WARREN, Pa. - The question of how much Warren Mall is worth remains unsettled.
Representatives of the mall ownership appealed the real estate assessment on the 25.84-acre property.
During a bench trial Monday before Judge Maureen Skerda, witnesses said the property is "distressed," "tired," "risky," and "at the end of its useful life" and the current valuation of $2.2 million is too high. No determination was made Monday. The attorneys were given 10 days to submit closing arguments. Skerda will rule after receiving those arguments.
An appraiser hired by mall owner Mike Kohan put a value of $1.1 million on the property in December 2011.
In establishing the market value appraisal, William Bender of Dan McCown and Company examined the property in person and reviewed income and expense information from the facility. He took into account the sale price of the mall - $720,000 - and looked at similar cases involving other malls, he said.
He said the capitalization approach he used to arrive at the value shows "what somebody is willing to pay for so much net income."
The mall's reported net operating income for 2010 was $116,272.
"It's a risky property," Bender said. "It's a tired mall. It's sort of gotten to the end of its useful life."
Neither of the parties in the case had any concerns about Bender's qualifications, but Barry Klenowski, Board of Assessment appeals solicitor, questioned some of his numbers.
Immediately, Klenowski pointed out that although Bender's appraisal showed the correct $720,000 sale price, he had used $790,000 as the sale price in a key calculation - the capitalization rate.
Bender said he had made an error.
"Sale price makes a big difference," Klenowski said. "That's critical when calculating your cap rate?"
"Yes," Bender said.
Further, Klenowski questioned whether the $720,000 was a fair "arm's length" price.
"I talked with Mr. Kohan," Bender said.
He also testified that he spoke with a representative of the seller, Zamias Services Inc.
That Bender exclusively used financial information provided by Kohan, "the man paying your bill," was a point of concern for Klenowski.
"These were provided to me," Bender said. "I make the assumption these are reasonably accurate."
He testified that it is typical to accept the financial statements from the owner.
In establishing the capitalization rate, Bender said he used the projected first year net income - $226,261 - and the incorrect sale price of $790,000. That resulted in a capitalization rate of 28.64 percent. That rate is high, he said. "You see it with distressed properties."
The mall qualifies as distressed because "someone coming in is taking a great amount of risk ... in this case because it has no tenants," he said.
Aside from the anchor stores - Big Lots, Bon-Ton and Kmart - 18.06 percent of the mall was occupied at the time of Bender's analysis.
Klenowski also took exception to the other malls sold at about the same time that Bender used as points of comparison.
Bender said he used financial information from a mall in Virginia and another in North Carolina that were purchased out of bankruptcy. Both malls, he testified, were purchased by Kohan.
He said there were no malls sold in the region to compare at the time of his appraisal.
Kohan testified about his efforts to increase traffic in the mall. He said he "did feel comfortable (buying the mall) at that price."
"It was income-producing," he said. "I buy properties based on income ... based on capitalization rate."
His efforts to fill the mall have not succeeded.
"There's absolutely no traffic in the mall," he said. That first impression gives retailers no incentive.
His "square foot demand was as low as 50 cents," he said. "I'm offering today the same price" and still cannot fill the space.
Asked how the Warren Mall is similar to the malls in Virginia and North Carolina, Kohan said they are not similar. "How could I compare with Warren Mall?"
"Exactly," Klenowski said.
Stephen Zamias, vice chairman of Zamias Services, testified that the company sold the mall after 32 years under pressure from the loaning bank.
He said Sun America, now a division of AIG, was still owed $13.5 million on its loan. "They didn't give a doggone," Zamias said. "They wanted the toxic asset off of their books."
Sun America authorized Zamias to accept Kohan's $720,000 offer, the highest of four, on the $13.5 million debt.
Zamias testified that his company made the decision not to put in a higher bid to keep the mall, without the debt. "We realized Warren was a lost cause," he said. "There was nothing we could do to alter its outcome."
He said the company had 22 agents working and "not one of them could get a nibble."
At one point, Sun America authorized Zamias Services taking up to $1 million from a successful mall to "buy" national tenants, Zamias said. "They said, 'It won't work. We're not doing it.' They kept looking at the demographics. No one, even though we were footing the bill, would commit."