Financial Analysis on open-air retail shopping center. Project completed for class Real Estate Finance and Investments

1. 2008
9680 Argyle Forest Boulevard, Jacksonville, FL 32244
Christian Crane
Real Estate Finance and Investments
Dr. Sid Rosenberg
November 2008

2. Table of Contents
Table of Contents ............................................................................................................ 1
Executive Summary ........................................................................................................ 2
Market Analysis ............................................................................................................... 2
Current Market Cycle ...................................................................................................... 4
Subject Analysis .............................................................................................................. 4
Comparable Property #1 ................................................................................................. 8
Comparable Property #2 ................................................................................................. 9
Comparable Property #3 ............................................................................................... 10
Financial Analysis Explained......................................................................................... 10
Investment Valuation..................................................................................................... 12
Conclusion .................................................................................................................... 12
Appendix 1: Sensitivity and Scenario Analysis.............................................................. 13
Appendix 2a: OakLeaf Town Center Tenant Details ..................................................... 14
Appendix 2b: OakLeaf Town Center Tenant Details ..................................................... 15
Appendix 3: Century Retail – New Retail Construction Site Map .................................. 16
Appendix 4: Financial Analysis of Property, including Pro Forma ................................. 17
1

3. Executive Summary
The following report is an exhaustive analysis of an unanchored, open-air, shopping center
located in the southwest quadrant of Duval County, Jacksonville, FL. In order to determine if
there is an economic benefit from investing in this property, an invasive analysis of the market
area was conducted and a single retail shopping center was identified as being a potentially
feasible investment. The findings and recommendations of the analysis are contained within this
report.
The objective of this report is to determine the property’s economic feasibility for investment.
It is worth noting that current market conditions demand additional premiums for increased risks,
which add additional challenges to investment recommendations. Economic volatility and
waning consumer demand in the retail sector have severely destabilized confidence in investing
in this type of property.
After analysis, it has been determined that this property purchased at a maximum price of
$2,520,000 with an approximate loan amount of $1,638,000 (65% of the maximum purchase
price), an expected interest rate of 9.25% (see page 12 for further details for rate
determination), over a 25-year mortgage period, that the Internal Rate of Return is 25.0%.
Market Analysis
Jacksonville is Florida’s largest city, located in Duval County, along the St. Johns River and the
Atlantic Ocean. It is the largest metropolitan area in Northeast Florida, and the fourth largest in
the state. The metropolitan area includes three beach cities and the counties of Baker, Clay,
Duval, Nassau, and St. Johns. Jacksonville encompasses 841 square miles,1 with 68 miles of
the Atlantic Ocean’s coastline, and 300 miles of river.2 Three major interstate highways run
through the city: I-10, I-95, and I-295. By car, Jacksonville is 6 hours from Atlanta, 2 hours from
Daytona, and 3 hours from Orlando (Disney area). Often dubbed, “The River City,” or “The
Gateway to Florida,” Jacksonville is the most populated city in the state of Florida. The 2006
population estimate is 794,555,3 made up of 48.4% male, and 51.6% female. 4
Some of the notable highlights of the area include its military affiliation. The military has had a
long-standing, commanding presence in Jacksonville, with two major U.S. naval bases, and
noted as being the city’s largest employer. Naval Air Station Jacksonville employs 19,500
workers, and Naval Station Mayport employs 15,293.5
Jacksonville International Airport, Craig Municipal Airport, Cecil Field, and Herlong Airport are
the nexuses of the aviation industry in Jacksonville and Duval County.
1
City of Jacksonville, “About Jacksonville,” <http://www.coj.net/About+Jacksonville/default.htm>
2
Jacksonville Regional Chamber of Commerce, “Life in Jacksonville,” <http://www.myjaxchamber.com/general.asp?id=4>
3
US Census Bureau, “Jacksonville City, Florida,” “2006 Population Estimates,”
<http://factfinder.census.gov/servlet/DTTable?_bm=y&-geo_id=16000US1235000&-ds_name=PEP_2006_EST&-
mt_name=PEP_2006_EST_G2006_T001>
4
“Jacksonville, Florida,” < http://www.city-data.com/city/Jacksonville-Florida.html>
5
Ibid. “Jacksonville Business Overview,” “Major Employers.”
2

4. Several Fortune 500 Companies are located in Jacksonville, some of which include: Winn-Dixie
Stores, Inc., CSX Corp., Landstar System, and Fidelity National Financial, Inc.6
Finance and insurance companies are rooted in Jacksonville, with companies such as Citibank,
Bank of America, Wachovia, Fidelity National Financial, Washington Mutual, Blue Cross & Blue
Shield of Florida, and Aetna. More than 11% of Jacksonville’s workers are employed in financial
and insurance services, and real estate companies.7 However, it is worth noting that based on
current economic conditions and recent work-force cut backs, it is not unreasonable to expect
that at least a portion of these companies’ local employees would be adversely affected.
Within Jacksonville’s expansive city limits, there are several pockets of growing areas. One
such area is found on the southwest portion of Duval county just west of Orange Park. This
growing area - commonly referred to as the “Argyle” area or “OakLeaf” area - has seen
enormous residential and commercial growth that has surpassed area developers’ projections.
Don Hinson, president of the Hutson Cos., developer of OakLeaf Plantation, has stated he
projected a 15- to 20-year build-out with 30,000 people. In just 4 years, they’ve sold 4,000
homes and have seen an influx of 10,000 people to the area.8 In particular, the retail and
commercial growth has also been substantial. This is due in part to the success of the
Development of Regional Impact (DRI) OakLeaf Plantation and surrounding Planned Urban
Developments (PUD), such as the Watermill and Chimney lakes communities.9 Some of the
large retailers and anchors in the immediate area include Super Target, Kohl’s, The Home
Depot, Circuit City, HH Gregg, Bealls, and several supermarkets (three Publix supermarkets
and a Winn-Dixie within a 5-mile radius). It should be noted that a majority of the national
retailers in this area are located in the 800,000 square-foot open-air regional shopping center
OakLeaf Town Center.10
Visual observation through personal inspection has revealed a significant amount of new office
space construction, in additional to the current retail expansion. The significance of the office
space will help draw business to the retail outlets, especially those that house restaurants which
offer lunch-time service.
Considering all of the above elements, there is evidence that shows opportunity in this area for
investment in a smaller, open-air shopping center. One of the greatest advantages of the area is
that it is surrounded by residential hubs on all sides of the retail district. The area is seen as
having the right elements for it to become a successful retail hub: an existing and growing
market, motivated shoppers, and an appropriate mix of residential, commercial, and office
space. However, the recent down-turn in the economy has given new challenges to the retail
market. For instance, surveys conducted show that many people plan to cut back on holiday gift
shopping this year. Compounding this problem is pressure from big-box retailers, such as Wal-
Mart, and their ability to be a low-cost leader in the retail industry.11 These types of forces
substantially affect the health of local tenants, of which make up a majority of the tenants for
unanchored, open-air retail centers.
6
http://money.cnn.com/magazines/fortune/fortune500/2008/states/FL.html
7
Ibid. “Market Development,” “Workforce Statistics.”
8
http://jacksonville.bizjournals.com/jacksonville/stories/2007/10/15/focus4.html
9
Marden, William, Jacksonville Business Journal < http://jacksonville.bizjournals.com/jacksonville/stories/2007/10/15/focus4.html>
10
Marden, William, Jacksonville Business Journal < http://jacksonville.bizjournals.com/jacksonville/stories/2007/10/15/focus4.html>
11
http://www.fibre2fashion.com/news/textiles-industry-news/newsdetails.aspx?news_id=64173
3

5. Current Market Cycle
According to Dr. Glenn Mueller, Real Estate Investment Strategist with Dividend Capital Group,
the current retail market cycle for 2nd tier properties for the nation is in a declining ‘Hyper-supply’
phase, in which there are increasing vacancies and continued new retail construction.12 The
national average rent growth is estimated to be positive, but should be noted that it is in decline.
When compared with the national average, the Jacksonville retail market is in a recession
phase, with increasing vacancies and additional construction completions. The Jacksonville
retail market is also experiencing negative rent growth.13 Visual observation of the subject
market area confirmed Mueller’s assessment; increasing vacancies were found in surrounding
open-air centers and several new open-air center developments under construction were also
observed.
Subject Analysis
The retail property of analysis is located at 9680 Argyle Forest Boulevard, which is listed as The
OakLeaf Crossing Center. See figure 2 at the end of this report for an actual overhead photo of
the subject property. The property is convenient to I-295, the Buckman Bridge, churches,
schools, and PUDs, including 11,000-residential unit OakLeaf Plantation.14
The following shows the population mix from the property:15
3 Miles: 35,800
5 Miles: 100,900
7 Miles: 212,400
The following shows the average household income from the property:16
3 Miles: $57,000
5 Miles: $53,000
7 Miles: $51,500
This data indicates the demographics of the area are substantial enough to support an open-air
retail center of this type.
In the ZIP code area of the property (32244), there are 18,569 houses and condos and 5,001
renters occupying apartments.17 The demand of housing and retail space are projected by
growth rates in population. Housing sales in the area are currently soft. Home sales have
slowed from a year ago and inventories of unsold homes have increased. However, it should be
noted that residential construction has slowed considerably, with respect to single-family home
12
Mueller, Glenn R., Ph.D.; Third Quarter 2008 Real Estate Market Analysis – Cycle Monitor, Dividend Capital Research, November
2008
13
Mueller, Glenn R., Ph.D.; Third Quarter 2008 Real Estate Market Analysis – Cycle Monitor, Dividend Capital Research, November
2008
14
The Sembler Company – OakLeaf Town Center Site Plan and Area Details <www.sembler.com>
15
Census Bureau - <http://factfinder.census.gov >
16
Census Bureau - <http://factfinder.census.gov >
17
American Community Survey - <http://factfinder.census.gov/servlet/ACSSAFFFacts>
4

6. production falling to half.18 This figure is not unusual considering the current economic plight of
the market area. Regardless, this change is expected to have an impact on the retail market,
which has been included in the analysis of the project. This is especially true since smaller
open-air centers with local tenants are considered riskier investments than those with credit
tenants.
OakLeaf Town
Center (photo is
outdated – see
Appendix 2 for
further tenant
details)
Publix-anchored
retail center
Walgreens SunTrust
Bank
OakLeaf
Plantation
(approx. ¼ mile
southwest)
Subject Property
9680 Argyle Forest
Blvd
Source: www.mapquest.com
The property itself is a 25,108-square foot, open-air, unanchored retail shopping center built in
2005.19 The base area of the building is 298 feet long by 65 feet deep. The canopy area, which
hangs over the base area by 2 feet on each side, is 302 feet by 19 feet deep. The building
structure is built of concrete block and is rectangular in shape. The parking lot is paved asphalt
and there appears to be ample parking for all businesses.
There is access to the property from both the east-bound and west-bound directions of Argyle
Forest Boulevard. The west-end of the subject’s parking lot is shared with a neighboring
Walgreens Drug Store. The east-side of the lot is connected to a SunTrust bank. Egress from
the property to Argyle Forest Boulevard is limited to just the east-bound traffic. However, there
is access to a traffic light allowing entry to both directions of Argyle Forest Boulevard by driving
through the connected Walgreens’ parking lot.
The subject property currently has a total of 11 units, with all but two occupied. One of the
vacant units is 2,500 square feet and the other is 2,400 square feet. This translates to a
18
<http://www.huduser.org/Publications/PDF/CMAR_JacksonvilleFL.pdf>
19
City of Jacksonville data - < http://apps.coj.net/pao_propertySearch/Basic/Detail.aspx?RE=0164114000>
5

7. vacancy rate of 19.5%, which is slightly higher than the area average, based on the comparable
properties. However, it should be noted that the subject has recently lost both tenants, The
Huntington Learning Center and Lackay Caribbean Food Mart.
The current tenants are as follows:
• Gator’s Dockside Restaurant
• Padrino’s Italian Restaurant
• Goodwill
• Hot Wok (Chinese Take-out Restaurant)
• J&L Dry Cleaners
• Hair Studio 22 (Hair Salon)
• Secret Nails (Nail Salon)
• Game Force (Video Game store)
• No Limits Dance Studio
One of the most important benefits the subject property has is its location - across Argyle Forest
Boulevard from the OakLeaf Town Center, as well as sitting between a large open-air center
which houses a Bealls department store and an HH Gregg Electronics and Appliance store.
Additionally, a Publix grocery store and accompanied open-air shopping center sits less than
0.5 miles east of the subject property. The close proximity of these outlets helps feed additional
shoppers to the property and gives excellent exposure.
The traffic count at the intersection closest to the subject property (OakLeaf Plantation Parkway
and Argyle Forest Boulevard) is estimated at 80,000 cars per day.20 This figure helps with
visibility to the shopping center and is taken account for in accounting for risk.
However, there are a few factors that must be taken account for that adds additional risk to the
property. One such risk is the current construction of a new retail open-air shopping center
(Century Shoppes of OakLeaf) which is located 0.5 miles south of the subject property (see
Appendix 4 for site map).21 This new project is expected to add nearly 36,000-square feet in
retail space to the area and open in the 2nd quarter of 2009. This square-feet estimate does not
include any outparcels. It is unknown how many tenants have signed agreements in this new
space. According to the leasing company, Century Retail, there are still three anchor tenant
spaces currently available. The leasing rates in this new retail space is quoted at $34.00/SF and
$8.00/SF for Common Area Maintenance fees (C.A.M.) As shown later in this analysis, these
rates are significantly higher than the leasing rates of the subject property and the comparable
properties. Because of this, the leasing figures here are not considered in the analysis of the
subject property.
Another risk to the subject property is the amount of retail space still available in the large
OakLeaf Town Center property. Like the Century Shoppes of OakLeaf from above, the retail
space available in this shopping center is not comparable to the subject property and the rates
are not considered in the investment decision. However, due to the number of available retail
space, it is a concern that there is a large amount of vacant retail space in the immediate area.
According to the property management company over OakLeaf Town Center, The Sembler
Company, there is a total equivalent (smaller retail – spaces from 1,000 SF to 5,000 SF in size)
20
The Sembler Company – OakLeaf Town Center Site Plan and Area Details <www.sembler.com>
21
Century Retail – see figure 3
6

8. retail space available of 19,864. Much like the Century Shoppes, the leasing rates are slightly
higher – ranging from $25.00-$30.00/SF plus $6.30/SF in C.A.M. fees.
Below is a site map of the OakLeaf Town Center. See Appendices 2a and 2b for a more
detailed view of the tenants found in the OakLeaf Town Center. The spaces highlighted in
yellow in the figures are those that are vacant.
Source: http://www.sembler.com/
One risk of particular interest is with the current economy heading towards recession and its
effect on local unemployment. The area’s current unemployment rate is 6.6%22, slightly higher
than the nation’s average of 6.0% (as of September 2008).23 Because of rising unemployment, it
is expected that consumer retail demand will be constricted considerably.
Other considerations when determining risk would include the ever-growing foreclosure rates
found in this area. While the current demise of the credit and housing markets have affected
nearly every community, it should be noted that according to the Jacksonville Business Journal
the OakLeaf/Argyle area has some of Jacksonville’s higher foreclosure rates. Though unsettling,
there is still an enormous residential presence in this area.
22
http://jacksonville.bizjournals.com/jacksonville/stories/2008/11/17/daily35.html
23
http://www.bls.gov/web/laummtrk.htm
7

9. Source: http://www.multiplottr.com/
Comparable Property #1
The first comparable property is located at 6621 Argyle Forest Boulevard. This property is
located approximately 3 miles from the subject property. It is a slightly older building than
subject property. The property management company overseeing this retail space is YWM, Inc.
There are 10 total suites, of which 9 are occupied. The tenants here include24:
• Argyle Cleaners (dry cleaners)
• Magic Touch Hair
• Jeepney Stop Oriental Fast Food
• Argyle Discount Beverage
• Sunset Novelties (adult-oriented)
• Tan without Sand Tanning
• KT's Alterations and Custom Embroidery
• New China Restaurant
• Cannalli's Pizza
This property is a slightly irregular-shaped building, resembling a rectangular structure that
angles approximately 140° inward close to the center of the building. Like the subject property,
this building is also made of concrete block with a stucco exterior. The building has total
leasable square feet of 20,070, with about only 1,000 square feet vacant. The property also has
an asphalt-paved parking lot, which is shared with a neighboring gas station and convenience
store.
It is thought that the presence of the adult-oriented shop will potentially hurt the value of this
site, which suggests some tenants/shoppers may not be attracted to this center. This, in
addition to current economic troubles, may hint to why the leasing rates are lowest here. The
property also sits slightly obscured behind a gas station, which may also affect its desirability,
which suggests yet another factor for the lower rates. On the other hand, this property is located
24
Tenant list compiled based on personal inspection
8

10. at a fairly busy intersection (Youngerman Circle and Argyle Forest Boulevard), which does
make up for some of the lost attractiveness.25
The total leasing rate (SF plus C.A.M.) is $23.00/SF compared to $24.00/SF with the subject
property. This property’s vacancy rate is about 5%, compared to the nearly 19.5% vacancy rate
of the subject. The C.A.M. fees are thought to be higher due to the slightly older age of the
property, but the maintenance of the property appears to be similar to the subject property. Most
occupants here have been tenants for several years.26 As indicated above, this property has the
lowest vacancy rate of all properties described in this report.
Comparable Property #2
The next comparable property is located at 8540 Argyle Forest Boulevard. It is thought this is
the most comparable property to the subject. This property has slightly older construction than
subject property. It is located approximately 1.5 miles from the subject. This property has a total
of 9 units, with all but two occupied. Total leasable square feet is 19,227 with 3,150 square feet
currently vacant. This equals a vacancy rate of about 16%. The tenants at this location
include27:
• Beef O'Brady's (Sports Bar/Restaurant)
• Argyle Chiropractic; Asian Food Market
• Champion Kenpo Karate Studio
• Domino's Pizza
• LV Nails and Day Spa
• Hair Cuttery
• In By 9, Out By 5 Dry Cleaners
This property has the benefit of being located next to a Winn-Dixie grocery store and a
McDonalds restaurant on the opposite side of the parking lot. However, this particular building is
tucked away off the road, slightly hidden by trees, which predictably hurts its exposure from the
road. Though slightly older, this property appears to be well-maintained and similar in condition
to the subject property.
The building is rectangular in shape, with dimensions similar to the subject property. Like the
subject property, this building is also made of concrete block with a stucco exterior. The
property also has an asphalt-paved parking lot, which is connected to neighboring retail
properties. For added aesthetic appeal, this building also has a tasteful blue neon light strip
bordering the façade of the building; this helps with the night-time visibility issues that the
property suffers from.
The total leasing rate for the comparable is $23.50/SF, $0.50/SF less than the subject. As
mentioned above, this property has a vacancy rate of roughly 16%.
25
Traffic observation made based on personal inspection of property
26
YWM, Inc.
27
Tenant list compiled based on personal inspection
9

11. Comparable Property #3
The third comparable property is located at 8635 Blanding Boulevard. This property is deemed
to be the least comparable to the subject property. It is of newer construction, closest in age to
subject property. This property is managed by Grunthal & Schueth. It has the benefit of being
located in a prime location off of Blanding Boulevard, just west of I-295. These two major
arteries give this property the most exposure to potential shoppers. It is approximately 4 miles
from the subject property. This particular property, though it has no anchor like the other
properties, does benefit from some credit tenants, including28:
• Ted's Montana Grill
• Applebee's
• Panera Bread
• Starbucks
Other tenants found in this strip center include:
• Gamestop (Video Game store)
• Beepers N' Phones (cell phone store)
• Movie Stop (video rental store).
This property is actually two smaller, rectangular buildings connected by an overhead arbor.
Like the subject property, this building is also made of concrete block with a stucco exterior. The
building has a total of 27,740 leasable square feet, making it the largest of the properties. Of the
total leasable square feet, there are 2,650 square feet currently vacant. There is an asphalt-
paved parking lot, which is not directly shared with any neighboring businesses. While this is a
newer-construction building with a slightly more appealing façade, the property itself appears to
be similarly maintained to the subject property.
While credit tenants are thought to be less risky than local tenants, it is worth noting that several
credit tenants have been eliminating excess stores as of late. Notably, Starbucks has closed
over 100 stores throughout the country throughout 2008.29
The total leasing rate for this comparable is $27.50/SF, or $3.50/SF higher than the subject
property. Again, it should be noted that this property has some huge advantages over the
subject property which lends it to the higher rates. This property’s vacancy rate is just under
10%.
Financial Analysis Explained
When considering investment in the subject property, many of the aforementioned risks (as
described in Subject Analysis) significantly affect the benefits, particularly with regards to
vacancy and potential credit loss (VCL). The recent downturn in the economy is especially
troublesome for those retails centers with local tenants.30 Considering that the subject does not
have the benefit of a strong credit anchor tenant, there is a serious risk imbalance present.
28
Tenant list compiled based on personal inspection
29
http://www.reuters.com/article/ousiv/idUSWNAS851720080131
30
http://www.deloitte.com/dtt/cda/doc/content/us_retail_EconomicStorm_070708.pdf
10

12. Additionally, the presence of other open-air retail centers currently under construction in close
proximity compounds the vacancy problem. An average of current local vacancy rates (subject
property and comparables) equates to 12.6%. This compared to the Jacksonville average
vacancy rate of 8.6% - as reported by the Coldwell Banker Commercial Benchmark October
2008 report – is markedly higher, which is the result of nearly 100,000 additional retail square
feet that is under construction in a 2-mile radius from the subject property location.31 Adding to
this are credit loss issues. Missed tenant rental payments should be considered inevitable when
taking into account the struggling economy and other local factors as described earlier.
According to Dorothy Ziegelbauer, Credit Loss History Analyst at Insurance Services Office,
Inc., Jacksonville credit loss rates for retail centers is estimated to be about 2.5%. Based on
Mueller’s Real Estate Cycle Monitor for the 3rd Quarter 2008, which suggests a slow Christmas
season, this would support a higher vacancy and credit loss rate (tenants not renewing, costs
exceeding revenues, etc). With this being taken into consideration, it is not unreasonable to
expect that the VCL has a real potential to undermine the fiscal and business health of local
tenants, which would require an additional risk premium of 0.5%. Thus, considering the vacancy
rate of 12.6%, the credit loss rate of 2.5%, and the premium of 0.5%, the VCL rate used in this
model is 15.6%.
The Expense Growth Rate (EGR) was assigned at a base rate of 3%. Taking into account rising
energy and insurance costs, the EGR was expected to increase slightly over the base 3%.
However, due to the current state of the economy (pending recession), the expense growth rate
is not expected to deviate much from the base 3%, which is the value used in this model.
Based on current market conditions and the current economic uncertainty, the Income Growth
Rate (ICR) has been calculated to be 1.25%. While it is optimistic that the local retail market will
eventually rebound within the next 5 years, that growth will be stunted over the next 2-3 years
with the potential looming recession (based on negative GDP growth). An ICR of 1.25% is being
used when considering those tempered expectations.
According to industry analysts, the current market interest rate for commercial mortgages are
expected to rise in part due to mounting commercial loan delinquencies, resulting in a larger
increase in spread between Commercial Mortgage-Backed Securities over Treasury rates. 32
This suggests that the best commercial rates would be at least 8.0%. There are also reports
indicating credit is drying up locally, especially for unanchored retail.33 Due to the present risks
associated with an unanchored, open-air retail shopping center, a risk-premium of 125 basis
points is being assessed, equating to a loan rate of 9.25%.
According to Philip Rachels, President Corinthian Real Estate Capital, LLC, the capitalization
rate (cap rate) on unanchored, open-air shopping centers is at least 9%. When considering the
current risks associated with subject property, particularly the vacancies, the percentage of local
tenants, and the current state of the economy, the cap rate used in this analysis has an
additional premium of 1.5% added, translating to an effective cap rate of 10.5%.
Additionally, Rachels also verified that the market today expects the Loan-to-Value (LTV) an this
type of property to be no more than 65%, a drastic reduction from the previous figure of 75%.
While this requires a larger cash outlay, it does significantly increase the Debt Coverage Ratio
to a 5-year average of 2.05, up from 1.78 with a 75% LTV. This larger ratio significantly exceeds
the lenders minimum safety net of 1.25.
31
http://www.cbcbenchmark.com/reis.pdf
32
http://online.wsj.com/article/SB122703851606838297.html
33
http://jacksonville.bizjournals.com/jacksonville/stories/2008/11/17/daily24.html?brthrs=1
11

13. Finally, the Discount Rate/Internal Rate of Return (IRR) for a property of this type is expected to
be approximately 25%, according to Rachels.
When considering the Capital Gains Rate at 15%, an additional 5% premium has been added to
take into account the in-coming government’s proposed policy on increasing the Capital Gains
Rates. The rate used in this model is 20%.
A standard ordinary corporate tax rate of 35% was used in this model.34
Investment Valuation
Based on all financial variables discussed in this report, a maximum purchase price for this
property has been determined. The maximum purchased price was derived from setting the Net
Present Value (NPV) to $0 (see Appendix 1) which calculates to an approximate price of
$2,520,000.
An estimated property value has been calculated by taking the first year’s Net Operating Income
(NOI) and dividing it by the 10.5% cap rate, equating to an approximate value of $3,400,000.
The above-calculated property value is then used to determine the maximum loan amount by
multiplying it by 65%, giving a loan amount value of $2,210,000.
Please see Appendix 4 for a detailed pro forma of how these figures were determined.
Conclusion
With the uncertain economy, it has been increasingly difficult to predict the future success of
any business, especially retail. There are some definite advantages of the location of the subject
property as well as a pleasant climate and low cost of living. Other benefits for investing in this
property include:
• an established tenant base
• continued local area growth
• excellent location and visibility
• an IRR that exceeds the minimum amount required
However, there are still several risks associated with investing in the retail market at the present
time. To reiterate Dr. Mueller’s projections for the retail market in Jacksonville, the current cycle
is entering a recession phase, which puts additional pressure and risk on open-air centers,
especially those without an anchor. Additionally, the subject property is now with a slightly
higher vacancy rate than the other comparable properties, has a detriment of having additional
open-air centers currently under construction in close proximity, and also the turmoil of a
troubled economy; all of which will inevitably adversely affect demand. With all available data
being considered, it is recommended that the maximum purchase price for this property be
$2,520,000.
34
http://www.kiesling.com/Portals/1/docs/General/2008-2009%20Corporate%20Tax%20Rate%20Data.pdf
12

14. Appendix 1: Sensitivity and Scenario Analysis
The first sensitivity scenario simulates what the IRR would be if worst-case circumstances were
realized. The following chart shows the worst-case sensitive areas versus the forecasted
sensitive areas:
Worst-Case Forecasted Change
0.25% 1.25% -1.0%
Income Growth Rate
5.0% 3.0% +2.0%
Expense Growth Rate
Vacancy and Credit
21.6% 15.6% +6.0%
Loss
10.0% 9.25% +0.75%
Interest Rate
14.5% 10.5% +4.0%
Cap Rate
Capital Gains Tax
25.0% 20.0% +5.0%
Rate
With this worst-case scenario the IRR would drop to -5.2% from 25%.
The second sensitivity scenario simulates what the IRR would be if best-case circumstances
were realized. The following chart shows the best-case sensitive areas versus the forecasted
sensitive areas:
Best-Case Forecasted Change
3.25% 1.25% +2.0%
Income Growth Rate
2.5% 3.0% -0.5%
Expense Growth Rate
Vacancy and Credit
10.0% 14.0% -4.0%
Loss
7.5% 8.50% -0.25%
Interest Rate
9.0% 10.5% -1.5%
Cap Rate
Capital Gains Tax
15.0% 20.0% -5.0%
Rate
With this best-case scenario the IRR would increase to 40.9% from 25%.
Though the spread between the worst-case scenario and the best-case scenario certainly
favors sizeable gains, it is expected that with all market conditions considered, the worst-case
scenario has a much higher probability of realization than that of the best-case scenario.
13

15. Appendix 2a: OakLeaf Town Center Tenant Details
14

16. Appendix 2b: OakLeaf Town Center Tenant Details
15

17. Appendix 3: Century Retail – New Retail Construction Site Map

18. Appendix 4: Financial Analysis of Property, including Pro Forma