Recently, one of the large Retail Shopping Complexes in San Marcos, TX, built in 1985, became available for purchase. The complex has 183,000 sq ft of retail space divided in the following spaces:

Square Feet???Tenant???# Yrs remaining??$/Square Foot (NNN)

Store 1 - 10,000 sq ft??Blockbuster??5???$20

Store 2 – 10,000 sq ft??Gold’s Gym??10???$20

Store 3 – 50,000 sq ft??Target???5???$15.50

Store 4 – 5,000 sq ft??Radio Shack??10???$22.50

Store 5 - 5,000 sq ft??Body Works?? 10???$22.50

Store 6 - 1,000 sq ft??San Marcos Floral ?5???$26.00

Store 7 - 1,000 sq ft??GNC???5???$26.00

Store 8 - 1,000 sq ft??Mr. Gatti’s??10???$26.00

Store 9 – 50,000 sq ft??Best Buy??5???$15.50

Store 10 – 50,000 sq ft??JC Penny??5???$15.50

The current owners have disclosed that the three large anchor tenants, Target, Best Buy and JC Penny have indicated that they will be moving out of their space by the end of the year. However, they are still obligated to continue to pay the rent for the number of years that remain in their leases or until new tenants are found to occupy their lease spaces.

Additionally, Blockbuster, although still paying rent, has entered into Chapter 11, in an attempt to reorganize, and may or may not be closing the store after reorganization.

The current landlords pay 1% of the appraised value ($35,000,000) in property taxes, below the average 2.77% rate, due to an agreement that was negotiated with the city when the shopping center was built. The expectation is that the City will continue to honor the low tax rate for the new buyer for the foreseeable future.

The current liability and property insurance costs are 1% of the value of the property per year.

The parking lot covers an additional 150,000 sq feet and costs the landlord approximately $1 per sq ft to maintain.

All other common area maintenance and utility costs are billed back to the tenants, based on the amount of space that they lease. Currently the bill backs are posted 30 days after the landlord pays the bills and run at $10 per sq foot per year. All of the tenants pay their rent on time including the common area bill back amounts.

Once the tenants vacate the properties will be available for release. Typically, any new tenant will be responsible for paying for any and all upgrades to the space they lease. Due to the age of the center, its location and the depressed market, the worst case scenarios projected the rents for any new tenant spaces will only be 75% of the existing rents.

Based on the value of the property, and the credit worthiness of the new buyers, it will be possible to secure a commercial loan at 6.5% for the first 15 years with a 20% down payment and 1.5 points.

The new owners will have to pay a rental real estate commission of 10% of the first years rent for any new tenant that is found.

Structurally, the exterior of the buildings, including the roof, appear to be in excellent shape with no expected maintenance for the next 10 years. However, one can never predict the effects that Mother Nature will have on a building structure. Therefore, a reserve of 2% of annual rents is always a good idea for any buyer.

Based on projected market conditions there is no projected appreciation for commercial properties in this location. However, if the Texas State University is able to meet its student growth projections, growing by 30% over the next 5 years, this location may see renewed tenant interest, as it is the closest retail shopping complex to campus. That will mean in 5 years the rents may be on par with today’s market rents and there may be modest appreciation of 3% per year beginning in year 5.

A similar shopping complex, built in the mid 1990’s, with average remaining lease terms of 12 years, recently sold for $165 per sq foot of retail lease space.

Questions:(use EXCEL to format problem and answer questions)

1. What are the risk factors for a new buyer?

2. What assumptions need to be made for a business case analysis for purchase of this retail shopping complex?

3. What price would you pay to insure a 10% return on your investment if you planned on holding on to the complex for 10 years? For 15 years?

4. Would you rent to new lessees as fast as possible or wait until the existing leases for the companies that will be leaving are almost over?

5. What are the critical factors that are under the control of the owners, to insure that this investment remains cash flow positive for each year they plan to own it?

6. Why do you think the current owner selling?