Land Pricing in the Buckingham

Land Pricing in the Buckingham Place Deal Pricing Max Price by Site Use Type, per acre: Big Box: $19/sf/year in income ($20/sf for occupied space less the stabilized vacancy rate of 5% yields a $19/sf average) To achieve the target cap rate, $19/total-value-per-sf must be equal to or greater than 7.75%, or: 19/.0775 = $245.16 Less the $70/sf in construction costs = $175.16 At 10,000sf of retail space per acre, the maximum price that should be paid per acre of Big Box space is $1,751,600.

Specialty Retail/Entertainment: $28.2/sf/year in income ($30/sf occupied; 6% vacancy) To achieve the target cap rate, $28.2/total-value-per-sf must be equal to or greater than 7.25%, or: 28.2/.0725 = $388.97 Less the $85/sf in construction costs = $383.97 At 8,000sf of retail space per acre, the maximum price that should be paid per acre of specialty retail/entertainment space is $3,071,760.

Apartment: $8.78/sf/year in income ($1.10/sf/month = $13.20/year for occupied space; 5% vacancy; 30% reduction of gross rental income lost to operating expenses) To achieve the target cap rate, $8.78/total-value-per-sf must be equal to or greater than 6.75%, or: 8.78/.0675 = $130.07 Less the $95/sf in construction costs = $35.07 At 18,000sf of apartment space per acre, the maximum price that should be paid per acre of apartment space is $631,260 Office: $7.20/sf/year in income ($15/sf occupied; 20% vacancy; 40% reduction of gross rental income lost to operating expenses) To achieve the target cap rate, $7.20/total-value-per-sf must be equal to or greater than 7.75%, or: 7.20/.0775 = $92.90 Less the $100/sf in construction costs = $-7.10 At 10,000sf of office space per acre per floor, the total loss on three-story office space construction would be $-213,000 An estimated 220,000sf of specialty retail entertainment space (10% of currently existing 2.2 million sf) and 700,000sf of big box space (25% of currently existing 2.8 million sf) is needed to meet unmet demand, translating to 70 acres of Big Box space and 27.5 acres of specialty retail/entertainment space.

30 acres of the site must be set aside for storm water management/wetlands, leaving a remaining 42.5 acres (170 acres of the original site -- 70 acres Big Box -- 27.5 acres specialty retail/entertainment -- 30 acres storm water management/wetlands = 42.5 acres). Population density in the nearby city of Nashua is 4.4 people per acre. At 18 apartment units per acre and an average household size of 2.7, the density per acre of apartment-developed land is 48.6.

A population density of 5 people per acre for the entirety of the 170-acre site would mean a maximum of 850 residents in the development, and 850/48.6 = 17.49, or approximately 17.5 acres of apartment complexes should be developed. The remaining 25 acres of the sit3 (42.5-17.5 = 25) might be better devoted to additional Big Box or specialty retail/entertainment space rather than office space, but regardless these last 25 acres should not be included in pricing considerations, as revenue from this space is minimal at best given current projections.

The final pricing determination can be made thus: Big Box: 70 acres x $1,751,600 max price/acre = $122,612,000 Specialty retail/entertainment: 27.5 acres x $3,071,760 max price/acre = $53,755,800 Apartments: 17.5 acres x $631,260 max price/acre = $11,047,050 Sub-total: $187,414,850 Initial Fixed Costs: $80 million ($40mil site costs, $40mil addl. costs) Total max.

that should be paid for the site: $107,414,850 REITS and Real Estate Ownership Given the description of REITs and the overall industry provided in the case study, as well as the specific history and success of CBL a first a private real estate development company (a schedule C corporation) and then as a publicly traded REIT, there are several reasons that real estate ownership in the United States is so dominated by this and other publicly traded REITs.

The fact that such companies are able to pass untaxed earnings on to shareholders makes ownership through a REIT more profitable than through many other corporation vehicles, as is demonstrated by CBL's own experience and growth as a company.

This increased profitability of any REIT is an incredibly attractive feature to many smaller (and larger) investors when it comes to publicly traded REITs, as this allows for the direct profits of real estate earnings to be transferred to shareholders as dividends (and indirectly in increased stock value/equity) without requiring these investors to endure any of the hassle of real estate ownership.

Public trading and ownership also allows for much faster capital growth and thus real estate holding growth, meaning that publicly traded REITs can grow much faster than private corporations and thus would easily -- and as history has shown, did easily -- grow to dominate the real estate ownership landscape in the United States. Drawbacks to public ownership, of course, do exist. When compared to private corporations, public companies must keep a stricter eye on the short- and medium-term bottom line.

There are also more owners and thus more decision makers that must be considered, stricter accounting and governance regulations that must be met, and a variety of other operational complexities that are placed under greater control and scrutiny in publicly traded companies. Development The amount of new development that CBL specifically and REITs generally should engage in depends on a number of factors stemming from the market and industry at large as well as from inside companies themselves.

Market forces including the pace of overall economic growth nationally, regionally, and locally would be one limiting factor on development, especially in the current era. No company should be engaging in extensive development currently except in areas that are identified as having significant unmet demand for retail services. Other external forces that are also more local in their influence include barriers to development imposed by infrastructure imitations, taxation, and similar factors.

Risk aversion is also a limiting factor when it comes to new development, and this is one that applies to CBL significantly. As one of the largest REITs in the country, stability is key to CBLs continued growth and profitability, and engaging in high-risk ventures such as new developments is not something the company should engage in frequently, as is made explicitly clear in the description of the company provided in.