. On average, total sales were equal to nearly 55.0 percent of household income in 1994. Determinants of Retail Sales Growth and U.S. Retail Sales by Key Store Type 1990 1994 2000(P) Determinants Population 248,700,000 260,000,000 276,200,000 Households 91,900,000 95,700,000 103,700,000 Average Household Income $37,400 $42,600 $51,600 Total Census Money Income $3.4 Tril. $4.1 Tril. $5.4 Tril. % Allocations of Income to Sales GAFO Stores 13.9% 14.4% 14.7% Convenience Stores 12.9% 11.7% 10.7% Home Improvement Stores 2.8% 3.0% 3.3% Total Shopping Center- Inclined Stores 29.6% 29.1% 28.8% Total Retail Stores 54.3% 54.6% 52.8% Sales ($Billion) GAFO Stores $472 $592 $795 Convenience Stores 439 479 580 Home Improvement Stores 95 123 180 Total Shopping Center- Inclined Stores $1,005 $1,194 $1,555 TOTAL RETAIL SALES $1,845 $2,237 $2,850 Note: Sales and income figures are for the full year; population and household figures are as of April 1 in each respective year. P = Projected. Source: U.S. Census of Population, 1990; U.S. Bureau of the Census Current Population Reports: Consumer Income P6-168, 174, 180, 184 and 188; Berna Miller with Linda Jacobsen, "Household Futures", American Demographics, March 1995; Retail Trade sources already cited; and Dougal M. Casey: ICSC White Paper GAFO sales have risen at a compound annual rate of approximately 6.8 percent since 1991 based on the following annual change in sales. 1990/91 2.9% 1991/92 7.0% 1992/93 6.6% 1993/94 7.0% According to a recent study by the ICSC, GAFO sales are expected to grow by 5.0 percent per annum through the year 2000, which is well above the 4.1 percent growth for all retail sales. This information is presented in the following chart. Retail Sales in the United States, by Major Store Type 1994 2000(P) Percent Change Compound Store Type ($ Billions) ($ Billions) Total Annual GAFO: General Merchandise $ 283 $ 370 30.7% 4.6% Apparel & Accessories 110 135 22.7% 3.5% Furniture/Home Furnishings 120 180 50.0% 7.0% Other Shoppers Goods 81 110 35.8% 5.2% GAFO Subtotal $ 592 $ 795 34.3% 5.0% CONVENIENCE GOODS: Food Stores $ 398 $ 480 20.6% 3.2% Drugstores 82 100 22.0% 3.4% Convenience Subtotal $ 479 $ 580 21.1% 3.2% Home Improvement 123 180 46.3% 6.6% Shopping Center- Inclined Subtotal $1,194 $1,555 30.2% 4.5% All Other 1,043 1,295 24.2% 3.7% Total $2,237 $2,850 27.4% 4.1% Note: P = Projected. Some figures rounded. Source: U.S. Department of Commerce, Bureau of the Census and Dougal M. Casey. In considering the six-year period January 1995 through December 2000, it may help to look at the six-year period extending from January 1989 through December 1994 and then compare the two time spans. Between January 1989 and December 1994, shopping center- inclined sales in the United States increased by $297 billion, a compound growth rate of 4.9 percent. These shopping center- inclined sales are projected to increase by $361 billion between January 1995 and December 2000, a compound annual growth rate of 4.5 percent. GAFO sales, however, are forecasted to increase by 34.3 percent or 5.0 percent per annum. Industry Trends According to the National Research Bureau, there were a total of 40,368 shopping centers in the United States at the end of 1994. During this year, 735 new centers opened, an 10.0 percent increase over the 667 that opened in 1993. The upturn marked the first time since 1989 that the number of openings increased. The greatest growth came in the small center category (less than 100,000 square feet) where 457 centers were constructed. In terms of GLA added, new construction in 1994 resulted in an addition of 90.16 million square feet of GLA from approximately 4.77 billion to 4.86 billion square feet. The following chart highlights trends over the period 1987 through 1995. Census Data: 8-Year Trends No. of Total Total Average Average % Change New % Increase Year Centers GLA Sales GLA per Sales in Sales Cen- in Total (Billions) Center per SF per SF ters Centers ---- ------ ------------- ------------ ------- ------- ------- ----- ---------- 1987 30,641 3,722,957,095 $602,294,426 121,502 $161.78 2.41% 2,145 7.53% 1988 32,563 3,947,025,194 $641,096,793 121,212 $162.43 0.40% 1,922 6.27% 1989 34,683 4,213,931,734 $682,752,628 121,498 $162.02 -0.25% 2,120 6.51% 1990 36,515 4,390,371,537 $706,380,618 120,235 $160.89 -0.70% 1,832 5.28% 1991 37,975 4,563,791,215 $716,913,157 120,179 $157.09 -2.37% 1,460 4.00% 1992 38,966 4,678,527,428 $768,220,248 120,067 $164.20 4.53% 991 2.61% 1993 39,633 4,770,760,559 $806,645,004 120,373 $169.08 2.97% 667 1.71% 1994 40,368 4,860,920,056 $851,282,088 120,415 $175.13 3.58% 735 1.85% Compound Annual +4.01% +3.88% +5.07% -.13% +1.14% N/A N/A N/A Growth Source: National Research Bureau Shopping Center Database and Statistical Model From the chart we see that both total GLA and total number of centers have increased at a compound annual rate of approximately 4.0 percent since 1987. New construction was up 1.85 percent in 1994, a slight increase over 1993 but still well below the peak year 1987 when new construction increased by 7.5 percent. Industry analysts point toward increased liquidity among shopping center owners, due in part to the influx of capital from securitized debt financiang and the return of lending by banks and insurance companies. REITs have also been a source of capital and their appetite for new product has provided a convenient take out vehicle. Among the 40,368 centers in 1994, the following breakdown by size can be shown. U.S. Shopping Center Inventory, January 1995 Square Feet Number of Centers (Millions) ----------------- --------------- Size Range (SF) Amount Percent Amount Percent --------------- ------ ------- ------ ------- Under 100,000 25,450 63% 1,266 25% 100,000-400,000 13,035 32% 2,200 45% 400,000-800,000 1,210 3% 675 15% Over 800,000 673 2% 750 15% Total 40,368 100% 4,865 100% Source: National Research Bureau (some numbers slightly rounded). According to the National Research Bureau, total sales in shopping centers have grown at a compound rate of 5.07 percent since 1987. With sales growth outpacing new construction, average sales per square foot have been showing positive increases since the last recession. Aggregate sales were up 5.5 percent nationwide from $806.6 billion (1993) to $851.3 billion (1994). In 1994, average sales were $175.13 per square foot, up nearly 3.6 percent over 1993 and 1.14 percent on average over the past seven years. The biggest gain came in the super- regional category (more than 1 million square feet) where sales were up 5.05 percent to $193.13 per square foot. The following chart tracks the change in average sales per square foot by size category between 1993 and 1994. Sales Trends by Size Category 1993-1994 Average Sales Per Square Foot Category 1993 1994 % Change Less than 100,000 SF $193.10 $199.70 +3.4% 100,001 to 200,000 SF $156.18 $161.52 +3.4% 200,001 to 400,000 SF $147.57 $151.27 +2.5% 400,001 to 800,000 SF $157.04 $163.43 +4.1% 800,001 to 1,000,000 SF $194.06 $203.20 +4.7% More than 1,000,000 SF $183.90 $193.13 +5.0% Total $169.08 $175.13 +3.6% Source: National Research Bureau Empirical data shows that the average GLA per capita is increasing. In 1994, the average for the nation was 18.7. This was up 17 percent from 16.1 in 1988 and more recently, 18.5 square feet per capita in 1993. Among states, Florida has the highest GLA per capita with 28.1 square feet and South Dakota has the lowest at 9.40 square feet. The estimate for 1995 is for an increase to 19.1 per square foot per capita. Per capita GLA for regional malls (defined as all centers in excess of 400,000 square feet) has also been rising. This information is presented on the following chart. GLA per Capita All Regional Year Centers Malls 1988 16.1 5.0 1989 17.0 5.2 1990 17.7 5.3 1991 18.1 5.3 1992 18.3 5.5 1993 18.5 5.5 1994 18.7 5.4 Source: International Council of Shopping Center: The Scope of The Shopping Center Industry and National Research Bureau The Urban Land Institute, in the 1995 edition of Dollars and Cents of Shopping Centers, reports that vacancy rates range from a low of 2.0 percent in neighborhood centers to 14.0 percent for regional malls. Super-regional malls reported a vacancy rate of 7.0 percent and community centers were 4.0 percent based upon their latest survey. The retail industry's importance to the national economy can also be seen in the level of direct employment. According to F.W. Dodge, the construction information division of McGraw-Hill, new projects in 1994 generated $2.6 billion in construction contract awards and supported 41,600 jobs in construction trade and related industries. This is nearly half of the construction employment level of 95,360 for new shopping center development in 1990. It is estimated that 10.18 million people are now employed in shopping centers, equal to about one of every nine non-farm workers in the country. This is up 2.9 percent over 1991. Market Shifts - Contemporary Trends in the Retail Industry During the 1980s, the department store and specialty apparel store industries competed in a tug of war for consumer dollars. Specialty stores emerged largely victorious as department store sales steadily declined as a percentage of total GAFO sales during the decade, slipping from 47.0 percent in 1979 to 44.0 percent in 1989. During this period, many anchor tenants teetered from high debt levels incurred during speculative takeovers and leveraged buyouts of the 1980s. Bankruptcies and restructuring, however, have forced major chains to refocus on their customer and shed unproductive stores and product lines. At year end 1994, department store sales, as a percentage of GAFO sales, were approximately 37.5 percent. The continued strengthening of some of the major department store chains, including Sears, Federated/Macy's, May and Dayton Hudson, is in direct contrast to the dire predictions made by analysts about the demise of the traditional department store industry. This has undoubtedly been brought about by the heightened level of merger and acquisition activity in the 1980s which produced a burdensome debt structure among many of these entities. When coupled with reduced sales and cash flow brought on by the recession, department stores were unable to meet their debt service requirements. Following a round of bankruptcies and restructurings, the industry has responded with aggressive cost-cutting measures and a focused merchandising program that is decidedly more responsive to consumer buying patterns. The importance of department stores to mall properties is tantamount to a successful project since the department store is still the principal attraction that brings patrons to the center. On balance, 1994/95 was a continued period of transition for the retail industry. Major retailers achieved varying degrees of success in meeting the demands of increasingly value conscious shoppers. Since the onset of the national economic recession in mid-1990, the retail market has been characterized by intense price competition and continued pressure on profit margins. Many national and regional retail chains have consolidated operations, closed underperforming stores, and/or scaled back on expansion plans due to the uncertain spending patterns of consumers. Consolidations and mergers have produced a more limited number of retail operators, which have responded to changing spending patterns by aggressively repositioning themselves within this evolving market. Much of the recent retail construction activity has involved the conversion of existing older retail centers into power center formats, either by retenanting or through expansion. An additional area of growth in the retail sector is in the "supercenter" category, which consists of the combined grocery and department stores being developed by such companies as Wal- Mart and Kmart. These formats require approximately 150,000 to 180,000 square feet in order to carry the depth of merchandise necessary for such economies of scale and market penetration. Some of the important developments in the industry over the past year can be summarized as follows: - The discount department store industry emerged as arguably the most volatile retail sector, lead by regional chains in the northeast. Jamesway, Caldor and Bradlees each filed for Chapter 11 within six months and Hills Stores is on the block. Jamesway is now in the process of liquidating all of its stores. Filene's Basement was granted relief from some covenant restrictions and its stock price plummeted. Ames, based in Rocky Hill, Connecticut, will close 17 of its 307 stores. Kmart continues to be of serious concern. Its debt has been downgraded to junk bond status. Even Wal-Mart, accustomed to double digit sales growth, has seen some meager comparable sales increases. These trends are particularly troubling for strips since these tenants are typical anchors. - The attraction of regional malls as an investment has diminished in view of the wave of consolidations and bankruptcies affecting in-line tenants. Some of the larger restructurings include Melville with plans to close up to 330 stores, sell Marshalls to TJX Companies, split into three publicly traded companies, and sell Wilsons and This End Up; Petrie Retail, which operates such chains as M.J. Carroll, G&G, Jean Nicole, Marianne and Stuarts, has filed for bankruptcy protection; Edison Brothers (Jeans West, J. Riggins, Oak Tree, 5-7-9 Shops, etc.) announced plans to close up to 500 stores while in Chapter 11; J. Baker intends to liquidate Fayva Shoe division (357 low-price family footwear stores); The Limited announced a major restructuring, including the sale of partial interests in certain divisions; Charming Shoppes will close 290 Fashion Bug and Fashion Bug Plus stores; Trans World Entertainment (Record Town) has closed 115 of its 600 mall shop locations. Other chains having trouble include Rickel Home Centers which filed Chapter 11; Today's Man, a 35 store Philadelphia based discount menswear chain has filed; nine subsidiaries of Fretta, including Dixon's, U.S. Holdings and Silo, filed Chapter 11; and Clothestime, also in bankruptcy will close up to 140 of its 540 stores. Merry-Go-Round, a chain that operates 560 stores under the names Merry-Go-Round, Dejaiz and Cignal is giving up since having filed in January 1994 and will liquidate its assets. Toys "R" Us has announced a global reorganization that will close 25 stores and cut the number of items it carries to 11,000 from 15,000. Handy Andy, a 50 year old chain of 74 home improvement centers which had been in Chapter 11, has decided to liquidate, laying off 2,500 people. - Overall, analysts estimate that 4,000 stores closed in 1995 and as many as 7,000 more will close in 1996. Mom-and-Pop stores, where 75 percent of U.S. retailers employ fewer than 10 people have been declining for the past decade. Dun and Bradstreet reports that retail failures are up 1.4 percent over Last year - most of them small stores who don't have the financial flexibility to renegotiate payment schedule. - With sales down, occupancy costs continue to be a major issue facing many tenants. As such, expansion oriented retailers like The Limited, Ann Taylor and The Gap, are increasingly shunning mall locations for strip centers. This has put further pressure on mall operators to be aggressive with their rent forecasts or in finding replacement tenants. - While the full service department store industry led by Sears has seen a profound turnaround, further consolidation and restructuring continues. Woodward & Lothrop was acquired by The May Department Stores Company and JC Penney; Broadway Stores was acquired by Federated Department Stores; Elder Beerman has filed Chapter 11 and will close 102 stores; Steinbach Stores will be acquired by Crowley, Milner & Co.; Younkers will merge with Proffitts; and Strawbridge and Clothier has hired a financial advisor to explore strategic alternatives for this Philadelphia based chain. - Aside from the changes in the department store arena, the most notable transaction in 1995 involved General Growth Properties' acquisition of the Homart Development Company in a $1.85 billion year-end deal. Included were 25 regional malls, two current projects and several development sites. In November, General Growth arranged for the sale of the community center division to Developers Diversified for approximately $505 million. Another notable deal involved Rite Aid Corporation's announcement that it will acquire Revco Drug Stores in a $1.8 billion merger to form the nation's largest drug store company with sales of $11 billion and 4,500+/- stores. - As of January 1, 1995 there were 311 outlet centers with 44.4 million square feet of space. Outlet GLA has grown at a compound annual rate of 18.1 percent since 1989. Concerns of over-building, tenant bankruptcies, and consolidations have now negatively impacted this industry as evidenced by the hit the outlet REIT stocks have taken. Outlet tenants have not been immune to the global troubles impacting retail sales as comparable store sales were down 3.1 percent through November 1995. - Category Killers and discount retailers have continued to drive the demand for additional space. In 1995, new contracts were awarded for the construction or renovation of 260 million square feet of stores and shopping centers, up from 173 million square feet in 1991 according to F.W. Dodge, matching the highest levels over the past two decades. It is estimated that between 1992 and 1994, approximately 55.0 percent of new retail square footage was built by big box retailers. In 1994, it is estimated that they accounted for 80.0 percent of all new stores. Most experts agree that the country is over-stored. Ultimately, it will lead to higher vacancy rates and place severe pressure on aging, capital intensive centers. Many analysts predict that consolidation will occur soon in the office products superstores category where three companies are battling for market share - OfficeMax, Office Depot and Staples. - Entertainment is clearly the new operational requisite for property owners and developers who are incorporating some form of entertainment into their designs. With a myriad of concepts available, ranging from mini-amusement parks to multiplex theater and restaurant themes, to interactive high-tech applications, choosing the right formula is a difficult task. Investment Criteria and Institutional Investment Performance Investment criteria for mall properties range widely. Many firms and organizations survey individuals active in this industry segment in order to gauge their current investment criteria. These criteria can be measured against traditional units of comparison such as price (or value) per square foot of GLA and overall capitalization rates. The price that an investor is willing to pay represents the current or present value of all the benefits of ownership. Of fundamental importance is their expectation of increases in cash flow and the appreciation of the investment. Investors have shown a shift in preference to initial return, placing probably less emphasis on the discounted cash flow analysis (DCF). A DCF is defined as a set of procedures in which the quantity, variability, timing, and duration of periodic income, as well as the quantity and timing of reversions, are specified and discounted to a present value at a specified yield rate. Understandably, market thinking has evolved after a few hard years of reality where optimistic cash flow projections did not materialize. The DCF is still, in our opinion, a valid valuation technique that when properly supported, can present a realistic forecast of a property's performance and its current value in the marketplace. Equitable Real Estate Investment Management, Inc. reports in their Emerging Trends in Real Estate - 1996 that their respondents give retail investments generally poor performance forecasts in their latest survey due to the protracted merchant shakeout which will continue into 1996. While dominant, Class A malls are still considered to be one of the best real estate investments anywhere, only 13.0 percent of the respondents recommended buying malls. Rents and values are expected to remain flat (in real terms) and no one disputes their contention that 15 to 20 percent of the existing malls nationwide will be out of business by the end of the decade. For those centers that will continue to reposition themselves, entertainment will be an increasingly important part of their mix. Investors do cite that, after having been written off, department stores have emerged from the shake-out period as powerful as ever. The larger chains such as Federated, May and Dillard's, continue to acquire the troubled regional chains who find it increasingly difficult to compete against the category killers. Many of the nations largest chains are reporting impressive profit levels, part of which has come about from their ability to halt the double digit sales growth of the national discount chains. Mall department stores are aggressively reacting to power and outlet centers to protect their market share. Department stores are frequently meeting discounters on price. While power centers are considered one retail property type currently in a growth mode, most respondents feel that the country is over-stored and value gains with these types of centers will lag other property types, including malls, over five and ten year time frames. The following chart summarizes the results of their current survey. Retail Property Rankings and Forecasts Invest Potential Investment Potential 1996 Predicted Value Gains Property -------------------- Rent --------------------- Type Rating1 Ranking2 Increase 1 Yr. 5Yrs. 10Yrs. Regional Malls 4.9 8th 2.0% 2% 20% 40% Power Centers 5.3 6th 2.3% 1% 17% 32% Community Centers 5.4 5th 2.4% 2% 17% 33% 1 Scale of 1 to 10 2 Based on 9 property types The NCREIF Property Index represents data collected from the Voting Members of the National Council of Real Estate Investment Fiduciaries. As shown in the following table, data through the third quarter of 1995 shows that the retail index posted a positive 1.23 percent increase in total return. Increased competition in the retail sector from new and expanding formats and changing locational references has caused the retail index to trail all other property types. As such, the -2.01 percent decline in value reported by the retail subindex for the year were in line with investors' expectations. Retail Property Returns NCREIF Index Third Quarter 1995 (%) Period Income Appreciation Total Change in CPI 3rd Qtr. 1995 1.95 - .72 1.23 .46 One Year 8.05 -2.01 5.92 2.55 Three Years 7.54 -3.02 4.35 2.73 Five Years 7.09 -4.61 2.23 2.92 Ten Years 6.95 .54 7.52 3.53 Source: Real Estate Performance Report National Council of Real Estate Investment Fiduciaries It is noted that the positive total return continues to be affected by the capital return component which has been negative for the last five years. However, as compared to the CPI, the total index has performed relatively well. Real Estate Investment Trust Market (REITs) To date, the impact of REITs on the retail investment market has been significant, although the majority of Initial Property Offerings (IPOs) involving regional malls, shopping centers, and outlet centers did not enter the market until the latter part of 1993 and early 1994. It is noted that REITs have dominated the investment market for apartment properties and have evolved into a major role for retail properties as well. As of November 30, 1995, there were 297 REITs in the United States, about 79.0 percent (236) which are publicly traded. The advantages provided by REITs, in comparison to more traditional real estate investment opportunities, include the diversification of property types and location, increased liquidity due to shares being traded on major exchanges, and the exemption from corporate taxes when 95.0 percent of taxable income is distributed. There are essentially three kinds of REITs which can either be "open-ended", or Finite-life (FREITs) which have specified liquidation dates, typically ranging from eight to fifteen years. - Equity REITs center around the ownership of properties where ownership interests (shareholders)receive the benefit of returns from the operating income as well as the anticipated appreciation of property value. Equity REITs typically provide lower yields than other types of REITs, although this lower yield is theoretically offset by property appreciation. - Mortgage REITs invest in real estate through loans. The return to shareholders is related to the interest rate for mortgages placed by the REIT. - Hybrid REITs combine the investment strategies of both the equity and mortgage REITs in order to diversify risk. The influx of capital into REITs has provided property owners with an significant alternative marketplace of investment capital and resulted in a considerably more liquid market for real estate. A number of "non-traditional" REIT buyers, such as utility funds and equity/income funds, established a major presence in the market during 1993/94. 1995 was not viewed as a great year for REITs relative to the advances seen in the broader market. Through the end of November, equity REITs posted a 9.3 percent total return according to the National Association of Real Estate Investment Trusts (NAREIT). The best performer among equity REITs was the office sector with a 29.4 percent total return. This was followed by self-storage (27.3%), hotels (26.7%), triple-net lease (20.6%), and health care (18.8%). Two equity REIT sectors were in the red - outlet centers and regional malls. Retail REITs As of November 30, 1995, there were a total of 47 REITs specializing in retail, making up approximately 16 percent of the securities in the REIT market. Depending upon the property type in which they specialize, retail REITs are divided into three categories: shopping centers, regional malls, and outlet centers. The REIT performance indices chart shown as Table A on the following page, shows a two-year summary of the total retail REIT market as well as the performance of the three composite categories. Table A - REIT Performance Indicies Y-T-D Total Dividend No. of REIT Market Return Yield Securities Capitalization* ----------- ----------- -------------- ---------------- As of November 30, 1995 ---------------------------------------------------------- Total Retail 0.49% 8.36% 47 $14,389.1 Strip Centers 2.87% 8.14% 29 $ 8,083.3 Regional Malls -2.47% 9.06% 11 $ 4,886.1 Outlet Centers -2.53% 9.24% 6 $ 1,108.7 ------------------------------------------------------- As of November 30, 1994 ------------------------------------------------------- Total Retail -3.29% 8.35% 46 $12,913.1 Strip Center -4.36% 7.98% 28 $ 7,402.7 Regional Malls 2.84% 8.86% 11 $ 4,459.1 Outlet Centers -16.58% 8.74% 7 $ 1,051.4 * Number reported in thousands Source: Realty Stock Review As can be seen, the 47 REIT securities have a market capitalization of approximately $14.4 billion, up 11.5 percent from the previous year. Total returns were positive through November 1995, reversing the negative return for the comparable period 12 months earlier. It is noted that the positive return was the result of the strength of the shopping center REITs which constitute nearly 60 percent of the market capitalization. Total retail REITs dividend yields have remained constant over the last year at approximately 8.36 percent. Regional mall and shopping center REITs dominate the total market, making up approximately 85 percent of the 47 retail REITs. While many of the country's best quality malls and shopping centers have recently been offered in the public market, this heavily capitalized marketplace has provided sellers with an attractive alternative to the more traditional market for large retail properties. Regional Mall REITs The accompanying exhibit Table B summarizes the basic characteristics of eight REITs and one publicly traded real estate operating company (Rouse Company) comprised exclusively or predominantly of regional mall properties. Excluding the Rouse Company (ROUS), the IPOs have all been completed since November 1992. The nine public offerings with available information have a total of 281 regional or super regional malls with a combined leasable area of approximately 229 million square feet. This figure represents more than 14.0 percent of the total national supply of this product type. The nine companies are among the largest and best capitalized domestic real estate equity securities, and are considerably more liquid than more traditional real estate related investments. Excluding the Rouse Company, however, these companies have been publicly traded for only a short period, and there is not an established track record. General Growth was the star performer in 1995 with a 15 percent increase in its stock price following the acquisition of the Homart retail portfolio from Sears for $1.85 billion - the biggest real estate acquisition of the decade. Table B Regional Mall REIT analysis Cushman & Wakefield, Inc. REIT Portfolio CBL CWN EJD GGP MAC ROUS SPG TCO URB -------------------------------------------------------------------------------- Company Overview -------------------------------------------------------------------------------- Total Retail Cen. 95 23 51 40 16 67 56 19 12 -Super Reg.* 5 1 28 14 4 27 21 16 7 -Regional 11 22 23 25 10 27 35 3 2 -Community 79 - 11 1 2 13 55 - 3 -Other - - - - - - 3 - - Tot. Mall GLA** 17,129 12,686 44,460 28,881 10,620 44,922 39,329 22,031 8,895 Tot.Mall Shop GLA**6,500 4,895 15,300 12,111 - 19,829 15,731 9,088 2,356 Avg. Total GLA/Cen.**180 552 872 722 664 670 702 1,160 741 Avg. Shop GLA/Cen.** 68 213 300 303 - 296 281 478 196 -------------------------------------------------------------------------------- Mall Operations -------------------------------------------------------------------------------- Reporting year 1994 1994 1994 1994 1994 1994 1994 1994 1994 Avg. Sales PSF of Mall GLA $226 $204 $260 $245 $262 $285 $259 $335 $348 Minimum Rent/Sales ratio 8.6% 7.1% 8.3% - - - 6.8% 10.2% 8.1% Total Occupancy Cost/Sales ratio 12.2% 10.0% 12.4% - 11.2% - 10.2% 14.8% 11.7% Mall Shop Occupancy Level 88.7% 84.0% 85.0% 87.0% 92.9% - 86.2% 86.6% 93.3% -------------------------------------------------------------------------------- Share Price -------------------------------------------------------------------------------- IPO Date 10/27/93 8/9/93 6/30/94 4/8/93 3/9/94 1996 12/26/93 11/18/92 10/6/93 IPO Price $19.50 $17.25 $14.75 $22.00 $19.00 - $22.25 $11.00 $23.50 Current Price (12/15/95) $21.63 $ 7.38 $13.00 $19.13 $19.75 $19.63 $25.13 $ 9.75 $21.75 52-Week High $22.00 $14.13 $15.13 $22.63 $21.88 $22.63 $26.00 $10.38 $22.50 52-Week Low $17.38 $ 6.50 $12.00 $18.13 $19.25 $17.50 $22.50 $ 8.88 $18.75 -------------------------------------------------------------------------------- Capitalization and Yields -------------------------------------------------------------------------------- Outstanding Shares*** 30.20 36.85 89.60 43.37 31.45 47.87 95.64 125.85 21.19 Market Cap.*** $653 $272 $1,165 $830 $621 $940 $2,403 $1,227 $461 Annual Dividend $1.59 $0.80 $1.26 $1.72 $1.68 $0.80 $1.97 $0.88 $1.94 Dividend Yield (12/15/95) 7.35% 10.84% 9.69% 8.99% 8.51% 4.08% 7.84% 9.03% 8.92% FFO 1995**** $1.85 $1.50 $1.53 $1.96 $1.92 $1.92 $2.28 $0.91 $2.17 FFO Yield (12/15/95) 8.55% 20.33% 11.77% 10.25% 9.72% 9.78% 9.07% 9.33% 9.98% -------------------------------------------------------------------------------- Source: Salomon Brothers and Realty Stock Review; Annual Reports * Super Regional Centers (>=800,000 Sq. Ft) ** Numbers in thousands (000) includes mall only *** Numbers in millions **** Funds From Operations is defined as net income (loss) before depreciation, amoritizatoin, other non-cash items, extrodinary items, gains or losses of assets and before minority interests in the Operating Partnership. CBL - CBL & Associates CWN - Crown American EJD - Edward Debartolo GGP - General Growth MAC - Macerich Company ROUS - Rouse Company SPG - Simon Property TCO - Taubman Centers URB - Urban Shopping Shopping Center REITs Shopping center REITs comprise the largest sector of the retail REIT market accounting for 29 out of the total 47 securities. General characteristics of eight of the largest shopping center REITs are summarized on Table C. The public equity market capitalization of the eight companies totaled $6.1 billion as of December 15, 1995. The two largest, Kimco Realty Corp. and New Plan Realty Trust have a market capitalization equal to approximately 34.5 percent of the group total. While the regional mall and outlet center REIT markets struggled through 1995, shopping center REITs showed a positive November 30, 1995 year-to-date return of 2.87%. Through 1995, transaction activity in the national shopping center market has been moderate. Most of the action in this market is in the power center segment. As an investment, power centers appeal to investors and REITs because of the high current cash returns and long-term leases. However, with their popularity, the potential for overbuilding is high. Also creating skepticism within this market is the stability of several large discount retailers such as Kmart, and other discount department stores which typically anchor power centers. Shopping center REITs which hold numerous properties where struggling retailers are located are currently keeping close watch over these centers in the event of these anchor tenants vacating their space. Similar to the regional mall REITs, shopping center REITs have been publicly traded for only a short period and do not have a defined track record. While the REITs have been in existence for a relatively short period, the growth requirements of the companies should place upward pressure on values due to continued demand for new product. Table C Shopping Center REIT analysis Cushman & Wakefield, Inc. REIT Portfolio DDR FRT GRT JPR KIM NPR VNO WRI -------------------------------------------------------------------------------- Company Overview -------------------------------------------------------------------------------- Tot. Properties 111 53 84 46 193 123 65 161 Tot. Retail Centers 104 53 84 40 193 102 56 141 Tot. Retail GLA* 23,600 11,200 12,300 6,895 26,001 14,500 9,501 13,293 Avg. Shop GLA/Cen.* 227 211 146 172 135 142 170 94 -------------------------------------------------------------------------------- Mall Operations -------------------------------------------------------------------------------- Reporting year - - 1994 - 1994 - - 1994 Total Rental Income - - $71,101 -$125,272 - -$112,223 Average Rent/SF $6.04 - $5.78 - $4.82 - - $8.44 Total Oper. Expenses - - $45,746 - $80,563 - - $76.771 Oper. Expenses/SF - - $3.72 - $3.10 - - $5.78 Oper. Expenses Ratio - - 64.3% - 64.3% - - 68.4% Total Occupancy Level 96.6% 95.1% 96.3% 94.0% 94.7% 95.4% 94.0% 92.0% -------------------------------------------------------------------------------- Share Price -------------------------------------------------------------------------------- IPO Date 1992 1993 1994 1994 1991 1973 1993 1985 IPO Price $19.50 $17.25 $14.75 $22.00 $19.00 - $22.25 - Current Price (12/15/95) $29.88 $23.38 $17.75 $20.63 $42.25 $21.63 $36.13 $36.13 52-Week High $32.00 $23.75 $22.38 $21.38 $42.25 $23.00 $38.13 $38.13 52-Week Low $26.13 $19.75 $16.63 $17.38 $35.00 $18.75 $32.75 $32.75 -------------------------------------------------------------------------------- Capitalization and Yields -------------------------------------------------------------------------------- Outstanding Shares** 19.86 32.22 24.48 19.72 22.43 53.26 24.20 26.53 Market Cap.*** $ 567 $ 753 $ 435 $ 407 $ 948 $1,152 $ 872 $ 959 Annual Dividend $2.40 $1.64 $1.92 $1.68 $2.16 $1.39 $2.24 $2.40 Dividend Yield (12/15/95) 8.03% 7.01% 10.82% 8.14% 5.11% 6.43% 6.20% 6.64% FFO 1995**** $2.65 $1.78 $2.25 $1.83 $3.15 $1.44 $2.67 $2.80 FFO Yield (12/15/95) 8.87% 7.61% 12.68% 8.87% 7.46% 6.66% 7.39% 7.75% -------------------------------------------------------------------------------- Source: Salomon Brothers and Realty Stock Review; Annual Reports * Numbers in thousands (000) includes mall only ** Numbers in millions *** Funds From Operations is defined as net income (loss) before depreciation, amoritizatoin, other non-cash items, extrodinary items, gains or losses of assets and before minority interests in the Operating Partnership. DDR - Development Diversified FRT - Federal Realty Inv. GRT - Glimcher Realty JPR - JP Realty Inc. KIM - Kimco Realty Corp. NPR - New Plan Realty VNO - Vornado Realty WRI - Weingarten Realty Outlook A review of various data sources reveals the intensity of the development community's efforts to serve a U.S. retail market that is still growing, shifting and evolving. It is estimated 25- 30 power centers appear to be capable of opening annually, generating more than 12 million square feet of new space per year. That activity is fueled by the locational needs of key power center tenants, 27 of which indicated in recent year-end reports to shareholders an appetite for 900 new stores annually, an average of 30 new stores per firm. With a per capita GLA figure of 19 square feet, most analysts are in agreement that the country is already over-stored. As such, new centers will become feasible through the following demand generators: - The gradual obsolescence of some existing retail locations and retail facilities; - The evolution of the locational needs and format preferences of various anchor tenants; and - Rising retail sales generated by increasing population and household levels. By the year 2000, total retail sales are projected to rise from $2.237 trillion in 1994 to almost $2.9 trillion; shopping center-inclined sales are projected to rise by $361 billion, from $1.194 trillion in 1994 to nearly $1.6 trillion in the year 2000. Those increases reflect annual compound growth rates of 4.1 percent and 4.5 percent, respectively, for the six-year period. On balance, we conclude that the outlook for the retail industry is one of cautious optimism. Because of the importance of consumer spending to the economy, the retail industry is one of the most studied and analyzed segments of the economy. One obvious benefactor of the aggressive expansion and promotional pricing which has characterized the industry is the consumer. There will continue to be an increasing focus on choosing the right format and merchandising mix to differentiate the product from the competition and meet the needs of the consumer. Quite obviously, many of the nations' existing retail developments will find it difficult if not impossible to compete. Tantamount to the success of these older centers must be a proper merchandising or repositioning strategy that adequately considers the feasibility of the capital intensive needs of such an undertaking. Coincident with all of the change which will continue to influence the industry is a general softening of investor bullishness. This will lead to a realization that the collective interaction of the fundamentals of risk and reward now require higher capitalization rates and long term yield expectations in order to attract investment capital. GRAPHIC SHOWING OPERATING EXPENSE BUDGET (1996) GRAPHIC SHOWING TENANT SALES REPORT (1995) GRAPHIC SHOWING PRO-JECT LEASE ABSTRACT REPORT GRAPHIC SHOWING PRO-JECT PROLOGUE ASSUMPTIONS REPORT GRAPHIC SHOWING PRO-JECT TENANT REGISTER REPORT GRAPHIC SHOWING PRO-JECT LEASE EXPIRATION REPORT GRAPHIC SHOWING ENDS FULL DATA REPORT FOR PRIMARY AND TOTAL TRADE AREA GRAPHIC SHOWING REGIONAL MALL SALES (1991-1993) GRAPHIC SHOWING CUSHMAN & WAKEFIELD INVESTOR SURVEY QUALIFICATIONS OF RICHARD W. LATELLA ---------------------------------------- Professional Affiliations ------------------------- Member, American Institute of Real Estate Appraisers (MAI Designation #8346) New York State Certified General Real Estate Appraiser #46000003892 Pennsylvania State Certified General Real Estate Appraiser #GA-001053-R State of Maryland Certified General Real Estate Appraiser #01462 Minnesota Certified General Real Estate Appraiser #20026517 Commonwealth of Virginia Certified General Real Estate Appraiser #4001-003348 State of Michigan Certified General Real Estate Appraiser #1201005216 New Jersey Real Estate Salesperson (License #NS-130101-A) Certified Tax Assessor - State of New Jersey Affiliate Member - International Council of Shopping Centers,ICSC Real Estate Experience ---------------------- Senior Director, Retail Valuation Group, Cushman & Wakefield Valuation Advisory Services. - Cushman & Wakefield is a national full service real estate organization and a Rockefeller Group Company. While Mr. Latella's experience has been in appraising a full array of property types, his principal focus is in the appraisal and counseling for major retail properties and specialty centers on a national basis. As Senior Director of Cushman & Wakefield's Retail Group his responsibilities include the coordination of the firm's national group of appraisers who specialize in the appraisal of regional malls, department stores and other major retail property types. He has personally appraised and consulted on in excess of 200 regional malls and specialty retail properties across the country. Senior Appraiser, Valuation Counselors, - Princeton, New Jersey, specializing in the appraisal of commercial and industrial real estate, condemnation analyses and feasibility studies for both corporate and institutional clients from July 1980 to April 1983. Supervisor, State of New Jersey, Division of Taxation, Local Property and Public Utility Branch - in Trenton, New Jersey, as sisting and advising local municipal and property tax assessors throughout the state from June 1977 to July 1980. Associate, Warren W. Orpen & Associates, - Trenton, New Jersey, assisting in the preparation of appraisals of residential prop erty and condemnation analyses from July 1975 to April 1977. Formal Education Trenton State College, Trenton, New Jersey Bachelor of Science, Business Administration - 1977 As of the date of this report, Richard W. Latella, MAI, has completed the requirements under the continuing education program of the Appraisal Institute. QUALIFICATIONS OF BRIAN J. BOOTH ---------------------------------- General Experience ------------------ Brian J. Booth joined Cushman & Wakefield Valuation Advisory Services in 1995. Cushman & Wakefield is a national full service real estate organization. Mr. Booth previously worked for two years at C. Spencer Powell & Associates in Portland, Oregon, where he was an associate appraiser. He worked on the analysis and valuation of numerous properties including, office buildings, apartments, industrials, retail centers, vacant land, and special purpose properties. Academic Education ------------------ Bachelor of Science (BS) Willamette University (1993) Major: Business-Economics Salem, Oregon Study Overseas (Spring 1992) London University London, England Appraisal Education ------------------- 110 Appraisal Principles Appraisal Institute 1993 120 Appraisal Procedures Appraisal Institute 1994 310 Income Capitalization Appraisal Institute 1994 320 General Applications Appraisal Institute 1994 410 Standards of Professional Practice A Appraisal Institute 1993 420 Standards of Professional Practice B Appraisal Institute 1993 Professional Affiliation ------------------------ Candidate MAI, Appraisal Institute PARTIAL CLIENT LIST --------------------- VALUATION ADVISORY SERVICES CUSHMAN & WAKEFIELD, INC. NEW YORK PROFESSIONALS ARE JUDGED BY THE CLIENTS THEY SERVE VALUATION ADVISORY SERVICES enjoys a long record of service in a confidential capacity to nationally prominent institutional and corporate clients, investors, government agencies and many of the nations largest law firms. Following is a partial list of clients served by members of VALUATION ADVISORY SERVICES - NEW YORK OFFICE. Aetna Air Products and Chemicals, Inc. Aldrich, Eastman & Waltch, Inc. Allegheny-Ludlam Industries AMB Institutional Realty Advisors America First Company American Bakeries Company American Brands, Inc. American District Telegraph Company American Express American Home Products Corporation American Savings Bank Apple Bank Apple South Archdiocese of New York Associated Transport Atlantic Bank of New York AT&T Avatar Holdings Inc. Avon Products, Inc. Bachner, Tally, Polevoy, Misher & Brinberg Baer, Marks, & Upham Balcor Inc. BancAmerica Banca Commerciale Italiana Banco de Brasil, N.A. Banco Santander Puerto Rico Banque Paribas Baker & Mackenzie Bank of America Bank of Baltimore Bank of China Bank of Montreal Bank of New York Bank of Nova Scotia Bank of Seoul Bank of Tokyo Trust Company Bank Leumi Le-Israel Bankers Life and Casualty Company Bankers Trust Company Banque Indosuez Barclays Bank International, Ltd. Baruch College Battery Park City Authority Battle, Fowler, Esqs. Bayerische Landesbank Bear Stearns Berkshire Bertlesman Property, Inc. Betawest Properties Bethlehem Steel Corporation Bloomingdale Properties Borden, Inc. Bowery Savings Bank Bowest Corporation Brandt Organization Brooklyn Hospital BRT Realty Trust Burke and Burke, Esqs. Burmah-Castrol Cadillac Fairview Cadwalader, Wickersham & Taft Caisse National DeCredit Campeau Corporation Campustar Canadian Imperial Bank of Commerce Canyon Ranch Capital Bank Capital Cities-ABC, Inc. Care Incorporated Carter, Ledyard & Milburn Chase Manhattan Bank, N.A. Chemical Bank Corporation Chrysler Corporation C. Itoh & Company Citibank, NA Citicorp Real Estate City University of New York Clayton, Williams & Sherwood Coca Cola, Inc. Cohen Brothers College of Pharmaceutical Sciences Collegiate Church Corporation Columbia University Commonwealth of Pennsylvania Consolidated Asset Recovery Company Consolidated Edison Company of New York, Inc. Continental Realty Credit, Inc. Copley Real Estate Advisors Corning Glass Works Coudert Brothers Covenant House Cozen and O'Connor Credit Agricole Credit Lyonnais Credit Suisse Crivello Properties CrossLand Savings Bank CSX Dai-Ichi Kangyo Bank Dai-Ichi Sempei Life Insurance Daily News, Inc. Daiwa Securities Dart Group Corporation David Beardon & Company Davidoff & Malito, Esqs Dean Witter Realty Debevoise & Plimpton DeMatteis Organization Den Norske Bank Deutsche Bank DiLorenzo Organization Dime Savings Bank Dodge Trucks, Inc. Dollar/Dry Dock Savings Bank Donovan, Leisure, Newton & Irvine Dreyer & Traub Dun and Bradstreet, Inc. Eastdil Realty Advisors East New York Savings Bank East River Savings Bank East Rutherford Industrial Park Eastman Kodak Company Eaton Corporation Eichner Properties, Inc. Ellenburg Capital Corporation Emigrant Savings Bank Empire Mutual Insurance Company Endowment Realty Investors Enzo Biochem, Inc. Equitable Life Assurance Society of America Equitable Real Estate European American Bank F.S. Partners Famolare, Inc. Farwest Savings & Loan Association Federal Asset Disposition Authority Federal Deposit Insurance Company Federal Express Corporation Federated Department Stores, Inc. Feldman Organization Fidelity Bond & Mortgage Company Findlandia Center First Bank First Boston First Chicago First National Bank of Chicago First Nationwide Bank First New York Bank for Business First Tier Bank First Winthrop Fisher Brothers Fleet Bank Flying J, Inc. Foley and Lardner, Esqs. Ford Bacon and Davis, Inc. Ford Foundation Ford Motor Company Forest City Enterprises Forest City Ratner Forum Group, Inc. Franchise Finance Corporation of America Fried, Frank, Harris, Shriver & Jacobson Friendly's Ice Cream Corporation Fruehauf Trailer Corporation Fuji Bank Fulbright & Jaworski G.E. Capital Corporation General Electric Credit Corporation General Motors Corporation Gerald D. Hines Organization Gibson Dunn and Crutcher Gilman Paper Gladstone Equities Glimcher Company Glynwed, Ltd. Goldman, Sachs & Co. Greater New York Savings Bank Greycoat Real Estate Corp. Greyhound Lines Inc. Grid Properties GTE Realty Gulf Coast Restaurants Gulf Oil HDC HRO International Hammerson Properties Hanover Joint Ventures, Inc. Hartz Mountain Industries Hawaiian Trust Company, Ltd. Hertz Corporation Home Federal Home Savings of America HongKong & Shanghai Banking Corporation Horn & Hardart Huntington National Bank Hypo Bank IDC Corporation Ideal Corporation ING Corporation Integon Insurance International Business Machines Corporation International Business Machines Pension Fund International Telephone and Telegraph Corporation Investors Diversified Services, Inc. Iona College Irish Intercontinental Bank Irish Life Assurance Israel Taub Isetan of America, Inc. J & W Seligman & Company, Inc. JMB Realty J. B. Brown and Sons J. C. Penney Company, Inc. J. P. Morgan Jamaica Hospital James Wolfenson & Company Jerome Greene, Esq. Jewish Board of Family & Children's Services Jones Lang Wootton K-Mart Corporation Kelly, Drye and Warren, Esqs. Kennedy Associates Key Bank of New York Kerr-McGee Corporation Kidder Peabody Realty Corp. Kitano Arms Corporation Knickerbocker Realty Koeppel & Koeppel Kronish, Lieb, Weiner & Hellman Krupp Realty Kutak, Rock and Campbell, Esqs. Ladenburg, Thalman & Co. Lans, Feinberg and Cohen, Esqs. Lands Division, Department of Justice Lazard Freres LeBoeuf, Lamb, Greene & MacRae Lefrak Organization Lehman Brothers Lennar Partners Lepercq Capital Corporation Lexington Corporate Properties Lexington Hotel Corporation Lincoln Savings Bank Lion Advisors Lomas & Nettleton Investors London & Leeds Long Term Credit Bank of Japan, Ltd. Lutheran Church of America Lynton, PLC Macluan Capital Corporation Macy's MacAndrews and Forbes Mahony Troast Construction Company Manhattan Capital Partners Manhattan College Manhattan Life Insurance Manhattan Real Estate Company Manufacturers Hanover Trust Company Marine Midland Bank Mason Tenders Massachusetts Mutual Life Insurance Company May Centers, Inc. Mayer, Brown, Platt McDonald's Corporation McGinn, Smith and Company McGrath Services Corporation MCI Telecommunications Mellon Bank Memorial Sloan-Kettering Cancer Center Mendik Company Mercedes-Benz of North America Meridian Bank Meritor Savings Bank Merrill Lynch Hubbard Merchants Bank Metropolis Group Metropolitan Life Insurance Company Metropolitan Petroleum Corporation Meyers Brothers Parking System Inc. Michigan National Corp. Milbank, Tweed Millennium Partners Miller, Montgomery, Sogi and Brady, Esqs. Mitsui Fudosan - New York Inc. Mitsui Leasing, USA Mitsubishi Bank Mitsubishi Trust & Banking Corporation Mobil Oil Corporation Moody's Investors Service Moran Towing Corporation Morgan Guaranty Morgan Hotel Group Morse Shoe, Inc. Moses & Singer Mountain Manor Inn Mudge Rose Guthrie Alexander & Ferdon, Esqs. Mutual Benefit Life Mutual Insurance Company of New York National Audubon Society, Inc. National Bank of Kuwait National Can Company National CSS National Westminster Bank, Ltd. Nelson Freightways Nestle's Inc. New York Bus Company New York City Division of Real Property New York City Economic Development Corporation New York City Housing Development Authority New York City School Construction Authority New York Life Insurance Company New York State Common Fund New York State Employee Retirement System New York State Parks Department New York State Teachers New York State Urban Development Corporation New York Telephone Company New York Urban Servicing Company New York Waterfront Niagara Asset Corporation Nippon Credit Bank, Inc. Nomura Securities Norcross, Inc. North Carolina Department of Insurance NYNEX Properties Company Olympia and York, Inc. Orient Overseas Associates Orix USA Corporation Otis Elevator Company Owens-Illinois Corporation PaineWebber, Inc. Pan American World Airways, Inc. Paul, Weiss, Rifkind Park Tower Associates Parke-Davis and Company Paul Weiss Rifkind, Esqs. Penn Central Corporation Penn Mutual Life Insurance Company Pennsylvania Retirement Fund Penthouse International Pepsi-Cola Company Peter Sharp & Company Petro Stopping Center Pfizer International, Inc. Philip Morris Companies, Inc. Philips International Phoenix Home Life Pittston Company Polyclinic Medical School and Hospital Port Authority of New York and New Jersey Postel Investment Management Prentiss Properties Realty Advisors Procida Organization Proskauer Rose Goetz and Mandelsohn, Esqs. Provident Bank Prudential Securities Pyramid Company Rabobank Nederland Ratner Group RCA Corporation Real Estate Recovery Realty Income Corporation Remson Partners Republic Venezuela Comptrollers Office Revlon, Inc. Rice University Richard Ellis Richards & O'Neil Ritz Towers Hotel Corporation River Bank America Robert Bosch Corporation Robinson Silverman Pearce Aron Rockefeller Center, Inc. Rockefeller Center Properties Roman Catholic Diocese of Brooklyn Roosevelt Hospital Rosenman & Colin Royal Bank of Scotland RREEF Rudin Management Co., Inc. Saint Vincent's Medical Center of New York Saks Fifth Avenue Salomon Brothers Inc. Salvation Army Sanwa Bank SaraKreek USA Saxon Paper Corporation Schroder Real Estate Associates Schulman Realty Group Schulte, Roth & Zabel BDO Seidman Seaman Furniture Company, Inc. Security Pacific Bank Semperit of America Sentinel Realty Advisors Service America Corp. Shea & Gould, Esqs. Shearman and Sterling, Esqs. Shearson Lehman American Express Shidler Group Sidley & Austin Silver Screen Management, Inc. Silverstein Properties, Inc. Simpson, Thacher and Bartlett, Esqs. Skadden, Arps, Slate, Meagher & Flom Smith Barney Smith Corona Corporation Sol Goldman Solomon Equities Sonnenblick-Goldman Southtrust Bank of Alabama Spitzer & Feldman, PC Stahl Real Estate Standard & Poors State Teachers Retirement System of New York State Teachers Retirement System of Ohio Stauffer Chemical Corporation Stephens College Sterling Drug, Inc. Stroheim and Roman, Inc. Stroock and Stroock and Lavan, Esqs. Sullivan and Cromwell, Esqs. Sumitomo Life Realty Sumitomo Mutual Life Insurance Company Sumitomo Trust Bank Sun Oil Company Sutherland, Asbill & Brennan Swiss Bank Corporation Tenzer Greenblat, Esqs. Textron Financial Thatcher, Proffitt, Wood The Shopco Group Thomson Information/Publishing Thurcon Properties, Ltd. Tobishima Associates Tokyo Trust & Banking Corporation Transworld Equities Travelers Realty, Inc. Triangle Industries TriNet Corporation UBS Securities Inc. UMB Bank & Trust Company Unibank Union Bank of Switzerland Union Carbide Corporation Union Chelsea National Bank United Bank of Kuwait United Fire Fighters of New York United Parcel Service United Refrigerated United States District Court, Southern District of New York United States Life Insurance United States Postal Service United States Trust Company Upward Fund, Inc. US Cable Corp. Vanity Fair Corporation Verex Assurance, Inc. Victor Palmieri and Company, Inc. Village Bank Vornado Realty Trust W.P. Carey & Company, Inc. Wachtell, Lipton, Rosen & Katz, Esqs. Waterfront New York Realty Corporation Weil, Gotshal & Manges Weiss, Peck & Greer Wells Fargo & Co. Westpac Banking Corporation Western Electric Company Western Union International Westinghouse Electric Corporation White & Case Wilkie Farr and Gallagher, Esqs. William Kaufman Organization Windels, Marx, Davies & Ives Winthrop Financial Associates Winthrop Simston Putnam & Roberts Witco Corporation Wurlitzer Company Yarmouth Group

Dates Referenced Herein   and   Documents Incorporated By Reference

This 10-Q Filing   Date   Other Filings
11/30/94
1/1/95
2/1/95
9/30/9510-Q
11/30/95
12/15/95
1/1/96
1/19/96
1/22/96
3/4/96
For The Period Ended3/31/96
Filed On / Filed As Of5/15/96
1/1/00
12/31/05
1/31/10
1/31/15
 
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