Value Retail’S Downfall? Heknew Downfall? Retail’S Bevalue to Going Italy Or to Company Tohis Weretherelimits His Guest

outlet strategy in Italy? in outlet strategy multi-brand by dominated nation a still also was and world the of brands luxury theleading of many to home was Italy market. the new to entirely Italy going to be Value Retail’s downfall? Heknew downfall? Retail’s beValue to going Italy or to company tohis Weretherelimits his guest. to Hell.’” ‘Go means it Tuscany, in but Luck,’ ‘Good means it also InLombardy, wolf.’ the of mouth the is ‘in “mad butcher” of Florence, what “Boca Lupo” meant. Dario responded, “Well, the literal translation Lupo.” out“Bocca shouted down his champagneglass. Someone shoutedout “BuonaFortuna” or “Good Luck” while another threat to brands the that represented evening, in atmosphere, there was atension in the room. What hewas proposing was newand possibly areal he was about acquire to for investor. Hedidnot need market research; he acted from his and personal experience sense of the them heknew (though IRRs disliked in bigideas, the Graybar Building in 1958and the Empire State Building investment in 1961. Wien was interested like deals landmark together put had Wien syndication. estate real of originator the been had Wien, his company’s new 18,503 m on working together to atoast Scott proposed Ferragamo.Zegna, dessert, VersaceandTod’s, Before an existing important most his of Week withsome luxury serving villages outlet European of operator publication may stored bereproduced, inaretrievalsystem, used MA02163, Boston, Publishing, School Business write Harvard 800-545-7685, and Fellows 2008President 2003, ©Copyright 2002, endorsements, sources of primary or illustrati data, numbers, have been fictionalized. HBSdeveloped cases are as the basis solely for class discussion. Cases are not intended to Ani Vartanian prepared Associate underResearch case thesupe this ______1 Breakaway The Family Value Retail ARTHUR I SEGEL mechanical, photocopying, recording, or otherwise—wi 1 square meter = 10.76 sf., sf., =10.76 meter square 1 As withhad seen else he in everything Italy,Sc th him joining friend his ask over to bent Scott Scott was from a New York based real estate estate fam real based NewYork a from was Scott Ch and theChairman Malkin, Scott 2002, In March €(Euro)

1 = $0.95, as of August 2002. 2002. August of as $0.95, = 1 2 open air outlet village to be built 98 kilometers south of Milan on land land on Milan of south kilometers 98 bebuilt to village outlet air open

€ 7.26 million. 7.26 ons of effective orineffective management. of Harvard College. To order copies or request To or permission to order copies College. ofreproduce Harvard ma thout the permission of Harvard Business School. 1 Although the dinner sparkled with a convivial convivial witha sparkled thedinner Although ina spreadsheet, ortransmitted inany form orby any means— a location close to their home. Scott smiled and put put and smiled Scott home. their to close location a any real any estate companygoing transnational? Was rvision of Senior Lecturer Segel, ArthurI of parts which, in ott was left perplexed as as perplexed left ott was d potential clients in Italy including Prada, Gucci, Gucci, Prada, including Italy clientsin potential d fashion retailers. Could Value Retail pursue its pursue Retail Value Could retailers. fashion instinctively) and was a thoughtful and skilled skilled and thoughtful a was and instinctively) at evening, Dario Cecchini, the famed cook and and cook famed the Cecchini, Dario evening, at brands, hosted a dinner during Milan’s Fashion Fashion Milan’s during dinner a hosted brands,

he was introducing a real a introducing was he ily. His Grandfather, the lawyer, Lawrence A. Lawrence the lawyer, ily. HisGrandfather, or go to http://www. hbsp. harvard. edu. No par harvard.edu.No hbsp. http://www. to go or ief Executive of Value Retail, a developer and developer a Retail, Value of Executive ief to what was intended by by intended to what was estate product almost productalmost estate REV: JULY 7, 2008 7, JULY REV: 9-803-008 terials, call1- terials, cluding the electronic, serve as as serve t of this

This document is authorized to be used only in the Commercial Real Estate Asset Management course by John Khajadourian at Real Property Association of Canada on 08/17/2012. Use outside these parameters is a copyright violation also en route the to Cotswoldsand the Bard’s birt family (Churchill’s Palace Blenheim and University motorway London from separated inOxfordshire “Bister”) in question. consumer the British of willingness the and transport, developm of kind that forbade authorities planning In England high visibility. with interchange highway 2 Bicester Grandfather. and Father his for working including business, estate real the learning schools business and law spent it. He run to eventually and company family joinexpected to the three children,of was eldest Scott a civicleader.The becoming approach while duringthe purchased. once manage detailofand them theduediligence thento properties mi operations thorough, his upon Herelied market. 803-008 American style center, factory outlet which could be Cambridge. “Andwe then had an idea: arbitrage whynot the two cultures and bring aNorth figure to do next. what out He had ou seen factory in collapsed business estate thereal hitand War developments becausewere often they complex and there thus When was lessGulf the competition. theBerlin of thefall after inGermany deals London, and hehis and colleagues switched their focus to European projects. They chased several tothen, Europe.”bringing years sameback later,ended that vision up (See Exhibit 1);and Hills Beverly to street European shopping ideaof a the introduced funny. We of kind is it,it of think you “When business. retail the of creativity and sizzle the and development Rodeo Drive in BeverlyHills. This property captur development deals and focused on California proj U.S. for inLondon fund investment an raised He own. his on out went he as learned Scott crazy,” or world incompetent areeither you assumes leave asuccessful“When family the business, you younger His business. thefamily from away break to need a felt Scott Depression, Great the during hisown outon struck had Grandfather his just as apprenticeship an began Cityand toNewYork headed After considerable searching, Scott and his colleagues found a22acresite in Bicester (pronounced Unit the In site. suitable fora began The hunt “I spent the summer in midtown Manhattan assisting the leasing team for a major office major fora team theleasing assisting Manhattan midtown in spentthesummer “I hands-on a with holdings thefamily expanded successfully had PeterMalkin, Dad, Scott’s Scott loved the energy of developm of theenergy loved Scott After eight years of attending college and graduate school (JD/MBA) at Harvard, in 1984 Scott would never be a lawyer.” lawyer.” a be never would ge you where business in a tobe want don’t ‘You once said: Helmsley Harry of business.As the the career. Ilovedfreedomand creativity orbartenders guards werelife who myfriends of any than transaction one that on thecommission from money more made I exhilarating. was off the street rented and 3,500S.F. I did the deal completely bymyself, at age eighteen, and it everyoneelsewas when InAugust, building.

interchange some 62 miles northwest of London, London, of northwest miles 62 some interchange ent, of creating value out of nothing. He moved his family to to hisfamily Hemoved nothing. outof value creating of ent, Wall but were outbid. butwereoutbid. Wall away on vacation, atenant prospect walked in the ensuing recession, Scott and his team had to to had histeam and Scott recession, ensuing the by hilly sheep farms. Located two miles from a a from miles two Located farms. sheep hilly by tlets before in Freeport, Maine during his years in in years his during Freeport, Maine in before tlets hplace at Stratford-upon-Avon. There would be be would There Stratford-upon-Avon. at hplace ects, including a luxury retail development at 2 2 at development luxuryretail a including ects, ed States, one would first focus on atraditional come atourist destination,Great to Britain?” home), the site met Value Retail’s criteria. It was was It criteria. Retail’s Value met site the home), ed his imagination. He liked the added value of of value theadded Heliked hisimagination. ed nded business partner, Harry Helmsley, to scrub partner, to business HarryHelmsley, scrub nded summers and time after classes during college, college, during classes after time and summers . That experience realestate launchedmy , that option did not exist as local and regional regional and local as exist not did option , that t paid by the hour.’ I soon realized that I that realized soon I bythehour.’ t paid brother, Tony, agreed withhisDad. to work agreed Tony, brother, to drive up to an hour or two to shop were all were all shop to ortwo hour an to up to drive in commercial real estate with his family. But his family. with estate real incommercial ent. Traditional lack of mobility, ease of of ease mobility, of lack ent. Traditional and near the tourist attractions of Oxford Oxford of attractions tourist the near and He was drawn to retail toretail drawn He was Value Retail Retail Value

This document is authorized to be used only in the Commercial Real Estate Asset Management course by John Khajadourian at Real Property Association of Canada on 08/17/2012. Use outside these parameters is a copyright violation percent of sales. sales. of percent varied by the country) could cancelvaried bythe the country) could contract. rent. If atenant could not achieve anappropriate levelsales, of the landlord (the exact mechanism theoperat of itsshare pay still It would the base. ₤ test was: wouldconvincing brands the customers that would want come to inthe place. first Scott added,“My litmus Gucci find this to be an acceptable environment?” The villageneeded to represent 3 2 sales costs and local real estate taxes. They wouldU.S. also pay a percentagewould last for ten years and the “tenant” would pay a rent It stylecontract. store department a developing of theidea with up came colleagues his and Scott of 12.5% of VAT 1954,Tenant of Landlord Act British the specifically leases and of exclusive European nature get around the center expansion inthe United States.” “imagine aU.S.Cabinet member signing off on asmall shopping center or a10,000 SF shopping Transport SaidScott: Theof andEnvironment. Minister and the government central including was Next, community. the and politicians the locals, links rail unused relatively two between located was the area. to automobiles, many too not but tourists, be emptiedand out, thatBicester villa the outlet most wereeach native to country. another, although thisseemed to be slowly changing. Some tr limited was There transnational. brands were known throughout Europe; so in more was it But fragmented. and localized urban shopping gene were countries European All no traffi with pedestrianized virtually was Oxford of center.were de politics the and parties political competing They saw it as a of years of thethousands threat,”(reflecting advantage of being an American in Europe is thatyou areviewed as irrelevant rather thanhated recalledin presumption law, the the against not project was Scott. wher States, theUnited in Unlike codified. heavily Asincreased by75,000square feet forof atotal 95stores and 1750parking European spaces. were laws in the Bicesterlater was entrepreneurship.” hostile to fundamentally is culture “Yousee, the European U.S., outlet village for 50stores with real 1,100parking spaces. There was no grand welcome,” explained Scott. estate was hi whole of required theconstruction to required infrastructurelimited improvements Retail Value Percentage rents are typical in retail. There is usually a minimum or base rental after which percentage rates kick in a in as kick rates percentage which after rental base minimum or a isusually There retail. in typical are rents Percentage government. the to tax paid or a consumption taxes value added of exclusive sales to Refers 62.5/SF in rent, which, as it was higher than the base rent of of rent base the than higher it was as which, inrent, 62.5/SF Attracting brands to this unusual arrangemen unusual this to brands Attracting Brands would pay abase rent of hurdle first the processwas out theapproval Figuring not would business her or his that convinced be to had Bicester in owner store downtown Every daunti was Oxfordshire in process approval The “They thoughtwerewe aliens when originally we proposedthe of idea a107,000 square foot 2 , whichwould beoffset against the base rent. Soif abrand had

rally against new retail ideas, especially when it meant a new non- new a meant it when especially ideas, new retail against rally ansferability of brands from one country or region of a country to to country a of orregion country one from brands of ansferability enmity between European neighbors).” neighbors).” European between enmity ghway interchanges or rail stations. stations. orrail interchanges ghway ₤ 35 per square foot annually, pl annually, foot 35 persquare 3

gewould be adestination location bringingmore develop the site, as opposed to many which which tomany opposed as developthesite, ing costs over and above the base orpercentage base the above over and costs ing licate. Surrounded by ring roads, the downtown the roads, downtown Surrounded ring by licate. Europe. for Veryfewexample, retailers, were e the real estate develo estate e thereal c. “It was hard to puncture through this process. process. this topuncturethrough hard was c. “It The zoning authorities hated traffic; but the site butthesite traffic; hated authorities The zoning t was the next big challenge. Critical was was Critical big challenge. thenext was t Europe was the reverse. Scott went on, “the “the on, went Scott reverse. the was Europe . The first step was getting the support of the of the thesupport getting was Thefirststep . ng, taking over three years. Oxfordshire had had Oxfordshire overthreeyears. taking ng, higher percentage of sales than is typical in the inthe istypical than sales of higher percentage to receive the approval from national entities, entities, national from approval to receivethe ; getting it leased was the next challenge. To To challenge. next the was leased ; gettingit ₤ 35/SF,would obviate the need to pay us their share of the operating theoperating of share us their ₤ 500/SF insales, it wouldpay per could proceed if the the if proceed per could 803-008 3

This document is authorized to be used only in the Commercial Real Estate Asset Management course by John Khajadourian at Real Property Association of Canada on 08/17/2012. Use outside these parameters is a copyright violation formulae, which Scott articulated as: as: articulated Scott which formulae, same the on primarily based Madrid and Paris Brussels, Barcelona, of outside villages outlet new opened successfully Retail Value luck, good and idea valid work,a hard hours, long through But littlerespect showed and toEurope came typically onthe differencereflecting vast Europe between and othermajorto conceptEuro the Value Retail expanded approximately of sales average achieving London, central after number the also was It peryear. visitors million 4 Bicester andBeyond have toeverythree reinventmonths.” ourselves (See Exhibit 2.) luxurystated, brand products “Our short have very leading a of president the As own. its of all life a has business high-fashion The fashions.” season’s wearto prior to who these brandsare willing “aspire” groups and to or spending the economic said Scott. “Our goal isappeal to to the brand aware, but not thefashion forward consumer, to cater merchandising the best to creating pr a thisisnot But longtimeago. a been leased countless offers that for and space ifnormal thiswere a shopping center company,would ithave of afew dominantsuch brandsGucci.of as As the spring ofwas 2002,it still vacant. “Wehad have Retail. toValue important was merchandise Burberry Ferragamo, Versace, Klein, Calvin Hilfiger, fashions at onstore, their Bond while London citystore Streetin the central exhibit latest could styles and prices 40% quite often expe was fit-out which to60% more.”it a tourist attraction, and to get people to spend 3-4hours at aminimum. Brands paid for their own Polowell tobe had Thebuildings integrity. and quality Ralph Lauren signed up first. 803-008 Cerruti, Jaeger, Tommy • • • • • • • • • Bicester Village opened1995. By in the spring One large location was held in reserve. It had been so for 1½ years with the aim of attracting one Onewashad inbeen held for reserve.so of largelocationone with Itattracting 1½ aim the years

community at large. large. at community integrit and standards thehighest maintaining term, short on keeping brands initself; destination tourist a village each making risks; up-front minimize and overtime demand build to development phasing personnel; cultur local the to village each customizing pricelocations; full to 30% typically was the pricing that ensuring were which goods quality providing brands; of portfolio quality highest the assembling locating within one hour alarge of urban areaproviding astrong “catchment”; offer. We are trying to build a sense of place that is sustainable.” issustainable.” that place of sense a tobuild trying Weare offer. nsive. had “We to convince brands that this was their country cancelable service contracts; cancelable servicecontracts; typically at least one year old; old; oneyear least at typically operty company, it’s a re it’sa operty company, one attraction for Asian shoppers visiting Britain Britain visiting shoppers forAsian attraction one designed to make shopping entertaining, to make make to entertaining, shopping make to designed of 2002Bicester was abig success, attracting 2.5 and Villeroy & Boch followed. The high quality quality high The followed. Boch & Villeroy and e including architecture, merchandise mix and and mix merchandise architecture, including e and patience for European culture and values. values. for cultureand European patience and lives. We are selling fish; it rots quickly. We We quickly. rots it fish; selling lives. Weare 70% reduced from the pricing in the brands’ brands’ the in pricing the from reduced 70% the United States. U.S.real estate developers y with brands,y with employees, investors and the pean cities. “How little I knew,” said Scott, Scott, said I knew,” little “How cities. pean ₤ 600/SF. Over the next four years tail organization committed committed organization tail Value Retail Retail Value

This document is authorized to be used only in the Commercial Real Estate Asset Management course by John Khajadourian at Real Property Association of Canada on 08/17/2012. Use outside these parameters is a copyright violation repayment of the then outstanding debt. Holding Holding debt. outstanding then the of repayment service and 50%of the residuals after areturn of Investors received a10%simple cu risk those take to willing were investors individual potentially with properties in equity investing of wary were investors institutional traditional While debt. 80% and equity 20% with capitalized outlet activity in America. “My jobisto “My America. in outlet activity 14yearsandworked Polo ran for retail for their the in living life adult her spent had and France in spwelcomed the “American company’s They fromHermes. camewoman professional Another stifling. awoman, life, especially for European huge a for concepts new identifying and Emmanuel Forexample, structures. organizational companie traditional from “misfits” people.” the about all it’s end the In organization. retail, leasing, security, maintenance, in centersworked of the each company at operating thein banks. Employees visitors the and of consisted theoffice properties other than at worked, and based the developments.atthe new was properties Everyone only themselves—the his employees mostwhere of villages, forexisting retail operations the theorganization between 4 The Organization Retail Value VersaceAlek, who in ran Aleksander Michalowski. investors had sold their limited partnership interests for 10 times their original equity investment. investment. 10times their equity for original interests partnership their hadsold limited investors butrelative private, ina interests trade could Investors situation. tax own her or his to according investor each for differ obviously years. seven to five within individu in interests of sale the felt Scott although “Footfall” is a retail expression referring to the number of feet coming to a center. Each village was a separate, stand alone investment and legal entity. Each was typically typically was Each entity. legal and investment alone stand separate, a was village Each down while while footfall down aregoing sales whose maximizing IfIseeof value. abrand amportfolio stores, realestate the I best the with edge the cutting at constantly us keeping in so, doing In our anchor. is that stores villa outlet our In location. retail orthebest A) Euro store.In theanchor about youtalk States, is goal culture.Ultimately, my estate real not a company, the operating of Desirée Bollier, theCEO Scott added,“We are not aconventional company. property This is aretail management his more, dividing and developingthree By 2002,Scott had 145employeesfivevillages managing “to analyze stocks, oversee marketing, advertising advertising marketing, oversee stocks, analyze “to I watch the sales numbers week by week. Marketin week. week by numbers sales the I watch Scott hired another retailer who reported to Desiré to who reported retailer another hired Scott themselves.” thebrands as much as brand a as village cashmere in stores in the Midlands. We are a top-of-the-line getsinvolved. citizenry Thelocal get involved. boutique. We position our whole 4 is doubling, I know we have a problem. problem. a wehave Iknow isdoubling, All numbers and sharing arrangements were pre-tax and would would and pre-tax were arrangements sharing and numbers All

ly illiquid, secondary market. In Bicester, for example, some of the the of some example, for InBicester, market. secondary ly illiquid, mulative preferred return plus 50% of the cash flow afterdebt preferredreturn50%offlow themulative plus cash s, rebels who needed to be challenged beyond the typical large marketing, accounting and finance. finance. and accounting marketing, irit” of giving everyone a chance. chance. everyone a giving of irit” develop the right tools,” Desirée began, Desiréebegan, tools,” right the develop three small rooms in central London, convenient for for convenient London, central in rooms small three al centersof or the companya whole as mightoccur businessin Middle the andEurope, East and their unstable short term “leases,”private equity and pe we talk about the “ITZA” (In Terms of Zone (InTermsofZone the“ITZA” about pe wetalk Scott had grown his team steadily, often attracting attracting often steadily, team his grown had Scott to drive sales. In a shopping mall in the United intheUnited shoppingmall Ina sales. to drive U.S. and the U.K. Prior tojoining ValueRetail she ges, we have no anchor stores. It is the mix of of mix isthe It stores. anchor no have we ges, retail developer. She found European found developer.corporate She retail We have to market smartly. You can’t put s, especially for the potential of greater returns. greater of forthepotential s, especially the UK Ireland and for6years, was halfPolish, le Delanöe had spent years developing centers centers developing years spent had Delanöe le capital, payment of th payment capital, periods were to projected periods and store design. dodeals.This I isaretail, came from Polo Ralph Lauren. She was raised was She Lauren. Ralph Polo from came g is an engine for positioning. The brands The brands positioning. for engine is an g e to act as the director of Bicester Village, Village, Bicester of thedirector as toact e e preferred return ande preferred be up to ten years; 803-008 5

This document is authorized to be used only in the Commercial Real Estate Asset Management course by John Khajadourian at Real Property Association of Canada on 08/17/2012. Use outside these parameters is a copyright violation within 120kilometerswithin ofand 26million residents an Located 98kilometers of south Milan and 111kilometers inception. its since Retail Value Harvard MBA,based inU.S.,who development the had areal background estate with and had been road, the Autostrada A-1, at Fidenza. The research on Italy was led by Tony McAuliffe, another they identified ahighly visible, reasonably priced 35acre site at an exit on the dominant North-South population thesignificant serving coverage European 6 Fidenza, Italy Lomond Scotland. in said: Alek half Scot, and grew up on the Amalfi Coast in Italy. He commuted by plane 803-008 from hishome in Loch employees first bythe name.” Everyone is on afirst name basis. “Not many European company chairmen arecalled by all of the people. quality only with be done th are thebrands towhat listening to dictatetous,not theother way around.always We are inventingwe as go along, but always foundation.” conscience. Last yearshe got the whole involved with company and Elton his John AIDS brands,” the to liaison overall our development, inmet Europe. She at Scott an Urban Land Institute conference. “Annie is our research and operation Karan’s Donna head to toFlorence moved she which after Republic, Banana for Production of worked UniversityTexas atthe and and marketing indesign majored Dallas, from five of oldest the was Marie Ann consultant. independent an Scichili, Marie Ann was Roderick with Working in Europe. experience development had realestate extensive intheirdreams.” participate We helppeople shoppers, we the (where createjobs), community our investors, and brands. most the importantly, . places for escape. “For us,” Frank added,“it is to place third a have you and home, high quality brand niche. Howard Schultz of Starbucks youwork, said,“Youhave have your your makes sense for themakes brands sense for In the Europe, consumer. we have amonopoly this in br therebyallowing life, second a goods their giving continued and Alek’s Desirée’s themes: “Wehelp to companies rationalize production their by inthe trade therag comefrom had Fidenza had asmall population of 23.1thousand people and was famous for its Parma cheese. Va for market important an was region The Milan Another senior member of the retail operations te operations retail the of member senior Another touch. these Ittakes cultivate timeto brands.” in keep to humble, be to need We complacent. too or arrogant too be never can We conscious. hour driveor from tourists Bicester toEngland. coming Theyarebrand and loyal price mall. Our target shoppersare 18 to 48 year old women who live within an average of atwo village outlet in an Locations new blood. with department onebig like Village runBicester “I “Everything depends on customer service and a serviceand customer on depends “Everything going are “They in, chimed Marie Ann time,” of ahead planning are clients our outwhat find “We England, in he Raised company. the for markets new expansion into Gibbs the oversaw Roderick inking soinking them.” we can support We have horizontal, avery informal cross-cultural organization.” garment district in New York City before joining Value Retail. He Retail. Value joining before City New York in district garment escape to.” Ideally, for Schultz, St for Schultz, Ideally, to.” escape aValueRetail Everyone village. happy: the is are not as important as in a traditional shopping shopping traditional a in as important as not are store, continually positioning and upgrading upgrading and positioning continually store, added Scott, “She is our spiritual guide and and guide spiritual our is “She Scott, added ands toands generate additionalcash What flow. am inam the business was Frank Blanchette. Frank ttention to detail,” Scott added, “and these can thesecan “and added, Scott to detail,” ttention centers. After six years of studying the market, market, the studying of sixyears After centers. for five years fivefor inKong Hong as the President of annual trafficcount of 18.5 million cars.9.1 lue Retail if they were truly to provide a a theyweretrulytoprovide if lue Retail northof had Bologna,acatchment the site arbucks, should be one of those those beoneof should arbucks, Value Retail Retail Value

This document is authorized to be used only in the Commercial Real Estate Asset Management course by John Khajadourian at Real Property Association of Canada on 08/17/2012. Use outside these parameters is a copyright violation most steadfastly resistant countries tolarge format commerce and, in fact, implemented Law 426in Table A A Table cities. leading the re orvisiting through passing tourists foreign the market, and with apartic from project onthe broker leasing cred has who partner local a need also You hurt. get cannot they locals the show and idea an sell to have You him? against shopkeepers local the of all quo. Wh status the Italy becausewants everyone reverse. “In Italy you the need local council 150%on your side. There is typically no development in 6 5 The Process Coast. Amalfi the and Rome, Tuscany, of destinations southern popular the from toand way their on region re Village Fidenza make would the A-1 exit from domestic million 12 another with annually, the region Netherlands (21%),Japan (18%),the UK (16%),Germany (13%)andStates the United (10%) visited destinations such as Florence, Padua, Portofino, and Venice. Some 4,350,000 foreign tourists from the and his colleagues beginning in the Spring, 2002.Unieco would alsoserve as the project contractor. theproper owned firm, construction regional reputable Exhibit 3 kilometer 60 within located were people million Retail Value eoa2747 2,6 17.8 19 21.6 821,563 Verona 257,477 953,973 19.6 Florence 374,501 917,110 Bologna 379,964 907,583 18.6 Genoa 632,366 10.3 2,214,282 Turin 900,987 3,099,366 20.1 Naples 1,000,470 16.8 Milan 1,301,551 3,757,609 Rome 2,655,970 3,817,133 iy Population City ISTAT 2001 Data derived from statistics provide by Healey & Baker and ISTAT. Italy had been pretty unchallenged much by large retailers until the late 1990’s. It was one of the If the government decision making process was highly centralized in England, in Italy it was the was it Italy in in England, centralized highly was process making decision government the If In addition to its excellent location, the site the location, itsexcellent to In addition 5 Scott hoped that the Fidenza project would attract area residents as well as Italian and Leading Italian Cities: “Population & Per Capita Income” PerCapita & Cities:“Population Italian Leading ). The minimal siterequired the on egress.Unieco, for work infrastructure accessand a City ular expertise in retail. expertiseinretail. ular

Healey &Baker,one of the larges Province Population y would a local mayor risk saying “yes” and have have and “yes” saying risk mayor local a would y gion. Table A shows the demographics for Italy’s Italy’s for demographics the shows A Table gion. benefited from its proximity to leading tourist tourist leading to proximity its from benefited s and 19.2 million within 90 kilometers. (See (See kilometers. 90 within million 19.2 and s ibility,” said Paul D’Analeze, the proposed new new theproposed D’Analeze, Paul said ibility,” adily accessible to tourists driving through the the through driving tourists to accessible adily visitors from Italy. Visibility and adedicated ty and was willing to sell it in stages to Scott toScott it instages tosell willing was ty and 6

€ Per Capita Income in t real estate brokerage firms in firms in brokerage estate t real 1,000’s 803-008 7

This document is authorized to be used only in the Commercial Real Estate Asset Management course by John Khajadourian at Real Property Association of Canada on 08/17/2012. Use outside these parameters is a copyright violation B demonstrateswide this difference Shopping Estimates Shopping Estimates Shopping 3% only for accounting retailers multiple with (See Europe. in other countries to moderate and lower price retail chains priceretail lower and moderate two although area, catchment the in competition retail minimal had itself site Fidenza The stores. and stores specialty through sold was Everything itwas and inItaly, weremanufactured brands commercial concentrationsof largestoresorcenters shopping of any kind. meters from being within 300meters ofanother su of the local elections restricting the development of any new concentrationof stores over 500square enter and where. Recently, for example, in Spain, back to feudaltimes. The shopkeepers local often ag that theresult levels, with addition,of as 1991,much of the approval authorityhad been devolvedprovincial to the and local retailers, but the tightening of the law in the 1990’s had significantlyslowed down their growth. In thousand. Aslight relaxationof permit approvals in the 1980s led to an influx of large format believed that Italy would do everything it coul it everything do would Italy that believed grocery/department store. In grocery/department Ita focus centersusually shopping large In Europe, 8 9 8 7 The Market United States. wished to transform andtheir enlarge shops. 1971, which imposed stricter rules for obtaining licenses and favored existing shopkeepers who 803-008 Italy lost annually10,000 specialty chains Sweden’s Ikea and Germany’s Lidl. An Italian retailers’ association estimated that from 1995 to 2000, review process. thro going after used only and timeconsuming and which deals withthenational heritage. Although there was ajudicial appellate process, itwas costly were Sovr evaluatedbythe criteria value. These were centersinItaly historic All an Bologna For example, theapplicant. of requisite stores larger than 1,500m “Scope” in “Scope” in The Harvard Design School Guide to Shopping Retail densities in Europe were 4 SF per capita versus 31 SF per capita in the United States. Table Italy had the most fragmented retail distribution system in Europe. Many of the top luxury luxury thetop of Many in Europe. system distribution retail fragmented most the had Italy Each jurisdiction was different, but local coun local but different, was jurisdiction Each to response historic a was regulation this of Part The average size shopping center in Europe 54,000 was SF versus almost ten times that in the In the 1990’s, in one year alone, local retailerswere battling 513foreignowned retailers, including The Harvard Design School Guide to Shopping The Harvard Design School Guide to Shopping 7 ; p 51, 52. 52. p 51, ; 52. p 51, ; . There are numerous large malls serving most U.S. cities but they are rare in Europe. are rarein Europe. but they U.S.cities most serving malls . There large arenumerous 2 or with sales areas over 400 m 400 over areas or withsales reement hadreement to bereached withnumerous different parties.

protected for their historic, archaeological, artistic or environmental ly, a permit from the regional auth regional the from permit ly, a (Boston, 2002) p. 638 & 642 & 642 p.638 2002) (Boston, Exhibit 4 9 . In Italy, retail density per capita was extremely low compared compared low extremely was percapita density retail Italy, . In both had storesin the city. both and family owned in citycenters. shops .) As 2002,the of numbershops of was about 720,000 (Taschen Publishing, Boston 2002) ICSC (Taschen Publishing, Boston 2002) ICSC d to remain a country of small shopkeepers. shopkeepers. small of country a remain to d a regional law in Catalonia was passed in advance inadvance passed was inCatalonia law regional a of sales, which was low compared to any other other toany compared low was which sales, of dictated to new the what dictated government stores could ugh a precise and generally inflexible government government inflexible generally preciseand a ugh the most style conscious country in the world. world. inthe country style conscious most the aintendenza ai Beni Pubblicior the public body around ahypermarket,which is acombination d Venice were known tobe known were Venice d boutiques. There were few malls or department ordepartment malls were few There boutiques. the guild tradition of small shopkeepers, dating dating shopkeepers, small of tradition guild the cils all reviewed the retail use and the moral moral the and use retail the reviewed all cils ch project, thereby effectively ruling out any 2 in towns with populations of less than ten ten than less of populations with intowns ority had to be obtained for new new for be obtained to had ority particularly stringent. stringent. particularly Harvard City: Project onthe Harvard City: Project onthe 8 But Scott Value Retail Retail Value

This document is authorized to be used only in the Commercial Real Estate Asset Management course by John Khajadourian at Real Property Association of Canada on 08/17/2012. Use outside these parameters is a copyright violation 10 worse as traveldown you Italian the boot.” accepted black market.was the norm. It iscorruption “There at all levels,” Paul added,“getting also reflected their fearand the years of terrorist incidents. There was also ahuge and culturally undere to theirway of went out People their style. lack this of Some information. toshare reluctant corpor and families Thebanks, information. or lease barely existed. Even when properties wereco under frequent. less were sales property this, of Because passing of patrimony, of tradition long a there was keep their mouthsItaly.shut.” There Business wasno U.S. people style openness are returnpolicy. asked questions no its advertising stunned ofinformation. when constraint posed. this example, End, Land’s for As in they muchof come Europe,protect small family owned businesses unable to compete with 9-9operatinghours and the labor here. When between imbalances the toredress were intended it comes to information, Italians European country. Retail Value area (including from international tourists), an tourists), international from (including area Fidenza development sitewould capture 2.1%of all billion. billion. Information from “Shopping Centres: Italy” (Healey & Baker), November 2001. Table B Table If information was hard to find in the United Stat theUnited in find to hard was information If Paul D’Analeze, the Fidenza proposed leasing broker, Many marketsin Europe such as France and Total Retail Area (million square meters) 0 m 100 200 300 400 500 600 700 800 900 2 ,1,7,0 ft 8,313,575,000 772,350,000 m 29% of totalWorld 75% of totalU.S. m 579,259,000 ! United States malls Shopping U.S. 39% Total Retail Area: World Area: Retail Total 2 10 2 2 An independent market study commission study market independent An ! Wal-Mart (worldwide) 28,010,000 m2 3.6% of total U.S. ,3,3,0 ft 7,932,530,000 736,950,000 m 102,051,000 m 102,051,000 ! 14% of total Asia total of 14% Japan 37% Asia Total Retail Area, World = 1,998,171,000 m = 1,998,171,000 World Area, Retail Total

2 — percentage of World total retail retail area total of World percentage — 2 2 ,4,7,0 ft 1,943,978,000 180,600,000 m 31% of total Europe total of 31% 55,894,000 m 55,894,000 ! U.K. 10% Europe 2 d estimated total retail sales for the catchment of catchment forthe sales retail total d estimated 2 2 of transparency pride,their image, wastheir dueto Germany had predatory pricing regulations which which regulations pricing predatory had Germany was prohibited by the courts in Germany from from Germany in the courts by prohibited was to stores,especially large the and shopkeepers the ations who owned the real estate were extremely wereextremely estate real the owned who ations stimate their wealth, theirstimate for example. Butpartof it ,7,5,0 ft 1,575,850,000 ntract, it was often almost impossible to get sales sales toget impossible almost often it was ntract, 146,400,000 m real estate on from one generation to the next. the to generation one onfrom estate real Latin America the retail sales within the extended catchment extended catchment within the salesthe retail es, then in Europe and, in particular, Italy, it it Italy, particular, in and, in Europe then es, 7% added, “Itis very difficult to do in business 2 2 2 (est.) ed by Value Retail indicated that the the that indicated Retail ed byValue 29,000,000 m 1,5,0 ft 312,156,000 Former USSR 1% 2 2 85700ft 78,577,000 7,300,000 m 0.3% Africa 2 2 803-008 € 3.1 9

This document is authorized to be used only in the Commercial Real Estate Asset Management course by John Khajadourian at Real Property Association of Canada on 08/17/2012. Use outside these parameters is a copyright violation represented in project. that scale, small a sitetocreate that and Florence between itsfactories near itself for that which Scottwas contemplating for Fidenza. Gucci had also just opened asuccessful outlet store the to spine maincatchment highway areabuton the church (44%)at nearly four times the rate of Europeans (11.5%). that thefact despite family and tochurch solely strength of tradeunions the and Church. Thethat the ChurchSundays emphasized were devoted was and bycountry varied this although prohibited Sunday mornings and shopping in the afternoons. In Europe, Sunday hours were virtually America, there was awell established tradition reaching back to the 1890’s of going to church on restrictions, dating back again to the Middle Ages, against shopping on Sundays. In much of leases, buthowRetail could expecttenants Value to and sales transaction on data any, if limited, there was only Not information. little so culture with sales. of 14% than more not typically are costs occupancy total some still was which sales, of 17% than not more keep thehadbrands. to Scottfelthe Furthermore, famous most world’s the of some for to home close too be might in Italy opening time, over brands wantWhile to come? Scott was convinced that there would agrowing be internationalization of customers no were ifthere come shopping center hecountries where had alreadybeen For developing in example,pondered, Europe. Scott the would recently opened a 19.3 thousand m thousand 19.3 a opened recently accepted black market tradition?” Scott asked. their percentage rent “How payments? our does model acountrywith in work an and extensive 10 11 Leasing 803-008 negative no was there as long as consent, landlord’s the without profits, keepany and sublet usually could Tenants space. another to out moved tenant old the if costs relocation for rent termination actu was thelandlord instances, few Ina pay. the rentexceededthe market rate. grossly allowed to break the lease as aresult of “gravi motivi”(serious motives) at any point if, for example, landlord took the or propertyown government for the use. its Undersame law, the atenant was the unless evict to impossible virtually were and torenew options one-way had usually tenants inEngland contrast, By (RPI). inflation Italy, leases were for 6years with a6-year renewal and an annual bump of 75%of the increase in few pages based on state local and civil codes as opposed to atypical U.S.lease of over 100pages. In “Thou Shalt Not Shop” in Leases were different in Italy and Europe than in than Europe and inItaly weredifferent Leases In addition to alack of transparency in European real estate, there were strong and complex legal Even if one could attract the brands, Scott questioned whether Value Retail could function in a function in Retail brands,whether could Even attractthe questioned Value ifonecould Scott other the from different quite was Italy that confirmed and Scott for concerns major all were These There had been some limited precedents.had Theresome Anglo-American developer, Glen, had limited beenAn McArthur Tenants also had rights of preemption to match the rent, which a new tenant could be willing to willing be could tenant new a which rent, the match to preemption of rights had also Tenants than obligations and rights different had also Tenants The Harvard Design School Guide op. cit. cit. op. Guide School Design Harvard The multi-store center. Dolce & Gabbana had confirmed its intention to be be to itsintention confirmed had Gabbana & Dolce center. multi-store

2 outlet center in Seravalle near Genoa, in a much smaller initial lease terms were typically 25 years. years. 25 termsweretypically lease initial recent surveys showed Americans regularly attended attended regularly Americans recent surveys showed Arezzo and had recently announced an expansion at ally obligated to pay the old tenant 18 months of of months 18 tenant old the topay obligated ally what high to compared States,what the where United total occupancy costs (rental rate plus all costs) to to costs) plusall rate (rental costs occupancy total tradition in Italy? Would the brands themselves themselves brands the Would Italy? in tradition the United State. Leases were typically only a a only weretypically Leases State. theUnited changing in some. This reflected two factors: the the factors: two reflected This some. in changing report accuratelytheir p.729. p.729. coast, just with arental formula rate similar to in the in United States. For example, in Italy, 11

sales in order to make tomake inorder sales Value Retail Retail Value

This document is authorized to be used only in the Commercial Real Estate Asset Management course by John Khajadourian at Real Property Association of Canada on 08/17/2012. Use outside these parameters is a copyright violation steps in Rome sold for for sold Rome in steps recent a Forexample, rents. lower for in exchange huge. potentially Italy, in but low, traditionally was keymoney the England, In lease. existing already an into buying of value the right to ancientmonuments Egyptian a19 and operas (the Fidenza areawas Verdi’s home) and incorporating elements of amedieval fortress town, United States. The first stage would consistof 50units in approximately 10thousandm usable with 2,116parking spaces, which was considerably more parking than is the standard in the buildingRodeoTheDrive. 2concept called aphased for developmentof 120units in 18,503m Scott togethersince and thein Brian U.S.,whenbeen had days Brian worked their responsible had for The Financing The Design wherele countries in costs, especially instance many in Finally, property. the on impact Retail Value favorite material would be used in England and not in France?” France?” in not and inEngland beused would material favorite hard way, one usesend, suffered buthaving risky. along design way”saidScott. was but the The exciting steelthein culture England and facingBurbank, California. (See Exhibit 5)“Europe is real difficulties. but design the conceptsfrom borrowed and filmmaking Look concrete at EuroDisney of history area’s the from inspiration found also Brian region. the throughout known well or Canary Wharf, in both France. successful in the Who wouldhave thought Eiffel’s balance of approximately m 8500 could differ by country. There were noU.S.style There could differby country. Rent was also typically paidquarterly in advanceopposed (as to monthly inU.S.),but the again, this and were amortization for the free first 2to 3years, followed by twenty-year amortization period. fixed with aswap if providedby abank. Loans usually were for 70-80%of the value of the project guarantees fromor developer. owner the permanent byleases secured financing or other assets from the acompany balance of sheet or by Instead, expertise. lending construction have not littl was There plant.” power a for project financing type ofdevelopment. ventur to akin more standards, by American returns at 7.5%interest withno amortization 5years. for years. three in occupancy stabilized upon million service,and debt before any operations from Oftenmore important than the annual leases themselves was the so called “key money,” orthe Brian came up with an unusual idea for a design inspired by the stage sets of Guiseppe Verdi’s Verdi’s Guiseppe of sets stage bythe inspired design fora idea unusual an upwith came Brian The complete development costs were expected to run were expectedto run costs The development complete Garriso Brian Director Development Retail’s Value The architect also called for using local building materials wherever possible. “We learned the “We learned the materials possible. wherever building local using for called also The architect Rates were typically fixed if the loan was provided was theloan if fixed weretypically Rates to was moreakin “Development financing America. North in than Italy was in different also Debt € 12 million while the annual rent was only only was rent theannual while million 12 2 usable built by year 3. 3. builtbyyear usable ase terms were more than ten years. years. thanten weremore terms ase th century Italian palazzo, thelatter architectural in an style after a5%vacancy allowance andall costs, of Sometimes owners or developers traded key money money key traded developers or owners Sometimes Value Retail expected to obtain a loan of of loan a obtain to expected Retail Value a developer got one loan for both construction and and construction forboth loan one developergot a replete withmisreadingreplete North Americans talented key moneytransaction on alease near the Spanish While the project was projected to generate high high togenerate projected was the project While depreciation in Europe; although Italy did have have did Italy although in Europe; depreciation s, tenants were s, tenants responsibl e concept of construction financing. Bankers did did Bankers financing. of construction concept e by an insurance company or floatingoften and this in higher risks werethe too, so, capital, e of Paramount Studio’s production facilities in in facilities production Studio’s Paramount of n createdthen vision Fidenza project. for the € 56.2 million (see Exhibit 6) with cash flow flow withcash 6) Exhibit (see million 56.2 € 150,000. e for structural repair repair structural e for €39 2 with the million million € 803-008 7.747 11 2

This document is authorized to be used only in the Commercial Real Estate Asset Management course by John Khajadourian at Real Property Association of Canada on 08/17/2012. Use outside these parameters is a copyright violation rent of of rent above theabove base percentage rent.or 12 12 projec theFidenza into investors his bringing preferred return, and repayment of the debt,leaving of costs operating total Of expected to achieve 50% of the cash flowfrom operat the United States, he could not expectpreleasingbefore the development commenced, buthe 95% occupancy. expenses, realestatemarketing taxes, main including of occupancy costs per m the brands onboard. to Similar his abase other rent projects, structure of the consist of would ex reasonably theycould felt Retail Value prospects, comparables and the product was unique. But in as there were in the U.S. incentives encouragedevelopment areas to in ofunemployment. Sowere high no there taxbenefits 803-008 3? year in stabilization change to the deal was Whatwould fair? thenu some he new proposalhe putforward? How persuadelongstanding could his that investors a there costs? example,compensate. he, Was charge for Could his direct adevelopment feebeyond year lows, if he could strike abetter deal with his partners. He alsoan had organization to risk andwas thereafter, risk transferred the equity toinvestors. the thefront-end all bore Retail ThusValue cost). at Retail Value from bebought now would progress investor bringinthe to looking permits before projec the until waited pre-development. Hehad flow after debt service, and 50% of the residuals af then sell of to uponachievement cash stabilized flow operations. from pres was atremendous there of borrowing, the cost versustheUnited 10%to 11%in States. Because a best properties in the United States. Scottthat felthe could sell Fidenza at a6.5%to 7.0%caprate significant retail propertiesin Germanyhad even soldat caprates of 4.5%,versus 7.0%to 7.5%for the capitali muchlower at trading properties often such limited supply, any commitments signed construction before securing the heand inFidenza, store another add eventually values of some while that knew Scott were variable. of European real

As in Bicester, if, for example, a brand had sales of Scott was notsure his whether rental beachieved rates because could there were so few Since there was no anchor tenant for the project as in ashopping mall or grocer anchored center in

Scott wondered,nowValue Retail was that es more cumulative 10% a investors his gave Scott Typically, One of advantagesof the Europe versus the United € 2 plus operating expenses offset by12.5%of sales 450/ m 450/ 2 , would obviate the need to pay the base. The tenant would still pay its share of the operating costs over and and over costs operating ofthe share its pay still would tenant The base. pay the to need the obviate , would €626 perm

€ 3.1 million at 95% occupancy, occupancy, 95% millionat 3.1 2 , of which , of

€176 € 5,000/ m 5,000/ t, Scott and his team had spent 5 years and and years 5 spent had histeam and t, Scott perm his brands from other Value Retail villages might might Retail villages other his brands from Value s that would buy out Value Retail (the work in in work (the Retail outValue buy would s that 2 ssets could generally be sold at yields at or below below or at yields at sold be generally could ssets ter return of the investor zation rates than in the United States. Some Some States. United inthe than rates zation , it would pay pay would , it t contractors obtained all the necessary zoning zoning necessary the all obtained contractors t 2 estate had historically stayed high, with retail retail with high, stayed historically had estate pect to get the rents if they could get enough of enough could get they if rents get the to pect were for service charges and all operating costs costs operating all and charges were forservice tenance, repairs and utilities based on stabilized onstabilized based utilities and repairs tenance, sure to build with lower interest coverage and coverage and interest lower with build to sure his colleagues probably would have to start start to have would probably colleagues his ions from lease-up in year 1and 75%in year 2. the balance to Scott and his colleague. Prior to Prior colleague. his and toScott the balance discussing the proposed terms with tenant tenant with terms proposed the discussing mbers look like if he sold the project upon upon theproject sold he if like mbers look tablished and interest rates had fallen to forty toforty fallen had rates interest and tablished States was thatwith so few transactions and

12 preferred return, plus50%of thepreferred excesscash . For projection purposes he assumed total he assumed total . For projection purposes € 1.3 million were fixed and and werefixed million 1.3 € 625/ m 625/ 2 in rent, which higher than the base s’ equity, payment ofthe payment s’ equity, € € 5 million in in 5 million 1.8 million million 1.8 Value Retail Retail Value € 450

This document is authorized to be used only in the Commercial Real Estate Asset Management course by John Khajadourian at Real Property Association of Canada on 08/17/2012. Use outside these parameters is a copyright violation “Go tohell.” mean did really they maybe mused, Scott Week, Fashion during in Milan toast that to back Thinking his partners. to towhat propose out numbers and figure the to crunch his to sleeves rolled up fair? year of theend at sale a assuming what, get would parties, the toall sense made which investors, payments? rental their inmaking be honorable would histenants ensure to do he could What risks? his tomitigate do he could What different? and otherkind less?What were30% sales if be his investors to his returns would What service? debt after even break to required was occupancy achieve to hejustify paytheorder neededtheWhat that rents toreturns? ininvestment and risk. much too present might Italy that concerned was Conclusion Retail Value Scott was glad he was back in London, where he lived with his wife and four daughters, as he he as four daughters, and withhiswife lived he where inLondon, back was he glad was Scott sonew was product the and limited was information where markets workin thumb of rules Did tenants his must occupancy of level What work. would numbers the if see to needed he Second, As he pondered his latest development opportunity, Scott listed his primary concerns. First, he he First, concerns. primary his listed Scott opportunity, development latest his pondered he As s of sensitivity analyses might he do? hedo? might analyses sensitivity s of including himself and his growing company. Who Who company. growing his and himself including 3 upon projected stabilized occupancy? What was was What occupancy? stabilized projected upon 3 Finally, Scott had to develop a proposal for his for proposal a todevelop had Scott Finally, 803-008 13

Value Retail Retail Value

803-008 15

This document is authorized to be used only in the Commercial Real Estate Asset Management course by John Khajadourian at Real Property Association of Canada on 08/17/2012. Use outside these parameters is a copyright violation 16 Retail Value Source: Exhibit 3 803-008 Fidenza Village: The Location The Village: Fidenza

Value Retail Retail Value

G.L.A. (Sq.m.) per 1,000 Inhabitants 100 200 300 400 500 600 0

Norway Europe in Density Center Shopping

Luxembourg

U.K.

Austria

Denmark

Finland

Portugal

ITALY

Hungary

Poland 803-008 Turkey 17

This document is authorized to be used only in the Commercial Real Estate Asset Management course by John Khajadourian at Real Property Association of Canada on 08/17/2012. Use outside these parameters is a copyright violation 18 Exhibit 5 803-008 Source: Value Retail Retail Value Source: Fidenza: the Design theDesign Fidenza: Value Retail Retail Value

This document is authorized to be used only in the Commercial Real Estate Asset Management course by John Khajadourian at Real Property Association of Canada on 08/17/2012. Use outside these parameters is a copyright violation Retail Value Source: Exhibit 5 Retail Value (cont.) Fidenza: the Design theDesign Fidenza: (cont.) 803-008 19

This document is authorized to be used only in the Commercial Real Estate Asset Management course by John Khajadourian at Real Property Association of Canada on 08/17/2012. Use outside these parameters is a copyright violation aeRn 401,0) 8,326,000 Expense Reimbursemen Base Rent (450*18,503) 2,116 Service Debt Before Operations from Flow Cash 22.24 18,503 ( Total Cost ( Cost Construction ( Rent Gross Car Parking Spaces: Units 120 Usable Area(sq.meters) Build Area(sq. Site Area (acres) New Type Build 579,000 11,583,000 7,747,000 Cash from flow Operations Vacancy (5%) Gross Rent 20 13 Value Retail Exhibit 6 803-008 prtn xess 3,257,000 11,004,000 Operating Expenses EffectiveIncome Gross Figures disguised Figuresdisguised Fidenza International Outlets

€ € /usable sq. meter) meter) sq. /usable /year) Fidenza: The Development Budget mtr) 19,375 meters) € / usable sq. meter) 161,0) 3,257,000 t (176*18,503)

3,038 1,275 626

(

€ ) 13

Value Retail Retail Value

This document is authorized to be used only in the Commercial Real Estate Asset Management course by John Khajadourian at Real Property Association of Canada on 08/17/2012. Use outside these parameters is a copyright violation Exhibit 6 Permits & Miscellaneous Finance Fees Marketing Costs Professional Fees Construction

pria es 61,077 6,037,136 1,116,960 811,648 1,308,783 5,990,923 2,408,788 1,517,063 2,826,196 6,960,302 174,515 1,047,090 TOTAL COST 755,939 Fees Appraisal Contingency Local Administration Planning/Impact Legal&Professional Fees Miscellaneous Overheads Studies on Interest debt financing Pro-Development Bank Fees1 Legal/Notary/Registration auto e 8,765 277,483 184,986 21,836 1,222,765 7,260,000 231,223 Valuation Fee Agent's Fee Expended Predevelopment Costs Miscellaneous Legal:Acquisition&Planning Stamp/Registration/Notarial Land Fees Cost EEOMN EUNO OT 13.8 COSTS ON RETURN DEVELOPMENT etrOeigPooin 305,539 1,364,832 1,460,722 812,579 305,548 154,607 436,516 349,218 1,819,643 454,923 981,685 484,664 3,248,688 Center Opening Promotion Brochure Advertising &Promotion Contingency 336,547 Brand 1,309,548 19,044,971 DirectMarketing Costs 118,262 Agents' Fees Marketing Incentives Legal Consultant Professional Fees Fees Quantity Surveyors Contingency Architects &Engineers Project Design Management Consultant Contingency Contract External Retail Value Source: Value Retail Retail Value Source: (cont.) Fidenza: The Development ( Budget Site Acquisition

€ ) 56,212,524 23,603,207 11,195,973

2,424,983 803-008

Residual Limited to Partners @ 50% Partners toLimited Split Available Funds Less of Return Equity Debt Less Cost Transaction 5% Less Value Residual a ae % Value Residual Cap Rate CFO Stabilized Cash-on-cash Partners Equity Cash Flow Service Debt Operations from Flow Cash Stabilized Proforma Returns and Cash Flow Statement Statement Flow Cash and Returns Proforma Proforma Returns Pre-Split(000s) Residual Calculation 14

Residual Calculation

Value Retail Retail Value

Year 1 cashflow falls to short cover The preference. balance preferenceof is carried forward on a cumulative basis er0Ya er2Year 3 Year 2 Year 1 Year 0 Cash Flow Limited to Partners @ 50% Partners toLimited Split Less Equity Preference** Financing After Flow Cash Only Interest Financing: Less Financing Before Flow Cash Available for Distribution Preference CarryForward oa oLmtdPrnr Year 3 Year 2 Year 1 Year 0 IRR Partners toLimited Total Partners toLimited Split Residual Cash Flow (Preferred+ Split) Investment Original (cont) Proforma Returns and Cash Flow Statement Statement Flow Cash and Returns Proforma (cont) 15

Partners Projected Returns Pretax Partners ProjectedReturns Projected Cash Flow to Partners Partners to Flow Cash Projected 803-008 23