AN ANALYSIS OF

THE EFFECTS OF SOBs ON

Prepared for:

Ms. Sangeeta Kuruppillai

Assistant City Attorney

CITY OF DALLAS

Office of the City Attorney

City Hall 7BN

Dallas, Texas 75201

Prepared by:

PETER MALIN, MAI

THE MALIN GROUP

Real Estate Programmers

Litigation Support Services

Dallas, Texas

April 29, 1997

Ms. Sangeeta Kuruppillai

Assistant City Attorney

CITY OF DALLAS

Office of the City Attorney

City Hall 7BN

Dallas, Texas 75201

RE: The analysis of the effects of Sexually Oriented Businesses (SOBs), specifically those which offer or advertise live entertainment and operate as an adult cabaret on the property values in the surrounding neighborhoods. The findings below update and incorporate the report prepared by The Malin Group dated December 14, 1994.

Dear Ms. Kuruppillai:

In accordance with our engagement letter dated August 2, 1994, as amended on March 21, 1997, we have completed the study referenced above. Below is a summary of our findings and the reasoning behind our conclusion.

Sexually oriented businesses, specifically those that offer or advertise live entertainment and operate as adult cabarets, currently exist in the city of Dallas. Many of these businesses are located by themselves away from other SOBs while in some areas of the city they can be found concentrated in one area.

In our December 14, 1984 Report ("The Report") we found that SOBs have both a real and a perceived negative impact on surrounding properties. In such areas, crime rates are higher and property values are lower and/or the properties take longer to lease or sell. Our study has found that the higher the concentration of these businesses in one locale, the greater their impact on the neighborhood.

Ms. Sangeeta Kurupillai

April 29, 1997

Page 2

There are two primary ways in which SOBs affect the neighborhood: one is by their presence, including signage and advertising, and the other is by the hours they keep and the type of people they attract.

Their presence influences the public’s perception of the neighborhood in which they are located. SOBs "can create ‘dead zones’ in commercial areas where shoppers do not want to be associated in any way with adult uses, or have their children walk by adult uses."¹ This influence appears to be the same whether the dancers are appearing in a state of nudity or semi-nudity. The public perception is that it is a place to be avoided by families with women and children.

The second major influence is the hours of operation and the type of people which SOBs attract. This appears to lead to higher crime in the area, loitering by unsavory people, including prostitutes, and parking problems which can negatively affect the surrounding businesses. Additionally, there is frequently parking lot noise and disturbances which often turn violent The SOBs keep late hours which can also become a nuisance to nearby residents.

We studied police calls for service emanating from 10 different SOBs over a four-year period from 1993 through 1996 and found that SOBs were a major source of such calls. The seven SOBs along West Northwest Highway near Bachman Lake averaged more than one call to the police everyday. We also studied sex-related arrests for the four-year period ending March 1997. The number of sex crime arrests which included rape, prostitution/commercial vice and other sex offenses, was 396 in the area along West Northwest Highway which includes the seven SOBs. This compares to 77 and 133 sex crime arrests respectively in two similar areas along Northwest Highway, the second of which contained two SOBs spaced more than a ½ mile from the other. From this evidence, it appears that there are increased sex crime arrests and disturbances requiring police presence around SOBs and significantly more crime when there is a concentration of SOBs in one area.

We reviewed studies completed in numerous other cities including Austin, Los Angeles, Indianapolis, New York, and Phoenix on the effects of adult entertainment on the surrounding properties. In addition, we reviewed summaries of similar studies completed in Islip, New York; St. Paul, Minnesota; Whittier, California; Manatee County, Florida and New Hanover County, North Carolina. Finally, we did extensive research regarding the SOBs in Dallas.

_____________________________

¹Adult Entertainment Study, Department of City Planning, City of New York, 1994, p. 3.

Ms. Sangeeta Kurupillai

April 29, 1997

Page 3

All of these localities, after completing their own independent study of the issue, and reviewing the work of the others, decided to enact controls on SOBs which would prohibit them, from concentrating in one area in the community and limit the areas in which they could locate to those away from residential, religious, educational and recreational uses.

In most cases, the localities limited SOBs from locating in all but a few zoning districts. They set minimum distances between other SOBs as well as residential, religious, educational and recreational uses. These distances were generally 500 or1,000 feet. Most localities established amortization periods after the enactment of the ordinance in which SOBs became non-conforming. Generally, local authorities could grandfather certain SOBs through a public hearing process. Most of the clubs that were grandfathered were isolated establishments which advertised discretely and were buffered from residential uses.

In several instances, State and Federal Courts have found that legislation controlling SOBs was constitutional and did not abridge First Amendment rights. As long as the locality provided for a sufficient number of relocation sites, these restrictions were found to be constitutional.

We reviewed these studies to determine whether the other cities used sound principles in reaching their conclusions. After reviewing the studies completed by New York, Phoenix, Indianapolis, Austin and Los Angeles, we determined that their methodology was appropriate and their conclusions were sound. We have no reason to believe that these findings would be any difference in Dallas.

These studies in the "other localities found that adult entertainment uses have negative secondary impacts such as increased crime rates, depreciation of property values, deterioration of community character and the quality of urban life."²

In other cities’ studies, as well as the study that we completed in Dallas, "Where respondents indicated that their businesses or neighborhoods had not yet been adversely affected by adult uses, this typically occurred in Study Areas with isolated adult uses. Moreover, these same respondents typically stated that an increase in such uses would negatively impact them. Community residents fear the consequences of potential proliferation and concentration of adult uses in traditionally neighborhood-oriented shopping areas and view the appearance of one or more of these uses as a deterioration in the quality of urban life."³

²IBID. p. vii

³IBID. p. viii

Ms. Sangeeta Kurupillai

April 29, 1997

Page 4

In Dallas, we interviewed a number of real estate brokers active in an area punctuated by SOB’s who reported that SOBs "are perceived to negatively affect nearby property values and decrease market values." Eighty percent of the brokers responding to a NYC survey indicated that an adult use would have a negative impact on nearby property values. This is consistent with the responses from a similar national survey of real estate appraisers"⁴ completed by Indianapolis and a survey completed in Los Angeles of real estate professionals.

"Adult use accessory business signs are generally larger, more often illuminated, and graphic (sexually-oriented) compared with the signs of other nearby commercial uses. Community residents view this signage as out of keeping with neighborhood character and are concerned about the exposure of minors to sexual images."⁵ This was a major complaint in our interviews in Dallas and the findings of the New York City report as well as the other localities.

We have prepared a video tape to accompany this report that shows typical SOB signage in Dallas. The newer clubs that stand-alone and meet the requirements of Chapter 14 Section 41A of the Dallas zoning code, generally have more discrete on-site signage while those that must compete for customers from nearby or adjacent Sobs have more obvious on-site signage intended to draw the public’s attention.

SUMMARY

We found from our study of three Dallas neighborhoods and the findings of numerous other localities, that one isolated SOB has much less direct impact on the neighborhood than a concentration of SOBs. It does, however, impact the properties immediately surrounding it. The more visible it is, the more impact it has.

Concentration Effect

Our study shows that the location of multiple SOBs in one neighborhood can have a major impact on the neighborhood by contributing to crime, driving away family-oriented businesses

⁴IBID. p. viii

⁵IBID. p. viii

Ms. Sangeeta Kurupillai

April 29, 1997

Page 5

And impacting the nearby residential neighborhoods. When concentrated, SOBs typically compete with one another for customers through larger, more visible signs, and graphic advertising. They tend to be a magnet for certain types of businesses such as pawn shops, gun stores, liquor stores, check cashing storefronts and late-night restaurants.

Impact on Surrounding Properties

The highest and best use of nearby property becomes limited under the principle of conformity as few other tenants wish to be near the SOB-dominated area. Investors and lenders are unwilling to invest in new improvements in these areas and the vacant land sits idle for years. Single-family homes in the area frequently end up as rentals because the families move away from the SOB-dominated area and it becomes exceedingly difficult to sell such houses.

Attitudinal Impact

As the recent New York City study states: "The experience of urban planners and real estate appraisers indicates that negative perceptions associated with an area can lead to disinvestment in residential neighborhoods and a tendency to shun shopping streets where unsavory activities are occurring, leading to economic decline.⁶ The forces that influence real estate value are described as follows: "The market value of real property reflects and is affected by the interplay of basic forces that motivate the activities of human beings. These forces, which produce the variables in real estate market values, may be considered in four major categories: social ideas and standards (emphasis added), economic changes and adjustments, governmental controls and regulation, and physical or environmental changes."⁷ The attitudinal data in the survey is thus significant even in those instances where the current negative impacts of adult entertainment establishments are difficult to measure.8

⁶IBID, page vi

⁷The Appraisal of Real Property, seventh edition, by The American Institute of Real Estate Appraiser, Page 3.

⁸Adult Entertainment Study, Department of City Planning, City of New York, 1994,

Page vi.

Ms. Sangeeta Kurupillai

April 29, 1997

Page 6

SCOPE OF WORK

Our study was conducted in the following manner.

We reviewed similar studies of adult entertainment completed by five major cities.

As part of our research, we identified a Study Area which included seven SOBs operating as Cabarets (The "Study area"). We then proceeded to compare and contrast this area with two other areas of Dallas with similar land uses and traffic patterns (the "Control Areas"), one of which did not include any SOBs and one that included two that were a half mile apart. These were compared on the basis of sex-crime rates and calls for police over a four year period. Additionally, we interviewed property owners or their real estate brokers and agents who are actively leasing, listing, managing, buying or selling properties in the Study and Control Areas.

We collected and analyzed crime statistics within the Study Area and the two control areas known as Control Area East and West. These crime statistics included the four years ending December 1996. Both the number of sex-crime arrests and number of police calls at the specific SOBs were analyzed (See Exhibit C). The number of sex crime arrests, in the Study Area which includes the concentrations of SOBs was five times higher than the Control Area with no SOBs and nearly three times higher than the Control Area with two isolated SOBs.

We then contacted owners or their real estate representatives at properties in each area that were either trying to sell or lease land or improvements. This interview process included talking to people involved with single family residences, strip shopping centers, community shopping centers, apartments, free standing retail stores, vacant restaurant buildings, vacant auto part stores and vacant commercially zoned land.

We surveyed this group regarding the length of time the property had been on the market, their experience with that property with respect to its pricing and what observations they could offer about trends in the neighborhood. If it was a real estate agent, we asked them to compare this property in this neighborhood to similar properties in other neighborhoods. Finally, we asked these agents if the presence of SOBs in the neighborhood had any impact on their property or the surrounding neighborhood.

The Study Area is a neighborhood located near Bachman Lake on West Northwest Highway, a major gateway to the city where seven SOBs area located. There are three other locations of concentrated SOBs; Greenville Avenue near Lovers Lane; Harry Hines Boulevard near Royal Lane and Spur 342 east of California Crossing where smaller concentrations of SOBs are congregated. We did not study these areas.

Ms. Sangeeta Kurupillai

April 29, 1997

Page 7

Generally, most other live entertainment SOBs are dispersed and located individually throughout many neighborhoods in the city.

The Control Areas, East and West, were chosen due to their similar land uses and traffic patterns to those of the Study Area. Control Area West is an area along West Northwest Highway just to the east of the Study Area which does not contain any SOBs. It is located along the same highway as the Study Area and predominately consists of highway commercial and residential uses. Control Area East consists of another part of the same highway, East Northwest Highway. This Control Area, however, contains two SOBs one of which, PT’s, is at Lawther Lane at the east end of the Control Area and a second SOB, Doll’s House, is located at the west end of the Control Area. This area contains both highway commercial and residential uses. The two SOBs are approximately one-half a mile apart but are within 1,000 feet of residential uses.

The boundaries of the three areas were chosen to coincide with the Police Department beats. It is through the beats that crime data is collected and analyzed.

ANALYSIS OF DATA

A summary of other localities’ findings regarding SOBs:

DALLAS, TEXAS

Property Owner/Agent Interviews

Between September and November, 1994 the Malin Group interviewed 30 people who were either the owners of commercial property or their agents in the one Study Area and two Control Areas. During March and April 1997, we conducted further interviews with some of the same and many additional owners and agents in the areas.

All of the people interviewed in the Study Area believed that their property values (or those of the owner that they represented) were lower due, in part, to the presence of the seven SOBs operating as Adult Cabarets along West Northwest Highway. This loss of value manifested itself in a variety of ways including: increased operating costs, such as, additional security patrols, burglar alarms, trash cleanup; income property selling at much lower sales prices than comparable properties in similar areas, extreme difficulty leasing in certain shopping centers and a lack of demand for commercial land.

We examined three sales of retail zoned land in the Study Area which sold for but a fraction of what similar properties along the same highway in the Control Area brought. The land sales in

the Control Area ranged between $10.00/SF and $12.00/SF while four sales along the same

highway just a mile away in the Study Area sold for prices between $1.20/SF and $7.00/SF respectively.

Two tracts with income-generating retail buildings show similar results. The one in the Study Area sold a 16.5% capitalization rate (cap rate) while the one in the Control Area sold on a 12.5% cap rate (the higher the rate the lower the value). This difference in rates can be directly attributed to the additional risk factors reflected by the area. The difference between the two yields reflects a 25% drop in property prices near the concentration of SOBs.

In our interviews with real estate professionals, we learned that some properties had been on the market next to or across the street from SOBs for over 10 years. Interest in these sites historically has come from the same small group of users which includes: other SOBs, pawn shops, liquor stores, night clubs, tanning salons, and certain restaurants. These users have found that the SOBs clientele will patronize their businesses; therefore, they tend to congregate near SOBs. We learned that retail space near SOBs is more difficult to lease because the type of tenant who will locate there tends to be limited to those listed above. As a result, these properties take much longer to market. Also, a comparison of lease rates between the Study Area and the Control Area showed lower asking rates near the SOBs operating as adults cabarets.

Most owners and agents that we interviewed who have holdings in either the Study Area or Control Area West believe that should the Study Area be rid of the SOBs, more investment in new restaurant and retail properties would quickly follow. This is due to the high traffic count along Northwest Highway, the density of surrounding developments and the demand generated from the surrounding business and residential neighborhoods. Many others we talked to echoed these sentiments and believed that owners would make significant investments in nearby apartments if the SOBs were gone.

Crime

As part of our comparison of these areas, we collected crime statistics for the Study Area and compared them to the two Control Areas. We found that sex-related crimes were over five times higher in the Study Area than in Control Area West and nearly three times higher than in Control Area West. Sex Crimes, as defined by the FBI, include: rape, prostitution/commercial vice and sex offenses. (See Exhibit A attached). The results of this comparison show crime in three similar commercial corridors along Northwest Highway. The Study Area had 396 sex crime arrests during the 50 months period through March 1997 while Control Area East and West had 133 and 77 respectively. Control Area West is less than a mile from the Study Area along the same highway; yet, it had five times fewer sex crime arrests.

These results cannot be solely attributed to the SOBs because of the differences in demographics other factors may be contributing to the crime in the Study Area. However, the data clearly suggests that the SOBs are one of major causes of crime and confirms the results of similar studies in Austin, Los Angeles, Indianapolis, etc. This is true especially with respect to the sex crimes where the same result has been found in nearly all the other localities studied.

Police Calls

We analyzed Dallas Police Department call logs where such calls were made from the SOBs in the three areas (See Exhibit B). A review of these calls from the four year period 1993 through 1996 shows a repetitive series of complaints coming from these SOBs which includes assaults and unruly behavior both inside and outside of the clubs. The Police Reports show numerous situations where weapons were present and prostitution was occurring. In the Study Area during this four year period, there was more than one call per day for the Dallas Police from these seven locations.

DALLAS – SUMMARY

In all of our interviews in both 1994 and 1997, we found that only one person thought they benefited from the presence of the SOBs. The SOBs were largely responsible for the Study Area’s negative perception by the public and many people interviewed believe that the SOBs are largely responsible for the high crime in the area.

The Control Areas, where crime was lower, were also impacted by the nearby presence of SOBs. The two SOBs reported 275 calls for Police during the last four years. The Control Area with the two SOBs also had significantly more sex crime arrests than the Control Area with no SOBs.

We found that properties in Dallas are negatively impacted by the presence of SOBs. This is more evidence when the concentrate in one area, but can be seen elsewhere through the dining and shopping patterns in the neighborhood. We found that crime is significantly higher in the Study Area where seven establishments are located. Contributing to this is competition for customers requiring larger, more obtrusive and graphically suggestive signage. Little investment

in the area is being made because there are a limited number of users who wish to be near such establishments. What investment is occurring requires much higher returns to offset the risks apparent in the neighborhood.

Our findings here in Dallas are reinforced by the numerous studies done in other localities, all showing higher crime in areas where SOBs are concentrated (especially sex crimes). The general negative feelings towards these areas and avoidance of the area by those who live in the surrounding community, both in our study and those from around the country, show how the public perceives such areas. This is reinforced by numerous newspaper articles on the subject, both in Dallas and the other localities and national press. The presence of the SOBs in the Dallas Study Area has resulted in a general disinvestment in the surrounding properties.

Respectfully submitted,

THE MALIN GROUP

Peter Malin, MAI

Managing Director

PM/kn

EXHIBITS

EXHBIT A

EXHIBIT D

Study of the Effects of the Concentration of Adult Entertainment Establishments in the City of Los Angeles, Prepared by Los Angeles City Planning Department, June, 1977.

Adult Business Study – Impacts in Late Evening/Early Morning Hours, Prepared by Phoenix Planning Department, June 1994.

1986 Staff Study in Support of S.O.B. Ordinance. Prepared by the City of Austin, Texas, 1986.

Adult Entertainment Businesses in Indianapolis – An Analysis, Prepared by Department of Metropolitan Development Division of Planning, February, 1984.

Adult Entertainment Study, Prepared by Department of City Planning, City of New York, November, 1994.

EXHIBIT E

PETER MALIN, MAI

QUALIFICATIONS IN REAL ESTATE

COUNSELING, VALUATION AND EXPERT SERVICES

Peter Malin, a third generation real estate professional, has 19years experience in the field. His experience ranges from being a Land Use Manager for the nation’s largest private landowner (IPCO) to being a founder of Dallas’ fourth largest Commercial Real Estate firm.

Today, as Managing Director of The Malin Group, he oversees a small group of real estate economists in Dallas, Texas, providing advice and counsel to a national client base. His writings on issues in Real Estate have been published in a wide range of international journals, magazines and newspapers. He is the editor and publisher of a widely recognized newsletter, Capital and Investment Trends, reporting on real estate trends in the Texas markets.

For four years Mr. Malin worked for International Paper Company, the nation’s largest private landholder, in their development, land management and real estate divisions. He was involved in the valuation of timberlands as well as the development of recreational real estate such as ski areas and waterfront property.

After spending four years as a commercial appraiser in Dallas, Texas, Mr. Malin became the Director of Real Estate Valuation for Laventhol and Horwath in their Dallas office. In this capacity, he directed a national practice which specialized in property valuation and counseling. He received the MAI designation in 1986 from the Appraisal Institute, and has testified in numerous courts during the past eleven years as an expert on real estate values.

Mr. Malin’s other experience includes appraisal, market research and counseling on commercial properties throughout the U.S., including:

• Major urban developments including urban land, hotels, office buildings, parking garages and regional malls.

• Major recreational developments including hotels, resorts, conference centers, golf courses and residential communities.
• Special use properties such as computer and telecommunication centers with clean rooms, marinas, NASCAR sanctioned racetracks, airplane hangers and school campuses.

After leaving Laventhol and Horwath, he founded Newmarket Consulting Group and the parent firm, Newmarket Group Southwest, a full service commercial real estate firm.

While at Newmarket, he established a national practice comprised of valuation, consulting and litigation services performed in over 35 states.

Currently Mr. Malin is licensed and certified as a general appraiser in California, Massachusetts and Texas. He has held appraisal licenses in over 20 states during the past five years. Mr. Malin is also a licensed real estate broker in the state of Texas.

Mr. Malin is a graduate of the Kent School in Kent, Connecticut. He received his Bachelor of Arts degree in American Studies from the University of Denver in 1973. Later, he completed graduate level courses at New York University'’ Real Estate Institute, followed by study in Real Estate Investments and Taxation at a graduate level at North Texas State University.

In 1988 – 1990, Mr. Malin developed and hosted the Annual Real Estate Education Conference sponsored by the Appraisal Institute in Dallas. He has lectured on International Appraisal issues and developed and taught the first Appraisal Course on "International Appraising" for the Appraisal Institute. In 1993, he lectured at the 20^th World Congress of Federation Internationale de Geometric as well as the 6^th Annual Valuation of Assets in Bankruptcy Conference sponsored by the University of Texas Law School. Mr. Malin continues to lecture on real estate topics for The Dallas Bar Association and the American Society of Appraisers.

Mr. Malin has been hired. . . expert witness in numerous cases involving real estate issues and valuation. He has testified or been admitted as an expert in local, state, and Federal courts in Texas, Florida, Alabama, and Louisiana.

Today, The Malin Group Real Estate Economists continues to serve a national client base and provides real estate research, advice and counsel to its clients. Mr. Malin continues to publish timely articles on industry trends in national forums such as Urban Land Magazine and The Mortgage Banker. He also continues to publish the firm’s newsletter, Capital and Investment Trends which covers the Texas real estate markets.