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Date:  November 24, 2000                                                                                 


To:  Jim Mahaney


From:  Dana Radcliffe


Re:  Deloitte & Touche report to SIDA


The following are my comments on Deloitte & Touche's October 31 report for the Syracuse Industrial Development Agency (SIDA) regarding the proposed expansion of Carousel Center.


1.  Limited scope of the D&T study


It is important to recognize that the purpose of the Deloitte & Touche report is quite narrow.  As stated on the first page of the cover letter, the study was done to help the development agency "determine whether SIDA's financial assistance is required to support the proposed expansion."  Deloitte's conclusion is that "it appears that SIDA's assistance through issuance of tax-exempt bond financing is required for Pyramid to undertake the proposed expansion of Carousel Center up to approximately 3.6 million square feet of GLA [gross leasable area]" (Executive Summary, p. 5).  In other words, Deloitte concurs with Pyramid that the deal is not financially feasible on its own.


In the course of its work, Deloitte identified two general requirements for the success of the expansion.  First, all three phases must be built.  Second, the expanded center must become a major retail and tourist destination, having a primary trade area with a 150-mile radius and drawing a large number of visitors from beyond 150 miles.


Deloitte offers no opinion on whether it is likely that the expanded mall will be able to meet these two requirements.  Regarding the first, Deloitte says only that "it is in Pyramid's self-interest to develop all three expansion phases" (p. 54), not that it is probable that Pyramid will be able to do so.  About the second requirement, Deloitte affirms only that, given Pyramid's leasing strategy for the expansion, "Carousel Center could become the dominant retail destination center in Upstate New York" (p. 54).  In another place, it cautiously concludes that "[w]ith a unique tenant mix, Pyramid could potentially expand the trade area" (p. 31).  Again, the wording is very careful.  Deloitte does not claim that it is probable that the expanded center will become a major tourist destination, but only that with the "right" tenants it "could" happen.


In general, contrary to a description of it in the press, the report is not a feasibility study.  A feasibility study offers conclusions about the probability of a project's success, and the Deloitte & Touche study does not do that.  Rather, it points out necessary conditions for the feasibility of the expansion project, rather than estimating the overall feasibility itself.  That is, what it claims is that the expansion cannot succeed without SIDA bond funding, without Pyramid's completing all phases of the plan, and without the expanded center's becoming a major retail and tourist destination.  Deloitte takes no position on the probability of the project's meeting the latter two conditions.


2.  Is SIDA funding necessary?


In reaching its conclusion that Pyramid cannot carry out the expansion without bond funding from SIDA, Deloitte relied in part on the developer's financial projections for the project.  On the basis of those projections, Deloitte found that, without the bond funding, the return on equity would be an unacceptable 2.5%, and that, with SIDA's bond funding, the return would be 7.7% (pp. 61-62).


Deloitte did not challenge Pyramid's financial projections.  However, certain critical numbers raise serious questions.  The first troubling item is gross revenues, or total operating receipts, for the fully expanded center.  Citing Pyramid's data, Deloitte reports that gross revenues "are projected to be in the $20.00 per square foot range, but reflect the 'lower decile' ($17.98/sq. ft.) for super-regional malls in the Northeast Region" (Executive Summary, p. 4).  This means that, with SIDA funding, with all phases completed (making it the largest mall in America) and with being a major retail and tourist destination, the expanded Carousel Center is nevertheless projected to generate gross revenues that place it among the lowest 10% of super-regional shopping centers in the Northeast in total revenues.  This is especially puzzling when we see that Pyramid projects the property's combined sales to be $328 per square foot, putting it high in the upper 10% of both national and regional centers in total sales (pp. 29, 35).  (In this connection, the following comment by Deloitte is of interest:  "As with any shopping center, retail sales are the driving force for generating income.  With higher sales volume, owners are able to charge higher rents and generate more operating income" (p. 35).)


A second disturbing projection is the operating expense ratio of approximately 47% for the expanded center.  This item is the ratio of operating expenses to total operating receipts.  The 47% figure is surprising, first, because the expense ratio for the current Carousel Center is 34%--a level it has maintained for the past three years (p. 36).  But, more than that, the projection is far higher than the averages and even the upper deciles for both the nation and the region.  This number's deviation from industry norms, along with a similar deviation for operating receipts, is evident when we combine these projections with data presented on the table for "Super-Regional Center 2000 Operating Results" (p. 35).




















East Region


Upper Decile


Upper Decile



Sales      /s.f.














Receipts   /s.f.












Ratio of Total

Receipts to

Total Sales












Expense Ratio













I have added to Deloitte's figures the ratio of total operating receipts to total sales, which is implied by the first two items in the table.  It is unclear why, given Pyramid's projections, the ratio of total operating receipts to total sales should be less than half those of the national and regional norms.  Indeed, it seems reasonable to think that, with such a high level of sales, Pyramid would be able to charge much higher rents from tenants in the expanded Carousel Center.


In general, for the expanded Carousel Center, Pyramid projects revenues to be extraordinarily low (despite robust sales) and projects the expenses to be unusually high.  What should we make of this?  There seem to be two possibilities.  (1) If we assume that there are in fact good reasons—not identified by Deloitte—why the projected operating receipts are so low (when projected sales are so high) and why the projected expense ratio is exceptionally high, then we have to conclude that, as an investment, the project is much riskier than other super-regional shopping center developments, which occasions concern about the feasibility of the expansion.  (2) On the other hand, if we assume that the operating receipts figure is too low and/or the expense ratio is too high, we must conclude that the implied return on equity should be higher than 2.5% (without the PILOT) or 7.7% (with the PILOT).  If this assumption is correct, it raises doubts about the need for SIDA bond financing.


Also on the matter of expenses and revenues, it is worth mentioning that Pyramid projects that total operating expenses (including the PILOT payment) will increase 3.4% per year in Years 6 through 15 (p. 52).  However, it projects that net operating income will increase only about 1.6% over the same period, and cash flow (i.e., net revenues after tenant and placement reserves, before debt service) will increase approximately 1.3% per year (p. 52).  Of the latter trends, Deloitte remarks that "this moderate growth in income is indicative of a relatively level income stream with limited upside potential over the long-term" (p. 52).


With respect to the project as an investment, how good a return on equity is 7.7%?  There may be prospective investors who are interested in such a return, but it is noteworthy that Pyramid expects to pay 8.6% on conventional financing for the expansion.  (In this deal, you want to be the lender rather than the investor—at least given Pyramid's financial projections.)


3.  The expanded center as a major retail and tourist destination


According to Deloitte & Touche, Carousel's primary trade area must achieve a radius of 150 miles or more;  otherwise, it will be unable to support the second and third phases of the expansion (Executive Summary, p. 3).  In addition, the mall "would need to become more of a destination center that would attract shoppers from more than 150 miles away" (p. 53).  In short, the shopping center must draw large numbers of visitors from much farther away than it does now, and this will require that it become a major tourist destination, with a large portion of the mall leased to destination retail, entertainment, and recreational tenants (p. 53).


Is it likely that the expanded mall will be able to become a major retail and tourist destination, rivaling Minnesota's Mall of America?  Again, we should be clear that Deloitte draws no conclusions about the probability that an expanded Carousel Center would attain the volume of shoppers it must have in order to enjoy even the modest success represented by the projected 7.7% return on equity.  Moreover, as we consider how realistic it is to assume that the center will become a major retail and tourist destination, we encounter several unsettling questions.


A trade area of a 150-mile radius would include Toronto, Buffalo, Rochester, and Albany, all of which have super-regional shopping centers, with which the expanded Carousel Center would be competing, at least with regard to the traditional retail portion of its tenant mix.  Although those centers do not feature as many destination retail, entertainment, and recreational tenants as Carousel plans to include, they do have many of the well-known retail chain stores that are likely to be in the expanded mall.  Will the attractions of the expanded center be powerful enough to compensate for the traditional retail competition from other large shopping centers in the region?  We really don't know, and Deloitte does not address that question.  Furthermore, should we assume that developers in the urban areas within the new 150-mile trade area will not take competitive measures to forestall their losing significant shares of the regional retail market to the expanded Carousel Center?


Deloitte points out that the Cumings McNulty report says that, in order for Carousel to be converted "from a regional shopping center into an increasingly strong, major tourist destination," it should include a new aquarium along with hotel accommodations, among other things (p. 33).  Until recently, publicity about the mall expansion emphasized the aquarium as the central tourist attraction in the expanded center.  However, according to news reports, prospects for the aquarium seem to be fading.  In that case, if the expanded center does not include an aquarium, what tourist attraction is supposed to draw the millions of visitors needed for the expansion to succeed?  Also, Pyramid's plans to build an 800-room hotel on the premises were sufficiently tentative and uncertain for Deloitte to exclude them from this report (p. 16).  This is unfortunate, since, presumably, the hotel is essential to the expanded mall's being the major tourist attraction both Deloitte and Cumings McNulty say it must become.


Since the expansion would make Carousel the largest mall in the United States, Deloitte compares the expanded center to the Mall of America, in Bloomington, Minnesota, a suburb of Minneapolis-St. Paul.  Deloitte notes that there are 12 million people within 150 miles of Carousel, while (according to information supplied by Pyramid) there are only 4.2 million people within 200 miles of Mall of America (p. 33).  Despite the relatively small regional population, Mall of America attracted 42 million visitors in 1999, making it "one of the top tourist destinations in the country" (p. 32).  In fact, 35% of Mall of America's visitors come from beyond a 150-mile radius, with 59% coming from the Twin Cities' metropolitan area, and only 6% from the surrounding 150-mile region (p. 32).


Obviously, Syracuse's metropolitan-area population is much smaller than that of Minneapolis-St. Paul and, consequently, would be unable to provide anything near 59% of the visitors that would have to be projected for the expanded Carousel Center.  Moreover, the Twin Cities boast a large international airport and several major league sports teams.  Syracuse, on the other hand, has a considerably smaller airport, air fares to and from Syracuse are notoriously expensive, and we have no major league teams.  Further, Mall of America features Camp Snoopy and Legoland amusement parks, which no doubt draw large numbers of families, including many vacationers.  Deloitte's report says nothing about any attraction of that sort being planned for the expanded Carousel Center.  Hence, there is a genuine question about how many visitors the expanded mall will be able to draw from more than 150 miles away. 


It would seem, then, that the expanded center will have to attract a very large portion of its visitors from within the 150-mile radius.  Is it reasonable to expect that this will happen, especially given the urban centers that fall within the 150-mile trade area?


In thinking about this, we should keep in mind that Mall of America now attracts 25 million more visitors a year than does the current Carousel Center—42 million vs. 17 million (p. 32).  If Carousel is to rival Mall of America, we can infer that, to be successful, it will have to draw 20 to 25 million more people than it does now.  Again, will the attractions at the expanded mall be strong enough to pull in shoppers in such volumes?


This brings us to what I feel is the most critical question on this topic:  Can the expanded Carousel Center become a major tourist attraction if Syracuse itself does not become a major tourist destination?  That is, if Syracuse itself does not have a number of other "major league" attractions, then will the expanded mall be able, on its own, to draw the additional millions of visitors a year it will need to be feasible?  Will visitors come from Albany, Rochester, Buffalo, Toronto, and beyond in sufficient numbers to enable the expanded mall to become—and remain for 30 years—a major tourist destination and dominant retail center? 


4.  Must Pyramid build all three phases?


When Deloitte applied to Pyramid's financial model the assumption that only Phase 1 is completed, it found that the project is not feasible.  According to Deloitte, "[I]t is in Pyramid's self-interest to develop all three expansion phases.  With a total proposed expansion of up to 3.5 million square feet, Pyramid would be able to defray operating costs and, more importantly, the PILOT payment over significantly more square footage than just the approximately 867,000 square feet of GLA in Phase 1" (p. 54).  Now, I am unclear about this point, and I suspect other readers of the report are as well.  Given that the current center would be included in the 30-year PILOT, wouldn't PILOT payments then be defrayed over both the new and the existing GLA?  If they would be, and given that PILOT payments would need to service only $110 million in SIDA bond debt rather than the full $249 million, is it really certain that Pyramid must build all three phases for the project to be profitable?  This is important, of course, because legislators have expressed the worry that, upon receiving the 30-year PILOT, Pyramid might build only the first phase of the expansion.


Furthermore, even if it is in Pyramid's self-interest to develop all three phases, there is a real question whether it would be able to do so, given its financial projections:  7.7% return on equity (on a best-case scenario relative to attracting sufficient numbers of visitors, year round), $20 per square foot in operating receipts, and an expense ratio of 47%.  These numbers will surely raise eyebrows among bond underwriters, commercial lenders, and prospective equity investors.  Given the modest return projection, the extremely low operating receipts figure, and the extremely high expense ratio, we should remember that, at the end of its report, Deloitte & Touche lists several "concerns" about potential costs not accounted for in Pyramid's numbers (pp. 65-66).  These are additional risks to the project, as is the possibility, raised by Deloitte, that the mortgage interest rate will increase from a projected 8.6% before permanent financing is in place (p. 56).  All of these are unquantified risks to the project's ability to earn the projected return.


On the issue of Pyramid's ability to obtain sufficient financing for all three phases, I have one other question.  Deloitte & Touche indicates that Kaufmann's (occupying 188,162 square feet) and Lord & Taylor (occupying 100,000 square feet) own their own buildings, on ground leased from Pyramid (pp. 10-11).  This means that over 288,000 square feet—or 19.6% of the total GLA of 1.48 million square feet in the current Carousel Center is not owned by Pyramid.  If Pyramid thus owns only about 80% of the mall, how will this affect its ability to gain conventional financing secured by equity in the existing center?


5.  Real estate taxes


Deloitte says that SIDA requested that it "compare the current and proposed PILOT . . . payments for Carousel Center to real estate taxes on similar super-regional malls.  Consequently, the questions arise as to whether the city should forego collecting 'real estate taxes' in order to collect a PILOT payment for the next 30 years, and whether the PILOT payment is representative of market-oriented real estate taxes" (p. 37).


This is a peculiar commission by SIDA, for at least two reasons.  First, as a fiscal issue, whether the city (and county) should forego collecting property taxes on the existing mall for 30 years depends on whether the city (and county) would collect enough sales tax revenues from the increment in sales generated by the expanded mall to offset foregone property taxes.  SIDA apparently did not ask Deloitte to address that question.


Second, SIDA's request that Deloitte consider whether the designated PILOT payment is comparable to "market-oriented real estate taxes" erroneously assumes that real estate taxes are a "market" item.  They are not.  As two articles in the October 26, 2000 editions of the Syracuse Newspapers ("Price Comparison: What's a Mall Worth?" and "How to Price a Mall") make abundantly clear, real estate taxes on large malls are quite frequently a negotiated item.  Indeed, when Pyramid is the developer, it is virtually always a negotiated item.  As such, it reflects the extent to which the local government has the political will and the resources to fight an assessment challenge.  According to one of the articles, "Fees paid to special counsels and appraisers can easily exceed $100,000, and there's no guarantee of winning, municipal officials say."  One local assessor, referring to Pyramid's annual challenges of the assessed values of its properties, puts it this way:  "In most towns, the town board says, 'This is costing us a fortune.  Settle the thing.' . . .  The idea is to wear people down." 


Actual real estate taxes, therefore, may only very roughly represent market reality, given the necessity of negotiating assessed values in the face of constant challenges.  Since, with regard to assessed values and real estate taxes, "market comparables" are not really comparable, there is little point in GLA property tax comparisons of large shopping centers.  Interestingly, Deloitte seems to acknowledge this point, at least in part, when it declares that "we are not analyzing the fairness of market value for Carousel Center or the other shopping centers" whose real estate taxes Deloitte compares to Carousel's (p. 37).


Furthermore, apart from the issue of fairness, it is not clear why it matters how PILOT payments compare to foregone property taxes, since every dollar of every PILOT payment is actually equity for the investors, in that the payment goes to facilitate construction of the property and enhance its value.  In other words, because the PILOT payments add to the value of the property, they should be thought of as additions to the property's equity, not taxes "paid" by the developer.


The real question here is what the assessed value of the current Carousel Center should be in 2006.  Since, according to Pyramid's financial data, total retail sales at the shopping center are undergoing strong growth (21.4% in 1999, 10.9% projected for 2000), we could reasonably infer that net income will likely support a strong estimate of fair market value in 2006 (p. 13).


Of the $10.9 real estate tax figure implied by the center's current assessed value, Deloitte merely points to the negative impact on operating expenses if Pyramid had to pay that amount.  If such were the case, "the operating expense ratio would increase to 48%, which is well above the industry norm for super-regional malls" (p. 39).  It is not clear if Deloitte is implying that 48% is an unacceptable expense ratio on a large shopping center.  However, we should note that Pyramid itself projects that its expense ratio on the expanded mall will be 47%, which it apparently finds acceptable (p. 52). 


Incidentally, since foregone property taxes are important because they must be compared to incremental sales taxes from the project in order to assess the fiscal impact of the PILOT, the following figures are of interest.  On Pyramid's leasing strategy, with the completion of all phases, retail will go from 85.6% of the mall space to 38.6%, entertainment will go from 6.0% to 14.2%, dining will go from 4.3% to 5.0%, destination retail from 0% to 26.3%, recreational from 0% to 12.7%, and tourism/community/service from 4.1% to 3.2% (p. 53).  Deloitte did not do any calculations about the effect on taxable sales, but we can expect this change in tenant mix to lower the ratio of taxable sales to total sales at the center.


6.  Conclusion


The Deloitte & Touche report does not take up the feasibility of the proposed Carousel Center expansion.  Instead, it identifies conditions it believes are necessary for the project's feasibility, one of these being bond funding by SIDA.  Because of troubling questions about Pyramid's revenue and expense projections, it is still unclear whether SIDA bond financing is in fact needed for Pyramid to construct the expansion.  The other necessary conditions are that Pyramid build all three phases and that the expanded center become a major retail and tourist destination.  Since the existing mall would be included in the new PILOT and the bond amount would be only $110 million, it is not at all clear that Pyramid must complete all phases.  It is far from certain, too, that Pyramid will be able to construct all three phases.  And, as to whether the expanded Carousel Center is likely to become a major retail and tourist destination, Deloitte offers no opinion.  While that is one of the most critical questions regarding the feasibility of the expansion, the report gives no assurance that the center will be able to rival Mall of America.  Finally, Deloitte's discussion of real estate taxes does not help legislators evaluate the fiscal impact of the PILOT agreement.


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