The Effect of Crime on Commercial Property Market Value and Appraisals – Part 2 of 5
So I got all the generalities out of the way in Part 1… now it’s time to start getting real.
The Stigma of Crime on a Regional Mall
I was called on to appraise an older regional mall for a sale in the Midwest. No, I had no idea what a hornet’s nest I was walking into. Maybe that’s why they turned to me. Or maybe I was wearing my “kick me” shirt that day.
So I get out there to take a look at the mall before my scheduled inspection the following day. I like to do that when I have the time – just to get a feel for what’s going on. It helps that I have to eat and they have a food court too:) The mall was tired and could use a face lift, but otherwise it was like all those other older malls you know. What struck me as strange was the high vacancy rate and huge number of temporary tenants. Something was going on here so I pulled out my silly Sherlock Holmes hat and proceeded to investigate.
That night I went out to dinner and during my meal, I asked the waitress what she thought about “the mall”. I love to get the story from locals whenever I can but I wasn’t prepared for what I heard. In a nutshell, she said that everyone stayed away from it because of the crime. It seems that no one wanted to mention that to me before I got out there. Wonderful.
The next day I walk into the manager’s office and you could bet I was going to steer the conversation to this topic. A friendly sort, he told me about the problems they’d had and what they tried to do about it. It seemed that everything they tried didn’t work. More advertising and other promotional efforts were for naught. They even brought in a police substation. Having seen the place, I focused in on going through the boxes of rentals and picking out clues to this mystery – at least from the standpoint of how tenancy, rental rates and concessions changed over a five year period.
Two full days later I emerged from reading all the leases, the renewals, the lease modifications and all the documentation buried in a stack of boxes. I put the data on my handy-dandy rent synopsis form and came away with photocopies of rent rolls, income and expense statements and other stuff.
So here’s how income had changed at the mall as the result of the lingering effects of crime.
The Local Library is Worth Gold!
The next stop was the local library. With the thanks of the local librarian, I walked away with lots of newspaper photocopies that painted a stark picture. I had lots of material for quotes throughout the report. As part of my analysis, I also used demographics… but not in the way that you might think. Here is the result.
Here is a synopsis with identifying names removed to maintain confidentiality:
The mall suffers from stigma as the result of its crime press and the crime press in the area. This has occurred over an extended period of time, over a decade. This is more than enough time for the problem to have been exposed to potential customers.
As is obvious from the current crime listings above, crime within one mile of the subject is 48% greater than the national average, double that of the [Primary Mall] and almost triple that of [Secondary Mall]. Motor vehicle thefts are almost four times that of [Primary Mall] and almost five times that of [Secondary Mall] (e.g., the M.V. Theft or motor vehicle theft category above). This is important because the crime rate has been one factor that has deterred potential customers from coming to the mall, effectively reducing the subject’s draw and customer attraction radius. Automobile theft, as well as other crimes, is reported in local papers and television. Potential customers become aware of areas that have crime problems and do not patronize them, especially when an area has a history of vehicular theft. As was evident by our historical [Major Local Newspaper] search of crime related articles about the subject, the press seems to publish just about every one of these problems in the newspaper, creating and reinforcing the perception that crime is a big problem at the mall.
Try As They Might…
The crime problem just didn’t occur… it occurred over a period exceeding ten years. As a result, everyone knew about it (except yours truly… I’m such a tourist!). As part of my investigation, I looked into the prior ownership and their efforts. Here are the results.
If several owners and managers have not been able to overcome the crime stigma, we are not optimistic that new ownership and management will be able to solve the problem. Although it certainly is possible, we do not believe it would be prudent to make such assumptions given the inability of prior owners/managers to overcome the stigma and the attempts of large national marketing companies like [Household Commercial Brokerage Firm Name] that have tried.
All of this resulted in two major problems that caused incomes to slowly whittle away.
- Six major anchors were lost, greatly curbing net income
- Refinancing occurred a few times; this increased debt service while net operating income was in decline. Without much income, mall ownership could never afford to renovate the mall, so it just got more and more tired. This further accelerated the loss of national tenants.
There were lots of other things I did in my research, but they’re too numerous and detailed for a blog post. Maybe someday I’ll put it on our website as a case study. What’s important from the above is I used publicly available information to draw the same conclusions that a “well informed and advised” market participant would know, as stated in the definition of market value. There was no way around it in the income and expense declines and any income approach conclusion I made.
So how did I handle the valuation? I’m afraid you’ll need to read Part 3 to find out.
John Simpson, MAI
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[...] I could have looked in the newspaper like I did the prior regional mall example but I doubted that would give me anything specific. The place to go to get information was the [...]