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;; -;; �„ �;;: i ,;:; __ .x_,_.�_-._--____��.�..._ - --�a -�,.-�.�p��-.�.�«x.�---.�._.__.., F'LANIVING PREIF{7S continued The final average rental of the center depends upon its "mix" of tenants and also on the minimums which the larger tenants are willinb to pay. In Table 3 w�e have pr�e- sented an analysis of the key t�n- ants of each of our model centers and also the minimum rentals which a.�p�ar reasonable under the gen- eral circumstances, 1t should be noted that, in all three centers, the key department stores occupy 50% or more of the total space. This represents a con- siderable change from the planning of shopping centers a few years ago. .Howeve�, it has become very cle�cr that under today's competitive con- ditions, a regional center requires at least two departmenr stores. 'I'his also applies to a smaller regional or cor.umunity cent�er ii, as in the ex- ample of Center A, the junior de- partm�ent stor�;s are also consiclered key tenants. Tf we add to the dep�rtment stores, the variety stores and super- markets, we find the lar�er. tenants occupying 220,OQ0 f.�eet nf a t�tal of 3q0,C" � feet in Center A. Only 80,Q0'� is left for the smaller t�nants. In Center B about two thirds of the total space is accupied by the l�rger tenants. In C�nter C these lar�er tenants take up some- what less than two thirds of the total spacc. Larger tenants' minimum rents Tlie minimum rentals that can be secured from the larger t�nants have been estimat�d at an average of $1.25 in Center A, $1.46 in Cen- ter B, and $1.65 in Center C. A,s would be expected, the level af minimums for this group of stores is very closely related to the amount paid by th� department stores. We have estimated that the other stores, including specialty units and services, will pay an average oi $2.00 per square foot in Center A, rising to $2.50 in Center C. It should be n�ted that if 2�5,000 square feet are to be leased to such tenants in Cente� C, it will be nec�s- sary to attract several fairly large specialty stores, passibly a theatre, or other larger space users. Under these circumstances, the average minimum of $2.50 per square foot for this entire group of secondary tenants in Center C appears reason- able. Qverall minimum rental� The final average minimum for all of Center A is $1.45 per square foot, alrraost exactly the amount cal- culated as necessary to cover ex- penses and mortgage payments, and provide an eibht-year cash payout to the developer. Similarly, in Cen- ter B, the average minimum of $1.7� meets the desired level. In Center C, the average minimum of $1.95 is $.US less than the desired level necessary to provide an eight year payout. In this case, it may he possible to extend the mortgage amortization period to 30 years, at least tor the larger tenants, to ob- tain a sufTicient return. ■ 'I'he ^stimat.es for the three model centers make it easy to observe the ef�ect of variou5 factors such as va- cancies, extra land for future ex- pansion, or ctianges in land, con- structian, and mortgage costs. Vacancies: The estimates do not allow for variables. A 2% vacancy rate in Center A would increase the necessary average minimum by $.03 per square foot. L�ctrA lAnd: !n all the examples, land costs (including site prepara- tion) are relatively low as compared to construr,tion costs. As a res�ilt, carrying extra acreage :or future cx�ansion or supplementary uses has only a limited effect on costs and profits. In Center A, an extra 10 acres wo�rld increase investment by only $.25 per square foot of grass leasaUlP area. Annual carrying charges wQuld run only $.025 per square foot. Even in Center C, with land at $25,000 per acre, an extra 15 acres wouid represent an additional in- vestment of onlv $.47 per squarP faot of gross leasable area with carrying charges of less than $.OS per year. These amounts for holding extra land appear quite modest as com- pared to the general levels of costs, expenses and cash return generated by the centers. Effect �f different laad and build- ing costs: An increase or decrease in land costs of $5,000 per acr� changes total costs per square ioot of gross leasable area by Qnly $.50 in Center A, and by only $' in Center G This represents only $.OS -.06 change in the needed average minimum rentals. Since more than 80% of the total investment for the three modei cen- ters consists of construction costs, any savings or excesses have a much larger ef�ect. A 10% increase in building costs in Center A raises investment by $1. l.0 per square foot of gross leasable area. A similar 10% increase in Center C repre- sents an extra $1.65 per square foat. Mortgage cos�s: Limited changes in the basic interest rate have rather modest ef�ects on costs. If interest were calculated at S lh %, rather than the 6% used in our examples, annual costs for Center A would be reduced by less than $.04 per sc�uare foot of gross leasable area, and for Center C by only $.05 per square fc�ot. OF greater ef�ect, at least as regards the cash flow, is the mortgage amortization period. If Center A had a 25 year, rather than a 20 year mortgage, annual pay- ments would be reduced by more than $.10 per squar� foot of gross leasable are�. Factors affecting returns Percentage rents: The cash return to the developer depends in large measure on percentage rents paid over and above th^ minimums. As noted above, percentage rents are quite lo�v during the first one or two years of a center's operation, but in a successful center tend to rise in later years. �' 7y cent�r, of course, must generate ��me ovecages, but these can be much less than the averages shown for the Urban Land lnstitute study. Taking such mini- mum percentage rents would r�duce the cash return in the three model centers by $.20 - .25 per syuare faot. This still allows a nominal cash flow, but still represents a most unsatisfactory investment. It is clear that if there is any question as to the competitive strength of a center and its long SHOPPING CENTER AGE, JUNE 1968 A 7 a Total: Above Stores TOiAL CEf�TER OF STOf�� SPA�E i�N1� - /; TALS :�I�ER SQUAR� ,�U(�T � ,�. �.1► CENT�R � �ENT�R C . � � RENTAl, � _ . GRQS$. f - �3ENiAL � GROSS � RENTAL. QPER . ��EA . y�PEyi�Y�� ': AR��A�+ /�PER - 1�i �11 �_�� . ' SQ�� ;.-, ' V� • V� II.. l�� , ,.. S$�i-.� �.' ,. � VQ�� � . �� .: ��N '. �i,�� : 26o,oao ��; �5 `F, a��a�aao �1 s� : �;�2t? ' 40,OQ0 1.� 40 ;, 5U,U00 i 60 , 1.�1� 25,000 , 150 ' �44,�00 165 _�._ ... ._. �... . . . � .. ''�s.,.=.. _ .,"'_ _ _ __.�.. _. . 220,0000 $1.25 300,000 $1.45 nge future, some insura�ce has to ; built into the structure of mini- um rentals and also other lease �ovisions, such as common area iarges, and tax escalator provi- �ns. Even this protection is by no 3�; �`�ans adequate. A center which is 4iable to : naintain a reasonable bwth of s�les remains a doubtful ,�_ �;�estment for every one concerned tcluding the developer, the mort- �,,, ��e interests and the tenants. number of tentative conclu- may be drawn from this OPPING CENTER AGE, JUNE 1963 345,OGd $1.46 515,000 �1.65 500, 000 $1.70 analysis of planning shopping cen- ter profits. ' Conclusions 1. Within the range of land costs studied ($7,500 to $25,000 per acre) land remains a relatively small component of the total invest- ment. This may justify holding extra land, or extra payments for ar. optimum location. 2. Building costs must be regard- ed as the prime v�riable wk�ich must be most carefully controlled. 3. Mortgage terms provide a 800,000 $1.95 considerable area ef ilexibility, par- ticularly as regards the number of years amortization. 4. The rent of the key tenants should be regarded as the factor most closely controlling the average minimum rental that can 'be achieved for the entire shopping center. 5. Profit and also the soundness of the center depend on securing percentage rents. This, of course, is a direct result of a sound competi- tive position and the long ige �rov✓th of sales of the shopping center. 27