Simon Property Group is buying San Jose, Calif.'s Stanford Shopping Center for $333 million. According to Deutche Bank Securities, that equates to $256 per square foot for 1.3 million square foot leasehold interest. The property sits on land that will be leased from Stanford University for 51 years. The lease essentially calls for Stanford to receive 25 percent of the cash flow from the mall.

SPG did not give a cap rate, but market sources say it is in the 5 percent-6 percent range after taking into account the ground lease participation. The property has a fairly normal lease expiration schedule, but in-place leases are in the mid-$40s versus market rents in the $60s. This is consistent with the sales per square foot of $600.

"The more interesting element of the deal, in our view, is the potential cash flow growth," says JPMorgan analyst Michael Mueller in a report today on the sale. "In-place rents average in the mid-$40s/sf while market rents are about $60-70 per square foot. The potential releasing spreads are thus over 40 percent on rollovers compared to Simon's current spreads of about 25 percent. In addition, there are opportunities to re-tenant some of the space and achieve operating efficiencies through SPG's large platform.

At its peak in 2000, sales were $750 per square foot, but they fell along with the San Jose economy. "Simon believes sales have stabilized and this represents a one-time opportunity to acquire a franchise asset on the West Coast," says analyst Lou Taylor.

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