Committee Minutes

MINUTES/FINANCE-DEVELOPMENT STANDBY COMMITTEE
Tuesday, May 11, 2004 - 7:00 p.m.______________________________

Members present: Council Member Glassheim stated that in review of 2004 assessment values sitting in for Council Member Christensen, chair and Council Members Hamerlik and Gershman who were out of town, were Council Members Kreun and Kerian. Also present were staff members Mel Carsen, city assessor, and John Herz, asst. city assessor.

2.1 Protest of Assessor's 2004 values by Grand Cities Mall - Patrick Listermann.
Mel Carsen, city assessor, reported he put together report and his recommendation is based on information he has would be to uphold the assessor's value on Part 1 (Mall stores) and that value is $2,576,100; to uphold the value on Part 2 (K-Mart and Hollywood Video) and that value is $2,945,200; and Part 3 (former Sears building) recommending a reduction from $2,965,100 to $2,215,300. He stated he has documentation that was not ready at the time this report was made as to why his reduction on the former Sears Store and distributed copies, that this is income approach on the Sears store looking at rent from each tenant and does not include the Zimmerman Furniture who has been remodeling that space in the last couple months, but has taken actual rent and 5% vacancy factor and 6% expense and management and 4% on maintenance, that there are CAM (common area maintenance, incl. snow removal, sweeping, cleaning. lighting) charges that are not paid by the tenant because of vacant space and that amounts to approx. $2 per sq.ft. for something over 21,000 ft. and net income is $224,559 and used an 8% interest rate on the land and a 12% on the building, which comes out to an overall Cap. rate of 10.99%, that they use a building residual technique rather than using overall rate, they assign a rate to the land and a different rate to the building, depending on the economic life of that building. That the value of income stream is just over $2 million and to that added the value of the unfinished area (22,000 ft.) that is Zimmerman Furniture and also north half of the former warehouse, and that Noridian paid for their own interior finish and not included in the income stream but is included in assessor's value, and just added value of the permit, and that comes to $2,715,300 and less 3-year remodeling exemption of $500,000, and reduces value to $2,215,300; and that is his recommendation of Part 3 (Sears store).

Mr. Carsen explained that the Cap. rate is a relationship between the net operating income and the indicated value - whenever there is a sale, you take the sale price and divide by net operating income and get a Cap. rate; it represents the return that an investor would want to pay for the property for the depreciating asset and also to give the investor a reasonable return on his money. He stated that the Cap. rate that Mr. Listermann suggested 10.50 or 11% and his overall rate is 10.99% so essentially the same.

It was suggested by Mr. Listermann that the Cap. rate on the Columbia Mall when it sold was 10.5% and he has not been able to confirm the sale price on Columbia Mall and it was reported it sold for $30 million and if that is right, the Cap. rate is 10.5%, and maybe right. Mr. Carsen stated if using 10.5 instead of being $2,068,000 it would be $2,138,600 - the lower the rate the higher the value. Mr. Listermann concurred that they were close on the Sears building.

Patrick Listermann, chief operating officer of J.Herzog & Sons, a real estate and investment firm and stated that they manage the mall and represent a group of investors who put in money to buy the mall and also have a mortgage with Bremer Bank; and purchased the mall in 1997 and was under contract during the flood and closed on it during the flood and felt that even with the problems at that time that it was going to be a good asset and fit their investment criteria for properties they buy all over the country, and stated they have been part of the community since 1997. He stated they purchased the Sears building two years ago. He stated they felt they have contributed lot to the local economy and community with jobs and keeping Noridian in the community; contributed to sales tax; local contractors, etc.

He stated they are protesting the taxes and the reason for that is two-fold, 1) as a property manager they are basically a middle-man and pay taxes, insurance and tenants also pay for them, and the cost to maintain property is paid by the tenants, and when tax bill goes up, it increases rental for the tenants. 2) the vacant units and several other units and those taxes picked up by the landlord and investors will pay that increase.

He stated when get appraisals based on 1) cost approach which looks at bricks and mortar, and does depreciation, 2) income approach which looks at income of a property and that is the best estimate of value for an investment type property where equity put up by investor, and is the best approach to use for these type of properties; 3) sales comparison approach which looks at properties that have been sold recently. Cap. rates have been discussed and wanted to show as Columbia Mall just sold in 10.5 and 11.2 cap rate, and look very closely at property to purchase as investment and received all investment statements and did pass on that property because it is not their style of investment to buy property where you don't get the anchors. They do own the K-Mart building.

Mr. Carsen stated South Forks Mall sold in 1997 for $2.5 million, that in 1991 K-Mart made a major expansion at their expense, and that portion of K-Mart never sold, all that sells is investor's interest, K-Mart spent $1.5 million putting addition on and renovating the store with a 20-year lease plus 5 5-year options, and so K-Mart addition and remodeling is never included in the net operating income because they paid for that. Mr. Listermann stated that where his disagreement comes in that when bought the K-Mart building in 1997, he only looks at what K-Mart pays in rent because from rent pays expenses, bank and investors, and because K-Mart put $1.5 million into the store had no financial impact on his numbers because it doesn't bring any cash in; don't look at those improvements. It was also noted that Noridian also put in their remodeling, but when they are gone, get the increased value of that property because at some time investors do get that value. Mr. Carsen stated that K-Mart doesn't pay taxes, and that is part of the fallacy of the income approach looking from investors standpoint. Kreun stated they are putting value on the property and has to be formula to make that work.

Mr. Carsen stated in ND have to value all property interest, that is different than the investor's interest, that assessor has to assess land and the building, paying the tax is the landlord's responsibility to make sure the lease covers that.

After further discussion Mr. Listermann stated they were very close on Sears valuation, really the mall and K-Mart and Hollywood Video where he has Cap. rates and where there concern is and request for some reduced value.

Mr. Carsen stated their primary approach to valuing all commercial property is the cost approach, do use income approach when can get reliable verifiable information, that some of the problem he has with the income and expenses on this property is that he can't verify where that rent is coming from, suspect that much of the expenses are a fix-up expense, that Larry Stammen is the on-site manager and much of his time is spent fixing up Noridian, Big Lots and that is a capital improvement and is not a operating expense so thinks the expenses are expanded or embellished from what typical operating expenses would be, so the income approach unless you get really good reliable and verifiable information is very difficult, that he has done an income approach on the mall stores, independent of the numbers seeing today and also a comparison of values of similar strip malls and other stores, and that is very key in the assessment process is to have equity, that this is Board of Equalization and idea is to equalize taxes so have comparable values. He distributed information to the committee. Mr. Listermann stated they have factored in some reduction in expenses in their budget numbers for 2004.

Mr. Carsen reviewed comparison of properties - mall stores and excludes Sears, K-Mart and Hollywood, at $2.5 million value, and total value divided by leaseable is $20.87, on former Sears store total value is $30.91, Town & Country Shopping Center, Washington Square is $63.00 per ft., and South Town, just north of Rydell's, value $30.78, and this information shows they are equitable. He stated in the mall area they have spent a lot of money but short of tenants; that when figure vacancy, don't figure loss in value but figure vacancy factor over the extended period of time - that Budget Drug moved and vacancy on Budget is 4% year and that is part of the income approach.

Mr. Listermann stated not asking for special treatment, think that what happened at Columbia Mall should happen to them, 10.5 cap on existing income with 12% vacancy, that his cap rate should be more like 11 because lot of mom and pops and property very old, but will take 10.5; that what they have is an interior mall and good comparison with the Sears building but what these numbers don't tell you is what the rental rates are.

Glassheim stated he has concern on the vacancy rate at 5%. on mall stores. Mr. Carsen stated it wasn't 5% on mall stores as not using the income approach on the mall stores. He stated he has done an income approach on mall stores and started at $7 sq.ft. of leaseable area and a 25% vacancy, and took expenses like insurance, management, maintenance, the 75% of the common area maintenance and get down to an NOI of $293,500 and that generates a value of $2.66 million.

Mr. Carsen stated the loss in the 4 or 5 tenants, that amounts to something over $200,000 and he has attempted to use economic rent, stabilize it over a long period of time, using a 25% vacancy rate and a 10.9 Cap. rate and that generates a value of $2.6 approx.

Mr. Carsen stated that Herzog bought the property based on the value of the income stream, not including K-Mart, for $2.5 and have spent about $4 million on the mall for remodeling costs and if add those is $6.5 million and does not include the K-Mart leasehold improvements. The total for all properties $7.7 million for 2004. Mr. Stammen stated that is not the market value of the property.

Mr. Carsen stated they have to value entire property, and property is made up of a bunch of pieces, but are looking at the income stream is the investors value or landowners value, there is another part to that which is the leasehold interest and that is created in two ways, one is that the tenant builds something at his expense, or when the rent escalates and you are stuck with the old lease, and has to be assessed. He also stated that on the K-Mart and the Video Store the difference is the leasehold interest of the K-Mart addition and the remodeling. The mall stores there is a $400,000 difference.

After further discussion it was moved by Kerian and seconded by Kreun to accept the assessor's value on Part 3 (former Sears) at $2,215,300. Motion carried.

It was moved by Kerian and Kreun to reduce the value from $2,576,100 to $2,300.000 on Part 1 (Mall stores). Motion carried; Glassheim voted against the motion

John Herz, asst. city assessor, stated that the K-Mart lease was for 70,000 sq.ft. and K-Mart added over 26,000 sq.ft. to the building and what they want you to do is to eliminate the 26,000 sq.ft. from value, but by law they have to assess it. Mr. Listermann stated they are paying him $3.00/ft. on that and does have a value on it, and he does evaluate the expenses as they do own this and they pay him $3.11. Glassheim stated the building value is more than $3.11 sq.ft. only unable to get it because locked into a lease they won't be able to get until end of the lease, and asked how it could be valued at more than the $3.11 sq.ft. - it was noted that is the income approach. Mr. Stammen stated if building sold, lease would remain in effect. Mr. Carsen stated they have a leased fee in K-Mart and that is all they bought, that there is another part that is the leasehold interest that is held by K-Mart, and feels that the $2.9+million is justified on K-Mart and Video Store even based on their income. Mr. Stammen stated that if the market value is what someone would pay for it, that is what it is, while Mr. Carsen stated all buying is a leased fee, they get a deed to the real estate but they only buying a factual interest in the property which is leased fee, when buying leased property you are always subject to the lease for the term of that lease. Glassheim stated leasehold property for over a long period of time affects the marketability of the property.

It was moved by Kerian and Kreun to uphold the assessor's value on K-Mart and Hollywood Video, Part 2, of $2,945,200. Motion carried; Glassheim voted no.

ADJOURN

It was moved by Kreun and Kerian to adjourn. Motion carried.

Alice Fontaine
City Clerk