Three Sales Completed by Falcon During First Half of 2004

As part of the continuing review of all of the properties for which it provides asset management, Falcon Real Estate always considers whether or not a property should continue to be held. During the first six months of 2004 Falcon recommended to its clients that three properties be sold and all of these sales closed during this period. There were various reasons for recommending sale, as outlined below:

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The first property sold was the Woodinville Shopping Center in suburban Seattle, Washington. This property had been purchased by Falcon in February 1996 on behalf of a group of U.S. and overseas investors. The property was purchased from a real estate fund that was in liquidation at a total price of $10.1 million. A $9 million mortgage from Allstate Insurance Company was in place at the time of purchase and this mortgage was assumed by the purchasing group.

Falcon immediately instituted a program to upgrade the center and also began a more aggressive leasing effort. Previous ownership had been unwilling to invest in the center either for physical improvements or for new leasing. With new management in place, occupancy quickly rose to the 95% area and Falcon was also able to replace the anchor tenant with a new, higher quality food chain. As a result, a new $12.8 million mortgage was secured in 1999, completely repaying the original equity investment and providing a significant capital gain to the investing group.
Over the next five years the net income from the Center continued to improve but by 2004 Falcon’s analysis of the local retail market caused us to recommend to ownership that the Center be sold. When that recommendation was approved, we then interviewed a number of the premier retail brokers in the Seattle metropolitan area and selected one of these firms to actively market the property. As a result, several purchase offers were received and the property was sold at a price of $18.5 million. The internal rate of return was extraordinarily high in this case, with capital appreciation alone averaging over 40% per year. Because of the very large capital gains taxes that might have been incurred, the investors elected to reinvest the sale proceeds under the provisions of Section 1031 of the U.S. income tax code. Since the proceeds are being reinvested in another property, no capital gains taxes will be incurred at this time.

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The second property sold was a multi-tenant office building in suburban Chicago, Corporate West I in Lisle, Illinois. Falcon had taken over the management of this property in 1993 and had carried out an extensive renovation and re-tenanting of the property. It had originally been a single tenant property and Falcon had converted the building to multi-tenant use. Occupancy was brought up to the low 90’s and Falcon was able to re-finance the property in 1998 permitting the owner to receive approximately $750,000 as a return of capital. However, with the recent recession in the United States and the over-building in the Chicago office market, rental rates fell and vacancy rates rose, severely impacting this property. Our analysis indicated that in this case it would not be prudent to ask the owner to make additional investments in the property and we concluded that sale would be a better option. As a result, Falcon again interviewed local real estate brokerage firms – in this case those specializing in office properties – and gave the sale assignment to one of them. The property was subsequently sold at a price of approximately $4 million providing the owner with a small gain as compared to the original purchase price.

Finally, Falcon sold a large parcel of land in Los Angeles County, California. Again, Falcon had not recommended the purchase of this property but had taken over management on behalf of a client. This was a very well located piece of land, but there were a great many problems of an environmental nature that had to be solved before consideration could be given to its development or sale. It took a considerable period of time to solve the environmental problems, and it then became necessary to deal with zoning issues. California has among the most stringent zoning laws in the country and this situation was complicated by overlapping and competing regulatory jurisdictions. It was clear that the necessary approvals to develop the land could only be obtained by a local developer with appropriate political connections. Therefore, over a period of time, Falcon worked with several groups to try to obtain the maximum zoning to enhance the value of the property. After a very long process, this was ultimately accomplished and the property was finally sold. While a sale price was realized that was approximately 40% higher than the original purchase price, no income was earned during the holding period. There were, however, significant expenses – taxes, insurance and legal expense – that had to be covered during this period requiring significant capital contributions from ownership. The problems involved in this situation illustrate the reason that Falcon never recommends the purchase of raw land to our clients.


July 2004