THE COSTS OF DOING BUSINESS: $5.4 MILLION A MONTH

GERALD HINES’ lieutenants dislike talking money, an ironic situation akin to a minister avoiding talk of the deity.
But we talked to some knowledgeable sources, wheedled some information from Hines’ assistants, tossed in a little
educated guesswork and came up with some dollars and cents figures that one expert said “shouldn’t be too far from
the Galleria’s actual performance.”

Let’s talk about costs first. The Dallas Galleria will contain 4 million square feet of office, retail, hotel and
private club space. Construction costs nowadays average about $100 a square foot, though Hines may be able to do it
just a bit cheaper. Figure $400 million for the whole project.

Mortgages for this kind of high-quality development can run for 35 years. Hines likes to keep his mortgage costs
down by either investing his own money or selling equity interests in the property. In this case, let’s say he
convinced an equity partner – such as the Deutsche Bank, with which he has worked on numerous occasions – to
contribute $100 million to the project. That leaves $300 million to be financed for 30 to 35 years.

Let’s say Hines got a good mortgage rate, as successful large-scale developers usually do. Call it 16 percent,
though it may be a little lower, with another point added for various extras. That would make annual amortization
costs of $35,100,000, according to one local developer.

Now Hinesmust worry about his

equity partner, who stands at the pay window right behind the mortgage holder. Typically the equity partner, who
contributed 25 percent of the costs, would take a 50 percent interest in the property in return for a below-market
short-term return. We’ll call it 10 percent on $100 million, for annual amortization costs of about $10 million.
Actual operating costs for the supermalls range nationally from about $2.50 per square foot to $7.50 per square
foot. Hines is traditionally efficient, but the Galleria is a glamour building, which – like a glamour person –
requires a lot of attention. We’ll figure $5 a square foot, times 4 million square feet, for $20 million annually.

Hines, of course, already is receiving management fees and developer’s fees for his work at the Galleria. But that
income probably covers his overhead and not much else. Before he starts making any serious money, his shopping
center has to make $65.1 million a year, or $5,425,000 a month.

Retail sales should give him a good start. By the fall of 1983, when the Galleria has been open for about a year and
is more or less completely leased up and full of customers, it should be raking in gross sales of about $200 million
yearly, a figure that might rise by as much as 25 percent a year if Dallas is as kind to Hines as Houston has
been.

Calculating the mall management’s share of that pie is tricky, because different types of stores pay different flat
rental rates and different percentages of their gross receipts. Overall, though, the average is about 6 percent.
Figure $12 million for management from its retail tenants in 1983, and with 15 percent annual growth, $18.24 million
by 1986.

Offices are comparatively easy to cost out. In five or six years (after Galleria is complete and Hines has spent the
entire $400 million), there will be 2 million square feet of office space in four buildings on site. A conservative
estimate of office rental rates at that time would be $25 per square foot, or $50 million a year.

The Westin (formerly known as Western International) hotel at Galleria is, most likely, a joint venture between
Hines and the hotel firm. Westin wanted to pay 50 percent of the costs of the hotel in return for 50 percent of the
equity and the profits, but since Westin was drooling at the thought of getting into the Dallas Galleria, Hines
probably drove a tough bargain with the company. Let’s say Westin gets only 25 percent of its profits, and Hines
gets the rest. Profits at 1981 rates should be at least $1,000 for each of the hotel’s 440 rooms, and could easily
reach $2,000. And a second 500-room hotel is planned. Westin’s Houston hotels are full almost all of the time but
we’ll split the difference and say Hines gets $1.5 million in annual hotel revenues within five years.

The last money-maker in the mall is the University Club. Some developers will put athletic facilities in their
projects to entice office renters, whether the clubs make any money or not. The Club Corporation of America, a
Dallas-based firm that runs the Houston University Club and will run the Dallas Galleria facility, believes in
making money. We’ll drive down the middle of that lane, and say that anything Hines makes off the club is gravy.

Therefore, a conservative estimate of management revenues within five or six years would be $69.7 million. That
would leave Hines with his fees plus an annual net of $4.64 million, of which maybe 10 percent would go to Cornell
Oil, which contributed the 43 acres of land on which the Galleria sits.

More important overall would be the steady growth of Hines’ equity in the mall. His interest would become more
valuable as the mall became more successful, and he could sell all or part of his interest while maintaining
management control over the mall and office complex.

When Hines needed some spending money in 1976, he sold a reported 80 percent interest in his one-year-old Pennzoil
Place to a group of investors represented by the Deutsche Bank, for something more than $90 million. Much of that
probably went to the Houston skyscraper’s financiers, but Hines probably had enough left to pay the light bill until
the end of the month.