Final Case: Laguna Specialty Center

Chris Armour

REAL 3377

March 14, 2016

The Project

In the Laguna Case two projects are available to choose from: a specialty retail center or an office building. However, each product had vastly different expectations, market relevancies, and risk/reward profiles. As the name of the group suggests, Specialty Center Associates was a partnership developed with the intention of investing in the development of specialty retail centers throughout Southern California. The partnership optioned its first piece of land in Laguna, California with the intention of beginning their first specialty retail center development. The intended product was a relatively newer concept, aimed at drawing in higher income shoppers. Unlike most shopping centers, the specialty retail center would not rely on any anchor stores or large corporate brand stores, but instead offer goods from local and regional vendors. The type of products sold through said stores includes things like jewelry, women’s apparel, arts & crafts, specialty foods, gifts and household items. These developments typically have a few restaurants as well to help draw in customers. An additional feature of specialty retail centers in that they are typically 100,000 – 200,000 square feet and have an architectural theme to them.

The specialty center that the partnership intended to develop was set to begin construction in less than a month and they already had financing in place with an effective loan-to-value (LTV) of 83%. The $16,800,000 loan held a 9% annual interest rate with thirty year amortization and a sixteen year term, equating to an annual payment of $1,622,119. There was also a 1.5% commitment charge associates with this loan. Additionally, pension fund offering the loan had offered a construction loan at the same terms, with a 1% fee.

The project would encompass 112,000 square feet and include anywhere from fifty-six to eighty-six tenants, including two freestanding restaurants and three mall restaurants. Development costs, not accounting for any entrepreneurial incentive, come to $19,863,000. Base rents for mall shops, mall restaurants and freestanding restaurants were projected at $24.00, $27.00 and $28.50, respectively, bringing the total base rent to $2,790,000. However, each of the tenants has a sales percentage stipulation as well, requiring them to pay the overage, or difference between a set percentage of their sales revenues and the base rent. A key determination in this projection is the assumption of how much of the current and unserved market the new stores will be able to capture. While the greater Orange County area has been growing at a state leading pace, the per-person sales in the Laguna area have noticeably lagged. In the three categories of apparel, household and general this metric is only 16.8%, 19.3% and 22.1% of the Orange County average. Although much of this may be attributed to a lack of service in the area, it is important to consider that the area is not reflective of the overall county’s sales demographics and data. To forecast the proper sales projections, the expected sales per square foot in Orange County, broken down by merchandise type, was applied to an assumed capture rate for each different type and then multiplied by said merchandise type’s allocated space in the specialty center and their sales percentage rate. The assumed capture rates of non-restaurant categories ranged from 37% for apparel to 55% for items like jewelry, plant boutique and specialty food. In general this assumed a 20% increase in area capture rates over their current positon, with an additional gain attributed to the more high-end stores. For restaurants the assumed sales per square foot of $375 is expected to be captured in full due to the large underserves market potential and the fact that

none of the seven currently existing area restaurants are actually in Laguna. As a result, the restaurants are the only tenants that are projected to make enough sales to pay an overage beyond their base rent.

These factors allow for a projected first year potential gross income of $2,971,500. Assuming for first year vacancy of 15% and $180,000 for owners expenses, a first year net operating income (NOI) of $2,345,775 is obtained. Accounting for amortization, reserves and depreciation, as well as 50% income tax, a first year loss of $266,425 is projected, allowing for a tax shelter for investor other income. Year two and beyond assumes 8% growth in both income and expenses, with a stable 7% vacancy. Assuming for a disposition in early 2010, based on 2009 income and at a cap rate of 8.5%, a sale price of $52,090,076 is expected, with eventual proceeds to limited partners totaling $26,538,583. The resulting internal rate of return (IRR) for this project is 24.04%, with a net present value (NPV) of $3,721,772 based on the Bill’s expected passive investment IRR of 15%.

The second potential product for the site is a 148,000 square foot office building, developed as the regional headquarters for a major insurance company. The ten-story building has total development costs, excluding entrepreneurial incentive, of $15,393,750. The insurance company that brought this project to the partnership’s attention has also offered financing for the project with a $12,000,000 loan at an effective 77% LTV after a 1% fee. Loan terms are similar at 9% interest and thirty year amortization, but this loan also has a thirty year term. The annual payment for the insurance company financing is $1,158,657.

The insurance company would account for 70% .of the building occupancy, and would be locked into a fifteen year lease at a relatively low base rent of $20.70 per year, guaranteeing annual base income of no less than $2,070,000. Assuming the remaining 48,000 of speculative space is leased at a market rate of $25.20 and is occupied at 85% the first year gross income of $3,098,160 is projected, with an NOI of $2,333,160. After amortization, reserves, depreciation and income tax, first year cash flows of $267,305 are anticipated. Speculative space occupancy is projected to increase to 95% and remain stable thereafter, while the lease rates for speculative space tenants are expected to be locked in for five year periods with re-adjustments to market rates after every five year period. Market rates as well as expenses are assumed to grow at 8% annually. Using the previous disposition assumptions a sale price of $40,331,500 is projected, with eventual proceeds to limited partners in the amount of $21,827,983. The resulting IRR for this project is 25.12%, with an NPV of $3,385,125.

On an initial look, both of the potential products offer meaningful returns that go beyond what is expected by Bill Reynolds and the limited partners. The site is currently zoned as: General Commercial; Precise Development, meaning that it can be used for either of the mentioned products, but that it would be definitively zoned for that purpose only thereafter, so there could be no going back once zoning was completed. This is the only real legal factor involved with the overall project decision.

The People

The primary player in this case is Bill Reynolds; successful entrepreneur and limited partner of Specialty Center Associates. Bill recently become a limited partner in the company, entitling him to investment and cash flow participation, but without personally managing or making important decisions about the investments held. Bill has $900,000 to contribute to the first investment in the partnership and expects a 15% IRR. Bill, as a voting partner, needs to determine whether he believes the partnership should pursue the intended specialty retail center or the proposed office building.

Specialty Center Associates is the partnership entity through which Bill Reynolds is acting. Set up as a partnership, there are two classes of partners, limited and general. Limited partners, such as Bill Reynolds, supply investment funds and in turn are entitled to gains made on investments through the fund, however they do not participate in management decisions of the partnership’s investments once they have been made. General partners take an active role in managing the investments and do not supply capital (or at least not at significant levels) for investments, however they are entitled to a percentage of the returns to incentivize them to maximize the partnerships overall wealth.

A final player in this case is the major insurance company that proposes the office building project to Specialty Center Associates. The insurance company is looking to solidify its presence in Southern California by building a reginal headquarters and would like to do so on the site Specialty Center Associates plans to develop. They are willing to provide the financing for their proposed office building and are prepared to sign a fifteen year lease upon completion of construction.

The Process

The case takes place in December 2000 and is near the beginning of the action stage. Specialty Center Associates has already completed their conceptual stage in coming up with the idea and specifications for the specialty retail center, as well as researching the market demographics and retail sales data. They have also completed the pre-commitment stage because they have a loan commitment and limited partners are ready to move. The action stage is expected to begin in January 2001, less than a month away, and is expected to complete construction in December 2001. After such time the partnership plans to hold and operate the property for nine years during the custodial stage, before finally selling it in 2010.

The insurance company’s proposed office building has a deadline to respond of December 31, 2000, less than a month away. Although the project was just recently brought to the attention on Specialty Center Associates in early November, it is also nearly ready for the action stage. The conceptual stage has already been completed by the insurance company and a two week preliminary plan write-up by the partnership, along with the general market data obtained in the previous due diligence. With a loan commitment form the insurance company, and a tenant to take up 70% of the space, the only part of pre-commitment to complete is getting the vote form the limited partners. Expected to complete construction in early 2002, the property is expected

to stabilize in 2003 and be held and operated by the partnership until 2010, at which point it will be sold and the investment completely exited.

The Panorama

The site was located in Laguna, one of the fastest growing markets in Orange County, which itself was the fastest growing MSA in California. In fact Laguna had experience 20% population growth in the five years prior to the time period in which the case study is based, compared to 16% for Orange County. Despite such tremendous growth, the areas in and around Laguna still had vast amounts of undeveloped land to continue fueling further growth and expansion. This is reflected in the estimated area populated within a five mile radius increasing from approximately 203,000 in 1999 to 234,000 in 2002. The market is fairly even in terms in employment class and job type, but does lean towards higher-income professionals. The most common field of employment is professional employees at 22.5%, followed by craftsmen & foremen at 20.6%. Clerical and administrative roles are also meaningful contributions at 18% and 12%, respectively. The median family income within a 5 mile radius of the site is $39,942, over $3,000 higher than that if Orange County and $7,000 higher than that of Los Angeles County. Furthermore, 39.8% of families in the area make over $45,000 a year, as compared to just 33.7% in Orange County and 28.4% in Los Angeles County. The employment and income level data seems to indicate that the area is suitable for a specialty retail center catering towards high-income consumers.

The retail sales environment in and around Laguna is much less promising unfortunately. In 1999, the per capita retail sales in Laguna was only $585M, as compared to $2,544M in Orange County. With per capita retail sales having increased every year in Orange County since 1994, the lack of retail facilities and first-class restaurants in Laguna has held the market back from realizing its fullest potential. On a per person retail sales basis the area around Laguna is only capturing 19.3% of the expected average in Orange County. Even with the strong supply of developable land, a growing population and high-income residents, it is a substantial risk to assume that a new retail development would be able to increase the capture rate too significantly, even with a class leading product and perfect execution. However, an office building makes more sense in light of economic risk because the professional, high income resident base is also the type that would work in such a building. Having a strong, nationally known company as the main tenant, as well as knowing they are dedicated to the building because utu is their regional HQ, is likely to attract other successful companies to the office space, in addition to the existing talent pool within a close proximity.

Other considerations include the fact that this is all occurring one year into a new president and during the dawn of a new technological era with the internet. Stock market valuations during this time were very high and there was much uncertainty about the near-term future of the socio-political environment, so it would have made sense to limit risk exposure as much as possible. Due to the fact that the specialty retail center is a relatively new and unproven concept, it presents much more risk in this economic environment than the office project does.

The Physical Real Estate

The actual site itself is located in the Southern California town of Laguna, which is in Orange County, approximately 30 miles south of Los Angeles. The 12.5 acre site in the NE quadrant rests on slightly rolling topography, meaning it will need to be graded to a level, buildable surface. Soils tests have been performed and conclude that the ground is stable enough to build on, and in addition all utilities are already available at the site. Access and visibility for the site are both good, as it has a major highway, Orange Freeway, to the West and high-traffic Greenbriar Lane to the North. To the East of the property lies the Lotus Flood Control Channel, which blocks any access from that direction, and is less than ideal for a specialty retail center. However, to the South of the site a new convenience shopping center is under construction, which could eventually work to create a synergy effect with a specialty retail development. Additionally, a new mall is being developed to the West of the site, across Orange Freeway. While this too could drive some positive synergistic effects, it is also concerning as the mall is already under development and will very likely be operating and building a customer base before the specialty center can be completed, leaving it in a position to play catch –up and lure away customers from another new shopping outlet.

The design for the specialty retail center consists of a split-level structure with 112,000 leasable square feet. The upper level would include 28,000 leasable square feet, in addition to two freestanding, 8,000 square foot restaurants and approximately 8,000 square feet of mall walkway/concourse area. The lower level of the specialty center is designed to have 68,000 leasable square feet, including a large 10,000 square foot restaurant. 25,000 square feet has been allocated to the mall area on the lower level to build a traditional “court” as well. With approximately 338,000 square feet of land available for parking and landscaping around the specialty center, the design leaves room for about 800 parking spaces. Equating to about one space per 140 square feet of retail, which is substantially more than the typical allocation for retail parking of one space for every 200 square feet.

The office building proposed for the site is a much more traditional, straight forward development, consisting of a ten-story, 148,000 square foot building. Assuming for an approximate average of 14,800 square feet per floor and allowing for some additional space on the ground level, approximately 25,000 square feet of additional space is made available for parking. With an assumed need for parking of one space per 500 square feet of leasable space, the office building would require approximately 296 parking spaces, indicating plenty of room for additional space, landscaping, or possibly leasing or divesting a portion of the land remaining land.

The Recommendation

Although both of the proposed projects show strong potential for future returns, the office building shows a slightly higher IRR and has substantially less risk in my opinion, and therefore I believe it is the better investment decision. The intended specialty retail center is what the partnership originally intended to invest in when they formed, but that may also be blinding them to the economic and market risks involved with their current site. While the site itself it great,

the surrounding demographics around retails sales do not support a strong ability to capture market leakage and realize substantial revenues. The NPV of the specialty retail center is higher than that of the office building, but the reliability of the cash flows is much less certain and at risk of economic downturn. The office building is a more conservative investment because it involves a guaranteed tenant, and associated income stream, for at least fifteen years. Furthermore, business located in office buildings, particularly in the case of the insurance company, are much less exposed to general economic risk than retail locations, providing a further safety net for nearly identical returns between the two projects. However, the insurance company’s proposal does lock them into a very low lease rate compared to the current market, and maintains that rate for fifteen years. While this does work out for the current financial projections, it is a huge concession over the length of the lease that could definitely be negotiated downwards. I would recommend pursuing the office building project with one of the following three counter-offers: 1) Higher initial lease rate, maintain fifteen year lock-in, 2) adjust lease rate in five years to amount below market price that reflect current market price concession, or 3) receive a lower rate on the loan in exchange for keeping lease terms as-is. It is also relevant to re-visit the idea of additional cash flows through the office building project by leasing or divesting the additional land after developing the property space. With the possibility of additional returns through excess land and renegotiating with the insurance company, as well as less associated market and economic risk, the office building project is definitely the optimal option for Bill Reynolds and Specialty Retail Associates.

Retail Development CostsSquare Feet Building Shell Space Finish Tenant Allowance Total

Mall 33,000 $48 $36 $0.00 $2,772,000Mall Shops 86,000 $48 $21 $22.50 $7,869,000Mall Restaurant 10,000 $48 $45 $22.50 $1,155,000

16,000 $150 $0 $22.50 $2,760,000Landscaping $390,000Site Grading $1,260,000Overhead $747,000Archetectual & Engineering $450,000

Total Imporvements Value $17,403,000Breakdown of Tenant Allowance Total Land Value $2,460,000Drywall $1.05 Total Development Cost $19,863,000Acoustical Ceiling $1.95Toilet Room $3.75

Storefronts $6.00Electrical Ceiling Fixture $5.25Paint Interior Walls $0.75Carpet $3.75Total $22.50

Free-Standing Restaurants

Project FinancingLoan Amount $16,800,000Effective Amount $16,548,000LTV 83%Interest Rate 9%Term 16Amortization 30Commitment Charge 1.50%Annual Payment $1,622,119

Construction LoanLoan Amount $16,800,000Effective Amount $16,632,000LTV 85%Interest Rate 9%Term 1Amortization 30Points 1.00%Annual Payment $1,622,119

Interim CostsProperty Taxes $201,000Legal / Accounting $96,000Leasing Commissions $60,000Promotions $150,000Miscellaneous $75,000

Tenant MixTenants Categories GLA Space % % Rent

2 Free Standing Restaurant 16,000 9.50%3 Mall Restaurant 10,000 9.00%

5-7 Restaurants and Food: 26,000 23%

4-6 Specialty Food: 8,000 7% 8.00%

12-19 Apparel: 20,000 18% 5.50%

4-8 Household: 12,000 11% 3.00%

6-10 Jewelry & Gifts 10,000 9% 8.00%

8-12 Arts & Crafts: 10,000 9% 7.00%

1 Plant Boutique: 3,000 3% 7.00%

6-8 Services: 8,000 7% 7.00%

10-15 Miscellaneous: 15,000 13% 7.00%

56-86 112,000 100% Lease InfoTerm (Years) 15Annual Payments 12Type NNNMA Assessments/Sqft $0.60

Projected Rental IncomeMall Shops $24.00Mall Restaurants $27.00Free-standing Restaurants $28.501st Year Vacancy 15%Stablized Vacancy 7%Income Growth 8%

Owner ExpenseManagement Fee $105,000Promotions $30,000Property Taxes $45,000Total $180,000Expenses Growth 8%

Retail Pro FormaYear 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9

PGI 0 $2,971,500 $3,209,220 $3,465,958 $3,743,234 $4,042,693 $4,366,108 $4,715,397 $5,092,629 $5,500,039Vacancy 0 (445,725) (224,645) (242,617) (262,026) (282,989) (305,628) (330,078) (356,484) (385,003)EGI 0 2,525,775 2,984,575 3,223,341 3,481,208 3,759,704 4,060,481 4,385,319 4,736,145 5,115,036Owners Expenses 0 (180,000) (194,400) (209,952) (226,748) (244,888) (264,479) (285,637) (308,488) (333,167)NOI 0 2,345,775 2,790,175 3,013,389 3,254,460 3,514,816 3,796,002 4,099,682 4,427,656 4,781,869Loan Payments (1,622,119) (1,622,119) (1,622,119) (1,622,119) (1,622,119) (1,622,119) (1,622,119) (1,622,119) (1,622,119) (1,622,119)Pre Tax Cash Flow ($1,622,119) $723,656 $1,168,055 $1,391,269 $1,632,340 $1,892,697 $2,173,883 $2,477,563 $2,805,537 $3,159,750Amortization 0 110,119 120,030 130,833 142,608 110,119 110,119 110,119 110,119 110,119Reserve 0 60,000 64,800 69,984 75,583 81,629 88,160 95,212 102,829 111,056Depreciation 0 (1,160,200) ($1,160,200) ($1,160,200) ($1,160,200) ($1,160,200) ($1,160,200) ($1,160,200) ($1,160,200) ($1,160,200)Adj. Income (1,622,119) (266,425) 192,685 431,886 690,331 924,246 1,211,961 1,522,694 1,858,286 2,220,725GP Share 0 0 (48,171) (107,971) (172,583) (231,061) (302,990) (380,674) (464,571) (555,181)Taxable Income (1,622,119) (266,425) 144,514 323,914 517,748 693,184 908,971 1,142,021 1,393,714 1,665,544Tax Payable (50%) 811,060 133,213 (72,257) (161,957) (258,874) (346,592) (454,486) (571,010) (696,857) (832,772)After Tax Cash Flow ($811,060) ($133,213) $72,257 $161,957 $258,874 $346,592 $454,486 $571,010 $696,857 $832,772Equity In $3,813,000 $3,813,000 $3,740,743 $3,578,786 $3,319,912 $2,973,320 $2,518,834 $1,947,824 $1,250,966 $418,195

Retail DispositionExit Cap Rate 8.50% Book Value $10,581,400 Sale $52,090,076Sales Expense 3% Gain on Sale 41,508,676 Cost of Sale (1,562,702)Taxes 50% Depreciation (9,281,600) Loan Payback (15,366,134)Depreciation 15 Taxes (25%) (2,320,400) Income Tax (7,154,461)Capital Gains Tax 15% Remaining Gain 32,227,076 Net Proceeds $28,006,778Dep. Tax 25% Gain Tax (15%) (4,834,061) Equity Return ($418,195)

Total Taxes (7,154,461) GP Payout ($1,050,000)LP Proceeds $26,538,583

Office Building Development Cost Site Development $1,964,700

Building 148,000 SF @ $63.00 $9,324,000Tenant Finish 41,500 SF @ $25.50 $1,058,250Developer Fee 3.50% 432,000Contingency 5.00% 639,000Construction Total $11,453,250

Property Taxes $60,000Insurance $15,000Interest $540,000Finance Fees $120,000Architectural $615,000Legal Fees $45,000Leasing Commissions $250,800Promotions $300,000Miscellaneous $30,000Interim Total $1,975,800

Total Project Costs $15,393,750

Office Proposal DetailsGross Leaseable Space 148,000Insurance Tenant 100,000Remaining Leasable 48,000Insurance Rent / Sqft $20.70Lease Term (years) 15Speculative Space Rent $25.201st Year Vacanvy 85%Spec. Space Occupancy 95%

Operating Expense $765,000Replacement Reserves $45,000Growth Rate 8%Depreciation 15

FinancingLoan Amount $12,000,000Effective LTV 77%Loan Interest 9%Loan Term (years) 30Construction Loan Points 1%Eff. Construction Amount $11,880,000Annual Payment $1,158,657

Office Pro FormaYear 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9

Market Rent $3,098,160 $3,346,013 $3,613,694 $3,902,789 $4,215,012 $4,552,213 $4,916,391 $5,309,702 $5,734,478EGI 0 $3,098,160 $3,219,120 $3,219,120 $3,219,120 $3,219,120 $4,552,213 $4,552,213 $4,552,213 $4,552,213Owners Expenses 0 (765,000) (765,000) (765,000) (765,000) (765,000) (1,124,036) (1,124,036) (1,124,036) (1,124,036)NOI 0 2,333,160 2,454,120 2,454,120 2,454,120 2,454,120 3,428,177 3,428,177 3,428,177 3,428,177Loan Payments (1,158,657) (1,158,657) (1,158,657) (1,158,657) (1,158,657) (1,158,657) (1,158,657) (1,158,657) (1,158,657) (1,158,657)Pre Tax Cash Flow ($1,158,657) $1,174,503 $1,295,463 $1,295,463 $1,295,463 $1,295,463 $2,269,521 $2,269,521 $2,269,521 $2,269,521Amortization 0 78,657 85,736 93,452 101,863 111,030 121,023 131,915 143,787 156,728Reserve 0 45,000 48,600 52,488 56,687 61,222 66,120 71,409 77,122 83,292Depreciation 0 (763,550) ($763,550) ($763,550) ($763,550) ($763,550) ($763,550) ($763,550) ($763,550) ($763,550)Adj. Income (1,158,657) 534,610 666,249 677,853 690,463 704,166 1,693,114 1,709,295 1,726,880 1,745,991GP Share 0 0 (166,562) (169,463) (172,616) (176,041) (423,278) (427,324) (431,720) (436,498)Taxable Income (1,158,657) 534,610 499,687 508,390 517,847 528,124 1,269,835 1,281,971 1,295,160 1,309,493Tax Payable (50%) 579,328 (267,305) (249,843) (254,195) (258,924) (264,062) (634,918) (640,986) (647,580) (654,747)After Tax Cash Flow ($579,328) $267,305 $249,843 $254,195 $258,924 $264,062 $634,918 $640,986 $647,580 $654,747Equity In $3,513,750 $3,513,750 $3,263,907 $3,009,712 $2,750,788 $2,486,726 $1,851,808 $1,210,823 $563,242 $0

Office DispositionExit Cap Rate 8.50% Book Value $9,285,350 Sale $40,331,500Sales Expense 3% Gain on Sale 31,046,150 Cost of Sale (1,209,945)Taxes 50% Depreciation (6,108,400) Loan Payback (10,975,810)Depreciation 15 Taxes (25%) (1,527,100) Income Tax (5,267,762)Capital Gains Tax 15% Remaining Gain 24,937,750 Net Proceeds $22,877,983Dep. Tax 25% Gain Tax (15%) (3,740,662) Equity Return $0

Total Taxes (5,267,762) GP Payout ($1,050,000)LP Proceeds $21,827,983

Retail Income Sensitivity Analysis

Merchandise Base Rent Sqft of Space Total Base RentExpected Sales

Per SqftAssumed Capture

%Estimated Sales

Per Sqft Sqft of Space % of Sales % Sales Rent Expected RentFreestanding Restaurant $28.50 16,000 $456,000 $375.00 100% $375.00 16,000 9.50% $570,000.00 $570,000.00Mall Restaurant $27.00 10,000 $270,000 $375.00 100% $375.00 10,000 9.00% $337,500.00 $337,500.00Specialty Food $24.00 8,000 $192,000 $516.52 55% $284.09 8,000 8.00% $181,815.65 $192,000.00Apparel $24.00 20,000 $480,000 $305.88 37% $113.18 20,000 5.50% $124,494.12 $480,000.00Household $24.00 12,000 $288,000 $778.38 42% $326.92 12,000 3.00% $117,690.81 $288,000.00Jewelry & Gifts $24.00 10,000 $240,000 $262.50 55% $144.38 10,000 8.00% $115,500.00 $240,000.00Arts & Crafts $24.00 10,000 $240,000 $516.52 55% $284.09 10,000 7.00% $198,860.87 $240,000.00Plant Boutique $24.00 3,000 $72,000 $516.52 55% $284.09 3,000 7.00% $59,658.26 $72,000.00Services $24.00 8,000 $192,000 $363.05 39% $141.59 8,000 7.00% $79,290.31 $192,000.00Miscellaneous $24.00 15,000 $360,000 $363.05 39% $141.59 15,000 7.00% $148,669.32 $360,000.00

Total Rent $2,971,500.00

Office Income Sensitivity AnalysisTenant Base Rent Sqft of Space Total Base Rent Occupancy Expected RentInsurance Company $20.70 100,000 $2,070,000 100% $2,070,000.00Speculative Space $25.20 48,000 $1,209,600 95% $1,149,120.00

TOTAL $3,219,120.00

Retail Cash FlowsYear Inflow/Outflow2001 (4,624,060)2002 (133,213)2003 72,2572004 161,9572005 258,8742006 346,5922007 454,4862008 571,0102009 696,8572010 27,789,550IRR 24.04%

NPV (15% Disc.) $3,721,772

Office Cash FlowsYear Inflow/Outflow2001 (4,093,078)2002 267,3052003 249,8432004 254,1952005 258,9242006 264,0622007 634,9182008 640,9862009 647,5802010 22,482,729IRR 25.12%

NPV (15% Disc.) $3,385,125