Document DD3JYrK4Q09o1GppxRmoM6re4

Mid-Atlantic Region USX Tower, 47th Floor 600 Grant Street Pittsburgh, Pennsylvania 152' 412 471-9500 Fax 412 471-0995 June 2, 1994 Mr. Paul H. Kaut, Jr. Aluminum Company of America 1501 Alcoa Building Pittsburgh, PA 15219 RE: Alcoa Building Disposition Dear Paul: Enclosed is a draft of the report on the marketing of the Alcoa Building. Please give us your comments and we will prepare final copies for distribution. As we discussed, a meeting to review our assumptions and analysis will probably be necessary for everyone to fully understand our recommendations. We look forward to your comments. Sincerely, slm Enclosure cc G. Anderson G. Dudley ^---------- . Daniel H. Sliger c60763 0209 1 Executive Summary As agent on behalf of Alcoa, The Galbreath Company has had numerous meetings with Paul Kaut, Galen Anderson, Don Burrell and Tom Meshanko, to discuss a variety of scenarios relative to leasing the Alcoa Building. These meetings have included assessments of the competitive office leasing market, reviews of basic modern tenant requirements and the relative marketing "position" of the Alcoa Building with respect to these issues. It is our belief that a.successful leasing program will require a landlord cost of approximately S30 jper square foot to renovate the space for tenants plus the cost of.demolition and "new HVAC systems? Our estimates for demo and HVAC modifications are..$i0'pier^'s^iiare foot_,and would occur in two phases. v' The first phase would occur at the outset ofsourTeasing program "to'demo and retrofit the HVAC system on floors 2 thru 8 at aniestimated cost of 5875,000. The second phase would occur when Alcoa vacates the ibuilding and floors 9 thru 31 would be cleared out and retrofitted. The estimated cost of the second phase would be approximately S2,875,000. Realizing the capital required to finance tenant construction will have roughly a four year payoff, the question was raised whether or not it is prudent to pursue an aggressive leasing program. This report will describCtfrom a practical and financial standpoint, the risks and rewards of leasing the`Building compared to a sale now without new leases. A jkey?ingredient to our report is how to deal with the environmental issues described in'the ICF Kaiser Phase 1 Environmental Report. Assumptions - xJpiS-'" It is our .understanthrig-thauAlcpa desires to relocate to the North Side site as soon as is conveniently pdssiblej@d to sell the Alcoa Building to a responsible and capable investor .or user^Because a buyer was not found last year, it was then decided to lease the excess^space in the building. In keeping \\'ith.|he|nstitutional quality of the building, The Galbreath Company recommended j leasing program to position the property with other Class A buildings. In particular, the former Porter Building represents a good example of how the building should be presented to the market. Fortunately, the Alcoa Building is riot in need of the extensive remediation and renovations necessary at the Porter Building. After analyzing the cost to lease the property and determining the payoff of the capital required to be at least four years, some question was raised to the 1- - C60763 0210 practicality of the expenditures when there is a probability that Alcoa will not be an occupant or owner at that time. Lease Vs. Sale Evaluation A. Lease Scenarios As we consider options relating to leasing the buildmglfspace can either be leased "As Is" or can be renovated an,d|leased asT01asjAspace with the corresponding rent differential. "As Is" space typically rents for S12 toffiS^pensquare foot ful_l se_ryicewhich is about equal to the current operatingPXpens|s and real estat^tlxes for the building. These transactions normallylaftractTenants desiring shorter lease terms (i.e. one to three years) and appeal^tST^na^s, with poor credit looking for a bargain. The other problem isijfindin|3||gfight piece to the puzzle. Since the space will be used without extensSgf^t^lations, it makes the search for a tenant who can useQft||bdsting cS^^rftion more difficult. In our opinion, leasing "As Is"tspSceyviU|^ver the overall quality' perception of the building and resuhln^decr@se^gactwgfess of the building to an investor. Qualified buyers for the pi^l^|ypfbe those with a long term investment perspective. Suchli buyeffwilT want to increase value and stimulate maximum-rents through a renpvation program. Existing tenants in first generation space would only he in the way and would contribute negatively to valuef - ^ifciNewly renoMted^Class A space^r^ building of this age will rent for S20 per square fooTfull service. As described earlier, tenant improvements, design ^~fees;;and commissions will cost approximately S30 per square foot. ^Estimated cost for demolition and HVAC upgrades is $10 per square foot. Otho'iCapital expendifures will be necessary to upgrade the main lobby, add ^"handicapped restrooms to meet ADA mandates and to remediate any J0?' hazarddU;mSterials which may exist in the building. //} t From a fihancial standpoint, leasing renovated space will require tenants to sign on p at least ten-year terms to justify the expenditure of roughly $40 per square foot. If operating expenses and real estate taxes can be lowered to $ lOlper square foot, and if tenant costs are amortized at 9% over a fiveyeatr.lease term, the owner will have an annual negative cash flow of $3,500 peF floor. Insisting on ten-year terms will limit our prospects. Ten-year terms under the same rates and costs will result in an annual return of $47,089 per floor. a/< C60763 0211 To help evaluate a probable lease-up period with costs and rental income over a ten-year period, we have attached our Acquisition Analysis with leasing assumptions for your review. As you can see, we have assumed .Alcoa will remain in the building for three years during which time we lease the excess space. Years one and four of the evaluation have a significant shortfall due to the nvo phases of base building work required.;; After Alcoa leaves, it then takes another three years of aggressive .leasing to" stabilize the property. In all, capital required to renovate and,,lease-the building will amount to almost S14 million excluding^lobbv rehTovations, ADA work or With regard to remediation, it is our belief that space should^be gu|ted~`ind rebuilt to Class A standards with significant upgrades to the|HVASystem. This will probably necessitate the removal df anv asbestos, located above thq ceiling. The cost of remediation is a lahtildidjgapital expense and cannot be charged to tenants. Remediation costs'will t>e in addition to the tenant construction and base building '.vork: previdusly.described. From a pay-back perspective, commencing a leasuigip'rogram now in order to increase the value of the^uildinj||it-will take tintil 2001 to command a price that warrants the capital required"Ao reposition the Alcoa Building. Even then, net sale ^proceeds less capital expenditures will leave approximately S17 million. The'net gaitvof ;17 million will be reduced by the cost of remediation. Sale Scenarios The enclosed Acquisition Analysis'reflects our assumptions and opinion on ^the existirig.market^value of the property from an investment standpoint. I VVe feel a price of 58joJ9 million is appropriate and attainable based on the WnceTfainty of alease-up period and the capital required to reposition the property. - Any remediation costs will reduce value. Aside from premium ^dcatidn^anplher positive characteristic of the property to an astute, qualified buyer is the potential for phasing renovations during .Alcoa's lease back of space in the short term. This allows a running start on new leasing and the possibility of a nominal, but positive investment return in the early years. JT The Variables of price and lease-back term and rent obviously correlate directly. Our analysis assumes an Alcoa lease-back of 290,000 square feet for three years at S5.00 per square foot net. An all cash buyer, willing to close quickly at a price lower than the $8 to $9 million range and with a lower lease-back rent to Alcoa may be worthy of consideration. --3-- C60763 0212 I The institutional capital markets are definitely returning to commercial real estate investment. The Pittsburgh market enjoys one of the most stable office occupancy trends in the country and is an appealing market for most national, and some international, institutional investors. IV. Timing/Value In comparing the value of the building at the point,of staWlization of cash flow in 2001 to what may be considered fair markjfrvalue today!-"the-.proceeds are remarkably similar. If the building nets SI/^Bullion in ZOOi^ajidisjdiscountecfSt 9%, it is worth S9.3 million today. If the property nets $ 14 millforr:inT200ifit is equal to S 7.65 million now. plm. V. Conclusions A lease-up program is a labor intensiveeffort-for both'The.agent and the in-house real estate team. As we have suggetiejyg?peripd of sevefnyears will be needed to stabilize the building. It is our a^umptipn^^^Icoaj^fil relocate prior to 2001, leaving an asset of no long-term.value to the company.^On the contrary, a sale price of S7 to S9 million in the near,fixture will?resulftnXOirhi1ar benefit to the company when a net present value is iised to compare tjpTroceeds to a sale in 2001. VI. Recommendations il^^ff^elief that]^;.immediate:ale'is the best alternative when compared to a leaMng pfogram. Alcoa should list the building with The Galbreath Company at an askingprice of S10 million and-;be willing to remediate the building or credit to the buyer anragreed upon' amount to cover the costs of remediation. Alcoa should leas^pa'ckiloors 9,,thru 31 for three years at a triple net rate rent of approximately Sjglper squareif<ap^Jhe sales and marketing pr sively target .qualified buyer prospects through The Galbreatl md national - /databases. --4-- C60763 0213