3.26.10 Appraisal Filing Exhibit B

8/8/2019 3.26.10 Appraisal Filing Exhibit B

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EXHIBIT B

Case 8:09-bk-21712-TA Doc 217-2 Filed 03/26/10 Entered 03/26/10 18:41:32 DescExhibit B - Part 1 Page 1 of 43


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SELF-CO N TAIN ED REP O RT

OF A CO MP L ETE AP P RAISAL

Valuation of a

Residential SubdivisionBrightwater Unsold Lots-Units and Units in Escrow

Brightwater Dr between Warner Ave and Bolsa Chica St

Huntington Beach (Orange County), California 92649

Prepared for

California Coastal Communities, Inc.

6 Executive Circle, Suite 250

Irvine, CA 92614

Effective Date of the Appraisal

February 1, 2010

Prepared by

DISTEFANO COMPANY5020 Campus Drive

Newport Beach, California 92660

Phone 949-833-0880



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DISTEFANO COMPANYRea l Esta te A pp raisal a nd Co nsulting

5020 Ca mp us Drive Phone 949-833-0880

New port Bea c h, CA 92660 Fax 949-833-9040

www.d istef.co m e-ma il ca [email protected] m

February 19, 2010

California Coastal Communities, Inc.6 Executive Circle, Suite 250Irvine, CA 92614

Attention: Mr. Raymond J. Pacini, CEO

Re: Self-Contained Report of a Complete AppraisalBrightwater Unsold Lots-Units and Units in EscrowHuntington Beach, CA 92649

Dear Mr. Pacini:

In response to the appraisal services agreement, I have completed an appraisal

regarding the referenced property.

The purpose of the appraisal is to estimate the market value of the property under

the following valuation premise: bulk value as is to a single buyer. The valuation

premise is defined on page 3 of the following appraisal report.

On the basis of my investigation and analysis, I have formed the opinion that, as of

the effective date of the appraisal, February 1, 2010, the value of the fee simple estate

in the subject property is as follows:

MARKET VALUE (BULK VALUE)AS IS $219,700,000

The value estimate contemplates an exposure time of 9 months. The value

estimate is predicated on the definitions stated on pages 23 of the report and the

assumptions and limiting conditions on pages 47.



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DISTEFANO COMPANY, INC.

California Coastal Communities, Inc.February 19, 2010Page 2

The appraisal conforms to the Uniform Standards of Professional Appraisal Practice

(USPAP), the Financial Institutions Reform, Recovery, and Enforcement Act

(FIRREA), state and federal regulations concerning appraisals, and the Code of

Professional Ethicsand the Standards of Professional Appraisal Practiceof the Appraisal

Institute. A statement of my qualifications is attached as Appendix F.

This appraisal is intended to comply with the OCCs amended Appraisal Rule,

effective June 7, 1994, as published in the Federal Register, Volume 59, No. 108, and

with the Interagency Appraisal and Evaluation Guidelines, dated October 27, 1994.

Sincerely,

DISTEFANO COMPANY

Carl DiStefano, MAI

Certified General Real Estate Appraiser

(California Certificate AG001517)



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iii

D ISTEFANO COMPANY

C O N T E N T S

EXECUTIVE SUMMARY 1

ORGANIZATION OF THE REPORT 2APPRAISAL PREMISES 2

Definitions 2Client, Intended User, and Intended Use 3Purpose of the Appraisal 3Property Interest Appraised 4Effective Date of the Appraisal and Date of the Report 4Scope of Work 4Assumptions and Limiting Conditions 4

PROPERTY AND AREA DESCRIPTION 8Property Identification 8Owner of Record and Ownership History 8Environmental Issues 10Area Description 10Neighborhood Description 16Supply and Demand Analysis and Trends 19Site and Improvement Description 27Property Tax and Assessments 34

HIGHEST AND BEST USE 53Highest and Best Use of the Property As Is 53

DESCRIPTION OF THE APPRAISAL PROCESS 54VALUATION BULK VALUE AS IS 56

Forecast Revenue 56Retail Value of Completed Houses 57Comparable Improved Data 57Value Estimate - Sales Comparison Approach - Retail Values 78Bulk Value Estimate Discounted Cash Flow 80Value Estimate Bulk Value As Is 89Exposure Time 90

CERTIFICATION 90



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iv

D ISTEFANO COMPANY

ILLUSTRATIONS

Orange County Coastal Zip Codes 26Area Map 35

Neighborhood Map 36Subject Photographs 38Comparable Improved Data 59

APPENDIXES

Appendix A: Title Report Excerpts and Assessors Maps

Appendix B: Site Plan with Phases

Appendix C: MarketPointe Inventory

Appendix D: Unit List and Retail Values

Appendix E: Discounted Cash Flow Analysis Bulk ValueAppendix F: Appraisers Qualifications



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v

D ISTEFANO COMPANY

LOOKING WEST

ImperialHwy

La Palma



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EX E C U T I V E SU M M A R Y 1

D ISTEFANO COMPANY

E X E C U T I V E S U M M A R Y

subject property Brightwater residential subdivision (unsold lots-unitsand units in escrow). Various addresses.Brightwater Dr between Warner Ave and Bolsa Chica StHuntington Beach (Orange County), CA 92649

assessors parcel(s) See Appendix A

site description Total Brightwater project: irregularly shaped,approximately level tract totaling 105.3 acres, subdividedinto 356 single-family residential lots plus common areaparks and street frontages. Zoning: medium and low-density single-family residential. Status of entitlements:all in place. Density: 3.3 dwelling units per acre.

property appraised 276 units (11 units in escrow and 265 unsold units) to be

completed and sold. See unit list in Appendix D.unit mix See page 30

hazardous substances None observed

flood zone FEMA Zone X (no flood insurance required), FEMAMap 06059C0233H dated February 24, 2004.

unusual seismic hazards None

value estimate Bulk value as is $219,700,000

exposure/marketing time 9 months

value of personal property,

fixtures, and intangibles

included in the value estimate

Valuation includes future payments related to a sale ofthe model units to a third-party investor.

highest and best use Single-family residential subdivision



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OR G A N I Z A T I O N O F T H E R E P O R T 2

D ISTEFANO COMPANY

O R G A N I Z A T I O N O F T H E R E P O R T

This appraisal report is organized as follows:

Section 1 contains an executive summary and the appraisal premises,

definitions, and assumptions used inperformingthe appraisal

assignment as well as reportingthe results of the assignment.

Section 2 describes the general surroundings, the market area, and the

specific characteristics of the subject property.

Section 3 contains an analysis of the highest and best use of the subject

property as well as a description of the appraisal methods used in

estimating the value.

Section 4 contains the valuation of the bulk value. Section 5 contains the final value estimates and a certification.

Section 6 includes appendixes of supplemental information.

A P P R A I S A L P R E M I S E S

Definitions

Market Value

The most probable price which a property should bring in acompetitive and open market under all conditions requisite to a fairsale, the buyer and seller each acting prudently and knowledgeably, andassuming the price is not affected by undue stimulus. Implicit in thisdefinition is the consummation of a sale as of a specified date and thepassing of title from seller to buyer under conditions whereby:

1. buyer and seller are typically motivated;

2. both parties are well informed or well advised, and acting in whatthey consider their best interests;

3. a reasonable time is allowed for exposure in the open market;



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A P P R A I S A L PR E M I S E S 3

D ISTEFANO COMPANY

4. payment is made in terms of cash in United States dollars or interms of financial arrangements comparable thereto; and

5. the price represents the normal consideration for the property sold

unaffected by special or creative financing or sales concessionsgranted by anyone associated with the sale.1

Fee Simple Estate

Absolute ownership unencumbered by any other interest or estate subject only

to the limitations imposed by the governmental powers of taxation, eminent

domain, police power, and escheat.2

Valuation Premise

market value (bulk value)as is. The as is condition reflects the actual

physical, legal, economic, and political status of the land as of the effective date

of the appraisal. For this appraisal, the as is value estimate represents the

bulk value to a single buyer intending to complete the construction and

marketing of the project. The bulk value reflects a discount from aggregate

retail value to cover expenses of building and marketing unsold units.

Client, Intended User, and Intended Use

The client and intended user is California Coastal Communities, Inc. The

report is intended for the clients use in connection with asset valuation.

Purpose of the Appraisal

The purpose of the appraisal is to estimate the market value per the definition

on page 2.

1 Source: OCC, 12 CFR, Part 34, Subpart C-Appraisals 34.42 Definitions (g).2 Ibid., 140.



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D ISTEFANO COMPANY

Property Interest Appraised

The property interest appraised is the fee simple estate in the subject property,

including the future value of profit sharing related to the model units ownedby a third-party investor.

Effective Date of the Appraisal and Date of the Report

The effective date of the appraisalis February 1, 2010. The date of the report is

February 19, 2010, which is the date of the transmittal letter and the date when

the analysis and report were completed.

Scope of Work

The appraisal assignment represents a complete appraisalreported in a self-

contained reportformat as defined in the Uniform Standards of Professional

Appraisal Practice. In conducting the appraisal, I performed the following

activities:

1. Inspected the subject property and its surroundings. Reviewed the plans,

title report, and related information regarding the subject property.

Researched the zoning.

2. Collected information regarding area demographics, supply and demand

of competitive properties, sales of land and improved properties,

construction costs, and investor criteria in the market.

3. Confirmed and analyzed the data as described in the report to arrive at a

final value estimate.

Assumptions and Limiting Conditions

The value estimate stated in this report is subject to the following assumptions

and limiting conditions:



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D ISTEFANO COMPANY

8. The appraiser assumes that no unapparent conditions exist in the property

or subsoil that may affect the value of the property. The appraiser accepts

no responsibility for obtaining engineering, geologic, or environmental

studies to detect such conditions.9. The appraiser assumes that there is no encroachment of real property

improvements, unless otherwise stated. The appraiser has made no

engineering survey.

10. The appraiser expresses no opinion regarding the value of subsurface oil,

gas, or mineral rights, or surface entry rights, unless otherwise stated.

11. The appraiser assumes that subsoil conditions are adequate to support the

improvements. Earthquakes are not uncommon in the area, and the

appraiser accepts no responsibility for their possible effect.

12. The appraiser was not provided with information regarding toxic or

hazardous materials at the property, and did not become aware of such

materials during the investigation of the property unless otherwise stated.

The value estimate in this report assumes that no toxic or hazardous

materials exist at the subject property, or in proximity to it, that would

affect the value. The appraiser assumes that the property complies with all

governmental regulations concerning the environment, unless otherwise

stated.

13. The appraiser assumes that the property complies with all zoning and use

regulations, unless otherwise stated.

14. The appraiser assumes that all consents and authorities required by any

governmental or private entity are available for any use on which the value

estimate is based, unless otherwise stated.

15. The appraiser was not provided with a compliance survey regarding

conformity with the Americans with Disabilities Act (ADA). Should a

survey by a qualified professional reveal that the subject property does not

comply with the ADA, the value may be negatively affected. The value

estimate does not consider any consequences of ADA non-compliance.



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D ISTEFANO COMPANY

Appraisal Assignment and Report

16. The appraisal report includes maps, sketches, and exhibits solely as aids in

illustrating topics discussed in the report. Such aids should not be

considered as surveys, or be relied on for any other purpose, or be

reproduced, or be used apart from the report.

17. The appraiser assumes that the assignment does not include testimony or

attendance in court with reference to the appraisal, unless prior

arrangements are made regarding additional employment.

18. The distribution, if any, of the final value estimate between land and

improvements applies only for the stated use, and the distribution is

invalid if used with any other appraisal.

19. The possession of this report does not include the right of publication. Thereport is intended for the sole use of the client. Without the written

consent of the appraiser, the report may not be used for any purpose by

anyone other than the client to whom it is addressed.



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PR O P E R T Y A N D AR E A DE S C R I P T I O N 8

D ISTEFANO COMPANY

P R O P E R T Y A N D A R E A D E S C R I P T I O N

Property Identification

address Various addresses within the Brightwater subdivision (unsold lots-

units and units in escrow)South side Warner Ave and Los Patos Ave between Pacific Coast

Hwy and Bolsa Chica StHuntington Beach (Orange County), CA 92649

assessors parcel(s) See assessors maps in Appendix A

legal description See title report in Appendix A

Owner of Record and Ownership History

The Uniform Standards of Professional Appraisal Practicerequire the appraiser to analyze

any sales of the property that have occurred within 3 years of the effective date of the

appraisal or any current purchase agreements, options, or listings for the property.

According to the title report, the current owner of the fee estate in the subject property is

Signal Landmark. The current owner, or related entities, has owned the land since the 1970s.

The owner is developing a 356-unit, single-family residential subdivision on the property as

described in this report. The owner has built and will continue to build all the homes in the

project. No lots have been, or are, offered for sale to other builders.

The owner filed a Chapter 11 bankruptcy petition in October 2009 and is in the process of

preparing a plan of reorganization.

Unit Status

The status of the entire Brightwater project, and property appraised is as follows as of the

effective date of the appraisal:



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D ISTEFANO COMPANY

Status

Number

ofUnits

Subject PropertyProduction units unsold (14 speculative units under construction and 251

vacant lots to be improved with single-family residences) 265Production units in escrow scheduled to close Mar-10 through Sep-10 oncompletion of construction 11

Subtotal subject property 274

Not a PartProduction units sold to individual buyers from Dec-07 through Jan-10 (not apart of the subject property) 63

Model units sold to an investor in Dec-08 (not a part of the property appraisedexcept for future payments to the owner of the subject property, included in

the valuation as personal property) 17

Subtotal sold units 80

Total Brightwater 356

A unit list in Appendix D shows the status of each unit. Sold units were all sold for cash

without seller financing. Buyers are required to live in the unit as their principal residence for

18 months (anti-speculation clause).

Model Sale Leaseback

In December 2008, the owner of the subject property sold the 17 model units to an investor

under a sale-leaseback agreement until models are ultimately sold to individual buyers on

project sell-out. For appraisal purposes, the pertinent terms of the purchase, sale, and lease

agreement are as follows:

date of agreement December 29, 2008close of escrow December 31, 2008

buyer seller Brightwater Models LLC / Signal Landmarkproperty 17 completed model homes including furnishings

price $25,000,000 to be paid as follows

$22,500,000 in cash at close of escrow (December 31, 2008)$2,000,000 deferred payment payable December 2010

$500,000 to reimburse seller for converting the models to habitable

residences

Continued on following page.



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D ISTEFANO COMPANY

lease of model homes Seller to lease-back the property from buyer

lease term 36 months from close of escrow (expires December 31, 2011)

extension options Two, 1-year extension optionsrent Per schedule attached to the lease

expenses Net lease. Seller-tenant to pay all property taxes, insurance, utilities,maintenance, and repair expenses

disposition of models Seller to have exclusive right to sell each model for 90 days at 5%

commission.

additional purchase

price

Buyer to pay Seller 75% of difference between the retail selling prices

to individual buyers and the Buyers cost plus 16% internal rate ofreturn on Buyers costs.

Environmental Issues

No environmental information was provided for review. The appraisal assumes that no

environmental issues exist that would influence the value.

Area Description

The Los Angeles metropolitan area covers parts of five Southern California counties: Los

Angeles, Orange, San Bernardino, Riverside, and Ventura.

The subject property is in the city of Huntington Beach in north coastal Orange

County about 26 miles southeast of downtown Los Angeles, 3 miles northwest ofdowntown Huntington Beach, and mile inland from the Pacific Coast.

Huntington Beach (incorporated in 1909) covers an area of 26.4 square miles and is

the third largest city in Orange County in terms of population. The city is known for its

long beach (8.5 miles), mild climate, and excellent surfing.

Population

The following table shows the trend in population growth.



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D ISTEFANO COMPANY

P OP UL AT I ON GR OW T H

Average Average AverageMetropolitan Annual Orange Annual Huntington Annual

Year Los Angeles Change County Change Beach Change

1970 9,976,000 1,432,000 115,960 1980 11,426,000 1.4% 1,945,000 3.1% 170,505 3.9%

1990 14,630,000 2.5% 2,424,000 2.2% 181,519 0.6%

2000 16,554,900 1.2% 2,867,800 1.7% 190,300 0.5%

2009 18,536,885 1.3% 3,139,017 1.0% 202,480 0.7%Source: California Department of Finance.

Population growth in Huntington Beach is limited by the relative lack of developable

land.

EconomyThe Southern California economy, along with the national economy, has begun a

recovery from the most severe recession since WWII. The recession began in fall 2007

with the collapse of sub-prime residential lenders and then spread throughout the

economy. The bankruptcy of Lehman Bros. in September 2008 was the catalyst for a

worldwide financial panic now largely abated. The fourth quarter 2008 and first quarter

2009 saw the worst of the recession, including a severe credit crunch, declining house

prices, and a declining stock market. Unprecedented government intervention has

stabilized the economy and is expected to result in a gradual recovery that will gain

strength in the last half of 2010 and thereafter. The stock market appears to have

bottomed in March 2009, and house prices appear to have started recovering currently.

u.s. gross domestic product. Gross domestic product (GDP) measures the output of

goods and services produced by labor and property located in the United States. The

following table shows the trend in GDP.



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D ISTEFANO COMPANY

U.S. gross domestic product grew in the third and fourth quarters of 2009 after severe

declines in the preceding four quarters.

consumer trends. Consumer confidence levels reflect peoples feelings about general

business conditions, employment opportunities, and their own income prospects. The

following table shows the trend in consumer sentiment as measured by the Consumer

Confidence Index.

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

1980q3

1981q2

1982q1

1982q4

1983q3

1984q2

1985q1

1985q4

1986q3

1987q2

1988q1

1988q4

1989q3

1990q2

1991q1

1991q4

1992q3

1993q2

1994q1

1994q4

1995q3

1996q2

1997q1

1997q4

1998q3

1999q2

2000q1

2000q4

2001q3

2002q2

2003q1

2003q4

2004q3

2005q2

2006q1

2006q4

2007q3

2008q2

2009q1

2009q4

Annualized change %

Source: U.S. Bureau of Economic Analysis.

U.S. GR OSS DOM E ST I C PR ODUC T B Y Q UAR T E R



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D ISTEFANO COMPANY

The consumer confidence index declined to 25 in February 2009, its lowest point since the

inception of the index in 1967. The index has since recovered somewhat, although is still

very low (55.9 as of January 2010).

pmi index. The Institute of Supply Management publishes the Purchasing Managers

Index that is considered one of the best leading indicators marking the end of a recession.

The index measures the breadth of economic distress or success across firms. When the

index turns up decisively, an expansion is typically one to four months away, although insome cases the index has turned up as long as a year before the end of a recession.

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

Jan-80

Jan-81

Jan-82

Jan-83

Jan-84

Jan-85

Jan-86

Jan-87

Jan-88

Jan-89

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Consumer Confidence Index (1985=100)

Source: The Conference Board, New York (www.conference-board.org).

IN DE X OF CON SUM E R C ON F I DE N C E



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D ISTEFANO COMPANY

The Purchasing Managers Index fell to 32.9 in December 2008 to a level seen only in the

worst recessions since World War II. The index recovered to 58.4 as of the latest figure

(January 2010), giving some hope for better conditions ahead.

Job Growth

Job growth is a good indicator of overall economic activity and strongly influences the

real estate markets. The following table shows the trend in job growth.

10

20

30

40

50

60

70

80

90

Jan-48

Jan-51

Jan-54

Jan-57

Jan-60

Jan-63

Jan-66

Jan-69

Jan-72

Jan-75

Jan-78

Jan-81

Jan-84

Jan-87

Jan-90

Jan-93

Jan-96

Jan-99

Jan-02

Jan-05

Jan-08

ISM PMI Composite Index

10

20

30

40

50

60

70

80

90

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

ISM PMI Composite Index

Source: The Institute of Supply Management.

P UR C HASI N G M AN AG E R S IN DE X



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D ISTEFANO COMPANY

JOB GROWTH ORANGE COUNTY PMSA

Jobs

AnnualIncrease/Decrease

% Changefrom Previous

Year

Dec-83 910,600

Dec-84 970,400 59,800 6.6%

Dec-85 1,015,300 44,900 4.6%

Dec-86 1,061,300 46,000 4.5%

Dec-87 1,118,400 57,100 5.4%

Dec-88 1,173,100 54,700 4.9%

Dec-89 1,184,700 11,600 1.0%

Dec-90 1,186,600 1,900 0.2%

Dec-91 1,146,100 -40,500 -3.4%

Dec-92 1,139,900 -6,200 -0.5%

Dec-93 1,136,600 -3,300 -0.3%

Dec-94 1,161,800 25,200 2.2%

Dec-95 1,184,800 23,000 2.0%Dec-96 1,217,800 33,000 2.8%

Dec-97 1,280,300 62,500 5.1%

Dec-98 1,339,400 59,100 4.6%

Dec-99 1,381,100 41,700 3.1%

Dec-00 1,424,800 43,700 3.2%

Dec-01 1,419,500 -5,300 -0.4%

Dec-02 1,437,100 17,600 1.2%

Dec-03 1,460,300 23,200 1.6%

Dec-04 1,492,300 32,000 2.2%

Dec-05 1,523,200 30,900 2.1%

Dec-06 1,543,800 20,600 1.4%

Dec-07 1,515,900 -27,900 -1.8%Dec-08 1,466,900 -49,000 -3.2%

Dec-09 1,417,600 -49,300 -3.4%Source: California Employment Development Department.

Jobs have declined for the past 3 years. As of its latest forecast (December 2009),

Chapman University forecasts that Orange County will experience essentially flat job

growth in 2010, with a weaker first half and stronger second half 2010.

unemployment. The following chart shows the trend in unemployment rates in

California and Southern California Counties.



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D ISTEFANO COMPANY

Current unemployment rates are at levels exceeding the 1982 and 1992 recessions,

reflecting the severity of the recent downturn. Unemployment is a lagging indicator, not

expected to start improving until late 2010. The Orange County unemployment rate

(10.1% as of January 2010) is at an all-time high, although is the lowest among

Californias major areas. The U.S. Federal Reserve Board forecasts that unemployment

nationally will decline from 9.5% in 2010 to 8.5% in 2011.

Regional SummaryThe economy appears to have begun an up-cycle, with GDP growth in the third and

fourth quarters of 2009, bringing to an end the worst recession since WWII. Job growth is

expected to be weak however, so that the recovery will be relatively moderate in

comparison to previous recoveries.

Neighborhood Description

Boundaries

The term neighborhoodis defined as a group of complementary land uses. The

neighborhood of the subject property is bounded by the Pacific Coast on the south and

west, by the Garden Grove Freeway (State Route 22) and the San Diego Freeway (I-405)

on the north and northeast, and by Beach Boulevard on the east.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

1980

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

Jan-10

U.S. Orange County

California Riv.-San Bern. CountiesLos Angeles County

Unemployment rate

Source: U.S. Department of Labor and California Department of Labor.

UN E M P L OYM E N T R AT E S



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D ISTEFANO COMPANY

Land Use

Land use includes a mix of suburban residential tracts, the original coastal downtown and

pier, a large light-industrial park in the northwest section of the city, and retail-office-

commercial uses concentrated on Beach Boulevard along its length from the coast to theSan Diego Freeway.

Transportation

In the vicinity of the subject property, Pacific Coast Highway (California Highway 1) is

the major north-south arterial street. Warner Avenue is the major east-west arterial street.

The closest freeway intersections to the subject property are at Warner Avenue and the

San Diego Freeway, 5 miles east, and at Bolsa Chica Road and the San Diego Freeway, 5

miles north. The John Wayne Orange County Airport is 11 miles east. Long Beach Airport

is 10 miles northwest.

Subject Property Immediate Surroundings Bolsa Chica Wetlands

In the 1960-70s the real estate subsidiary of Signal Oil Co. assembled approximately 1,900

acres of vacant coastal mesa, wetlands, and oilfield land and proposed developing a

marina and 6,000 residential units. In 2005, after years of entitlement negotiations, the

subject Brightwater project (356 units on approximately 106 acres) was approved for the

upper mesa overlooking the lower-lying wetlands. The balance of the site was sold or

donated in stages to the State of California for what is now the Bolsa Chica Ecological

Preserve operated by the California Department of Fish and Game. Starting in 2004, a

variety of public agencies began gradually restoring the Preserve as a wetlands ecological

habitat (primarily for coastal birds) and for light public use (hiking, photography, and

bird watching) but no further development allowed, thus permanently preserving ocean

views from the subject property. An Interpretive Center and hiking-running trail runs

along the southerly boundary of the subject Brightwater project.



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D ISTEFANO COMPANY

West of the Ecological Preserve across Pacific Coast Highway is the Bolsa Chica State

Beach running along 3 miles of coast from Sunset Beach to Huntington State Beach.

Northwest of the subject property along the coast is Huntington Harbour, an area of

expensive housing on navigable water channels developed in the 1960s-70s. North and

east of Brightwater is single-family residential development, with neighborhood-serving

commercial-retail development along arterial streets.

A 50-acre site across Bolsa Chica Street east of the subject property is owned by Shea

Homes and proposed for 111 high-end single-family homes (Parkside Estates).

Entitlements have not been granted, and it appears unlikely that this project, if built,

would come on stream in time to compete with the subject development.

Neighborhood Summary

The life cycle of a neighborhood usually involves four stages, varying only in intensity and

duration: growth, stability, decline, and revitalization. The neighborhood of the subject

property is an attractive, established coastal district in a long stage of stability. The

location close to the coast will support continued demand in the neighborhood as the

economy recovers.



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D ISTEFANO COMPANY

Supply and Demand Analysis and Trends

The Southern California residential real estate market, along with the national market, is

recovering from a sharp correction that began in 2007 after a period of extraordinarygrowth in 1999-2006. During the boom, prices increased at unsustainable rates, in many

cases more than doubling. The collapse of subprime lending beginning in fall 2007 and

consequent catastrophes in the credit markets precipitated a dramatic bust that is now

largely abated. Some observers indicate that prices have over-corrected to the downside,

with the market now in the early stages of a new up-cycle that will gradually gain

momentum to a new peak in 2016-18.

Demand

Housing demand depends primarily on job growth, the relation of housing prices toincomes, availability of financing, mortgage interest rates, and consumer sentiment. The

interplay of these factors influences the absorption of new residential construction, as well

as existing home sales.

job growth. Chapman University forecasts that Orange County will experience

essentially flat job growth in 2010, with a weaker first half and stronger second half 2010.

Future job growth and unemployment declines are expected to be relatively modest

compared with previous recoveries.

affordability. The following table shows the trend in housing affordability as measured

by the California Association of Realtors Housing Affordability Index.



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D ISTEFANO COMPANY

benefits the subject property - particularly the higher priced units. Interest rate spreads

have declined from 1.7% in early 2009 to less than 1% currently for jumbo versus

conforming loans. Now that home prices appear to be stabilizing, the supply of mortgage

financing should increase as investors seeking yield become more willing to invest insecuritized mortgages.

Mortgage interest rates remain low as shown in the following chart.

Mortgage interest rates are forecast to remain low at least until a recovery in the

residential market becomes more obvious.

market sentiment. One measure of consumer sentiment is the number of home sales.

According to DataQuick, an estimated 22,328 new and resale houses and condos sold in

Southern California in December 2009, up 12.1% from December 2008. The December

2009 sales figure is 11.2% below the December average. Sales have been buoyed by afederal tax credit of up to $8,000 for first-time buyers.

The National Association of Home Builders index remains very low at 19 as of

January 2010. Index readings below 50 indicate negative sentiment. The last time the

index was above 50 was April 2006.



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D ISTEFANO COMPANY

Investor sentiment regarding future homebuilder earnings, as evidenced by the

homebuilder ETF (XHB), appears to indicate that the worst is over, as shown in the

following chart.

Supply

new construction. The following table shows the trend in new residential construction

as measured by building permits.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1980

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

Dec-09

Multi-family

Single-family

New residential permits (in units)

Source: Construction Industry Research Board, Los Angeles.

ORANGE COUNTY BUILDING PERMITS -RESIDENTIAL PROPERTIES



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D ISTEFANO COMPANY

The chart reflects the real estate market cycles. New single-family construction has been

declining since the late 1990s because of relatively little developable residential land in

Orange County and high land and construction costs, and more recently the dearth of

financing. An additional source of supply is the shadow inventory of foreclosed houses,which is expected to burn off in about 18 months.

Price Trends

The following chart shows the trends in house price appreciation/depreciation as

measured by the S&P/Case Shiller Index.

The index measures the change in same-sale house prices from the price 12 months

earlier. As of the latest figures (November 2009), the index is at or near the zero line and

looks about to cross it in the next month or two, when prices will begin increasing again

after 3 years of declines.

The Case-Shiller indexes are broad measures and do not break down into smaller

geographic areas. In general areas close to the coast have seen lower price declines

compared with inland areas.

As of its December 2009 forecast, Chapman University indicates that the residential

price low occurred in first quarter 2009 and forecasts a 5.0% price increase for detached

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

Jan-88

Jan-89

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

LA Orange San Diego% Price change year over year

Source:Standard & Poors.

S&P/CASE SHILLER PRICE INDEX (RATE OF INCREASE/DECREASE FROM PREVIOUS 12 MONTHS)



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D ISTEFANO COMPANY

resale houses in 2010 with moderate increases going forward because the economic

recovery will be moderate.

The market is bottoming sequentially by price range. Prices for the lowest priced

houses have clearly turned up with multiple offers pushing prices above asking price.Mid-priced houses are also turning up. Highest priced houses, which did not decline as

dramatically, may not have begun an upturn as of yet. The slope of any future uptrend

will depend primarily on the rate of job growth and consumer sentiment.

DataQuick reports the following regarding prices and sales for Southern California

counties, with greater detail shown for coastal zip codes in Orange County:

SOUTHERN CALIFORNIA NEW AND RESALE SINGLE-FAMILY HOME SALES AS OF DECEMBER 2009

ZipCode

Numberof Sales

MedianPrice

% chgfrom

Dec 08Price/Sq Ft

Southern California CountiesLos Angeles 5,343 $340,000 6.3% $239Riverside 3,463 $190,000 -5.0% $100San Bernardino 2,549 $148,000 -12.8% $94San Diego 2,185 $365,000 9.8% $208Orange 1,833 $500,000 17.6% $289

Orange County Coastal Zip Codes1Capistrano Beach 92624 6 $555,000 -25.6% $328Corona del Mar 92625 15 $1,242,000 -57.5% $680Dana Point 92629 14 $790,000 23.2% $380Huntington Beach 92646 34 $660,000 10.0% $355Huntington Beach 92648 32 $738,000 -2.5% $349Huntington Beach (subject) 92649 18 $987,000 7.7% $471Laguna Beach 92651 34 $1,293,000 29.3% $1,019

Newport Beach 92660 36 $1,085,000 -10.7% $493Newport Beach 92661 2 $2,163,000 10.9% $1,307Newport Beach 92663 11 $940,000 -21.7% $905Newport Coast 92657 14 $1,975,000 16.2% n/aBalboa Island 92662 1 $1,645,000 -0.3% $1,689San Clemente 92672 21 $810,000 10.2% $441Seal Beach 90740 7 $849,000 17.9% $875

Source: DQNews.com

Median prices have been influenced downward by foreclosure pricing as evidenced by the

extremely low prices per sq ft in the Inland Empire counties (Riverside-San Bernardino),

which have the highest number of foreclosures. Orange County has the highest average

median prices because of relatively fewer foreclosures as well as its attractive location.Coastal prices per sq ft are significantly higher than the overall county average, as would

be expected.

1 See map on page 26.



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D ISTEFANO COMPANY

Chapman University forecasts that median resale single-family home prices will show

an increase of 1.6% in Orange County in 2010, after a 17.9% decline in 2009, for the

following reasons:

As sales activity shifts from lower-priced homes to higher-priced tiers, the medianprice will be pulled up.

The ratio of median home prices to median income will reach 5.6 in 2010, near itshistorical average of 5.7.

ORANGE COUNTY COASTAL ZIP CODES



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D ISTEFANO COMPANY

The ratio of Orange County to U.S. home prices will be at 2.3, also near itshistorical average ratio of 2.4.

Subject Property Immediate Competition

There are no directly competitive subdivisions along the Orange County coast. Data

regarding the most competitive properties are described in the sales comparison analysis

starting on page 58. The proposed Marblehead subdivision in San Clemente (300+ lots,

32 miles south and not directly competitive) is delayed by the bankruptcy of the financial

partner, Lehman Brothers.

Summary Residential Supply and Demand

The current consensus of forecasts is that the down-cycle in the for-sale residentialmarket is past the bottom and in the early stages of a recovery. New construction is

minimal, interest rates remain low, and prices have reached a level of affordability not

seen since the 1990s. A shadow inventory of foreclosed houses still needs to work through

the market, which may take another 12 to 18 months.

The subject property offers a an attractive combination of master-planned

environment, coastal location and views, and relatively affordable prices compared with

more upscale areas such as Newport Beach. The project came on stream at the wrong time

in the real estate cycle. Going forward, the dearth of meaningful competition and

improving economy should result in a successful completion of the project.

Site and Improvement Description

Maps and photographs for the subject property appear starting on page 35.

The subject property consists of the 276 units (11 units in escrow and 265 unsold

units) in the Brightwater single-family residential subdivision (total 356 lots-units). A

unit schedule is attached in Appendix D. A site plan is included in Appendix C.

The project is divided into four neighborhoods each with its own product mix and

model complex: The Trails, The Sands, The Cliffs, and The Breakers.The project opened in August 2007, and is being built in small phases (see phasing

plan in Appendix B). The basic infrastructure and common areas are complete. What

remains is installation of some streets, finishing of some lots, and construction of

individual houses.



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D ISTEFANO COMPANY

The owner intends to build out the project through the completion and sale of all

units. No lots are available for sale to developers. The valuation assumes that all

construction will be completed as proposed.

Access and Street Improvements

Brightwater Drive is the main backbone street running through the project connecting

with Bolsa Chica Street on the east and Warner Avenue on the west. Access to the

individual lots is via circulation streets off Brightwater Drive. Streets have asphalt paving,

concrete curbs, gutters, and storm drains, and overhead street lighting. Ultimately all the

streets in Brightwater will be public streets but privately maintained by the Brightwater

homeowners association.

Shape, Topography, and Drainage

The total site has an irregular shape consisting of lots to be finished. The topography is

basically level with slopes along the south and west boundary overlooking the Bolsa Chica

Ecological Preserve. Surface water run-off is directed to the streets.

Soils Conditions

No soils information was provided for review. The appraisal assumes that soils are stable

and adequate to support any proposed improvements.

Flood Zone and Earthquake Zone

The site is in Flood Zone X (outside any flood zone with no flood insurance required) per

FEMA map 06059C0233H dated February 24, 2004. The site is not within an Alquist-

Priolo special studies earthquake zone, although all of California is subject to earthquake

shaking.

Utilities

All public utilities and services are available to the site, with electrical serviceunderground.



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D ISTEFANO COMPANY

Nuisances and Hazards

I noticed no obvious nuisances or hazards that might influence the appeal or

marketability of the subject lots.

Zoning

Entitlements were originally processed through the California Coastal Commission and

the Orange County Planning Department while the property was in unincorporated

county land. In 2008 the entire property was annexed into the City of Huntington Beach,

which created a new specific plan, the Brightwater Specific Plan, incorporating the county

entitlements. All entitlements are in place. The zoning designation for the Trails and

Sands sections of the property are RM-15-SP (Residential Medium Density). The zoning

designation of the Cliffs and Breakers sections of the property are RL-7-SP (Residential

Low Density). The south periphery of the project and the native habitat along Los PatosAvenue are zoned OS (Open Space).

Status of Entitlements

All entitlements to development are in place. The appraisal assumes that no entitlement

risk exists for the property.

Easements, Encumbrances, and Encroachments

The title report (Appendix A) references utility easements with no influence on value. Theproject has no Mello-Roos or other infrastructure special assessment districts.

Project Amenities

The project has extensive landscaping, arbors, and signage at each major entrance: off

Warner Avenue and Bolsa Chica Street. Brightwater Drive also has extensive landscaping

along its entire frontage. There are four small parks with arbors and tot lots along

Brightwater Drive and a larger park and undeveloped natural habitat between The Trails

and The Sands. The mesa trail, which runs along the southerly project boundary

overlooking the Ecological Preserve, has landscaping, signage and interpretive kiosks off

Warner Avenue and off Bolsa Chica Street. A glass wall runs along the entire southerly

boundary of the project. The Los Patos Avenue and Bolsa Chica Street frontages have a

stucco wall and setback landscaping along the entire length. The project does not have a

community clubhouse or pool.



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D ISTEFANO COMPANY

Unit Mix

The project has four distinct neighborhoods of single-family detached homes (see site

plan on page 37) with unit mix as follows.

Unit Areas (Sq Ft)

Min Max BR BA Gar Base Price Ocean View

The Trails

Plan 1 1,710 3 2 2 $810,450

Plan 2 1,755 3 2 2 $850,000

Plan 3 1,843 1,953 4 2 2 $950,000

Total Trails 1,769

The Sands

Plan 1 1,927 4 2 2 $925,000

Plan 2 1,988 4 3 2 $950,000

Plan 3 2,161 4 2 2 $990,000

Total SandsThe Cliffs

Plan 1 2,724 2,928 4 3 2 $1,275,000

Plan 2 3,120 3,400 5 4 3 $1,395,000 $2,295,000

Plan 3 3,278 3,543 4 4 3 $1,495,000 $2,398,000

Plan 4 3,474 3,590 4-6 4 2 $1,550,000 $2,325,000

The Breakers

Plan 1 3,162 3,557 4 3-4 2 $1,500,000

Plan 2 3,548 3,785 5 4 3 $1,650,000

Plan 3 3,939 4,080 4-5 4-5 3 $1,840,000 $3,016,500

Plan 4 4,076 4,339 5-6 4 2 $1,900,000 $3,200,000

The Trails has the smallest and least expensive units, followed by the Sands, the Cliffs, and

the Breakers.



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Unit Count and Total Areas

Unit Area (Sq Ft) Lot Area (Sq Ft)

Project summary Models Sold Escrows Unsold Total Min Max Total Min Max Tota

Trails

Plan 1 1 12 2 7 22 1,710 2,835 4,144Plan 2 1 10 1 7 19 1,755 2,835 3,651Plan 3 2 7 12 21 1,843 1,953 2,835 4,179

Subtotal Trails 4 29 3 26 62 1,793 avg 111,142 3,113 avg 192,9

SandsPlan 1 1 5 1 18 25 1,927 2,831 4,674Plan 2 2 4 17 23 1,988 3,222 4,942

Plan 3 1 7 23 31 2,161 3,258 8,552

Subtotal Sands 4 16 1 58 79 2,037 avg 160,890 4,243 avg 335,1Cliffs no view

Plan 1 1 4 22 27 2,724 2,948 4,717 8,896Plan 2 1 1 2 15 19 3,120 3,400 4,982 8,465

Plan 3 1 2 15 18 3,278 3,543 5,039 8,184Plan 4 1 2 17 20 3,474 3,590 5,000 8,672

Subtotal Cliffs no view 4 9 2 69 84Cliffs view

Plan 1 5 5 2,724 2,948 4,715 6,445Plan 2 1 4 5 3,120 3,400 5,128 5,769

Plan 3 1 5 6 3,278 3,543 5,667 8,713Plan 4 1 8 9 3,474 3,590 5,264 8,756

Subtotal Cliffs view 0 0 3 22 25

Total Cliffs 4 9 5 91 109 3,219 avg 350,823 6,113 avg 666,3

Breakers no viewPlan 1 2 1 15 18 3,162 3,557 6,500 10,898Plan 2 1 16 17 3,548 3,785 6,243 8,455

Plan 3 1 13 14 3,939 4,080 6,231 9,052Plan 4 1 20 21 4,076 4,339 5,995 11,075

Subtotal Breakers no view 0 4 2 64 70

Breakers viewPlan 1 1 1 4 6 3,162 3,557 6,500 9,079

Plan 2 1 5 6 3,548 3,785 6,725 8,722Plan 3 1 1 6 8 3,939 4,080 6,300 8,546Plan 4 2 3 11 16 4,076 4,339 6,300 11,958

Subtotal Breakers view 5 5 0 26 36

Total Breakers 5 9 2 90 106 3,852 avg 408,307 7,583 avg 803,8

Total Brightwater 17 63 11 265 356 2,897 avg 1,031,162 5,613 avg 1,998,3

A unit schedule is attached in Appendix D.



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D ISTEFANO COMPANY

Standing Inventory and Construction Status

The following table summarizes the construction status of the 265 unsold units, and 11

units in escrow. Standing inventory is held to a minimum to reduce carrying costs.

Product Lot Plan

Unit

Area(Sq Ft) Construction Status

Speculative Unsold1 Breakers 20 3 3,940 85% complete

2 Breakers 59 3 3,940 100% complete3 Breakers 64 4 4,100 70% complete

4 Cliffs 61 2 3,308 100% complete5 Cliffs 62 1 2,940 100% complete

6 Sands 46 1 1,927 70% complete7 Sands 47 2 1,988 90% complete8 Sands 56 3 2,160 90% complete

9 Sands 57 3 2,160 100% complete10 Trails 4 3x 1,953 100% complete

11 Trails 34 3 1,941 60% complete12 Trails 36 1 1,710 60% complete

13 Trails 37 2 1,763 60% complete14 Trails 39 3x 1,953 60% complete

Homes in Escrow Order Date

1 Breakers - March 65 1 3,496 1Q10 95% complete2 Breakers - contingent 30 4 4,100 Q309 100% complete

3 Cliffs - March 75 2 3,305 1Q10 95% complete4 Cliffs - March 35 3 3,416 1Q09 100% complete

5 Cliffs - Aug 34 4 3,477 Q309 slabs only6 Cliffs - Aug 36 2 3,310 Q309 slabs only7 Cliffs - Aug 78 2 3,200 Q409 slabs only

8 Sands - Sept 54 1 1,988 1Q10 slabs only9 Trails - April 40 1 1,710 Q309 60% complete

10 Trails - April 38 1 1,710 Q409 60% complete11 Trails - April 35 2 1,763 1Q10 60% complete

The remaining 251 unsold lots are in vacant, finished and semi-finished condition (265

total unsold less 14 speculative units shown above). Costs to fully complete all the units

are included in the bulk value analysis.



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D ISTEFANO COMPANY

Unit Amenities

The Trails The Sands The Cliffs The Breakers

Exteriors Type V wood-frameconstruction, Hampton

Cottage, Craftsman,Tradition, Victorian styles

Type V wood-frameconstruction, Hampton

Cottage, Craftsman,Tradition, Victorian styles

Type V wood-frameconstruction, Hampton,

Craftsman, Traditionalstyles

Type V wood-frameconstruction, Hampton

Cottage, Craftsman,Traditional stylesCedar siding, brick, stoneaccents, hand-troweledstucco

Cedar siding, brick, stoneaccents, hand-troweledstucco

Cedar siding, brick, stoneaccents, hand-troweledstucco

Cedar siding, brick, stoaccents, hand-troweledstucco

50-year composite shingleroof with gutters

50-year composite shingleroof with gutters

50-year composition tileroof with gutters

50-year composition tiroof with gutters

Dual-pane windows Dual-pane windows Dual-pane windows Dual-pane windowsPaver driveways Paver drivewaysFront yard landscaping Front yard landscapingBlock rear and sidefencing

Block rear and sidefencing (tempered glass on

view lots)

Block rear and sidefencing (tempered glas

view lots)

Interiors Ceiling ht: 10' first floor-9' second floor

Ceiling ht: 10' first floor-9' second floor

Ceiling ht: 10' first floor-9' second floor

Ceiling ht: 10' first floo9' second floor

Smoke detectors and firesprinklers



Smoke detectors and fisprinklers

Pre-wired for computer

networks and cable


networks and cable


networks and cable

Pre-wired for compute

networks and cableSecurity system Security system Security system Security systemHome theater in familyroom

Home theater in familyroom



50-gallon water heater 50-gallon water heater 75-gallon water heater,recirculating

75-gallon water heater,recirculating

Heating and air-

conditioning

Heating and air-

conditioning

Dual heating and air-

conditioning

Dual heating and air-

conditioningFinished garages: painteddrywall with openers

Finished garages: painteddrywall with openers

Finished garages: painteddrywall with openers

Finished garages: paintdrywall with openers

Wood and gas burningfireplaces




Interior laundry withcabinets




Kitchens Granite counters Granite counters Granite counters Granite countersViking appliances built-inrefrigerator, gas cook top,convection oven andmicrowave oven,dishwasher, disposal

Viking appliances built-inrefrigerator, gas cook top,convection oven andmicrowave oven,dishwasher, disposal

Subzero built-inrefrigerator, Wolf gasrange, convection-microwave over, Askodishwasher

Subzero built-inrefrigerator, Wolf gasrange, convection-microwave over, Askodishwasher

Bathrooms Kohler sinks, tub faucets Kohler sinks, tub faucets Kohler sinks, tub faucets Kohler sinks, tub fauceCaesarstone counters Caesarstone counters Caesarstone counters Caesarstone countersFrameless shower door Frameless shower door Frameless shower door Frameless shower door

A variety of upgrades is offered including upgraded faucets and fixtures, additional

fireplaces, exterior hardscape and landscape. Some plans allow a flexible configuration for

home offices, dens, extra bedrooms/baths. The project has a tie-in with Restoration

Hardware featuring their products in some models.



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D ISTEFANO COMPANY

Models

Models are open seven days a week with in-house sales staff. Sales offices and design

centers are located in each model complex. The models will be restored as residences and

sold as the production units sell out.

Homeowners Association

The Brightwater Maintenance Association maintains common areas, parks, and entries.

Monthly dues are $177.

Improvement Comments

This is an attractive single-family subdivision of upscale to luxury homes, some with

ocean views, offering a wide range of unit sizes and amenities. The project is laid out withthe biggest units and lots in the south part of the project with the best views. The floor

plans offer a variety of distinctive features and options including loft-lookouts, media

rooms, outdoor living rooms with fireplaces, wine rooms, preparation kitchens, home

offices, and casitas. The units are well designed and have all the features expected by the

market.

Property Tax and Assessments

The property tax rate is estimated at 1.04%of the sales price. Brightwater does not have

any Mello-Roos supplemental assessments.



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D ISTEFANO COMPANY

AREA MAP



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PR O P E R T Y A N D AR E A DE S C R I P T I O N 36Case 8:09-bk-21712-TA Doc 217-2 Filed 03/26/10 Entered 03/26/10 18:41:32 Desc

Exhibit B - Part 1 Page 43 of 43

3.26.10 Appraisal Filing Exhibit B

Documents

Transcript of 3.26.10 Appraisal Filing Exhibit B