$10 million in corporate welfare could yield $25 million plus for developer

The controversial Highlands development in Bristol is up for sale, or at least 30 acres of it, about a year after it was completed in 2007. Originally mired in costly lawsuits over annexation between Bristol, Virginia and Washington County ($2 million), the scene (before relocated to its present location)of a mass eviction of poor people, and given $10 million in corporate welfare by Washington County, may net the developer $25.2 million. The citizens of Bristol, Virginia and Washington County got screwed in the process. (Let me note the developer did nothing improper, it was our corrupt public officials behind this whole sorry saga.) One Washington County supervisor asked just what these jobs (an absurd claim of 2000) was supposed to pay in this development. We never got an answer. This strip mall includes stores such as Bed Bath & Beyond, Best Buy, Books-A-Million, Pet Smart, Ross and T.J. Maxx. (The Target store isn't included in the sale.) A nearly identical strip mall in Sullivan County, Tennessee (about 25 miles away) received only spent $2.5 million in corporate welfare. I hope somebody buys a lot of cats at Pet Smart because the Washington County taxpayers really got "skinned" in this deal.

Background

Property Use Type:	Investment
Type:	Shopping Center
Power Center
GLA:	165,345 SF
Lot Size:	29.80 Acres
Occupancy:	100.00%
Price:	$25,211,000
Price/SF:	$152.48
Cap Rate:	7.00%
Year Built:	2007
Net Lease Investment:	Yes
Years left on Lease:	10+
Date Last Verified:	6/19/2008
Net Operating Income:	$1,764,770

Property Description:

This retail center offers an exciting opportunity to acquire an attractive power center investment shadow-anchored by Target. The property features long-term leases to national, credit tenants such as Best Buy, Bed Bath & Beyond, T.J. Maxx, Ross and PetSmart, providing the benefits of tenant diversification, while requiring minimal management. Furthermore, the property lies adjacent to an interstate highway in a prominent retail corridor, with such neighbors as The Home Depot, Wal-Mart, Sam's Club, Lowe's, Tractor Supply Co. and Office Depot. With this asset, an investor will capitalize on both real estate appreciation and scheduled increases in income.

Location Description:

The property is located in southwest Virginia approximately five miles northeast of central Bristol and adjacent to Interstate 81. With its wide variety of large retailers, the Bristol trade area draws from 12 counties, adding over 244,000 people to the region's population of nearly 560,000. Furthermore, residents of the three Tennessee cities within the region (Kingsport, Johnson City and Bristol), travel to Bristol, Virginia, to shop because Virginia's sales tax rate, at 5%, is nearly one-half the 9.5% charged in Tennessee.

Exit 7 off of I-81, where there is an average annual daily traffic count of 50,000, is one-half mile from the property. Adjacent to the property are The Home Depot, Dollar Tree, IHOP and Microtel. On the opposite side of Old Airport Road, where Exit 7 is, are a Wal-Mart Supercenter, Sam's Club, Office Depot, Lowe's, Tractor Supply Co., Food City, CineMark, Marriott, Holiday Inn, Blockbuster, Verizon, Ruby Tuesday, Outback Steakhouse, Red Lobster, Wendy's, Taco Bell, Chili's and O'Charley's. Cracker Barrel, Sonic and LaQuinta are on the opposite side of I-81.

From www.washcova.com:

Mr. Mark McDonald, Principal, Newton Oldacre McDonald (NOM), expressed appreciation to County Administrator Mark Reeter and staff for their time and dedication to The Highlands Project. Mr. McDonald provided background information on NOM. He explained that NOM was formed in 1992 and has about 103 years of combined experience. Since 1992, NOM has completed about 200 projects with approximately 95% of those projects being retail development. NOM currently has about a million and a half square feet under development that is similar to The Highlands Development Project. The Highlands Project was identified approximately three years ago. Because of environmental issues on the initial property for the retail shopping center, NOM identified an alternate site and scaled back the project to fit on the alternate site. The Highlands will have a look similar to the Johnson City Crossings development in Johnson City, TN. Mr. Mike McGuffin, Associate with NOM, provided the Board and IDA with a presentation The Highlands Project. Mr. McGuffin explained that The Highlands development would be constructed on 45.17 acres of property located on Lee Highway across from the former Campbell Chapel Church (Exit 7 area).

The property fronts US Highway 11 and abuts I-81 and is located entirely in Washington County. Mr. McGuffin reviewed the site plan for the development. Mr. McGuffin explained that the development would be approximately 329,769 square feet with an estimated $32 million in total investment. Mr. McGuffin further explained that NOM was very successful in getting tenants for the original Highlands Project and have been successful in convincing those tenants that the new property is a viable site for the development. He stated that the anchor tenants for the development includes one large discount department store and eight junior anchors. None of the tenants are in this market, but have stores in Johnson City and Kingsport. There will be seven out parcels suitable for retail and restaurants. The construction is scheduled to begin in August/September of this year with a projected grand opening of July/August 2007. Mr. McGuffin provided a comparison between The Highlands and Johnson City Crossings in Johnson City, TN. Both retail development complexes are similar in size. He stated that it is anticipated that The Highlands will be a catalyst for further development along Lee Highway just as Johnson City Crossings was for State of Franklin Road in Johnson City, TN.

Mr. McGuffin reviewed the Washington County Incentive Package, which is approximately $7 million and breaks down as follows: • $3 million paid by County upon 75% of the shopping center open to the public for business • $4 million to be received over a ten (10) year period of time by sales tax revenues generated by the shopping center • Developer to pay the interest on debt incurred by Washington County At this time Mr. McDonald discussed further the County’s participation in The Highlands Project. He explained that about ten years ago localities learned that shopping centers provide economic benefits, substantial sales tax revenue growth and is good neighbors. The retail development sector began to approach the localities asking for incentive packages to be funded by the sales tax revenue growth from the shopping centers. Mr. McDonald stated that the Exit 7 area has a significant retail hub, but does not have unusual retailers. The Highlands offers the opportunity to provide a unique shopping center experience, as well as an opportunity to provide an engine for economic growth in Washington County. Mr. McGuffin provided further justification for the financial incentive package. He explained that a revised economic package was offered to the anchor stores because The Highlands was competing with developers within the City of Bristol, Virginia for the same tenants.

The anchor tenants requested that their rent be modified because the new development project was smaller in size compared to the original development proposal. Construction costs have increased since the time estimates were put together for the original development proposal and the increasing interest rate environment also contributes to the need for a financial incentive package. Mr. McGuffin reviewed the sales tax analysis information for Washington County. He explained that the National Retailers Association tracks retail development in regions across the county. The Association provides a report on shopping centers in this region that are comparable in size to The Highlands. Based on the information in the report, it is projected that The Highlands will generate approximately $1 million plus annually in sales tax revenue for the County’s general fund, and $1 million plus annually for the County school system. Mr. McGuffin explained that The Highlands Project includes tenants with financial stability. Four of the tenants are traded on the NYSE and five of the tenants are traded on NASDAQ. Six of the nine tenants had annual sales in 2005 that exceeded $3 billion including three that exceeded $15 billion. The tenants are industry leaders with the primary anchor being the number two discount department store in the United States and two of the junior anchors are the number one and number two “off-price” retailers and another junior anchor is the number one linens and bath superstore. In conclusion Mr. McGuffin reiterated the following reasons that The Highlands Project will be good for Washington County: • Increase in Sales Tax Revenue ($1 million annually to the County’s General fund and $1 million annually to the School System) • Job Creation of 800-1000 jobs • Catalyst for future growth along Lee Highway • Capture Retail Sales in Washington County • Creates a better quality of life for citizens and for business recruitment through shopping opportunities and restaurants.

Mr. David Rose, Senior Vice Present with Davenport and Company, provided a presentation on the financial cost and benefit summary of Washington County’s financial participation package for The Highlands Project. In providing introductory remarks, Mr. David Rose explained that he worked with Washington County on the Southwest Virginia Regional Jail Authority Project and looks forward to working with the County on The Highlands Project. Mr. Rose explained that the role of Davenport & Company would be to advise the County and the IDA. Mr. Rose provided an overview of the financial cost and benefit summary for Washington County’s financial participation package. He explained that Davenport & Company in the capacity as financial advisor to Washington County has evaluated the financial participation package for The Highlands Project and determined the cash flow cost/benefit to the County and funding assumptions in order to provide NOM with the agreed upon financial participation. Mr. Rose reviewed the anticipated timing and key events for the project. He explained that it was Davenport & Company’s role to provide the County assurance that the $3 million upfront financial participation by the County after NOM reaches 75% tenant occupancy in The Highlands is a strong situation for the County. On June 27 it is anticipated that the Board of Supervisors and IDA will adopt a Joint Resolution of support that would authorize NOM to move forward with the project.

Mr. Rose explained that TRANOM has to obtain construction funding and in order to do so they must demonstrate that the $7 million financial incentive package is secure. In mid-July of 2007 if The Highlands Project has not reached 75% operational occupancy then the County does not have to be concerned with providing the $3 million to NOM at that time. Within 90 days if The Highlands has reached the 75% operational occupancy the County would then provide the $3 million upfront financial participation via the IDA. The County would expect copies of executed tenant lease/sales agreements and projected operational occupancy with expected opening dates for tenants. In summary, the County and IDA will provide TRANOM a Joint Resolution outlining the financial participation package so that TRANOM can obtain and close on construction funding. The project can commence upon closing of construction funding. A formal agreement between the County, IDA and TRANOM outlining the financial participation package must be adopted. Upon commencement of construction the County expects to receive copies of executed tenant leases/sales agreements and projected operational occupancy with expected opening dates for tenants. A notice must be provided by TRANOM to the County of 75% operational occupancy in order that the County can facilitate financing of the upfront $3 million financial participation via the IDA within 90 days. Mr. Rose reviewed the following key assumptions:

$7 million financial participation package 1. $3 million provided at evidence of 75% operational occupancy of project; 2. Balance of $4 million provided within 10 years of opening based upon a 45%/55% split between TRANOM LLC and Washington County, respectively; and 3. County is credited for the interest expense and cost of issuance of providing the $3 million initial payment to TRANOM LLC. County’s Obligations to the Project 1. Guarantee $3 million of cash funding via a debt financing through the appropriate legal conduit (e.g. IDA) at 75% operational occupancy of the project. 2. The $3 million borrowing would occur with a six year repayment based on level annual debt service at an average interest rate of 4.75% over six years.

Discussion ensued at this time. Responding to an inquiry, Mr. Siegel explained that in paragraph three of the proposed Joint Resolution it should read that there would be a total $32 million investment for The Highlands Project and not $60 million. He further explained that the $60 million figure was for the original proposal for The Highlands Project. Mr. Russell Owens, IDA Chairman, requested information pertaining to average wages for the jobs that would be created. Mr. McGuffin with NOM stated that he would attempt to get the information from the tenants but could not promise that it would be reliable information.

Washington County breaks ground for new 43-acre retail shopping area

Washington County officials break ground for The Highlands, a 43-acre shopping complex under construction near Exit 7 of I-81. Washington County broke ground Sept. 18 for a new 43-acre shopping complex to be called The Highlands. Located at Exit 7 of I-81, retailers T.J. Maxx, Books-A-Million, World Market and PetSmart are among the first announced tenants who plan to open in summer 2007. A joint venture between Newton Oldacre McDonald and local entrepreneur Mack Trammel, the 325,000 square-foot center will serve the retail needs of Southwest Virginia and Northeast Tennessee. The Highlands will contain more than 295,000 square feet of retail space and Newton Oldacre McDonald is presently in discussions with a number of national retailers who find the location attractive because of its proximity to a vast underserved market. In addition to retail space, the site will also provide opportunity for freestanding restaurants and other retail on out parcels of the property.

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