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Transcript of IN A SELF-CONTAINED APPRAISAL REPORT Real Estate … 2501688.pdf · VALUATION SERVICES APPRAISAL OF...
V A L U A T I O N S E R V I C E S
APPRAISAL OF REAL PROPERTY VOLUME I OF II HERITGAGE FIELDS MASTER-PLAN (formerly Marine Corp Air Station El Toro) Irvine, California 92618 IN A SELF-CONTAINED APPRAISAL REPORT As of July 1, 2007 Prepared For: Lehman Brothers Real Estate Mezzanine Partners 399 Park Avenue, 11th Floor New York, New York 10022 Prepared By: Cushman & Wakefield of California, Inc. Valuation Services, Capital Markets Group 1750 Fifth Avenue, 4th Floor San Diego, California 92101 C&W File ID: 07-31028-9175
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Cushman & Wakefield of California, Inc. 1750 Fifth Avenue, 4th Floor San Diego, California 92101 619.744.4040 x2002, x3008, Tel 619.744.4041 Fax [email protected] [email protected]
July 20, 2007 Mr. Andrew Dillenburg Lehman Brothers Real Estate Private Equity 399 Park Avenue, 11th Floor New York, New York 10022 RE: Heritage Fields Master-plan (2,107± Gross Acres)
Irvine, California 92618 C&W File ID. 07-31028-9175 Dear Mr. Dillenburg: Pursuant to your request, we performed a real property appraisal of the Heritage Fields master-plan project (formerly Marine Corp Air Station El Toro) in El Toro, California as more particularly described in the self-contained narrative appraisal report to follow. The appraisal was prepared to estimate the market value “as is” of the subject property. The intended use of this report is for the client, Lehman Brothers, for loan underwriting. It may be used in connection with the acquisition, disposition, and financing of the sale of the property. As currently proposed, Heritage Fields will consist primarily of residential, parks/recreation, and R&D land uses. Land uses and allocated acreages vary by district. The total land area for that area of the project which is the subject of this appraisal is approximately 2,107 gross acres or 2,086 acres net. The majority of the land within the Heritage Fields project is dedicated for residential development. Based on current entitlements, upon buildout the project could include up to 3,625 residential units. In the Lifelong Learning District, 1,026 homes are planned on 116 residential acres with construction types including but not limited to: faculty housing, mid-rise flats, single-family detached, and luxury triplexes. Other significant land use distributions in the Lifelong Learning District are 223 education acres, 215 exposition acres, 163.2 agricultural acres, 77.8 R&D acres, and 73.2 cemetery acres. For the Park District, 1,100 homes are planned on 365 residential acres with a wide range of single-family detached housing types. Other substantial land uses in the Park District are 306 golf course acres and 85 park/recreation acres. The Transit-Oriented District has approximately 1,500 housing units planned for 134.7 residential acres with townhome, apartment, and single-family detached construction types. The other primary land use in the Transit-Oriented District is 113 R&D acres.
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We, Brian J. Curry, MAI, SRA, and Edward A. Carlson, MAI, made a careful inspection of the property, gathered and analyzed considerable data and information having a bearing on its values. Our findings are submitted in this report. Based on our investigation and analyses, it was our opinion that as of July 1, 2007, the market value “as is” as defined herein, representing the fee simple interest in this property and subject to the assumptions as set forth within the body of this report, was as follows:
$1,060,000,000 One Billion Sixty Million Dollars
Date of Value – July 1, 2007 The appraisers recognize the assistance of Richard Zbranek, MAI, Tim Garey, Michele Kauffman, Chris Kelsey, Lori Matzke, and Tracie Tyler, all appraisers with Cushman & Wakefield, in various analyses, valuation, and final report preparation. As the subject is a master-planned community, the valuation methodology incorporated land use and cost assumptions. Of significant importance is that the appraisers relied upon the proposed land use and development cost budgets provided by the master developer. It was assumed that the submitted project costs and reimbursements were accurate for use in this analysis. Please reference the Extraordinary and General Limiting Conditions section of this report regarding additional assumptions relevant to the analyses and valuation conclusions contained herein. This report contains a total of 344 pages plus separately bound Addenda, which is a required portion of this report. The appraisal was prepared in conformance with the Uniform Standards of Professional Appraisal Practice (USPAP) adopted by the Appraisal Foundation, the regulations adopted by the Office of the Comptroller of the Currency; the Code of Professional Ethics and Standards of Professional Conduct of the Appraisal Institute; and Lehman Brothers Appraisal Guidelines. This appraisal report was prepared for use by Lehman Brothers. The appraisers and Lehman Brothers make no express or implied representation or warranty of any kind, and expressly disclaim any liability to any other person or entity with respect to the appraisal report. Again, the reader of this report is advised to give special attention to the Extraordinary and General Limiting Conditions upon which the valuation analyses and conclusions were drawn. We appreciate the opportunity of submitting this appraisal report. Please call if we may be of further service. Respectfully submitted,
Brian J. Curry, MAI, SRA Edward A. Carlson, MAI Certified General Real Estate Appraiser Certified General Real Estate Appraiser OREA No. AG003374-Expires February 23, 2008 OREA No. AG028717-Expires December 26, 2008
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CERTIFICATION STATEMENT We certify that to the best of our knowledge and belief: 1. the statements contained in this report are true and correct; 2. the reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions,
and are our personal, impartial, and unbiased professional analyses, opinions, and conclusions; 3. we have no present or prospective interest in the property that is the subject of this report, and no personal interest
with respect to the parties involved; 4. we have no bias with respect to the property that is the subject of this report or to the parties involved with this
assignment; 5. our engagement in this assignment was not contingent upon developing or reporting predetermined results; 6. our compensation for completing this assignment is not contingent upon the development or reporting of a
predetermined value or direction in value that favors the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal;
7. the appraisal assignment was not based on a requested minimum valuation, a specific valuation, or the approval of a
loan; 8. our analyses, opinions, and conclusions were developed, and this report has been prepared in conformity with the
Uniform Standards of Professional Appraisal Practice; 9. the reported analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity
with the requirements of the Code of Professional Ethics and Standards of Professional Practice of the Appraisal Institute, which include the Uniform Standards of Professional Appraisal Practice;
10. that the use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly
authorized representatives; 11. we, Brian J. Curry MAI, SRA and Edward A. Carlson, MAI made a personal inspection of the property that is the
subject of this report; 12. Richard Zbranek, MAI, Tim Garey, Michele Kauffman, Chris Kelsey, Lori Matzke, and Tracie Tyler, all appraisers
with Cushman & Wakefield, provided significant professional assistance to the persons signing this certification; 13. as of the date of this report, we, Brian J. Curry, MAI and Edward A. Carlson, MAI have completed the continuing
education program of the Appraisal Institute; 14. we hereby certify that we are competent to complete the appraisal assignment. The reader is referred to the appraisers’
qualifications contained in the report Addenda; 15. the date of market value “as is” was July 1, 2007; and the date of appraisal report was July 20, 2007.
Brian J. Curry, MAI, SRA Edward A. Carlson, MAI Certified General Real Estate Appraiser Certified General Real Estate Appraiser OREA No. AG003374-Expires February 23, 2008 OREA No. AG028717-Expires December 26, 2008
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TABLE OF CONTENTS Title Page Letter of Transmittal Certification Statement SUMMARY OF SALIENT FACTS AND CONCLUSIONS ....................................................................... 8 EXTRAORDINARY ASSUMPTIONS...................................................................................................... 12 GENERAL ASSUMPTIONS AND LIMITING CONDITIONS................................................................ 13 GENERAL INFORMATION ..................................................................................................................... 19
Property Identification / Legal Description............................................................................................. 19 Statement of Ownership.......................................................................................................................... 19 Date of Appraisal / Date of Report ......................................................................................................... 19 Intended Use / Intended User.................................................................................................................. 19 Scope of the Appraisal ............................................................................................................................ 19 History Overview of Subject Property.................................................................................................... 21 Exposure and Marketing Time................................................................................................................ 23 Personal Property, Fixtures, and Intangible Items .................................................................................. 23 Definition of Fee Simple Estate .............................................................................................................. 23 Definition of Market Value..................................................................................................................... 23 Definition of Market Value “As Is” ........................................................................................................ 24 Definition of Market Value “At Completion” ........................................................................................ 24 Definition of Finished Lots ..................................................................................................................... 24 Definition of Blue Top Lots.................................................................................................................... 24 Definition of Superpad............................................................................................................................ 25 Definition of Aggregate Retail Revenues ............................................................................................... 25
REGIONAL DESCRIPTION ..................................................................................................................... 27 CITY DESCRIPTION ................................................................................................................................ 35 PROPERTY DESCRIPTION ..................................................................................................................... 44
Location .................................................................................................................................................. 44 Project Background and Entitlements..................................................................................................... 44 Proposed Land Use ................................................................................................................................. 47 Site Size .................................................................................................................................................. 49 Product and Phasing Plan........................................................................................................................ 56 Affordable Housing Requirement ........................................................................................................... 56 Existing Land Uses ................................................................................................................................. 57 Surrounding Uses.................................................................................................................................... 58 Topography ............................................................................................................................................. 58 Access and Circulation............................................................................................................................ 58 Utilities.................................................................................................................................................... 59 Public Services........................................................................................................................................ 61 Easements and / or Encroachments......................................................................................................... 61 Seismic Hazards ...................................................................................................................................... 61 Flood Hazards ......................................................................................................................................... 62 Hazardous Materials ............................................................................................................................... 62 Biological / Environmental ..................................................................................................................... 63 Agricultural Resources............................................................................................................................ 63 Land Development.................................................................................................................................. 64
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Conclusions............................................................................................................................................. 66 MARKET ANALYSES .............................................................................................................................. 68
Introduction............................................................................................................................................. 68 Residential Pricing and Sales Activity.................................................................................................... 68 Housing Supply....................................................................................................................................... 73 Residential Demand Overview ............................................................................................................... 76 Residential Product and Pricing.............................................................................................................. 80 Product Absorption ............................................................................................................................... 114 planning area absorption and capture.................................................................................................... 117 Conclusions........................................................................................................................................... 119 R&D Land Market Analysis ................................................................................................................. 120 Auto Center Land Market Analysis ...................................................................................................... 129 Overview of Subject Education/Institutional Land Use........................................................................ 143 Office Market Analysis ......................................................................................................................... 151 Retail Market & Trade Area Analysis .................................................................................................. 159 Overview of Orange County Agriculture.............................................................................................. 167 Overview of Subject Exposition Land Use........................................................................................... 171
HIGHEST AND BEST USE COMMENTARY ....................................................................................... 177 Highest and Best Use As Vacant .......................................................................................................... 177 Highest and Best Use As Improved or As Proposed............................................................................. 179 Most Probable Buyer ............................................................................................................................ 179
MARKET VALUE “AT COMPLETION” - PLANNING AREAS / PARCELS ................................................... 180 Development Method (Residential Land)............................................................................................. 180 Sales Comparison Approach (Residential – attached and detached product) ....................................... 202 Reconciliation of Product Types........................................................................................................... 233
NATIONAL GOLF MARKET ANALYSIS OVERVIEW ...................................................................... 292 Golf Course (Facility) Inventory - 2006 ............................................................................................... 294 Golf Participation.................................................................................................................................. 296 Outlook ................................................................................................................................................. 297 National Trends Conclusion.................................................................................................................. 297 Competitive Facilities ........................................................................................................................... 298 Green Fees............................................................................................................................................. 301 Annual Rounds Played.......................................................................................................................... 301 Conclusions........................................................................................................................................... 301 Description of the Proposed Golf Course Improvements ..................................................................... 301 Methodology ......................................................................................................................................... 303 Sales Comparison Approach ................................................................................................................. 304 Income Approach.................................................................................................................................. 309
MARKET VALUE “AS IS”...................................................................................................................... 321 Development Method............................................................................................................................ 321 Conclusion ............................................................................................................................................ 344
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SCHEDULE OF MAPS/EXHIBITS Aerial Photograph ....................................................................................................................................... 10 Proposed Heritage Fields Districts.............................................................................................................. 11 Subject Photographs.................................................................................................................................... 16 Subject Photographs.................................................................................................................................... 17 Subject Photographs.................................................................................................................................... 18 Regional Map.............................................................................................................................................. 26 City Map ..................................................................................................................................................... 34 Neighborhood Map ..................................................................................................................................... 39 LLD Site Plan ............................................................................................................................................. 40 LLD Plan..................................................................................................................................................... 41 TODD Plan ................................................................................................................................................. 42 Park Plan ..................................................................................................................................................... 43 Master Land Use Plan ................................................................................................................................. 55 Primary Competition Map ........................................................................................................................ 140 Attached Residential Land Sales Map ...................................................................................................... 207 Detached Residential Land Sales Map...................................................................................................... 223 Commercial Land (Industrial / R&D) Sales Map ..................................................................................... 243 Commercial Land (Auto Center) Sales Map............................................................................................. 251 Commercial Land (Educational) Sales Map ............................................................................................. 258 Commercial Land (Office) Sales Map ...................................................................................................... 269 Commercial Land (Retail) Sales Map....................................................................................................... 277 Commercial Land (Agriculture) Sales Map.............................................................................................. 284
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SUMMARY OF SALIENT FACTS AND CONCLUSIONS PROPERTY: The subject property encompasses the proposed Heritage Fields
master-plan in El Toro, California. Heritage Fields represents the redevelopment of the former Marine Corps Air Station El Toro and generally located north of Interstate 5, south of Portola Parkway and Irvine Boulevard, west of Alton Parkway and east of Highway 133.
As currently proposed, Heritage Fields will consist primarily of residential, parks/recreation, and R&D land uses. Land uses and allocated acreages vary by district. The total land area for that area of the project which is the subject of this appraisal is approximately 2,107 gross acres or 2,086 acres net. The majority of the land within the Heritage Fields project is dedicated for residential development. Based on current entitlements, upon buildout the project could include up to 3,625 residential units.
OWNERS OF RECORD: Heritage Fields LLC (Lennar) OWNERSHIP INTEREST: Fee simple estate DESCRIPTIVE DATA: Site Area (Gross Acres) 2,107± (Per Developer) Site Area (Net Saleable Acres) 2,086± (Per Developer) Thomas Bros. Map: 861 A6-J4; 891 C1-D4. Development Agreement: Ordinance No. 05-10 Tract Map: Vesting Tentative No. 17008
Land Use NeighborhoodSaleable Acres± Units
Office TODD 10.5 --
Auto Center TODD 27.7 --
Retail LLD & TODD 40.5 --
Cemetery LLD 73.2 --
Civic LLD, TODD & Park 74.4 --
Park LLD, TODD & Park 125.9 --
Agriculture LLD & TODD 175.7 --
R&D LLD & TODD 181.8 --
Expo Ctr. LLD 215.7 --
Institutional LLD 238.5 --
Golf Course Park 306.3 --
Residential LLD, TODD & Park 615.8 3,625
Project Totals 2,086.0 3,625
LLD - Lifelong Learning District; TODD - Transit Oriented Development District; Park - Park District
MASTER LAND USE PLANHeritage Fields Master Plan, Irvine, California
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MARKET VALUE “AS IS”: $1,060,000,000 DATE OF VALUE: July 1, 2007 EXPOSURE & MARKETING PERIOD: Market Value “As Is”: 6 to 12 Months
DATE OF REPORT: July 20, 2007 APPRAISERS: Brian J. Curry, MAI, SRA Edward A. Carlson, MAI Cushman & Wakefield of California, Inc. Valuation Services, Capital Markets Group 1750 Fifth Avenue, 4th Floor San Diego, California 92101 Phone: (619) 744.4040 x2002, 3008 Fax: (619) 744.4041
Email: [email protected] [email protected]
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V A L U A T I O N S E R V I C E S 1 0
AERIAL PHOTOGRAPH
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V A L U A T I O N S E R V I C E S 1 1
PROPOSED HERITAGE FIELDS DISTRICTS
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EXTRAORDINARY ASSUMPTIONS 1. The appraisers relied on land development cost and reimbursements estimates provided by the
developer. It was assumed that the costs were reasonably true and correct. Any substantial changes in the cost estimates could have an effect on the value conclusions and the feasibility of development. It was assumed that competent and professional engineering has been completed and that the cost estimates were prepared by a qualified, professional service. A copy of the developer’s pro forma with estimated costs is included the Addenda.
2. The developer provided the appraisers with a land development pro forma. The pro forma presented
land sale revenues, critical path, etc. that may have been relied upon for this appraisal. It was assumed that information in the pro forma, and subsequent “verbal” updates by the developer, was true and correct. Note that any substantial changes in the estimates would have an effect on market value conclusions. A copy of the developer’s pro forma is included the Addenda.
3. It was assumed that the subject site is of a physical and legal nature that would allow for the
development of all residential and non-residential property types as presented in the developer’s latest business plan.
4. The developer intends to finance major backbone and/or other improvements via a public financing
vehicle through a Community Facility Districts (CFDs). Per the developer, it was assumed that the overall tax rate, including base and special assessments, for market rate units will be 1.75% and for active-adult housing will be 1.55%. For non-residential commercial property the burden is estimated at $4.00 per square foot. It was assumed the agricultural parcels will not be subject to special assessments. Any changes in the proposed tax burden structure would likely affect the appraisal analyses and conclusions.
5. It was assumed that land development of the subject property will proceed as currently proposed with
no substantial delays due to legal consequences, lack of adequate infrastructure, utilities, etc. 6. This appraisal report was prepared for use by Lehman Brothers. The appraisers and Lehman Brothers
make no express or implied representation or warranty of any kind, and expressly disclaim any liability to any other person or entity with respect to the appraisal report.
7. The property, being a former US Navy facility, includes several so-called LIFOC (Lease In
Furtherance of Conveyance) parcels which will be conveyed to the developer subsequent to final environmental clearance hurdles. This protocol is standard in base realignment and disposition scenarios such as the Heritage Fields project. It was assumed that environmental clearance and conveyance will proceed with no substantial obstacles that would alter the development plan as currently proposed by the master developer.
8. Acceptance of, and/or use of this report constitutes acceptance of the above extraordinary
assumptions.
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GENERAL ASSUMPTIONS AND LIMITING CONDITIONS 1. The property benefits from an approved vesting tentative tract map. This is typical of master-planned
communities in the area and not anticipated to unduly hinder the subject’s development as proposed. It is recommended that the client have available a copy of the Tentative Map(s) Conditions of Approval and retain appropriate legal council to review said document to assess the impact of the Conditions in their lending decisions.
2. The developer provided a preliminary title report (Order No. 7002439-23) prepared by First
American Title Company, dated December 7, 2006. The report is included in the addenda. There were numerous listed exceptions, primarily utility easements. No significant adverse easements, conditions, or encroachments, which were deemed to have a substantial impact on value, were noted upon review of the report or during the onsite inspection. The property was appraised assuming clear title and no unknown adverse easements or encroachments. A full title review is recommended.
3. The property rights appraised were the fee simple interest. It is recognized there are several short-term
leases for older properties on the property. We have not specifically analyzed said leases. 4. The appraisers relied on various information provided by the County of Orange, Lennar, the Concord
Group, Hanley Wood, REIS, and others. All of said information was assumed reasonably true and correct.
5. The appraisers included adjustment grids in the analyses. Specific adjustments were not deemed to be
absolute but were the appraisers’ attempt to reflect value contributions of the various factors in the marketplace. The adjustment process is sometimes fairly subjective in nature, primarily due to the many characteristics of value, variances in buyer/seller influences, imperfections in the market, etc. The adjustment grids represent an empirical format to simply lead the reader to a logical conclusion of the appraisers’ estimates.
6. Individual residential planning area values incorporated hypothetical product line assumptions, which
is typical of master-planned communities. No guarantee can be made as to eventual specific product constructed in each respective neighborhood. However, it was assumed that the planning areas/parcels would be developed with product relatively similar to that of the assumed hypothetical product.
7. The appraisers were provided copies of Soils, Hazardous Waste, Geotechnical, Environmental site
assessment reports prepared by various individuals and/or professional services. Per the studies, there were no soils, hazardous waste, geotechnical, or environmental conditions that would preclude development as proposed. It was assumed that all mitigation measures can be accomplished per the provisions found in the Environmental Impact Report. Further, it was assumed that any and all costs of potential mitigation measures, the responsibility of the master developer (buyer), have been discovered and included in the developer’s cost budget. For further details, it is recommended that the reader refer to a copy of the Environmental Impact Report.
8. All exhibits included in this report, including all maps, are for illustrative purposes only. The
appraisers make no guaranty as to the absolute accuracy of the boundaries depicted on any map, or the exact location of any properties illustrated on any exhibit.
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9. No responsibility was assumed for the legal description or title considerations. Title to the property was assumed to be good and marketable unless otherwise stated.
10. The property was appraised free and clear of any or all liens or encumbrances unless otherwise stated. 11. Responsible ownership and competent property management were assumed. 12. The information furnished by the client and others was believed to be reliable. However, no warranty
is given for its accuracy. 13. All engineering was assumed to be correct. The sketches and maps in this report were included to
assist the reader in visualizing the property and are not necessarily to scale. Various photos, if any, were included for the same purpose and were not intended to represent the property in other than actual status, as of the date of the photos. Site plans were not surveys unless shown from separate surveyor.
14. It was assumed that there are no hidden or unapparent conditions of the property, subsoil, or
structures that render it more or less valuable. No responsibility was assumed for such conditions or for arranging for engineering studies that may be required to discover them.
15. The appraisal was based on the premise that there is full compliance with all applicable federal, state,
and local environmental regulations and laws unless otherwise stated in the report. Further, that all applicable zoning, building, and use regulations have been complied with, unless a nonconformity has been stated, defined, and considered in the appraisal report. Further, it was assumed that all required licenses, certificates of occupancy, consents, or other legislative or administrative authority, local, state, federal and/or private entity or organization have been or can be obtained or renewed for any use on which the value estimate contained in this report is based.
16. It was assumed that the utilization of the land and improvements is within the boundaries or property
lines of the property described and that there was no encroachment or trespass unless noted in the report.
17. The distribution, if any, of the total valuation in this report between land and improvements applied
only under the stated program of utilization. The separate allocations must not be used in conjunction with any other appraisal and are invalid if so used.
18. Possession of this report or any copy thereof does not carry with it the right of publication. It may not
be used for any purpose by any person other than the party to whom it is addressed without the written consent of the appraisers, and in any event only with the proper written qualification and only in its entirety.
19. The appraisers herein by reason of this appraisal are not required to give further consultation,
testimony, or be in attendance in court with reference to the property in question unless arrangements have been made.
20. Neither all nor any part of the contents of this report (especially any conclusions as to value, the
identity of the appraisers, or the firm with which the appraisers are connected) shall be disseminated to the public through advertising, public relations, news, sales, or other media without the prior written consent and approval of the appraisers.
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21. The value estimates provided in the report apply to the entire property, and any proration of the total
into fractional interest will invalidate the value estimate, unless such proration or division of interests has been set forth in the report.
22. No responsibility was assumed for matters legal in character or nature, or matters of survey, or of any
architectural, structural, mechanical, or engineering nature. No opinion was rendered as to the title, which was presumed to be good and merchantable. The property was appraised as if free and clear, unless otherwise stated in this report. The legal description was assumed to be correct as used in this report as furnished by the client, his designee, or as derived by the appraisers. It was assumed that there are no hidden or unapparent conditions of the property, subsoil, or structures that render it more or less valuable. No responsibility was assumed for such conditions or for arranging for engineering studies that may be required to discover them. This would include subsoil conditions that are either expansive or restrictive to development, hazardous or toxic waste conditions due to chemical storage or leaks of underground tanks or onsite chemical use. The appraisers assumed no responsibility for any costs or consequences arising due to the need, or the lack of need, for flood hazard or earthquake insurance.
23. Any proposed improvements were assumed to have been completed unless otherwise stipulated; any
construction was assumed to conform to building plans referenced. The appraisers assumed that the reader or user has been provided with copies of available building plans and all leases and amendments, if any, encumbering the property.
24. The forecasts, projections, or operating estimates contained herein were based upon current market
conditions, anticipated short-term supply and demand factors, and a continued stable economy. These forecasts are subject to changes in future conditions.
25. The appraisers may not divulge the material (evaluation) contents of the report, analytical findings or
conclusions, or give a copy of the report to anyone other than the client, legal authorities via subpoena, or the Appraisal Institute.
26. Acceptance of, and/or use of this appraisal report constitutes acceptance of the above conditions.
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SUBJECT PHOTOGRAPHS
View looking southeast along Trabuco Road towards the subject
View looking southeast along Irvine Boulevard with the subject on the right
View looking southeast along Irvine Boulevard with the subject on both sides
View looking northwest along Irvine Boulevard with the subject on both side
View looking north from Irvine Boulevard at the proposed Park District
View looking south from Irvine Boulevard at proposed Park District
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SUBJECT PHOTOGRAPHS
View looking northeast along Bake Parkway with the subject along both sides
View looking south at proposed auto center
View looking northwest across Bake Parkway at subject proposed TOD
View looking southeast across Alton Parkway at proposed TOD
View looking north towards subject proposed Park District
View looking northwest towards proposed LLD
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SUBJECT PHOTOGRAPHS
View looking south from Irvine Boulevard at proposed LLD
View looking northeast within the proposed LLD
View looking northwest along Trabuco Road within the LLD
View of the Lennar new home center within the LLD
View looking south within proposed LLD
View of Irvine Transportation Center looking east within the proposed TOD
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GENERAL INFORMATION PROPERTY IDENTIFICATION / LEGAL DESCRIPTION The subject property encompasses the proposed Heritage Fields master-plan in El Toro, California. Heritage Fields represents the redevelopment of the former Marine Corps Air Station El Toro and generally located north of Interstate 5, south of Portola Parkway and Irvine Boulevard, west of Alton Parkway and east of Highway 133. A full legal description of the property may be found in the preliminary title report in the Addenda.
STATEMENT OF OWNERSHIP According to the developer, as of the date of value, title to the estate, or interest, was vested in the name of Heritage Fields, LLC. Title was held in fee. DATE OF APPRAISAL / DATE OF REPORT The date of market value “as is” was July 1, 2007. The date of appraisal report was July 20, 2007.
INTENDED USE / INTENDED USER The appraisal was prepared to estimate the market value “as is” of the subject property. The intended use of this report is for the client, Lehman Brothers, for loan underwriting. It may be used in connection with the acquisition, disposition, and financing of the sale of the property. This appraisal report was prepared for use by Lehman Brothers. The appraisers and Lehman Brothers make no express or implied representation or warranty of any kind, and expressly disclaim any liability to any other person or entity with respect to the appraisal report. SCOPE OF THE APPRAISAL The client requested a comprehensive narrative appraisal reported in a self-contained narrative report. The appraisal was prepared in conformance with the Uniform Standards of Professional Appraisal Practice (USPAP) adopted by the Appraisal Foundation; the regulations adopted by the Office of the Comptroller of the Currency; the Code of Professional Ethics and Standards of Professional Conduct of the Appraisal Institute; and Lehman Brothers Appraisal Guidelines. The appraisal assignment was not based on a requested minimum valuation, a specific valuation, or the approval of a loan. The property was last inspected in June 2006. The developer, Lennar, provided pertinent information regarding the project, including title report, proposed land use plan, lot/planning area exhibits, Environmental Impact Report, Design Guidelines, Tentative Map, business plan, revenue/costs pro forma, and other general information regarding the subject. Regional, city, and neighborhood data were based on numerous public and private sources, published studies, reports, and articles. The regional, city, and neighborhood descriptions were also based on a physical inspection by the appraisers. Site and improvement
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data were based on physical inspection of the subject, as well as plans, studies, assessor's records, budgets/schedules, and exhibits provided to the appraisers. In estimating the highest and best use for the property, an analysis was made of the data compiled in the above noted steps. Furthermore, a study and analysis of the residential and commercial markets in the subject area (Market Analysis) was performed to determine the financial feasibility and maximally profitable use of the proposed community. In developing the appropriate approaches to value, market data were collected from Comps Incorporated, Hanley Wood, The Concord Group, Orange County deed records, in-house materials, and other sources. The appraisers confirmed all sales, market, and/or other data used in the report with one or more persons and focused the data search on the subject's sphere of influence. Persons contacted included buyers, sellers, brokers, property developers, public officials, and others. The data collected and confirmed has been reported to an extent sufficient for the particular appraisal problem involved. After assembling and analyzing the data defined in the scope of the appraisal, a final estimate of market value was made. In the valuation process, three approaches to value are typically used. The cost approach requires an analysis of sales of similar parcels into an estimate of market value for the subject site. An estimate is then made as to the cost to replace the subject’s improvements at today’s costs using reliable sources of cost data. Depreciation or obsolescence from all causes is estimated based on the experiences of similar properties. This is then deducted from the replacement cost if new to arrive at the present worth of the improvements and the site. In analyzing the property, the appraisers performed static and yield residual analyses of the subdivision development method for residential product. This methodology is essentially an inverse cost approach analysis used by investors/builders analyzing a probable purchase price for the subject after deducting the appropriate costs for all other agents of production. Therefore, a cost approach analysis was inherently performed by the appraisers in the valuation of the subject. In the income approach, the property’s ability to generate net operating income is fully analyzed. The basis of this approach is founded on the principle of discounting the anticipated flow of future benefits into a present value indication. A variation of the income approach and cost approach, the development method, was used to estimate the market values of the various residential planning areas/parcels. This method provided estimates of the market value as finished superpads by estimating aggregate retail sales proceeds from proposed improvements and deducting profit and expenses in an appropriate manner. The development method accounts for the cost to develop the homes and all expenses, including a profit factor for the risk involved. A static residual model and yield analysis discounted cash flow (DCF) were used for this procedure. For the yield analysis, the periodic net revenues are discounted to determine the present worth of the future income stream after deducting development costs, costs to complete, and expenses. The sum of the discounted net incomes results in the estimated market value of the planning area (land). The static model incorporated the features of the yield model, but was presented in a cumulative line format. After the market values “at completion” of the residential planning areas/parcels were estimated, these figures were inputted into a larger master discounted cash flows to estimate the “as is” market value for the entire property.
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For land, the sales comparison approach is typically deemed the most appropriate. The sales comparison approach involves the comparison of sales, listings, expired listings, offers, etc. of properties to the subject (comparables) to indicate and provide a basis for determining its value. Adjustments and/or comparisons of the comparables are made to the subject relative to differences or similarities in property rights conveyed, financing, sale conditions, market conditions, location, legal, and physical characteristics. The basis for the adjustments and/or comparisons is generally formulated from data which indicate reactions of buyers and sellers to these differences. A range of adjusted values for the subject is usually found in this approach. The appraisers must correlate the range into a final indicated value by selectively rating the comparables as to their overall comparative values. The sales comparison approach was used in estimating the market value of the individual subject planning areas/parcels for both residential and commercial use. Also, a sales comparison analysis was considered in valuing the entire property. Said analysis would involve comparing larger master-planned community land sales to the subject property, adjusting for the various differences discussed above. In that there were few recent master-planned community sales from the larger Orange County area, and each master-planned community varies substantially in physical and financial characteristics (i.e. development potential), this approach had very limited application in this analysis. Additionally, due to the large project size of master-planned communities, most developers/buyers of master-plans analyze the individual component neighborhoods within the master-plans in arriving at a reasonable price for the entire property. Accordingly, the sales comparison approach to the entire master-plan was not deemed appropriate. HISTORY OVERVIEW OF SUBJECT PROPERTY The subject property represents a portion of what was the Marine Corp Air Station El Toro (MCAS El Toro). The decision to close MCAS El Toro was made by the Department of Navy (DON) under the Base Realignment and Closure Act in July, 1993. Since that time several plans for the reuse of the site have been prepared by various entities including the County of Orange, El Toro Reuse Planning Authority (ETRPA), and the City of Irvine. The current plan, called the Orange County Great Park Plan, is consistent with the concept for reuse of El Toro approved by the voters of Orange County in the March, 2002 initiative (Measure W). The Measure W initiative resulted in the designation of MCAS El Toro for park, open space and other uses and incorporating the site into the City of Irvine. On April 23, 2002, shortly after the passage of Measure W, the DON announced its intention to sell the property by public auction in accordance with federal surplus property disposal procedures. Following the DON decision to sell the land at public auction, the City of Irvine developed a concept plan to assure that the orderly development of the “great park” consistent with the Measure W initiative could be realized through the private sector. The objective of the Orange County Great Park Plan was to allow a reasonable economic return to the private sector buyer while assuring park, open space and other public areas would be dedicated to the City or other non-profit or governmental entity in perpetuity and improved without cost to the local taxpayer.
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The City prepared a land plan that would allow for increased development intensities in exchange for the private sector participation in a development agreement that required the full dedication and improvement of public infrastructure and open space amenities. The City’s strategy was to allow for intensified private development under a Development Agreement arrangement in return for dedication of lands to be used for park, open space and public and institutional purposes. The City also created a less intense development plan as the base/underlying zoning designation which would allow for the future private sector owner to decide for itself as to whether or not to pursue the more development intense overlay zoning through a development agreement. On July 8, 2003, the Irvine City Council adopted Ordinance No. 03-19, approving the original version of the development agreement and on July 1, 2004 the Planning Commission of the City held a public hearing, after certain findings and determinations had been made in regards to the development, recommending the City Council that the earlier agreement be approved. On October 12, the City Council also held a public hearing and adopted Ordinance No. 04-13, approving the earlier version of this agreement. Upon completion of the bidding process and the purchase of the property, in 2005 the city sought to revise the 2004 version of the Development Agreement and on May, 5, 2005 the Planning Commission held a public hearing for the new agreement and recommended its approval. On May 10, 2005, the City Council also held a public hearing for the new agreement and on May 24, 2005 adopted Ordinance No. 05-10 approving the new agreement.
The purchase of the former Marine Corps Air Station at El Toro took place in early 2005. By way of winning bid via online auction, Heritage Fields, LLC acquired the property for a total purchase price of $649,500,000. The land was subsequently transferred on July 12, 2005 from federal control to Heritage Fields, which voluntarily entered into a Development Agreement with the City of Irvine that guaranteed limited development rights in return for a package of land dedication and fees to be used by the City to develop the Orange County Great Park. The market value “as is” has been reconciled at $1,060,000,000, which is substantially higher than the most recent 2005 acquisition price of $649,500,000. A review of the builder’s cost budget indicated approximately $270,000,000 have been expended on the project to-date. Thus, total costs to date, including the land basis, were nearly $920,000,000. This figure does not include an additional $74,000,000 paid to SunCal Communities as a “redemption fee” to dissolve a partnership and various indirects costs such as property taxes, management, etc. Thus, total expenditures to date are over $1,000,000,000, quite similar to the “as is” appraised value. The property has benefited from extensive cost expenditures and advancement in entitlements since acquisition. On the other hand, market conditions have softened since the purchase date in 2005. The appraised value was deemed reasonable given the foregoing discussion
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EXPOSURE AND MARKETING TIME The estimated market value of the subject was premised on achieving a sale of the project in a reasonable exposure and marketing time. Indications of the exposure time associated with the market value estimate were provided by exposure times of master-planned community land sales in Los Angeles, Orange, Riverside, and San Diego Counties, interviews with participants in the market, and an analysis of general economic conditions. Exposure times were quoted as typically ranging from three to twelve months depending on the complexity of the property, size of investment, etc. Given that the subject is located in an active for-sale housing submarket with strong potential for future housing demand, it would likely generate substantial interest on part of potential buyers if offered for purchase. However, the large scale of the project, and the significant investment capacity to execute an acquisition of this type, limits the number of qualified buyers. A marketing and/or exposure period of six to twelve months was deemed reasonable for the larger property “as is.” An acquisition such as the subject property would require a large equity investment. The most probable buyer profile for a project such as the subject would include larger regional and national developers and/or builders, which often joint venture with various equity partners. PERSONAL PROPERTY, FIXTURES, AND INTANGIBLE ITEMS The property valued in this assignment did not include any personal property, fixtures, equipment, or intangibles. The contributory value of any such items was not applicable for this assignment and was not reflected in the reported value conclusions. Notable is that the model homes in the planned development would likely include various personalities and furnishings, which were not included in the appraised values. DEFINITION OF FEE SIMPLE ESTATE The property rights of ownership appraised were the fee simple estate. The fee simple title is regarded as an estate without limitations or restrictions and can be defined as:
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.1
DEFINITION OF MARKET VALUE For this assignment, market value can be defined as:
The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing 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 what they consider their own best
interest; (3) a reasonable time is allowed for exposure in the open market;
1Appraisal Institute, The Dictionary of Real Estate Appraisal, (AI, Chicago: 2002), p. 113.
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(4) payment is made in terms of cash in U. S. dollars or in terms 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 concessions granted by anyone associated with the sale.2 DEFINITION OF MARKET VALUE “AS IS” The scope of this assignment included providing a market value “as is” estimate for the entire property. Market value “as is” can be defined as:
The value of specific ownership rights to an identified parcel of real estate as of the effective date of the appraisal; relates to what physically exists and is legally permissible and excludes all assumptions concerning hypothetical market conditions or possible rezoning.3
DEFINITION OF MARKET VALUE “AT COMPLETION” The scope of this assignment included providing market value “at completion” estimates for the individual planning areas as graded superpads. Prospective market value “at completion” can be defined as:
Market value as if complete on appraisal date means the market value of a property with all proposed construction, conversion, or rehabilitation hypothetically completed, or under other specified hypothetical conditions as of the date of the appraisal.4
DEFINITION OF FINISHED LOTS For this assignment, finished lots can be defined as:
A parcel which as legal development entitlements created by a recorded subdivision map and a physical condition which includes fine graded, level building pads with an intract infrastructure abutting the individual lots consisting of asphalt paved right-of-way with concrete curb, gutter, sidewalks and street lighting in addition to necessary wet and dry utilities. With the exception of building permit and plan check fees, the finished lot condition also assumes prepayment of all applicable development fees including school and development impact fees.5
DEFINITION OF BLUE TOP LOTS For this assignment, blue top lots can be defined as:
A parcel which has legal development entitlements created by a recorded subdivision map and a physical condition which includes graded, level “certified” building pads and streets with offsite infrastructure abutting the neighborhood perimeter. A blue top condition would not include street improvements and completed intracts but would include installed utilities in the rights-of-way and stubbed to individual lots.6
2 Federal Register, Vol. 55. No. 161, 12 CFR Part 323, Section 323, Page 383, August 20, 1990. Also conforms to: 12 CFR Part 564, which applies to the Office of Thrift Supervision (OTS) of the Department of the Treasury; 12 CFR Part 722, which applies to the National Credit Union Administration (NCUA); 12 CFR Part 34, which applies to the Office of the Comptroller of the Currency (OCC) of the Department of the Treasury; and 12 CFR Part 225, which applies to the Federal Reserve System (FRS); RTC CFR 1608; and the Uniform Standards of Professional Appraisal Practice (USPAP) of the Appraisal Foundation. 3Appraisal Institute, The Dictionary of Real Estate Appraisal, (AI, Chicago, IL: 2002), p. 306. 4 Appraisal Policies and Practices of Insured Institutions and Service Corporations, Federal Home Loan Bank Board, "Final Rule", 12 CFR Parts 563 and 571, December 21, 1987. 5 Cushman & Wakefield – San Diego 6 Ibid.
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DEFINITION OF SUPERPAD For this assignment, superpad can be defined as:
Rough grading of the site to a sheet graded pad within each neighborhood, erosion control landscaping complete on external slopes, and storm drains stubbed to the neighborhood perimeter. Sewer, water and dry utilities are installed in backbone streets and stubbed to the neighborhood perimeter. Backbone streets between neighborhoods are constructed. Any fees, site plans, or other costs associated with construction of improvements are not included.7
DEFINITION OF AGGREGATE RETAIL REVENUES For this assignment, aggregate retail revenues can be defined as:
The sum of a number of individual market values of discrete units of realty: e.g., finished sites, condominiums, detached single family residences, individual units in a planned unit development, etc. Aggregate retail revenues is not a market value. The basic assumption underlying this value is that each unit will be sold individually at full market (retail) price (i.e., market value) to as many buyers as there are units on the same (effective) date of value. In the market valuation process each unit is individually valued based on market evidence. Then, those individual market values are totaled to arrive at the aggregate retail revenues.8
7 Op.Cit. 8 Cushman & Wakefield – San Diego
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REGIONAL MAP
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REGIONAL DESCRIPTION “Orange County”
MARKET OUTLOOK The outlook for the Santa Ana-Anaheim-Irvine Metropolitan Division (Orange County) remains good. Its economy is expected to outperform the U.S., although the lead will be much narrower than that seen in the first half of this decade.
• The loss of housing as a driver of the economy is one factor. Another is the end of accelerated defense spending, which will make aerospace a stable but no longer expanding industry in Orange County.
• International trade, technology-producing industries and tourism will continue to support the economy over the long term.
• Economic diversification has shielded the economy from potential risks. Household income is among the highest in the nation, supporting retail and local services. Orange County’s economy is expected to perform above-average over the long term.
MARKET DEFINITION The Los Angeles-Long Beach-Santa Ana Metropolitan Statistical Area (MSA) in Southern California is the largest of the three MSAs within the Los Angeles Combined Statistical Area (Los Angeles CSA), which also includes the Riverside-San Bernardino-Ontario and Oxnard-Thousand Oaks-Ventura MSAs. The Los Angeles-Long Beach-Santa Ana MSA is further divided into two metropolitan divisions—Los Angeles-Long Beach-Glendale and Santa Ana-Anaheim-Irvine. The Santa Ana-Anaheim-Irvine metropolitan division, which is the subject of this analysis, consists solely of Orange County and encompasses 34 incorporated cities.
LOS ANGELES-LONG BEACH-RIVERSIDE COMBINED STATISTICAL AREA AND COMPONENT COUNTIES
Santa Ana-Anaheim-Irvine Metropolitan DivisionSurrounding Los Angeles-Long Beach-Riverside CSA CountiesSanta Ana-Anaheim-Irvine Metropolitan DivisionSurrounding Los Angeles-Long Beach-Riverside CSA Counties
San Bernardino
Los Angeles
RiversideOrange
Ventura
CALIFORNIA
Source: Claritas, Cushman & Wakefield Analytics
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CURRENT TRENDS The Orange County economy is expanding, however its pace of growth has moderated since mid-year 2004. Job growth no longer exceeds the national average, but income growth is projected to lead both the U.S. and California. Supporting the economy are stable manufacturing industries, as indicated by estimated industrial production rising well ahead of the U.S. average. Travel and tourism as well as aerospace industries create stable growth for this region. The pace of growth has slowed, but not decreased, as indicated by a leveling of the trade sector and a moderate downturn in financial services. Near-term prospects for Orange County’s technology-producing industries remain good. Employment in the aerospace and defense sector are benefiting from the state’s increase in defense contracts in 2005 and a demand for commercial aircraft. Office-space using employment has flattened as of year-end 2006 but is expected to increase by mid-year 2007. Office vacancy rates maintain record lows despite a slight increase. To accommodate the demand, record levels of construction permits have been issued over the past year, and construction of new office space is underway. The increase in construction of new office space is anticipated to keep rental rates affordable. Construction employment will benefit from both residential development and from the extensive commercial projects in the pipeline. House-price appreciation has slowed to less than 10 percent over the year, and the volume of sales has declined in recent months. Yet even with slower appreciation, affordability is at its lowest point since 1983, indicating a severe imbalance between household income and home prices. Thus, even with moderate job growth and only a moderate imbalance between supply and demand, prices could fall as buyers balk at the higher prices and higher interest rates. ECONOMICS Historically, Orange County’s gross metro product (GMP) has exhibited considerably greater volatility than the nation’s Top 100 metro areas (Top 100). In the following exhibit and all subsequent time-series graphs, the shaded bars indicate the periods of a U.S. economic recession. The Top 100 Metro Areas are comprised of the 100 largest metropolitan statistical areas within the U.S. in terms of total employment as of 2006.
• Orange County’s annualized growth for GMP of 5.7 percent between 1996 and 2006 exceeded that of the Top 100 average annual GMP rate of 3.7 percent.
• The projected growth in the Orange County economy at 2.9 percent annually through 2011 is greater than that of the projected growth of the Top 100 Metro Areas of 2.7 percent annually.
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REAL GROSS PRODUCT GROWTH BY YEAR Orange County vs. Top 100, 1996 – 2011
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Ann
ual P
erce
nt C
hang
e
Top 100 Metro Areas Santa Ana-Anaheim-Irvine, CA Metropolitan Division Forecast
Source: Economy.com, Cushman & Wakefield Analytics
Orange County’s employment growth since the mid 1990’s generally exceeds that of the Top 100 Metros. The County recovered more quickly from the 2001 recession than did the Top 100.
• From 1996 to 2006, total employment in Orange County expanded at an average rate of 2.5 percent per year, nearly double the 1.5 percent pace of the Top 100.
• Between 2006 and 2011, Orange County’s employment growth is projected to equal that of the Top 100, with a projected average annual growth rate of 1.5 percent.
TOTAL EMPLOYMENT GROWTH AND UNEMPLOYMENT RATE BY YEAR Orange County vs. Top 100, 1996 – 2011
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Ann
ual P
erce
nt C
hang
e
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Unem
ployment R
ate
Top 100 EmploymentSanta Ana-Anaheim-Irvine, CA Metropolitan DivisionTop 100 UnemploymentSanta Ana-Anaheim-Irvine, CA Metropolitan Division
Forecast
Source: Economy.com, Cushman & Wakefield Analytics
Orange County has historically maintained a lower unemployment rate than the average across the Top 100.
• During 2006, Orange County’s unemployment rate averaged a low of 3.4 percent—much lower than the Top 100 unemployment rate of 4.5 percent.
• Orange County’s unemployment rate is expected to decrease to 3.2 percent by 2011—roughly 118 basis points below the projection for the Top 100.
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Orange County’s employment base is among the more diverse in the nation. • Orange County is substantially more weighted in the Manufacturing, Professional & Business
Services and Financial Services industry sectors relative to the Top 100.
• Orange County’s employment base is under-weighted in the Education & Health Services and Government sectors relative to the Top 100.
EMPLOYMENT BY SECTOR Orange County vs. Top 100, 2006 Estimates
0% 5% 10% 15% 20% 25%
ConstructionManufacturing
Trade, Transportation, & UtilitiesInformation
Financial ActivitiesProfessional & Business Services
Education & Health ServicesLeisure & Hospitality
Other Services (except Govt.)Government
Top 100 Metro Areas
Santa Ana, CA [Metropolitan Division]
Source: Economy.com, Cushman & Wakefield Analytics
As of 2006, Orange County served as headquarters to four of the nation’s Fortune 500 corporations: Ingram Micro (ranked 72), The First American Corporation (284), Pacific Life (441) and Standard Pacific (493). DEMOGRAPHICS Orange County’s population is significantly younger; more affluent, and better educated, when compared to the Top 100 metro areas.
• Orange County’s median age is relatively young at 35.2 years—slightly below the median age across the Top 100 of 36.1 years.
• It is also among the most affluent metro areas in the nation, with 29.8 percent of households having incomes of $100,000 or more.
• An estimated 31.2 percent of Orange County’s population holds a bachelor or graduate degree, compared to 27.8 percent of the population for the Top 100 Metros.
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Characteristic Orange CountyTop 100
Metro Areas U.S.Median Age (years) 35.2 36.1 36.4Average Annual Household Income $89,300 $72,180 $65,800 Median Annual Household Income $67,300 $53,900 $48,800
<$25,000 14.8% 21.6% 21.6%$25,000 to $49,999 21.9% 25.4% 25.4%$50,000 to $74,999 19.2% 19.5% 19.5%$75,000 to $99,999 14.3% 12.7% 11.8%$100,000 plus 29.8% 20.8% 17.5%
< High School 20.5% 18.4% 19.4%High School Graduate 17.3% 26.0% 28.4%College < Bachelor Degree 30.9% 27.7% 27.6%Bachelor Degree 20.6% 17.7% 15.7%Advanced Degree 10.6% 10.1% 9.9%
Education Breakdown:
Source: Claritas, Inc., Cushman & Wakefield Analytics
DEMOGRAPHIC CHARACTERISTICSOrange County vs. Top 100 MSAs and U.S., 2006 Estimate
Households by Annual Income Level:
Orange County’s population exceeded 3.0 million residents in 2006, but has experienced a slowdown in growth relative to the top 100 since 2002.
• Between 1996 and 2006, Orange County averaged annual population growth of 1.3 percent—slightly higher than the Top 100 average annual rate of 1.2 percent.
• Orange County’s population growth is expected to outpace the Top 100 through 2011, as its population is expected to grow on average by 1.1 percent annually, compared to the projected average 1.0 percent per year growth of the Top 100.
POPULATION GROWTH BY YEAR Orange County vs. Top 100, 1996 – 2011
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Ann
ual P
erce
nt C
hang
e Top 100 Metro Areas Santa Ana-Anaheim-Irvine, CA Metropolitan Division Forecast
Source: Economy.com, Cushman & Wakefield Analytics
Orange County outpaced both Los Angeles County and Ventura County in terms of population growth rates during the past ten years. The County lagged the Riverside-San Bernardino MSA, as did most of the
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areas of the Los Angeles CSA. During the next five years, Riverside-San Bernardino is expected to continue growing much more rapidly than Orange County and the other areas of the Los Angeles CSA.
Population (000s) 1996 20062011
Forecast
AnnualGrowth96-06
AnnualGrowth06-11
United States 269,802.4 299,426.2 312,849.5 1.0% 0.9%Top 100 MSAs 172,483.2 194,022.9 204,272.6 1.2% 1.0%
Los Angeles-Riverside-Orange County, CA CSA 15,471.6 17,785.7 18,951.8 1.4% 1.3%Los Angeles-Long Beach-Santa Ana MSA 11,771.0 12,967.5 13,546.2 1.0% 0.9%
Los Angeles-Long Beach-Glendale MD 9,127.0 9,967.5 10,382.0 0.9% 0.8%Santa Ana-Anaheim-Irvine MD 2,644.0 3,000.0 3,164.1 1.3% 1.1%
Riverside-San Bernardino-Ontario MSA 2,990.3 4,014.2 4,544.3 3.0% 2.5%Oxnard-Thousand Oaks-Ventura MSA 710.2 804.0 861.3 1.2% 1.4%
Source: Economy.com, Cushman & Wakefield Analytics
ANNUALIZED POPULATION GROWTH BY MSASanta Ana-Anaheim-Irvine MD
1996 – 2011
Demographics are a challenge over the long term for Orange County, as population growth shifts to the more inland regions of southern California. Orange County’s rate of population growth is constrained not only by very high business and living costs, but also by a limited amount of space for new home construction and low housing affordability. Orange County ranks highest in median household income among the Los Angeles CSA’s counties.
• Orange County’s 2006 estimated median household income was $67,300, 25 percent higher than the Top 100 median of $53,900.
• Over the past 10 years, Orange County’s 3.8 percent average annual growth in median household income was one-half of a percent higher than the Top 100 average annual increase of 3.3 percent.
• Through 2011, Orange County’s median household income is expected to grow an average of 3.2 percent per year, higher than the projected Top 100 average of 3.0 percent.
Orange County’s most significant concentrations of households with median incomes over $100,000 per year are located in the more sparsely populated northeast area near Yorba Linda and Placentia, within the southeast in Santa Margarita, and along the south coast from Newport Beach to Laguna Beach. Among the more densely populated communities, Costa Mesa and Newport Beach have the highest median household incomes. The north and west portions of the county are predominantly populated by middle income households.
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MEDIAN HOUSEHOLD INCOME DISTRIBUTION BY ZIP CODE Orange County, 2006 Estimate
Source: Claritas, Inc., Cushman & Wakefield Analytics
MARKET COMPETITIVENESS Orange County continues to attract a well-educated, affluent population, and is the Los Angeles region’s most diverse economy in terms of industry sectors.
• International trade with Asia in particular has resulted in Asian firms expanding into Orange County and establishing their U.S. headquarters offices within the region.
• Orange County is well-positioned to benefit from an accelerating global economy, particularly the Pacific Rim economies, which should deepen demand for electronics and tech equipment.
• While Orange County’s costs of doing business and living are high, its excellent quality of life is often considered conducive for top-level operations.
• The high costs of living and doing business generate some friction for long-term growth, but this is offset by the high quality of Orange County’s labor force, and the area’s good quality of life that make the area a good home for high-value added production of goods and services.
• Downside risk comes from Orange County’s exposure to the housing market. Should the housing market plummet under high interest rates, broad employment losses in the financial services sector are likely to follow.
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CITY MAP
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CITY DESCRIPTION "City of Irvine"
The subject property is located in the northern portion of the City of Irvine, just southeast of the former Tustin Marine Corps Air Station. The subject’s city and neighborhood are within an area commonly referred to as the Greater Airport Area. At the end of World War II, most of the land near John Wayne Airport was either vacant or used for agricultural purposes. Following World War II, several large aerospace companies built sprawling defense and research and development facilities in the area. For example, Ford Aerospace and Communications opened a 99 acre plant, on land leased from the Irvine Company, in Newport Beach in 1960. Demonstrating the area's continued transition from high technology and defense employment, this plant, which sold to Loral Aeronautics in 1990, closed and is being redeveloped with estate homes. The district's manufacturing plants were spawned by the area's favorable climate, low land costs, and proximity to Marine Corps Air Stations (MCAS) El Toro and Tustin. MCAS El Toro and Tustin were established during World War II. Camp Pendleton, which is the largest amphibious training base in the world, forms the southern boundary of the County and is home to the First Marine Division. Both MCAS Tustin and El Toro were recently closed as part of downsizing the American defense system. The Airport District is the most expensive commercial and residential district in Orange County, and is the county's largest employment center. The district consists of the cities of Costa Mesa, Irvine, Santa Ana, and Newport Beach. The focus of this district is John Wayne Airport. ACCESS AND TRANSPORTATION The City of Irvine is served by the Southern California freeway system. The San Diego (I-405) Freeway extends in a northwest-southeast direction through the central portion of the city. The Costa Mesa (SH-55) Freeway runs in a northeast-southeast direction along the western edge of the city. The Santa Ana (I-5) Freeway, situated approximately five miles north of the subject, runs in a northwest-southeast direction. Additionally, the SH-73, San Joaquin Hills Transportation Corridor, extends along the southerly portions of the city. Irvine offers specific transportation advantages for servicing the industrial and commercial markets with direct freeway links with downtown Los Angeles, Long Beach, San Diego and Orange County. Irvine is serviced by three major railroads: Santa Fe, Southern Pacific, and Union Pacific. The closest of these lines to the subject are the Southern Pacific and the Santa Fe Railroads. The railroads provide daily scheduled service to all transcontinental points with 24-hour switching service, reciprocal switching agreements, "piggy-back" service, and passenger service. The area is also served by AMTRAK and Metrolink. There are 14 local and long distance trucking lines serving the region. Greyhound Lines
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provide transcontinental service, providing hourly service throughout the Irvine-Santa Ana-Orange metropolitan area. Airport facilities are available at the John Wayne International Airport. DEMOGRAPHICS POPULATION The City of Irvine has a 2006 estimated population of 189,775 persons, representing a compound annual increase of 4.82 percent since 2000. The population is expected to grow annually by 3.48percent to 225,209 persons by 2011. Population in the three-mile radius of the subject is projected to increase by 2.17 percent in the next five years. This rate of growth is higher than the average for the County and the State, projected at 1.08 and 1.23 percent respectively, for the same period. HOUSEHOLDS The City of Irvine has an estimated 66,776 households, with an average household size of 2.72 persons, or below the county- and state-wide average of 3.04 and 2.91 persons per household, respectively. The total households in Irvine are expected to rise to 78,487 by 2011, an annual increase of 3.28 percent. Household formation in the subject’s three-mile radius is projected to increase by 2.14 percent during the next five years to 2.86 persons per household. INCOME Irvine has a 2006 average household income level of $107,885, which compares favorably with the Orange County average household income level of $89,328 and the State of California level of $74,936. Irvine also has a relatively high proportion of upper income households, with 41.11 percent of all households having an income level of more than $100,000 annually. The 2006 average household income in the subject’s three-mile radius is $90,215. This amount, when compared to State’s average, indicates that the subject is situated in a more affluent submarket in terms of income. HOUSING STOCK Irvine has a good mix of owner-occupied and rental housing, with approximately 57.15 percent owner-occupied households within the city. The City of Irvine has a 2006 median home price of $638,568. This compares favorable with Orange County and the State of California median home price at $536,761 and $406,962, respectively. The median housing value in the 3-mile radius of the subject is $549,806, which compares favorably with both the County and State figures indicating the subject is situated in a more affluent submarket. EDUCATION The Irvine population is well educated with approximately 58.38 percent of all adults with a college education or greater. This figure is well above the Orange County figure of 30.81 percent and the 26.62 percent figure for the State of California.
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EMPLOYMENT AND LABOR BASE The City of Irvine is home to approximately 9,800 businesses and approximately 168,000 employees. The unemployment rate is 3.4 percent. Major employers in Irvine include the University of California, Irvine (11,350 employees), St. Johns Knits (2,900 employees), Toshiba (2,500 employees), Irvine Unified School District (2,400 employees), and Verizon Wireless (2,300 employees). Irvine is also home to a world-class research institution at the University of California, Irvine, which has attracted a number of companies to this area, including Toshiba, Sony, Gateway, Oracle, Johnson & Johnson, Medtronic, and Allergan. The majority of the workforce is employed in the office sector (64%) with remaining workforce employed in the industrial sector (24%), institutional sector (6%), and retail sector (6%). The unemployment rate for the City of Irvine compares to 3.3 percent for Orange County and 4.4 percent for California. While most cities in Orange County experienced increases in unemployment rates during the recession, the City of Irvine improved. This increase is primarily attributed to increasing job opportunities in the textile/apparel manufacturing sector and transportation/utilities sector. subject neighborhood The subject is located on Corporate Park, which is basically a “loop” street improved with low-rise office buildings. Corporate Park is situated just off (easterly) Jamboree Road, and also “backs” to Barranca Parkway to the north. The subject is located just east of a retail strip center which is accessed off Corporate Park and Barranca. The tenants include several smaller restaurants/fast food restaurants including Arby’s, McDonalds, El Pollo Loco, and a Japanese restaurant and a sandwich shop, as well as several convenience tenants including a dry cleaners, photo shop, and a salon. The former Tustin Marine Air Base is located diagonally northwest across the intersection of Jamboree Road and Barranca Parkway. Portions of the site are being developed with a major retail center at this location. In addition to the projects above, the City of Irvine recently annexed the former El Toro Marine Base in southern Orange County, which is proposed for development as a Great Park. The proposed plan includes several thousand acres of open space, 3,400 homes, and 800 senior housing units. CONCLUSION The subject's location within the City of Irvine is a positive influence on its value. The property is located a few miles north of the City of Newport Beach and competes within one of the most prestigious office markets of Orange County. The subject's location is considered desirable based on the factors identified below:
• Employment in the area is strong. The Irvine Business Complex and the Greater Airport Area of Orange County have led the county in employment growth during the past decade.
• Transportation linkages to the area are convenient. Interstate-405 (San Diego Freeway) is 1.5 miles south of the subject.
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• The City of Newport Beach to the south of the subject, the University of California Irvine campus, and the numerous amenities combine to provide a high quality of life at the subject's location.
• The factors above combine to provide the subject property with an excellent “macro” location within the City of Irvine and County of Orange. Based on our analysis of the area, the property’s location will continue to be its primary positive characteristic.
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NEIGHBORHOOD MAP
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LLD SITE PLAN
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LLD PLAN
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TODD PLAN
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PARK PLAN
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PROPERTY DESCRIPTION “Heritage Fields”
For the Heritage Fields property description, the appraisers utilized general information and excerpts from the numerous reports provided by the developer and available from third parties and public records. All of said information was assumed reasonably true and correct. LOCATION The subject property is the Heritage Fields Master-planned community located in the City of Irvine, Orange County, California. Heritage Fields represents the redevelopment of the former El Toro Marine Corps Air Station, located in the western portion of the City of Irvine. The Heritage Fields project area (subject property) is generally located north of Interstate 5 to the south, south of Portola Parkway and Irvine Boulevard, west of Alton Parkway and east of Highway 133. Surrounding land uses include the permanent open space to the north, and the residential communities of Northwood and Northwood Point to the west. Large, natural open spaces within the Santiago Hills lie to the north, and the community of Foothill Ranch is located east of the project site. The subject is approximately 45 miles away from Downtown Los Angeles. Regional access is provided via Interstate 5 (I-5) in a northwest/southeast direction, Interstate 405 (I-405) in a southeast direction, and the State Highway 133 (SH-133) in a northeast/southwest direction. The project site is adjacent to the meeting point of two major freeways, as well as a significant state highway that runs from the Pacific Coast Highway in Laguna Beach to its junction with State Highway 241 (SH-241). PROJECT BACKGROUND AND ENTITLEMENTS The subject property represents a portion of what was the Marine Corp Air Station El Toro (MCAS El Toro). The decision to close MCAS El Toro was made by the Department of Navy (DON) under the Base Realignment and Closure Act in July, 1993. Since that time several plans for the reuse of the site have been prepared by various entities including the County of Orange, El Toro Reuse Planning Authority (ETRPA), and the City of Irvine. The current plan, called the Orange County Great Park Plan, is consistent with the concept for reuse of El Toro approved by the voters of Orange County in the March, 2002 initiative (Measure W). The Measure W initiative resulted in the designation of MCAS El Toro for park, open space and other uses and incorporating the site into the City of Irvine. On April 23, 2002, shortly after the passage of Measure W, the DON announced its intention to sell the property by public auction in accordance with federal surplus property disposal procedures. Following the DON decision to sell the land at public auction, the City of Irvine developed a concept plan to assure that the orderly development of the “great park” consistent with
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the Measure W initiative could be realized through the private sector. The objective of the Orange County Great Park Plan was to allow a reasonable economic return to the private sector buyer while assuring park, open space and other public areas would be dedicated to the City or other non-profit or governmental entity in perpetuity and improved without cost to the local taxpayer. The City prepared a land plan that would allow for increased development intensities in exchange for the private sector participation in a development agreement that required the full dedication and improvement of public infrastructure and open space amenities. The City’s strategy was to allow for intensified private development under a Development Agreement arrangement in return for dedication of lands to be used for park, open space and public and institutional purposes. The City also created a less intense development plan as the base/underlying zoning designation which would allow for the future private sector owner to decide for itself as to whether or not to pursue the more development intense overlay zoning through a development agreement.
Item DateEl Toro Base Closed July 1999
Measure W Adopted March 2002
Final EIR Certified May 2003
Zoning Established September 2003
Property Annexed into City of Irvine January 2004
Navy Issues Invitation for Bid (IFB) November 2004
Heritage Fields, LLC Purchased Property July 12, 2005
Development Agreement (Ordinance No. 05-10) July 12, 2005
ENTITLEMENTSHeritage Fields Master Plan, Irvine, California
Appraisal Note: The name of the master-planned community – Heritage Fields – was established by the current ownership subsequent to its purchase of the property from the DON. The planning framework for the project that was set out by the City of Irvine refers to the subject property and the adjacent park land/open space collectively as The Great Park. The EIR, for example, evaluates the subject MPC and the public park collectively, and the project is dubbed Orange County Great Park. On July 8, 2003, the Irvine City Council adopted Ordinance No. 03-19, approving the original version of the development agreement and on July 1, 2004 the Planning Commission of the City held a public hearing, after certain findings and determinations had been made in regards to the development, recommending the City Council that the earlier agreement be approved. On October 12, the City Council also held a public hearing and adopted Ordinance No. 04-13, approving the earlier version of this agreement. Upon completion of the bidding process and the purchase of the property, in 2005 the city sought to revise the 2004 version of the Development Agreement and on May, 5, 2005 the Planning Commission held a public hearing for the new agreement and recommended its approval. On May 10,
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2005, the City Council also held a public hearing for the new agreement and on May 24, 2005 adopted Ordinance No. 05-10 approving the new agreement.
The purchase of the former Marine Corps Air Station at El Toro took place in early 2005 by Heritage Fields, LLC. The land was subsequently transferred on July 12, 2005 from federal control to Heritage Fields, which voluntarily entered into a Development Agreement with the City of Irvine that guaranteed limited development rights in return for a package of land dedication and fees to be used by the City to develop the Orange County Great Park. Development Agreement – The document governing the development of the Heritage Fields project is a Development Agreement entered into by Heritage Fields, LLC and the City of Irvine. The DA guaranteed Heritage Fields, LLC development rights for the project in exchange for a package of land dedications and fees that are to be used by the city to develop The Great Park. Per the terms of the DA, Heritage Fields, LLC has the rights to develop 3,625 residential units and 5.3 million square feet of commercial uses. The City of Irvine receives approximately $672 million in development fees as follows:
$200 million Development Agreement Fees
$201 million Community Facilities District (CFD) bonds
$191 million Redevelopment Tax Increment (RDA TI)
$80 million Housing Set Aside Funds
It should be noted that Heritage Fields, LLC is proposing a series of changes to the DA. Under the terms of the DA, any changes to the plan may be proposed by the City and agreed to by Heritage Fields, LLC; however. According to the developer, in the fall of 2006, the Irvine City Council appointed a Committee composed of Mayor Krom and Councilman Agran to negotiate any proposed changes in the DA with Heritage Fields, LLC. The proposed changes to the plan include increasing the residential unit total by 5,875 for a total of 9,500 units. The commercial space would be reduced by 30 percent or 1.6 million square feet to a total of 3.7 million square feet. The proposed Amended Plan would also include the dedication of an additional 402 acres of land to the city including a 211-acre golf course, 131 acres in the Exposition Area, and 60 acres for affordable housing. This appraisal makes reference to the proposed Amended Plan, which is currently being considered by the City of Irvine and Heritage Fields, LLC, as the proposed modifications would have significant implications for the overall project if adopted. However, as of the date of value, the timing and the ultimate outcome of the proposed modifications is uncertain. As a result, we have not specifically analyzed the proposed modifications but have considered the potential benefit of the increase in project yield in the “as is” value discount rate selection.
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PROPOSED LAND USE Upon completion, the Heritage Fields Development Plan will consist primarily of residential, parks/recreation, and R&D land uses. Land uses and allocated acreages vary by district. The total land area for that area of the project which is the subject of this appraisal is approximately 2,107 gross acres or 2,086 acres net. The majority of the land within the Heritage Fields project is dedicated for residential development. Based on current entitlements, upon buildout the project could include up to 3,625 residential units. Per the ownership’s current business plan, which is summarized on a subsequent table, residential uses will encompass 615.8 acres.
Land Use NeighborhoodSaleable Acres± Units
Office TODD 10.5 --
Auto Center TODD 27.7 --
Retail LLD & TODD 40.5 --
Cemetery LLD 73.2 --
Civic LLD, TODD & Park 74.4 --
Park LLD, TODD & Park 125.9 --
Agriculture LLD & TODD 175.7 --
R&D LLD & TODD 181.8 --
Expo Ctr. LLD 215.7 --
Institutional LLD 238.5 --
Golf Course Park 306.3 --
Residential LLD, TODD & Park 615.8 3,625
Project Totals 2,086.0 3,625
LLD - Lifelong Learning District; TODD - Transit Oriented Development District; Park - Park District
MASTER LAND USE PLANHeritage Fields Master Plan, Irvine, California
In the Lifelong Learning District, 1,026 homes are planned on 116 residential acres with construction types including but not limited to: faculty housing, mid-rise flats, single-family detached, and luxury triplexes. Other significant land use distributions in the Lifelong Learning District are 223 education acres, 215 exposition acres, 163.2 agricultural acres, 77.8 R&D acres, and 73.2 cemetery acres. For the Park District, 1,100 homes are planned on 365 residential acres with a wide range of single-family detached housing types. Other substantial land uses in the Park District are 306 golf course acres and 85 park/recreation acres. The Transit-Oriented District has approximately 1,500 housing units planned for 134.7 residential acres with townhome, apartment, and single-family detached construction types. The other primary land use in the Transit-Oriented District is 113 R&D acres. MISCELLANEOUS LAND USES Exposition – The Lifelong Learning District is planned to include an Expo Center on 215.7 acres that is envisioned as a venue for commercial recreation, demonstration shows, training venues and a variety of
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other recreation and learning activities. The intent or goal of the Expo Center is to serve as the location for activities and programs that have a regional draw. The location of the Expo Center site is south of Irvine Boulevard and north of the northern boundary of The Great Park. The Expo Center is situated to the east of the Cemetery site. Cemetery – The Lifelong Learning District is planned to include a cemetery on 73.2 acres. The Cemetery is located just south of the UC Research Center, west of the acreage allocated for the Expo Center, and bounded by the northern portion of the Great Park. PARKS/RECREATION/OPEN SPACE The Specific Plan provides for a variety of public and private parklands, open space areas, private recreation facilities, and trails to serve the residents of the Heritage Fields project as well as the larger community. The following description summarizes the project’s planned parks, recreation and open space uses by district. While not a part of the subject property, The Great Park is central to the theme, planning and orientation of the Heritage Fields project. We have included a description of The Great Park as well. The Great Park – The Orange County Great Park Plan will provide a wide array of active and passive uses. Park features will include the Great Park Balloon, a tethered helium observation balloon that will provide an icon for the Great Park, rising to a height of 500 feet allowing for 25 miles of visibility. The Great Sports Park and Field, 165 acres dedicated to soccer and baseball fields, sports facilities and programs, a skateboard complex, rock climbing area, and a field house. The Great Lawn, in reminiscence of Orange County’s agricultural heritage, will have groves of citrus and acacia trees in its large open area that will accommodate public events and picnickers. The most distinctive element, the Great Canyon, will be in excess of two miles long and 60 feet deep, allowing visitors to cross the at a series of bridges at various points. A perennial stream with small pools will run the length of the canyon. History of El Toro will be recognized at the Veterans Memorial where the Great Park Air Museum will display vintage aircraft and remnants of the former airway. The Great Park will also include a Botanical Garden showcasing southern California’s plants and habitats, a Cultural Terrace linking the major cultural facilities, and a Wildlife Corridor, a three-mile corridor along the eastern border of the Great Park that will provide space for wildlife migration. More than 3,885 of the 4,700 acres will be dedicated to open space, education, and other public uses. The Park District – Two trails will connect the Park District with surrounding open spaces in the Great Park and the neighboring El Toro Reserve. Included in the Park District’s open space network are: a public neighborhood park, a recreation club and pool, lake and riparian corridor lines, a 27-hold golf course, a private lake club and recreation center, and a system of smaller neighborhood greens and pocket parks. Per the land use matrix, the Park District has a proposed 97.9 acres of Park/Recreation and Open Space.
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Lifelong Learning District – This district is more urban in its orientation and does not incorporate significant concentrations of open space. Parks and open space in the LLD will primarily take the form of neighborhood parks, greenways and pedestrian-oriented boulevards or esplanades. Per the land use matrix, the Lifelong Learning District has a proposed 14.4 acres of Park/Recreation and Open Space. Transit Oriented Development District – The TODD will include neighborhood park uses as well as links to community open space and The Great Park. A central Prado will provide an urban parkway or “main street” setting linking the Irvine Train Station and The Great Park. Per the land use matrix, the Transit Oriented Development District has a proposed 17.9 acres of Park/Recreation and Open Space. SITE SIZE Per the Tentative Tract Map No. 17008, dated April 2007, the total acreage of the entire Great Park project area is 3,585± gross acres inclusive of the five ownership entities that are represented in the project. The following table allocates the overall project by its ownership, according to the Tract Map:
Ownership AcreageHeritage Fields LLC 2,134.0
City of Irvine 1,292.3Federal Government 1.6
Roads 155.1Marshburn Channel 1.7
Total 3,584.7
SITE SIZEHeritage Fields Master Plan, Irvine, California
The subject of this appraisal is the Heritage Fields LLC ownership interest, which according to the VTTM, comprises 2,134 gross acres. The Heritage Fields LLC component is further demised into 43 individual lots summarized on the following page. The VTTM summary and the sum total of the individual lots differs slightly. We are not aware of the reason for this discrepancy. We note that further refinement and adjustment to the gross areas reported in the VTTM have been made by the subject ownership. Per the ownership’s business plan, the total net saleable acreage for the Heritage Fields project, upon which this appraisal is based, is 2,086 acres as summarized in the subsequent chart detailing the Heritage Fields project area by individual planning area.
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Lot Zoning Gross Acres
1 Vehicle Related Commercial 32.02 General Industrial 10.33 General Industrial 15.14 General Industrial 15.95 General Industrial 34.76 General Industrial 5.97 General Industrial 37.68 Transit Oriented Development 34.49 Transit Oriented Development 19.5
10 Transit Oriented Development 19.111 Transit Oriented Development 14.312 Transit Oriented Development 4.113 Transit Oriented Development 10.314 Exclusive Agriculture 12.515 Transit Oriented Development 12.816 Transit Oriented Development 60.117 Recreation 211.018 Low Density Residential w/ Golf Course Overlay 367.619 Lifelong Learning District 1.620 Lifelong Learning District 214.121 Lifelong Learning District 74.722 Low Density Residential 269.523 Lifelong Learning District 62.724 Lifelong Learning District 22.325 Lifelong Learning District 8.326 Lifelong Learning District 8.727 Lifelong Learning District 27.428 Lifelong Learning District 13.229 Lifelong Learning District 7.530 Lifelong Learning District 4.031 Lifelong Learning District 0.532 Lifelong Learning District 14.533 Lifelong Learning District 14.334 Lifelong Learning District 30.635 Lifelong Learning District 56.436 Lifelong Learning District 50.037 Lifelong Learning District 31.738 Lifelong Learning District 21.439 Lifelong Learning District 38.440 Lifelong Learning District 48.541 Lifelong Learning District 28.942 Lifelong Learning District 169.443 Lifelong Learning District 0.0
Total 2,135.8Source: Vesting Tentative Tract Map No. 17008Prepared by Fuscoe EngineeringDated April 9, 2007
ZONING BY LOTHeritage Fields Master Plan, Irvine, California
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 5 1
Parcel/Planning Proposed Product Product Density Gross Adjusted
Area Land Use Number Description or FAR Acres Acres Homes
Lifelong Learning District (LLD) L1 Agriculture 42 Agriculture 143.0 141.3L2 Agriculture 42 Agriculture 21.9 21.9L3 Marshburn Basin 41 CivicL4 R&D 36 R&D (LLD) 35.6 30.3L5 R&D 36 R&D (LLD) 42.2 35.9L6 Education 38 Institutional 17.7 17.7L7 Education 38 Institutional 7.1 7.1L8 Education 38 Institutional 28.4 28.4L9 Education 38 Institutional 35.0 35.0
L10 Residential 8 Faculty Housing 4.0 15.0 15.0 60L11a Residential 1 Mid-Rise Flats 25.0 5.5 5.5 136L11b Residential 1 Mid-Rise Flats 25.0 5.4 5.4 135L11c Residential 6 60x105 4.8 13.9 13.9 67L11d Residential 5 SFD 45x105 6.5 8.1 8.1 52L12 Education 38 Institutional 28.1 28.1L13 Education 38 Institutional 11.9 11.9L14a Residential 3 Luxury Triplex 6.0 16.7 16.7 100L14b Residential 2 Row TH 15.0 6.7 6.7 101L14c Park 44 Park 0.5 0.5L15 Residential 2 Row TH 15.0 6.7 6.7 101L16 Education 38 Institutional 15.2 15.2L17 Retail 34 Retail 19.6 19.6L18 SCE Expansion 41 Civic 0.5 0.5L19a Education 38 Institutional 2.3 2.3L19b R&D 36 R&D (LLD) 2.5 2.5L19c Education 38 Institutional 2.6 2.6L20 Retail 34 Retail 9.2 9.2L21 Retail 34 Retail 4.2 4.2
L22a-i Residential 5 SFD 45x105 6.5 3.1 3.1 20L22a-ii Residential 4 Courtyard 5.5 10.8 10.8 59L22a-iii Residential 2 Row TH 15.0 2.0 2.0 30L22a-iv Park 44 Park 3.7 3.7
L22b Education 38 Institutional 26.0 26.0L23 Park 44 Park 10.2 10.2L24 Residential 7 ETHIC 7.4 22.2 22.2 165L25 Education 38 Institutional 64.2 64.2L26 Cemetery 45 Cemetery 73.2 73.2L27 Exposition 46 Expo Ctr. 215.7 215.7
Total 936.5 923.1 1,026
HERITAGE FIELDS (EL TORO MCAS)2007 OVERLAY BUSINESS PLAN
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LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 5 2
Parcel/Planning Proposed Product Product Density Gross Adjusted
Area Land Use Number Description or FAR Acres Acres HomesPark District (PD)
P1a Residential 22 SFD 120x150 1.7 21.9 21.9 27P1b Residential 21 SFD 100x120 2.5 33.0 33.0 73P1c Residential 20 SFD 85x120 3.0 36.1 36.1 86P1d Residential 18 SFD 75x110 3.7 19.8 19.8 62P1e Residential 18 SFD 75x110 3.7 19.8 19.8 62P1f Residential 17 SFD 70x100 4.4 21.3 21.3 81P1g Fuel Mod 41 Civic 17.1 17.1P1h Neighborhood Greens 41 Civic 3.7 3.7P1i Major Roads 41 Civic 5.9 5.9P1j Orchards 41 Civic 32.7 32.7P1k Parks/Recreation 44 Park 8.5 8.5P1l Open Space - Natural 44 Park 8.2 8.2P2 Residential 17 SFD 70x100 4.4 21.3 21.3 80P3 Open Space 41 Civic 12.5 12.5P4a Residential 10 Courtyard 6.4 11.0 11.0 70P4b Residential 9 Luxury Att 5.5 15.5 15.5 85P4c Residential 10 Courtyard 6.4 10.4 10.4 67P4d Parks/Recreation 44 Park 21.4 21.4P5a Residential 9 Luxury Att 5.5 11.0 11.0 60P5b Parks/Recreation 44 ParkP6a Residential 19 SFD 80x110 3.5 21.9 21.9 76P6b Parks/Recreation 44 ParkP7a Residential 21 SFD 100x120 2.5 13.9 13.9 35P7b Residential 22 SFD 120x150 1.7 23.0 23.0 39P7c Parks/Recreation 44 Park 6.1 6.1P8 Parks/Recreation 44 Park 8.1 8.1P9 Parks/Recreation 44 Park 15.1 15.1
P10a Residential 16 SFD 70x110 4.0 11.0 11.0 44P10b Parks/Recreation 44 Park 9.6 9.6P11a Residential 22 SFD 120x150 1.7 42.0 42.0 71P11b Residential 21 SFD 100x120 2.5 20.0 20.0 51P11c Golf Facilities 43 Golf Course 102.1 102.1P11d Parks/Recreation 44 Park 13.0 13.0P12a Residential 21 SFD 100x120 2.5 12.3 12.3 31P12b Parks/Recreation 44 Park 3.6 3.6P13 Golf Facilities 43 Golf Course 204.2 204.2
Total 836.9 836.9 1,100
HERITAGE FIELDS (EL TORO MCAS)2007 OVERLAY BUSINESS PLAN
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 5 3
Parcel/Planning Proposed Product Product Density Gross Adjusted
Area Land Use Number Description or FAR Acres Acres HomesTransit Oriented Design District (TODD)
T1a Residential 33 SFD 60x100 5.1 10.0 10.0 51T1b Residential 33 SFD 60x100 5.1 9.0 9.0 46T1c Retail 34 Retail 6.0 6.0T1d Residential 31 SFD 45x100 6.8 9.8 9.8 66T1e Park 44 Park 0.5 0.5T2a Residential 33 SFD 60x100 5.1 19.0 19.0 96T2b Park 44 Park 2.6 2.6T3a Residential 31 SFD 45x100 6.8 5.0 5.0 34T3b Residential 26 Garden Flats/TH 17.0 5.0 5.0 85T3c Park 44 Park 3.5 3.5T4 Agriculture 42 Agriculture 12.5 12.5T5 Civic/Public 41 CivicT6 Civic/Public 41 CivicT7 Office 35 Office 10.5 10.5T8 Residential 25 Apartments 27.9 4.2 4.2 117T9a Residential 27 Brownstone Villa 14.0 8.0 8.0 112T9b Park 44 Park 4.3 4.3T9c Open Space 41 Civic 2.0 2.0
T10a Residential 24 Affordable (Low) 20.9 18.8 18.8 392T10b Park 44 Park 0.4 0.4T11a Residential 32 SFD 50x100 6.1 16.4 16.4 100T11b Park 44 Park 3.2 3.2T12a Residential 28 Townhome (Camden) 18.0 6.2 6.2 112T12b Residential 29 Courtyard (8-pack) 12.0 6.7 6.7 80T12c Residential 51 Willowhaven 13.0 8.6 8.6 112T12d Residential 30 Zero Lot Line 12.0 8.0 8.0 96T12e Retail 34 Retail 1.5 1.5T12f Park 44 Park 3.4 3.4T15 Fly-Away COI 41 Civic
Total 185.1 185.1 1,499
HERITAGE FIELDS (EL TORO MCAS)2007 OVERLAY BUSINESS PLAN
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 5 4
Parcel/Planning Proposed Product Product Density Gross Adjusted
Area Land Use Number Description or FAR Acres Acres HomesTODD NON-RESIDENTIAL
T13-1 R&D 48 R&D (TODD no f/way) 1.9 1.9T13-2 R&D 48 R&D (TODD no f/way) 2.0 2.0T13-3 R&D 48 R&D (TODD no f/way) 2.0 2.0T14-1 R&D 47 R&D (TODD f/way) 4.3 4.1T14-2 R&D 47 R&D (TODD f/way) 2.5 2.4T14-3 R&D 47 R&D (TODD f/way) 3.3 3.2T14-4 R&D 47 R&D (TODD f/way) 3.9 3.7T14-5 R&D 48 R&D (TODD no f/way) 2.8 2.7T14-6 R&D 48 R&D (TODD no f/way) 2.7 2.6T14-7 R&D 48 R&D (TODD no f/way) 1.7 1.6T14-8 R&D 48 R&D (TODD no f/way) 2.0 1.9T14-9 R&D 48 R&D (TODD no f/way) 3.1 3.0
T14-10 R&D 48 R&D (TODD no f/way) 3.3 3.2T14-11 R&D 48 R&D (TODD no f/way) 1.7 1.6T14-12 R&D 48 R&D (TODD no f/way) 1.6 1.5T14-13 R&D 48 R&D (TODD no f/way) 1.9 1.8T14-14 R&D 48 R&D (TODD no f/way) 1.4 1.3T14-15 R&D 48 R&D (TODD no f/way) 1.6 1.4T16-1 R&D 48 R&D (TODD no f/way) 1.2 1.1T16-2 R&D 48 R&D (TODD no f/way) 1.6 1.4T16-3 R&D 48 R&D (TODD no f/way) 1.5 1.4T16-4 R&D 48 R&D (TODD no f/way) 1.5 1.4T16-5 R&D 48 R&D (TODD no f/way) 2.2 2.0T16-6 R&D 48 R&D (TODD no f/way) 1.1 1.1T16-7 R&D 48 R&D (TODD no f/way) 1.7 1.6T16-8 R&D 48 R&D (TODD no f/way) 1.6 1.5T16-9 R&D 48 R&D (TODD no f/way) 1.6 1.5
T16-10 R&D 48 R&D (TODD no f/way) 2.8 2.6T16-11 R&D 48 R&D (TODD no f/way) 2.1 1.9T16-12 R&D 48 R&D (TODD no f/way) 2.5 2.3T16-13 R&D 48 R&D (TODD no f/way) 3.1 2.9T16-14 R&D 48 R&D (TODD no f/way) 1.7 1.6T16-15 R&D 48 R&D (TODD no f/way) 1.2 1.1T16-16 R&D 48 R&D (TODD no f/way) 1.3 1.2T16-17 R&D 48 R&D (TODD no f/way) 1.7 1.6T16-18 R&D 48 R&D (TODD no f/way) 1.9 1.7T17-1 R&D 48 R&D (TODD no f/way) 0.6 0.6T17-2 R&D 48 R&D (TODD no f/way) 1.6 1.6T17-3 R&D 48 R&D (TODD no f/way) 1.5 1.5T17-4 R&D 48 R&D (TODD no f/way) 1.7 1.7T17-5 R&D 48 R&D (TODD no f/way) 1.1 1.1T17-6 R&D 48 R&D (TODD no f/way) 1.1 1.1T18-1 R&D 48 R&D (TODD no f/way) 5.3 5.0T18-2 R&D 48 R&D (TODD no f/way) 4.3 4.1T18-3 R&D 48 R&D (TODD no f/way) 1.6 1.5T18-4 R&D 48 R&D (TODD no f/way) 1.5 1.4T18-5 R&D 48 R&D (TODD no f/way) 1.5 1.4T18-6 R&D 48 R&D (TODD no f/way) 3.0 2.8T18-7 R&D 48 R&D (TODD no f/way) 1.5 1.4T18-8 R&D 48 R&D (TODD no f/way) 1.5 1.4T18-9 R&D 48 R&D (TODD no f/way) 1.6 1.5
T18-10 R&D 48 R&D (TODD no f/way) 3.5 3.3T18-11 R&D 48 R&D (TODD no f/way) 1.7 1.6T18-12 R&D 48 R&D (TODD no f/way) 1.9 1.8T18-13 R&D 48 R&D (TODD no f/way) 2.0 1.9T18-14 R&D 48 R&D (TODD no f/way) 2.0 1.9T18-15 R&D 48 R&D (TODD no f/way) 3.2 3.0T19-1 Auto Center 37 Auto Ctr 5.4 5.2T19-2 Auto Center 37 Auto Ctr 5.5 5.3T19-3 Auto Center 37 Auto Ctr 5.9 5.6T19-4 Auto Center 37 Auto Ctr 7.6 7.3T19-5 Auto Center 37 Auto Ctr 4.5 4.3Total 148.5 140.9
TOTAL FOR HERITAGE FIELDS 2,107.0 2,086.0 3,625
HERITAGE FIELDS (EL TORO MCAS)2007 OVERLAY BUSINESS PLAN
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 5 5
MASTER LAND USE PLAN
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
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PRODUCT AND PHASING PLAN The 2007 Adopted Business Plan (ABP) for Heritage Fields provides the projected completion/land sale dates for the specific developments within each district. The timing referenced herein is based on the developer’s plans and does not necessarily correlate to the absorption schedule employed in our valuation. In the Lifelong Learning District, the cemetery is expected to be sold by September of 2007; there is a contract in-place for the cemetery. The developer contemplates that the first 139 single-family detached homesites are expected to be completed by June 2008 along with approximately four acres of retail in the south central portion of the district. By the end of 2008, another 136 homesites are anticipated for completion in addition to 30 acres of R&D. Per the ABP, in 2009 another 366 homesites are expected to be completed in the district as well as 2.5 acres of R&D, almost 10 retail acres, and 82 educational acres. In 2010, Heritage Fields is projecting the completion of 254 additional homesites, and the sale of approximately 100 acres of educational land and 160 acres of agricultural land in addition to 36 acres of R&D land. In 2011, the final 131 homesites, 26 educational acres, and the Expo Center are expected to be delivered/sold. According to the ABP, in the Park District the completion of 548 homesites is forecast for 2008 - 442 by June and the remainder in December. In 2010, another 269 homesites are planned for completion. The Golf Course is projected for delivery in 2011 along with an additional 62 homesites. In 2012, 94 homesites are to be completed followed by the final 70 the following year. Per the ABP, the Transit Oriented District is to experience significant activity through 2011. In 2007, 512 homesites and 6 R&D acres are projected for completion/sale. In May of 2008, 16.1 auto center acres are anticipated and in 2009 approximately 11 R&D acres, 11.6 auto center acres, and 12.5 agricultural acres are planned. In 2010, 50 R&D acres, 891 homesites, 10.5 office, and 6 retail acres are to be completed. In 2011 the final 46.6 R&D acres are scheduled for sale. The final 47 homesites are anticipated to be delivered in 2012. AFFORDABLE HOUSING REQUIREMENT Per law, a minimum of 15% of the total home count must satisfy affordable housing requirements. Because the property is located in a redevelopment district, 6% must be available for families qualifying for Very Low-Income Homes (VLIH), 4% for Low-Income Homes (LIH) and 5% for Moderate-Income Homes (MIH). As a condition of the Navy’s auction process, the LLC entered into an agreement to construct a total of 165 homes for families in transition (e.g., homeless). It is assumed that the 165 homes will not qualify for affordable housing, i.e., will not be a credit against the 15% requirement. In accordance with an executed agreement with homeless service providers, a 22.2-acre site (L24) is assumed conveyed for “transitional housing.” The current agreement anticipates that the site for the 165 transitional homes would be within
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
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the 215.7-acre Exposition Center area (L27), but the service provider, ETHIC, has stated an interest in being located with the Long-Term Learning District (LLD). VLIH and LIH requirements are to be met by conveying 18.8 acres of land (T10a) to the City’s Affordable Housing Trust, with required homes constructed by the Trust using RDA housing set-aside funds. MIH requirements are to be met by the construction of market-rate apartments, the intend being no reduction in land value for the apartment site (T8). Further, a total of 60 homes for faculty and staff are to be constructed on a LLD site (L10).
Planning Number Residential
Area Intended Use Units Acres Density
L10 Faculty Housing 60 15.00 4.00
L24 ETHIC 165 22.20 7.43
T8 Apartments 117 4.20 27.86
T10a Affordable Low Homes 392 18.80 20.85
Totals --- 734 60.20 ---
AFFORDABLE HOUSING SUMMARYHeritage Fields (El Toro MCAS)
The current proposal meets, and essentially over-mitigates, for the affordable housing requirement, which is 544 affordable homes (3,625 units x 15%). The four planning areas discussed have not been designated as land sale revenue events in the developer’s business plan and the appraisers have assumed the same, understanding that such sites are often conveyed to various affordable housing development entities with no effective land basis possible due to the high cost of constructing affordable housing and feasibility standards. EXISTING LAND USES The former MCAS El Toro base was developed in 1942 on land purchased from The Irvine Company. The former base operated continuously as a military air facility from that time until it was closed in July 1999, as part of the federal 1993 Base Realignment and Closure (BRAC) process. Since closure, existing buildings, structures, ancillary facilities, runways, etc. have been left on-site. Portions of the site are also currently used for agricultural operations. The current ownership is leasing some of the existing facilities for various interim activities, such as the golf course and equestrian facilities and the Cal State University, Fullerton Extension Campus, agricultural operations, and recreational vehicle storage. The former MCAS El Toro base generally consists of approximately 500 existing structures with approximately 4.6 million square feet of space. There are approximately 1,100 existing former military housing units. Development includes the MCAS and COMCABWEST headquarters building and the officers club, unoccupied residential housing, maintenance, operation, and storage uses, the airfield
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operations building, an equestrian center, golf course and industrial uses, with predominantly hangers and warehouses. The former base airfield also included five runways. It is our understanding, through conversations with the current ownership, that some of the existing improvements may have re-use potential within the context of the master-plan. However, the primary strategy for the ownership is to implement a land development/lot sale program consistent with the planning and zoning framework for the Heritage Fields project. Therefore, we have not considered the contributory value, if any, of the existing improvements. SURROUNDING USES Surrounding land uses include the Irvine Spectrum business park, Wild Rivers Water Park and the Verizon Wireless Amphitheater to the southwest, industrial/business parks to the southeast, residential neighborhoods to the west within the City of Irvine, residential neighborhoods to the southeast within the City of Lake Forest, and agriculture and open space to the northeast. TOPOGRAPHY The majority of the subject property has little topographic relief, with a slight slope (1.5 to 2.5 percent) to the west and southwest, and a gently sloping to steep hillside area at the eastern section of the site. Elevations in this portion of the project area range from approximately 200 feet above mean sea level (MSL) at the western corner of PA 51 to approximately 450 feet above MSL on Irvine Boulevard at the Wherry Housing Area and rising to over 750 feet above MSL at the eastern corner by the Foothill Transportation Corridor. The Santa Ana Mountains are north and east of the property and rise to 6,698 feet above MSL. The San Joaquin Hills south of the site rise to approximately 1,170 feet above MSL. The area south of Barranca Parkway has moderate slopes ranging from five to 20 percent. The site’s southwestern slope is interrupted by the manmade undulations at the Marine Memorial Golf Course (southeastern section) and the drainage areas along this course. The topography of the subject property does not present an obstacle to its future development. ACCESS AND CIRCULATION The project area is located north of the Santa Ana (I-5) Freeway, east of the Eastern Transportation Corridor (SR-133), and south of the Foothill Transportation Corridor (SR-241). Major roadways bordering the project area include Barranca Parkway to the south, Sand Canyon Avenue to the west, Portola Parkway and Irvine Boulevard to the north, and Alton Parkway to the east. The Irvine Transportation Center, a major multimodal transit center linking Orange County Transportation Authority (OCTA) bus, Metrolink commuter rail, and Amtrak rail services, is adjacent to the Southern California Regional Rail Authority (SCRRA) tracks, which bisects the area of the subject property.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
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The subject property is serviced by a series of significant roadways. The Eastern (SR-133) Transportation Corridor is located to the west and travels in a northwest-southeast direction. The Foothill (SR-241) Transportation Corridor navigates the northern section of the project site in a southeast-northwest direction until intersecting with the SR-133 just north of Portola Parkway. Portola Parkway is a sizeable highway to both the east and west of Jeffrey Road. Irvine Boulevard travels in a northwest-southeast direction through approximately the center of the project site. Sand Canyon Road crosses under the I-5 and intersects with Portola Parkway, Irvine Boulevard, and Trabuco Road, while running parallel the SR-133 on a northwestern border of Heritage Fields. Alton Parkway and Barranca Parkway venture along the perimeter of the former El Toro Golf Course and Bake Parkway is a major north/south roadway just east of the Heritage Fields project. The subject property is very well served by the regional transportation network and has access to mass transit. Overall access and internal circulation, upon completion of the project infrastructure, is considered very good. UTILITIES WATER Irvine Ranch Water District (IRWD) is the jurisdictional agency responsible for providing domestic water service to the Specific Plan area. According to the EIR, the IRWD does not have any adopted expansion plans for the potable water system within the project area. The Metropolitan Water District of Southern California (MWD) is planning for a parallel pipeline to the Allen-McColloch Pipeline (AMP), which currently traverses the EIR project area. The City of Irvine acknowledges that only existing infrastructure that meets current IRWD standards will be preserved for use in the future. Infrastructure considered below the IRWD standard will be replaced and/or upgraded based on IRWD recommendations during implementation of the Heritage Fields project. The IRWD will have sufficient water supply to serve the subject property. SEWER The Irvine Ranch Water District (IRWD) operates the Michelson Water Reclamation Plant (MWRP) located off Michelson Drive in the San Joaquin Marsh. The IRWD is a member of the County Sanitation Districts of Orange County (CSDOC) and is capable of conveying all sewage flows not treated at the MWRP to CSDOC facilities in Fountain Valley for treatment and disposal. The IRWD does not anticipate problems in supplying wastewater service to any current and future development in the City of Irvine. The subject project, therefore, will be sufficiently served by municipal sewer. SOLID WASTE Solid waste is collected by private waste haulers in unincorporated areas of the County. Solid waste generated at the subject property is collected by Waste Management Inc., a private solid waste hauler. Waste Management Inc. is also one of the private hauling firms permitted to work within the City of Irvine. Solid waste collected at the subject property is currently disposed of at the Frank R. Bowerman
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Landfill. The County of Orange Integrated Waste Management Department (IWMD) owns and operates the facility. STORM DRAINAGE Regional flood control and drainage systems exist throughout the vicinity of the Heritage Fields project area. Presently, the Eastern/Foothill Transportation Corridor, Partola Parkway, Irvine Boulevard and Jeffrey Road have major storm drain systems. Sand Canyon Avenue and Trabuco Road have no major drainage facilities. Of the five existing regional storm water basins relevant to the project site, no modifications are required except for the Marshburn Basin which will require the construction of the ultimate intake and outtake systems. The EIR determined that with the implementation of various mitigation measures storm water, flood plains, and groundwater impacts were deemed less than significant. For further details, it is recommended that the reader refer to a copy of the Final Environmental Impact Statement/Environmental Impact Report and Addendum. POWER Southern California Edison (SCE) is the jurisdictional agency currently responsible for providing electricity service to the area. A “The Orange County Great Park Program EIR Infrastructure Report” (Fuscoe Engineering, November, 21 2002) was prepared to design the backbone infrastructure system. This report is provided in Appendix J of the Final Program EIR. It is our understanding that in connection with the development of the Heritage Fields project, the existing electrical system will be replaced and the new system will comply with modern design methods, performance standards and specifications. The new system will be installed to generally coincide with the routing of new and existing roadways circulating throughout the project. Electrical lines will be required to be undergrounded pursuant to City standards. NATURAL GAS Southern California Gas Company (SCGC) is the jurisdictional agency currently responsible for providing natural gas service to the area of the subject property. The new on-site gas distribution infrastructure can be connected to and served from the existing SCGC infrastructure mentioned previously. The existing SCGC facilities are located within and adjacent to the subject property. The new gas distribution facilities will typically be installed in the right-of-ways of existing and proposed streets and will be located to efficiently meet the needs of the project. The new gas distribution systems will utilize current design, construction, and operating standards to meet the energy distribution needs of the proposed project. TELEPHONE The project site is located within the service area of Pacific Bell. Pacific Bell has existing telephone facilities within the vicinity of the subject property. Facilities exist near the intersection of Irvine Boulevard and Jeffrey Road and near Portola Parkway. Pacific Bell will need to extend/enhance existing facilities in order to accommodate the project. PacBell is capable of such an expansion.
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CABLE TELEVISION CoxCom, Inc. is the cable franchise currently providing cable television service to the subject property and the vicinity. The provider will be able to accommodate the needs for cable service for the project during buildout and upon completion. PUBLIC SERVICES FIRE AND EMERGENCY MEDICAL The subject development will be served by The Orange County Fire Authority (OCFA). OCFA provides fire protection and paramedic services to the City of Irvine, and 19 other jurisdictions. The subject property and vicinity are currently served by OCFA stations No. 20, 26, 36, 51, and 38. There is one operational fire station on the former base (Station No. 20). Station No. 20 provides fire protection service to both the former base property, as well as the surrounding off-base properties. LAW ENFORCEMENT The subject development will be served by the Irvine Police Department in Central Irvine.
EASEMENTS AND / OR ENCROACHMENTS The developer provided a title report (Order No. 7002439-23) prepared by the North American Title Company, dated December 7, 2006. The report is included in the addenda. There were numerous listed exceptions, primarily utility easements. No significant adverse easements, conditions, or encroachments, which were deemed to have a substantial impact on value, were noted upon review of the report or during the onsite inspection. The property was appraised assuming clear title and no unknown easements or encroachments. A full title review is recommended. SEISMIC HAZARDS According to the Environmental Impact Report, the project area is located in the seismically active Southern California region. There is no known active or potentially active fault crossing or projecting into the project area. Ground shaking has been experienced in the past and may occur in the future. The site has a low susceptibility for liquefaction because the alluvial sediments are relatively coarse and the water table is generally more than 80 feet below the ground surface. In order to assess the geologic/seismic risk associated with potential development, the City evaluates five general types of geologic conditions through Seismic Response Areas (SRA). SRAs describe the different types and magnitudes of potential seismic hazards, making it possible to evaluate the risks of property damage, personal injury, and loss of vital services which may result from an earthquake. The majority of the subject property is located within SRA-2. SRA-2 consists of denser soils/deeper ground water. The primary potential seismic hazard in this area is ground motion. The majority of the project area is within SRA-2 and is considered suitable for development. The northeastern portion of the project area is located
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 6 2
within SRA-3 and SRA-4. SRA-3 consists of shallow alluvium over and abutting bedrock. In this area, the primary potential seismic hazard is ground motion. According to the EIR, many of the existing buildings on the former MCAS El Toro do not meet current seismic codes. Many are older structures that were constructed prior to seismic codes being in place or were constructed to federal military standards, not California Seismic Code standards. According to the EIR, the potential for fault rupture in the project area is extremely low, whether the project site is developed according to the land uses identified in the Base Plan or the Overlay Plan. According to the City of Irvine there are no known active or potentially active faults crossing or projecting into the project area. The project is considered geotechnically feasible. For further details, it is recommended that the reader refer to a copy of the Environmental Impact Report and Addendum. FLOOD HAZARDS According to the EIR, it is anticipated that project will not have a significant cumulative impact on water quality, nor would the project adversely impact the beneficial uses of the relevant water bodies. In a number of cases, post-development runoff from the project site is expected to improve, thereby potentially improving water quality over current conditions. Storm water and ground water impacts are summarized as not significant and, with city coordinated flood control improvements, the impact on flooding, erosion or siltation in the watershed is likewise deemed not significant. For Further details, it is recommended that the reader refer to a copy of the Final Environmental Impact Report and Addendum. HAZARDOUS MATERIALS The operation of facilities located in the former MCAS El Toro historically included many activities involving the use, storage, transfer, and disposal of hazardous materials. According to the Orange County Great Park EIR, during the approximate 55 years of military operation, air station activities, the operation and maintenance of military aircraft and automotive vehicles, required the use of a large variety of hazardous materials. These hazardous materials consisted of petroleum-based products such as aviation and vehicular fuels, engine and lubricating oils, solvents, cleaners, paints, thinners, pesticides and herbicides; chlorinated/halogenated compounds, including trichloroethylene (TCE) and polychlorinated biphenyls (PCB); some radioactive materials; ordnance munitions; and propellants. Use of these materials typically involves the generation of hazardous byproducts and waste. Many of the existing buildings and facilities may contain hazardous building materials such as asbestos-containing building materials (ACM) and lead-based paint (LBP). The DON was required to complete all necessary remedial actions before the fee title to the former MCAS El Toro was transferred from federal ownership. The federal government is also required to
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
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conduct further remediation if additional contamination caused by DON actions is discovered or of a remedy fails to perform adequately subsequent to the transfer. The property, being a former US Navy facility, includes several so-called LIFOC (Lease In Furtherance of Conveyance) parcels which will be conveyed to the developer subsequent to final environmental clearance hurdles. This protocol is standard in base realignment and disposition scenarios such as the Heritage Fields project. It was assumed that environmental clearance and conveyance will proceed with no substantial obstacles that would alter the development plan as currently proposed by the master developer. The EIR outlines the mitigation measures that are required by the DON to remediate the adverse conditions on the subject property that result from the existence of hazardous materials on the site. Subsequent to mitigation, the EIR suggested that there would be no adverse impacts anticipated, as a result of the project, in relation to hazardous substances or the creation of any health hazards. The appraisers have no expertise in determining the existence of hazardous waste and are unable to make substantiated remarks in this field of study. It is assumed that any and all costs of potential mitigation measures are the responsibility of the DON. The appraisers’ descriptions and resulting comments are the result of the routine observations made during the appraisal process. For further details, it is recommended that the reader refer to a copy of the Final Environmental Impact Report and Addendum. BIOLOGICAL / ENVIRONMENTAL The subject property is located adjacent to the south of the NCCP Wildlife Reserve. The EIR and addendum report that the proposed project would not result in any direct impacts to the adjacent NCCP Reserve. Some indirect effects impacts include: intrusion of humans and domestic pets into the Reserve, predation of sensitive wildlife by domestic animals, increase population of species adapted to urban development (e.g. raccoons, opossum, and skunk) at the expense of more sensitive wildlife, increased fire risk and increased risk of invasion by exotic plant species. The indirect impacts associated with construction activities include potential erosion on exposed slopes, sedimentation of watercourses, dust accumulation on native vegetation and increased dumping of trash and other pollutants. The report concluded that implementation of the adopted mitigation measures will reduce all project-specific and cumulative biological impacts to a level of insignificance. For further details, it is recommended that the reader refer to a copy of the Final Environmental Impact Statement/Environmental Impact Report and Addendum. AGRICULTURAL RESOURCES The subject property is situated within an area with long-standing agricultural uses. The land use context is changing as agriculture becomes a less economically viable use of land. Areas of the subject property are currently utilized for farming and approximately 177 acres of the subject property are designated for agricultural land uses within the context of the master-plan we are evaluating in this appraisal.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
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The City is working to establish an Agricultural Legacy Program, which is intended to address the local and regional loss of agricultural land. The Program attempts to maintain agricultural lands for “metro farming”, which may include such activities as specialty farming, model farming, heritage farming, and community service/educational farming. Those areas within the subject property designated for agriculture could be suitable for such uses under the project zoning. Despite any City actions to zone land for agricultural uses on-site, the City does not have the authority to require landowners to continue farming operations on land that is zoned for agricultural use. The retention of agricultural land use designations on the site will not, therefore, necessarily result in the continuation of agricultural uses. For further details, it is recommended that the reader refer to a copy of the Final Environmental Impact Statement/Environmental Impact Report and Addendum. LAND DEVELOPMENT LAND DEVELOPMENT COSTS
The developer’s adopted business plan supplies income and expense estimates through 1st quarter 2015 reporting total master developer costs at $1,504,347,193 (untrended) and total revenues at $2,348,496,917 (untrended). Accordingly, the net cash flow is $844,149,724 (untrended). Note that substantial costs have been expended thus the $1,504,347,193 budget is over-stating remaining costs as of the date of value. Further discussion on projected revenues and remaining land development costs is presented in the “as is” valuation section of this report. DESIGN CRITERIA The subject site is a property of regional significance and is one of the largest remaining underdeveloped sites in central Orange County. The development plan encourages a mixed community of cutting edge technologies, research and job centers, which are integrated with learning, living, and recreational uses. The purpose of the urban design concept is to achieve aesthetic integration of uses within the site and with surrounding uses in the adjacent communities. The focus is to integrate anticipated land uses with existing facilities, and provide for architectural, landscape, streetscape, and site design enhancements to improve the character of the site. The existence of the Great Park, the proximity to permanent open space, and the orientation of the surrounding major access routes informs the formation of the three subject districts – the Park District, the Lifelong Learning District and the Transit Oriented Development District. As described previously, the plan for the Heritage Fields project is governed by the overall plan for the Great Park. The Heritage Fields project will be contained within distinct districts. The district structure concept addresses the major circulation corridors, entries into the site, the orientation of the districts relative to the Great Park and other site-wide design considerations that will provide an overall “look” or identity for each individual district.
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The visual continuity throughout the Heritage Fields project will be created through streetscape design, entry features, and project landscaping. Edges of the planning areas shall transition to blend with the adjoining streetscapes. Landscapes between planning areas shall blend to avoid abrupt landscape edges. The intent of site planning is to integrate buildings and site improvements into a unified setting with minimal impact of the development on adjacent land uses. Site planning concentrates on the proper placement of buildings, roads, and services. MAINTENANCE PLAN Maintenance responsibilities for the common project facilities would be divided among a Master Homeowners’ Association, Neighborhood Associations, Community Service District, and/or similar maintenance mechanisms. For maintenance costs not covered by public services, the developer has yet to form a community-wide association with monthly assessments. Said assessments are expected to be consistent with competing projects. TAX AND ASSESSMENT INFORMATION Current California taxation law requires a 1% of market value tax rate, plus additional assessments determined through individual communities bond indebtedness (Proposition 13). Actual assessments are typically based on the market value, as determined by the most recent acquisition price. Future assessments will be based upon the most recent acquisition price until additional improvements (land and/or homes) are constructed onsite or a subsequent change of ownership of the property or portions thereof. Subsequent annual tax increases are limited to a maximum of 2% per year. Disposition of the property, as of the date of study, would place the subject under Proposition 13 guidelines. Historical taxes are not available for the subject parcels given the property owners were the federal government with tax exempt status. The following table summarizes the current (FY 2006) real estate tax assessments for the subject property. The information was obtained from the Orange County Assessor. The Assessor’s Tax Maps outlining the subject’s Assessor’s parcels. As of the date of value, the subject’s Assessor’s Parcels do not correspond to the parcelization set forth in the Tentative Tract Map summarized previously. Our review of the subject’s tax records and parcel maps suggest that there are a number of parcels that are not currently assessed. These parcels, in some cases, seem to correspond to what are not currently roadways or access areas.
Per the terms of the Development Agreement, the Developer shall form a Community Facilities District (CFD) for the issuance of bonds, the proceeds of which would be used to construct and/or acquire and maintain the Proposed Public Benefit Facilities and Services and levy a special tax sufficient to pay principal and interest on the CFD bonds and associated costs. The maximum amount of the CFD is $201,000,000. For the market rate housing in the Heritage Fields project, the developer has estimated an
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V A L U A T I O N S E R V I C E S 6 6
overall rate of 1.75% to the homeowners. The active adult housing tax rate is slightly lower at 1.55%. For the commercial portion, the developer has estimated a tax burden of $4.00 per square foot of land (this figure is adjusted from the business plan, which includes $2.50 per square foot). Said tax rate would be fairly typical of most new larger master-plans in the area, which typically range from 1.10% to nearly 1.80%. Recent trends in property taxation laws seem to be of similar nature with no immediate changes anticipated. CONCLUSIONS Overall, the subject Heritage Field site was deemed to have very good development potential as planned. The property is one of the largest tracts of infill land remaining to be developed in Orange County. Both residential and commercial uses are situated near the property. Agricultural uses and significant open space are also adjacent to and incorporated within the project. The physical characteristics of the property are good for master-planned development. Employment centers, support facilities, and major transportation corridors (current and proposed) are within a reasonable distance from the property. The subject property benefits from an approved Development Agreement (contingent on conditions within the FEIR) which allows for 3,625 units, 6,585,594 square feet of commercial space, golf use, schools, and expo uses. As of the date of value, no physical or legal issues were apparent that would prohibit development to its highest and best use.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 6 7
APN Assesed Land Improved Total Assesed Taxes Implied Tax Rate580-081-09 $0 $0 $0 No tax levied
580-081-11 $35,041,104 $35,041,104 $352,302 1.01%
580-081-16 $0 $0 $0 No tax levied
580-081-29 $533,451 $533,451 $5,574 1.04%
580-081-31 $13,258,701 $13,258,701 $138,125 1.04%
580-081-32 $0 $0 $0 No tax levied
580-081-33 $0 $0 $0 No tax levied
580-081-36 $0 $0 $0 No tax levied
580-081-37 $4,851,098 $4,851,098 $50,548 1.04%
580-082-18 $58,271,730 $58,271,730 $585,820 1.01%
580-082-19 $453,883 $453,883 $4,581 1.01%
580-082-21 $29,189,661 $29,189,661 $293,664 1.01%
580-082-27 $130,110 $130,110 $1,317 1.01%
580-082-29 $18,865,438 $18,865,438 $189,698 1.01%
580-082-34 $16,014 $16,014 $178 1.11%
580-082-37 $17,186,520 $17,186,520 $172,690 1.00%
580-082-45 $127,608 $127,608 $1,300 1.02%
580-082-46 $1,152,474 $1,152,474 $11,622 1.01%
580-082-47 $4,219,064 $4,219,064 $42,496 1.01%
580-082-48 $390,330 $390,330 $3,930 1.01%
580-082-49 $0 $0 $0 No tax levied
580-082-51 $0 $0 $0 No tax levied
580-082-53 $0 $0 $0 No tax levied
580-082-54 $14,419,682 $14,419,682 $145,089 1.01%
580-082-58 $189,149,801 $189,149,801 $1,901,427 1.01%
580-083-01 $0 $0 $0 No tax levied
580-083-03 $0 $0 $0 No tax levied
580-083-04 $0 $0 $0 No tax levied
580-084-07 $27,542,769 $27,542,769 $277,100 1.01%
580-084-10 $13,360,788 $13,360,788 $134,431 1.01%
580-084-11 $7,234,112 $7,234,112 $72,823 1.01%
580-084-13 $3,883,781 $3,883,781 $39,113 1.01%
580-084-14 $119,601 $119,601 $1,220 1.02%
590-171-02 $9,297,355 $9,297,355 $95,323 1.03%
590-171-03 $5,738,848 $5,738,848 $58,841 1.03%
590-172-01 $2,986,023 $2,986,023 $30,741 1.03%
590-173-01 $24,705,873 $24,705,873 $253,791 1.03%
590-173-02 $14,575,314 $14,575,314 $149,727 1.03%
590-174-01 $3,619,558 $3,619,558 $37,314 1.03%
590-174-02 $76,083,779 $76,083,779 $780,531 1.03%
590-174-03 $0 $0 $0 No tax levied
591-071-07 $0 $0 $0 No tax levied
591-073-15 $25,613 $25,613 $268 1.05%
591-073-17 $7,066,470 $7,066,470 $72,452 1.03%
591-082-09 $8,123,863 $8,123,863 $83,401 1.03%
591-131-02 $26,063,019 $26,063,019 $271,679 1.04%
591-131-03 $0 $0 $0 No tax levied
591-131-06 $13,458,733 $13,458,733 $140,656 1.05%
591-131-11 $30,046,384 $30,046,384 $313,193 1.04%
591-131-14 $79,548,206 $79,548,206 $800,131 1.01%
591-131-18 $4,166,020 $4,166,020 $41,960 1.01%
591-131-23 $0 $0 $0 No tax levied
591-131-26 $57,499 $57,499 $595 1.03%
591-131-27 $1,273,869 $1,273,869 $12,935 1.02%
591-132-01 $14,473,728 $14,473,728 $148,523 1.03%
591-132-03 $37,031 $37,031 $388 1.05%
591-133-01 $1,711,446 $1,711,446 $17,222 1.01%
591-133-02 $28,614,174 $28,614,174 $287,853 1.01%
591-133-06 $27,237,511 $27,237,511 $273,822 1.01%
591-133-08 $84,071 $84,071 $863 1.03%
591-133-09 $26,522 $26,522 $285 1.07%
591-133-10 $8,562,734 $8,562,734 $86,094 1.01%
591-133-14 $762,144 $762,144 $7,689 1.01%
591-133-22 $103,087 $103,087 $1,064 1.03%
591-133-24 $734,621 $734,621 $7,557 1.03%
591-133-25 $1,022,864 $1,022,864 $10,300 1.01%
591-133-28 $6,824 $6,824 $87 1.27%
591-133-30 $1,377,163 $1,377,163 $13,861 1.01%
Total $830,988,066 $830,988,066 $8,424,195 1.01%
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 6 8
MARKET ANALYSES INTRODUCTION Heritage Hills is to include a wide variety of product types including detached residential, attached residential, affordable housing, R&D, office, retail, educational facilities, an exposition parcel, and a small amount of agricultural land. The appraisers have provided relative market trends, and subject positioning relative, for these various land use elements in the following market analysis discussion. RESIDENTIAL PRICING AND SALES ACTIVITY PRICING – ATTACHED PRODUCT The following chart details the attached housing pricing trend in the subject’s Orange County area during the past 12 quarters. As demonstrated, the overall price has decreased more than 3% over the last 3 years, from $558,774 in the 2nd quarter 2004 to $540,365 in the 1st quarter 2007. The average price per square foot, which reflects the “real” cost of housing, increased nearly 5% during the same period, from $365 to $383 per square foot. Over the same period, average unit size has decreased about 7%, from 1,540 to 1,428 square feet.
Source: Hanley Wood
Orange County Attached Price & PSF Trends
$502,524
$514,861
$540,365
$445,928
$565,168
$625,526
$603,896
$558,774
$652,862$683,319
$592,308$575,498
$383$406
$382
$426
$415
$365
$380$392 $396 $385
$423 $404
$300,000
$350,000
$400,000
$450,000
$500,000
$550,000
$600,000
$650,000
$700,000
$750,000
2/04 3/04 4/04 1/05 2/05 3/05 4/05 1/06 2/06 3/06 4/06 1/07
Quarter/Year
Pric
e
$300
$350
$400
$450
$500
$550
$600
$650
$700
$750
$800
Pric
e PS
F
Price Price PSF
As shown in the following table, the overall price has decreased 12% over the last 3 years, from $619,421 in the 2nd quarter 2004 to $544,531 in the 1st quarter 2007. The average price per square foot, which reflects the “real” cost of housing, remained the same during the same period, at $373 per square foot. Over the same period, average unit size slightly decreased 10%, from 1,682 to 1,498 square feet.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 6 9
Source: Hanley Wood
Central SubmarketAttached Price & PSF Trends
$494,528
$607,802
$544,531$527,217
$611,997
$659,676
$557,235
$613,118
$675,766
$624,726$619,421
$644,596
$373$396
$412
$453
$432
$435
$411
$373$412$381
$405$453
$350,000
$400,000
$450,000
$500,000
$550,000
$600,000
$650,000
$700,000
$750,000
2/04 3/04 4/04 1/05 2/05 3/05 4/05 1/06 2/06 3/06 4/06 1/07Quarter/Year
Pric
e
$360
$410
$460
$510
$560
$610
$660
$710
Pric
e PS
F
Price Price PSF
Housing priced above $500,000 made up 66% of the sales in the 1st quarter 2007. Approximately 34% was priced from $400,000 to $499,999.
Sales % Sales of Sales SubmarketPrice Range (Submarket) Submarket (County) % of County
Less than $350,000 0 0% 16 0%$350,000 to $399,999 0 0% 0 0%$400,000 to $499,999 121 34% 232 22%$500,000 to $599,999 113 32% 139 21%$600,000 to $749,999 105 30% 137 19%$750,000 to $999,999 20 6% 24 4%
$1,000,000 to $,1,499,999 (10) -3% -10 -2%Greater than $1,500,000 2 1% 6 0%
Total 351 100% 544 --- Source: Hanley Wood (1st Quarter 2007)
ATTACHED SALES BY BASE PRICE RANGECentral Submarket
PRICING – DETACHED PRODUCT The following chart details the detached housing pricing trend in the subject’s Orange County area during the past 12 quarters. As demonstrated, the overall price has increased 7% over the last 3 years, from $1,076,532 in the 2nd quarter 2004 to $1,162,420 in the 1st quarter 2007. The average price per square foot, which reflects the “real” cost of housing, decreased 2% during the same period, from $375 to $367 per square foot. Over the same period, average unit size has increased about 8%, from 2,916 to 3,170 square feet.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 7 0
Source: Hanley Wood
Orange County Detached Price & PSF Trends
$1,310,194$1,232,368
$1,162,420$1,218,654
$1,308,197
$1,176,209$1,152,407$1,076,532
$1,538,862
$1,193,382$1,172,525 $1,278,735
$367
$394$422
$410
$388
$375
$437
$364 $367 $377$375
$395
$500,000$600,000
$700,000$800,000$900,000
$1,000,000$1,100,000
$1,200,000$1,300,000$1,400,000
$1,500,000$1,600,000$1,700,000
2/04 3/04 4/04 1/05 2/05 3/05 4/05 1/06 2/06 3/06 4/06 1/07
Quarter/Year
Pric
e
$350
$400
$450
$500
Pric
e PS
F
Price Price PSF
Within the subject’s Central submarket, overall pricing trends were similar to the county. As shown in the following table, the overall price has decreased 11% over the last 3 years, from $1,059,487 in the 2nd quarter 2004 to $947,064 in the 1st quarter 2007. The average price per square foot, which reflects the “real” cost of housing, decreased 10% during the same period, from $406 to $366 per square foot. Over the same period, average unit size remained the same at 2,618 square feet.
Source: Hanley Wood
Central SubmarketDetached Price & PSF Trends
$1,158,141
$1,059,487$1,066,727
$1,110,587
$1,023,112 $1,041,256
$1,169,084
$1,459,043
$1,091,490
$947,064
$1,060,939
$982,149
$400$382
$395$379
$366$381
$472
$423
$380$373$399$406
$700,000
$800,000
$900,000
$1,000,000
$1,100,000
$1,200,000
$1,300,000
$1,400,000
$1,500,000
2/04 3/04 4/04 1/05 2/05 3/05 4/05 1/06 2/06 3/06 4/06 1/07Quarter/Year
Pric
e
$350
$400
$450
$500
$550
$600
$650
$700
$750
$800
$850
Pric
e PS
F
Price Price PSF
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 7 1
Detached housing priced above $750,000 made up 79% of the sales in the 1st quarter 2007. An additional 16% was priced slightly below in the $600,000 to $749,999 range. Only 4% of the sales activity was for housing priced $599,999 or below, however, this is due to the lack of available product rather than demand.
Sales % Sales of Sales SubmarketPrice Range (Submarket) Submarket (County) % of County
Less than $350,000 0 0% 0 0%$350,000 to $399,999 0 0% 0 0%$400,000 to $499,999 0 0% 0 0%$500,000 to $599,999 10 4% 10 0%$600,000 to $749,999 40 16% 40 0%$750,000 to $999,999 109 44% 152 72%
$1,000,000 to $,1,499,999 71 29% 233 30%Greater than $1,500,000 15 6% 81 3%
Total 245 100% 516 --- Source: Hanley Wood (1st Quarter 2007)
DETACHED SALES BY BASE PRICE RANGECentral Submarket
Most economists, builders, and other knowledgeable market participants anticipate a stabilizing trend in home prices in the short term. However, with the onset of less aggressive economic growth, and strains on housing affordability due to the rapid recent increase in home prices, there may be a moderate downward correction, which has been reported in more recent articles and surveys. NEW HOME SALES TRENDS Annual new home sales activity in Orange County has decreased in three of the last four years. From 2003 to 2005, total annual new home sales decreased nearly 9%± from 6,171 to 5,612 units (2005 had a slight increase over 2004). In 2006, total net sales were just over 3,500 units. As of the 1st quarter 2007, approximately 1,000 net sales were recorded, which if annualized, would suggest 4,000 sales by year end. Given the softening in demand, this figure is unlikely. Notable is a steady decline in the number of detached units sold annually, countered by a steady increase in attached units sold. These trends are seen as a combination of a general slowing trend in the market and also to the lack of available inventory. Historically, detached housing has made up the majority of sales in Orange County. As earlier noted, the number of attached projects has been increasing over the last few years due to increasing detached prices, demand for affordable housing, and a new regulatory climate governing the way lawsuits had previously discouraged attached housing developers. Given the increasing prices of traditional detached single family housing in Orange, Los Angeles, and West Riverside Counties, there has been and will likely continue to be growing demand for new homes in price ranges more consistent with small lot detached and attached housing, similar to the proposed product in the subject’s Heritage Fields.
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V A L U A T I O N S E R V I C E S 7 2
Source: Hanley Wood
Orange County New Home Sales
0500
1,0001,5002,0002,5003,0003,5004,0004,5005,0005,5006,0006,500
2003
2004
2005
2006
2007
Year
Uni
t Sal
es
Total Detached Attached
SALES ACTIVITY – ATTACHED PRODUCT The following chart shows net sales have been somewhat irregular over the last three years but with an overall increasing trend. The 3rd quarter 2004 had the fewest net sales (101 sales) recorded over the past three years. The 2nd quarter 2005 with 605 sales posted, was the highest quarterly volume over the three-year period.
Source: Hanley Wood
Net Attached Sales - Central Submarket
403
229
389
287322
401351
605
101
319
453413
50
150
250
350
450
550
650
2/04 3/04 4/04 1/05 2/05 3/05 4/05 1/06 2/06 3/06 4/06 1/07Quarter/Year
Net
Sal
es
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SALES ACTIVITY – DETACHED PRODUCT The following chart shows net sales have been somewhat irregular over the last three years, but a steady increasing trend over the past three quarters. The 2nd quarter 2006 had the fewest net sales (109 sales) recorded over the past three years. The 1st quarter 2005 with 359 sales posted, was the highest quarterly volume over the three-year period.
Source: Hanley Wood
Net Detached Sales - Central Submarket
229212
267304
188163
245
333
125109
173
359
0
50
100
150
200
250
300
350
400
2/04 3/04 4/04 1/05 2/05 3/05 4/05 1/06 2/06 3/06 4/06 1/07Quarter/Year
Net
Sal
es
SUMMARY – PRICING AND SALES ACTIVITY Product pricing trends had been generally positive up to about the 1st quarter of 2005, where in all categories of detached sale indicators have shown a potential for decline. Notable is that while the detached market has shown a decline in number of sales, the attached product has been on a general increase. Similarly, the subject’s Central submarket posted the highest price point over the past 3 years for both detached and attached product. A stabilization of pricing is anticipated over the next 12 to 24 months. A trend in sales velocity is not yet readily refined, however, based on recent surveys figures for 2007 indicate a slower year than 2006. Short-term projections are for a continuation of the “soft” market. Long-term projections, however, are for a positive trend in both pricing and sales activity with most knowledgeable market participants anticipating this market shift in 2008 or 2009. HOUSING SUPPLY OVERVIEW Hanley Wood reported that as of 1st quarter 2007, there were 335 units of unsold inventory in the 143 actively selling projects in Orange County. Unsold inventory defines product that has been released for sale but not yet sold and can be considered existing inventory. Another 5,540 units in active projects is considered remaining inventory or product that has received full approvals and has not been released for sale. This product may be under construction or pending construction and can be considered near-term inventory. Total existing and near-term inventory was 5,875 units. In addition, Hanley Wood reported that in
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Orange County there were 34,828 units of future supply in the various stages of the entitlement process. Notable is that future development includes a fairly even distribution of attached and detached product for Orange County. Future supply defines product in the various stages of the entitlement process (planning, tentative map, final map, etc), or long-term inventory.
# of Unsold Remaining Future # of Unsold Remaining FutureProduct Projects Inventory(1) Inventory(2) Supply(3) Projects Inventory(1) Inventory(2) Supply(3)
Attached 65 214 3,430 28,194 43 50 2,659 23,426
Detached 78 121 2,110 6,634 32 37 1,060 3,534
Totals 143 335 5,540 34,828 75 87 3,719 26,960
% of County --- --- --- --- 52% 26% 67% 77% (1) Unsold inventory includes completed homes and homes under construction in active projects. (2) Remaining inventory includes future construction in active projects. (3) Future supply includes proposed units in submitted entitlement process.
Source: Hanley Wood (1st Quarter 2007)
NEW HOUSING - EXISTING & FUTURE SUPPLYHeritage Fields Master Plan, Irvine, California
Central SubmarketOrange County
As of the 1st quarter 2007, there was unsold inventory of 87 units in the 75 actively selling detached projects in the Central Submarket. Another 3,719 units remain under construction in existing projects. Total existing, near-term and future construction inventory in both detached and attached projects was 3,806 units. Hanley Wood reported that there were 26,960 units of future supply in the various stages of the entitlement process in the Central submarket. Notable is that future development includes significantly more attached product versus detached product for the Central submarket. Current or near-term supply in the Central submarket comprises 65% of the county totals. In terms of future supply, the Central submarket accounts for 77% of the county’s inventory.
Submarket SubTotal % Total SubTotal % Tot Units % TotalCoastal North 2,304 8% 522 8% 2,826 8%
Central 23,426 83% 3,534 53% 26,960 77%North 297 1% 691 10% 988 3%
Coastal South 1,214 4% 1,180 18% 2,394 7%Inland South 953 3% 707 11% 1,660 5%
Grand Totals 28,194 100% 6,634 100% 34,828 100% Source: Hanley Wood (1st Quarter 2007)
FUTURE SUPPLY BY SUBMARKETHeritage Fields Master Plan, Irvine, California
Attached Units Detached Units Total Units
UNSOLD INVENTORY Until mid-2006, unsold inventory was decreasing. Through the remainder of 2006, and reflecting softening demand, unsold inventory increased substantially. As defined here, units remaining for development encompass those units not yet brought to market in active for-sale developments.
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Source: Hanley Wood
Remaining for Development (Active Detached Projects)
1,3181,396 1,359
2,110
1,450
1,8491,571
1,464
2,240
1,710
1,398
2,345
1,0601,235
1,203
304298465487517488632
370540
0
500
1,000
1,500
2,000
2,500
2/04 3/04 4/04 1/05 2/05 3/05 4/05 1/06 2/06 3/06 4/06 1/07Quarter/Year
Num
ber
of U
nits
Orange County Central
Source: Hanley Wood
Remaining for Development (Active Attached Projects)
1,597
3,2143,157
2,280
966
1,605
1,895
1,374
1,8781,656 1,691
3,430
4721,122
1,351
694
936
2,737
2,824
9191,187
1,353 1,402
2,659
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2/04 3/04 4/04 1/05 2/05 3/05 4/05 1/06 2/06 3/06 4/06 1/07Quarter/Year
Num
ber
of U
nits
Orange County Central
At the regional level, the continued reduced availability of land had allowed supply to decrease more rapidly than demand. However, the submarket’s level of detached units remaining for development (future construction) has remained fairly steady. The most recent number of remaining detached units (2,110) is up about 149% since the 2nd quarter of 2004, where there were 1,710 units remaining for development. The most dramatic trend is in the Central submarket, where there are currently 1,060 units remaining for development, up about 96% from 540 units in the 2nd quarter of 2004.
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Over the same period, the future construction of attached product has grown dramatically from 1,374 units in the 2nd quarter of 2004 to 3,430 units in the 1st quarter of 2007 (a 1.50% increase). The Central Submarket had an even more dramatic increase from 472 units in the 2nd quarter of 2004 to 2,659 units in the 1st quarter of 2007 (a 463% increase). SUMMARY – SUPPLY Based on the inventory and sales data, it appears that the long-term trend in Orange County is for a steady supply of housing product. However, it appears based on affordable housing demand, attached product will continue to represent a larger portion of the overall housing inventory. Supply is the more inelastic factor in the supply-demand equation, and if demand remains constant in conjunction with the economic expansion being experienced, there is a potential for a shortage in supply. However, this is not anticipated in the immediate future given the 34,828± units in the planning stages. In the short-term, the large supply of housing, along with moderate decreasing levels of demand, should continue to result in product pricing sensitivity, especially in the Orange County market where there has been the emergence of several large simultaneously selling master-planned communities. Overall, inventory has been decreasing in both the larger Orange County market and in the subject’s Central submarket. The submarket continues to encompass a sizable portion of new housing in Orange County, averaging 28% of total unsold Orange County inventory in the 1st quarter 2007 period. There are 3,534 detached units and 23,426 units of attached units of future supply in the subject’s submarket. Considering actual active and proposed supply in reported projects, the figure is 26,960 detached and attached units. The long-term trend is for a steady supply of housing product with a possible decrease in submarkets with scarce developable land. In the short-term, the decreasing number of sales, along with moderate to declining levels of demand, should continue to result in product pricing sensitivity. To summarize, the current supply of detached homes is on the decline due mainly to the scarcity of available land, while planned and existing attached product is on the increase, due to the demand for a more affordable housing. Some softening in the market is seen as the general economy slows and consumer confidence wavers. Long-term demand, however, appears to be sufficient for planned construction. RESIDENTIAL DEMAND OVERVIEW POPULATION The California Department of Finance reported the Orange County population was estimated at 3,098,121 as of January 1, 2007. This represents a 0.9%± increase from the previous year’s population of 3,071,924. The greatest population growth in the county was seen during the 1980s as the population grew annually by 2.5%± on average. However, the high growth rate did not persist throughout the 1990s as the population grew by an average of 1.8%± annually by the year 2000. Since then the population has grown annually by 1.4%± on average. The county population is projected to continue to grow at an annual average rate of 1.4%± reaching 3,291,628 by 2010, and
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3,552,742 by 2030. Population growth in the following two decades is projected to slow with average annual increases of 0.8%± and 0.4%±, respectively.
Source: California Department of Finance
Historical and Projected PopulationOrange County
3,552,742
3,433,609
3,291,6282,866,332
2,410,6681,932,708
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
1980 1990 2000 2010 2020 2030
Year
Popu
latio
n
According to the California Department of Finance, the city of Irvine’s population as of January 1, 2007, was 202,079, which was 4.1% higher than the 2006 population figure of 194,126.
Source: California Department of Finance & Southern California Association of Governments
Historical and Projected PopulationCity of Irvine
203,965
198,689
143,965
60,600
192,186
109,700
50,000
75,000
100,000
125,000
150,000
175,000
200,000
225,000
1980 1990 2000 2010 2020 2030
Year
Popu
latio
n
The city's population is forecast to increase to 10,703, or 3.4%± per annum, by the year 2010. The majority of demand is anticipated to be a combination of internal Orange County household growth and additional households moving into the area from other areas of Southern California. Long-term forecasts indicate that population levels should continue to increase, thus substantiating the need, or demand, for housing.
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EMPLOYMENT Historically, excluding 1993, the average unemployment rate for Orange County has been lower than the state and national rates. The county’s lowest average unemployment rate of 2.8% was attained in 1999, a year before the state’s and nation’s lowest average rates were recorded over the reported period. Since then, the county rate has been lower than the state’s and nation’s rates but generally closer than historical rates prior to 1999. The average unemployment rate for the county decreased to 3.5% in 2006, and was at 3.5% as of May of 2007, lower than the nation’s and state’s rates of 4.7% and 5.0% respectively.
Source: California Employment Development Department
Unemployment Rates - Not Seasonally Adjusted
4.74.64.9
5.45.6
6.16.9
7.5
4.5
4.2 4.0
4.75.8
6.0
5.55.1
5.04.8
9.3 9.4
8.6
5.9
6.7
4.9
5.45.2
7.8
7.2
6.36.7
6.1
5.3
3.53.5
6.7
3.3
5.04.5
3.52.7
2.9
4.2
6.9
5.7
5.14.8
4.33.8
2
3
4
5
6
7
8
9
10
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007Year
Une
mpl
oym
ent R
ate
(%)
United States California Orange County
Southern California Association of Governments projects steady employment gains for the Orange County region. Orange County is projected to increase its share of service employment approximately 0.9% annually over the 2000-2030 forecast period. The manufacturing sector share of total Orange County employment is expected to decline in this forecast period. Reportedly, a high number of tech jobs will be created around Irvine center in South Orange County. Wholesale, retail, and FIRE sectors are projected to slightly increase their shares of total county employment during the forecast period. As demonstrated in the following chart, employment levels in the Irvine area are forecast to increase at a slightly higher percentage than Orange County on a whole. At 1.3% annually, Irvine is forecasted to experience long-term projections of strong job growth. As economic expansion and development continues, the long-term projections are for continued increases in employment, which increases demand for housing.
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County Absolute % Avg. Annual City 2000 2010 2020 2030 Change Change % Change
Orange 1,514,611 1,749,985 1,848,135 1,921,806 407,195 27% 0.9%Irvine 196,736 246,189 262,115 271,469 74,733 38% 1.3%
Source: Southern California Association of Governments
FORECASTED TOTAL EMPLOYMENT GROWTHHeritage Fields Master Plan, Irvine, California
Year 2000 - 2030
PURCHASING POWER / AFFORDABILITY A significant part of the affordability equation is interest rates. Mortgage interest rates and the availability of financing in the subject’s submarket are similar to that of the county.
Source: Mortgagecafe & Freddie Mac
Historical Interest Rates
7.948.25
4.024.36
6.10
4.294.13
8.388.448.27
8.85
7.04
6.00
7.98
9.19
7.13
4.71
2.74
1.872.06
2.71
4.40
5.32
4.594.864.884.86
5.06
3.933.88
6.426.21
5.87
7.607.81
5.83 5.846.94
7.44
8.05
6.976.54
7.93
8.38
7.31
1
2
3
4
5
6
7
8
9
10
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Current2007
Year
Inte
rest
Rat
e
Prime Rate 11th District Cost of Funds Freddie Mac 30-YR Fixed
Historical Interest Rates
4.024.36
8.257.94
6.10
4.294.13
8.388.448.27
8.85
7.04
6.00
7.98
9.19
7.13
4.71
2.74
1.872.06
2.71
4.40
5.32
4.594.864.884.86
5.06
3.933.88
6.426.21
5.87
7.607.81
5.83 5.846.94
7.44
8.05
6.976.54
7.93
8.38
7.31
1
2
3
4
5
6
7
8
9
10
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Current2007
Year
Inte
rest
Rat
e
Prime Rate 11th District Cost of Funds Freddie Mac 30-YR Fixed
Although difficult to predict over an extended period, mortgage interest rates continue to remain at levels allowing for consistent purchasing power by prospective buyers. Mortgage interest fixed rates on 30-year conforming loans and 1-year adjustable loans were recently at their lowest in 40 years but have been increasing of late. It should be noted that interest rates are projected to increase from record lows. As of the “as is” date of value, the prime rate was 8.25%, which has held steady since June 2006. The appraisers analyzed Orange County and the city of Irvine with regard to household income levels as shown in the following chart. The city of Irvine’s 2000 median household income was $72,057 per year.
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This is more than the county, which had a median household income of $58,820. Within Irvine, 32% of the population earns over $100,000 per year while 33% earn less than $50,000 per year. The city income levels are expected to increase at a slightly greater rate than the county.
County Under $30,000 to $50,000 to $75,000 to $100,000 $150,000 Median IncomeCity $29,999 $49,999 $74,999 $99,999 $149,999 & Over 2000
162,783 229,575 193,379 130,633 130,297 89,48717% 25% 21% 14% 14% 10% $58,820
9,458 7,597 9,406 8,169 9,262 7,25218% 15% 18% 16% 18% 14% $72,057
Irvine
Source: U.S. Census Bureau
2000 HOUSEHOLD INCOMEHeritage Fields Master Plan, Irvine, California
Orange County
Given these figures, and anticipated price points for product in Heritage Hills, only a small portion of the submarket household could qualify for a home purchase in the project. However, these percentages do not account for households relocating from Los Angeles, Riverside, or San Diego counties. Further, these figures do not account for that portion of the population with sufficient cash or other assets to purchase a home without meeting the income criteria assumed in this analysis. Some prospective buyers in this submarket have diverse income and asset sources including older, more mature buyers with accumulated cash reserves. Buyers may also be moving up or down equity that effectively reduces mortgage payments. As evidenced by absorption of similar product in the submarket, there are a reasonable number of prospective buyers having sufficient purchasing power for the subject units, which translates into effective demand. CONCLUSIONS ON RESIDENTIAL HOUSING DEMAND Those factors typically gauged to determine demand for housing would indicate that demand in this submarket should continue at moderate levels. The population is increasing, steady gains in employment are forecasted, and interest rates are at acceptable levels. As discussed, growth rates are expected to continue in Orange County, Central, and Irvine submarkets. However, overall buyer motivation has slowed in the last year, while many factors such as population, interest rates, and overall business markets have remained strong. Although many potential buyers have the “ability” to purchase, they are not motivated to acquire given the latest softening in the market. Provided economic conditions do not deteriorate and/or interest rates do not increase substantially, demand for product in the submarkets should remain, which is further evidenced by absorption in area developments. RESIDENTIAL PRODUCT AND PRICING SUBJECT LAND USE The proposed land use plan was utilized by the appraisers in formulating product build-out and pricing scenarios. Lot sizes, master phasing, and project location essentially dictate the product segmentation. Tract production product will be offered, including detached single family residences and attached multi-
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family product (for sale units). The single family product (including zero lot line and courtyard homes) will be offered on minimum lot sizes ranging from 2,400 to 18,000 square feet. The attached product will be offered in projects consisting of medium and medium-high density condominiums and townhomes with densities of approximately 5.5 to 25.0 units per acre. Of note is that a variety of additional residential product will be offered, including faculty housing and moderate income affordable rental and for sale housing.
Per a review of the latest proposal, the Heritage Fields unit mix would include approximately 60% detached units and 40% attached units, not including faculty housing or affordable housing. Of the detached units, the mix is evenly weighted, with 52% of the lots having minimum lots sizes of 2,400 to 6,000 square feet and 48% having minimum lot sizes greater than 6,000 to 8,000 square feet. Of the 1,678 total multi-family units, approximately 70% are for sale condominiums and townhomes and 30% are rental apartments. The rental apartments include approximately 23% market rate units (117) and 77% affordable units (392). The total unit mix also includes 617 non-market units (17% of the total), including 60 faculty units and 165 units in the ETHIC planning area.
A likely project build-out would consist primarily of first-time and move-up housing for the smaller to mid-size production product and move-up or move-down housing for the larger production product. Preliminary base pricing and home sizes were provided for the residential product lines proposed by Lennar Homes (see proposed pricing summary table at the beginning of the Market Analysis section and below). The master developer utilized these preliminary product lines and projected the overall product build-out as summarized in the tables on the following pages. As shown, product would range from 1,125 to 5,900 square feet, with an overall average of 2,563 square feet.
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Neighborhood Planning Proposed Product Product Density Gross Adjusted Residential HomesArea/Parcel Land Use Number Description or FAR Acres Acres Acres
LLD L10 Non-Market Rate 8 Faculty Housing 4.0 15.0 15.0 15.0 60(Lifelong Learning L11a Attached 1 Mid-Rise Flats 25.0 5.5 5.5 5.5 136
District) L11b Attached 1 Mid-Rise Flats 25.0 5.4 5.4 5.4 135L11c Detached 6 60x105 4.8 13.9 13.9 13.9 67L11d Detached 5 SFD 45x105 6.5 8.1 8.1 8.1 52L14a Attached 3 Luxury Triplex 6.0 16.7 16.7 16.7 100L14b Attached 2 Row TH 15.0 6.7 6.7 6.7 101L15 Attached 2 Row TH 15.0 6.7 6.7 6.7 101
L22a-i Detached 5 SFD 45x105 6.5 3.1 3.1 3.1 20L22a-ii Detached 4 Courtyard 5.5 10.8 10.8 10.8 59L22a-iii Attached 2 Row TH 15.0 2.0 2.0 2.0 30
L24 Non-Market Rate 7 ETHIC 7.4 22.2 22.2 22.2 165Subtotal --- --- --- --- --- 116.1 116.1 116.1 1,026
PD P1a Detached 22 SFD 120x150 1.7 21.9 21.9 21.9 27(Park District) P1b Detached 21 SFD 100x120 2.5 33.0 33.0 33.0 73
P1c Detached 20 SFD 85x120 3 36.1 36.1 36.1 86P1d Detached 18 SFD 75x110 3.7 19.8 19.8 19.8 62P1e Detached 18 SFD 75x110 3.7 19.8 19.8 19.8 62P1f Detached 17 SFD 70x100 4.4 21.3 21.3 21.3 81P2 Detached 17 SFD 70x100 4.4 21.3 21.3 21.3 80P4a Detached 10 Courtyard 6.4 11.0 11.0 11.0 70P4b Attached 9 Luxury Att 5.5 15.5 15.5 15.5 85P4c Detached 10 Courtyard 6.4 10.4 10.4 10.4 67P5a Attached 9 Luxury Att 5.5 11.0 11.0 11.0 60
P6a Detached 19 SFD 80x110 3.5 21.9 21.9 21.9 76P7a Detached 21 SFD 100x120 2.5 13.9 13.9 13.9 35P7b Detached 22 SFD 120x150 1.7 23.0 23.0 23.0 39P10a Detached 16 SFD 70x110 4.0 11.0 11.0 11.0 44P11a Detached 22 SFD 120x150 1.7 42.0 42.0 42.0 71P11b Detached 21 SFD 100x120 2.5 20.0 20.0 20.0 51P12a Detached 21 SFD 100x120 2.5 12.3 12.3 12.3 31
Subtotal --- --- --- --- --- 365.2 365.2 365.2 1,100
TODD T1a Detached 33 SFD 60x100 5.1 10.0 10.0 10.0 51(Transit Oriented District) T1b Detached 33 SFD 60x100 5.1 9.0 9.0 9.0 46
T1d Detached 31 SFD 45x100 6.8 9.8 9.8 9.8 66T2a Detached 33 SFD 60x100 5.1 19.0 19.0 19.0 96T3a Detached 31 SFD 45x100 6.8 5.0 5.0 5.0 34T3b Attached 26 Garden Flats/TH 17.0 5.0 5.0 5.0 85T8 Apartment 25 Apartments 27.9 4.2 4.2 4.2 117T9a Attached 27 Brownstone Villa 14.0 8.0 8.0 8.0 112T10a Affordable 24 Affordable (Low) 20.9 18.8 18.8 18.8 392T11a Detached 32 SFD 50x100 6.1 16.4 16.4 16.4 100T12a Attached 28 Townhome (Camden) 18.0 6.2 6.2 6.2 112T12b Detached 29 Courtyard (8-Pack) 12.0 6.7 6.7 6.7 80T12c Attached 51 Willowhaven 13.0 8.6 8.6 8.6 112T12d Detached 30 Zero Lot Line 12.0 8.0 8.0 8.0 96
Subtotal --- --- --- --- --- 134.7 134.7 134.7 1,499
Total --- --- --- --- --- 616.0 616.0 616.0 3,625 (1) H ypothetical product assumptions based on Heritage Fields 2007 Overlay Business Plan.
PROPOSED RESIDENTIAL LAND USE SUMMARYHeritage Fields Master Plan, Irvine, California
The developer’s preliminary pricing for Heritage Fields is summarized in the following chart. The pricing was based on a preliminary market study for Heritage Fields prepared for the developer by Real Estate Economics (REE), dated December 2006. A subsequent market study of Heritage Fields, dated April 2007, was prepared by The Concord Group. The pricing recommendations for Heritage Fields by The Concord Group varied slightly from those provided by REE due to changes in the residential market from December 2006 to April 2007. The Concord Group’s market study, which provided the support for the appraisers’ home pricing assumptions, is discussed later in the Market Analysis section of this report. The
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developer’s preliminary average base pricing for the various market-rate (non-affordable) for-sale product ranges from $518,625 to $1,539,167 ($373 to $507 per square foot), as shown in the following chart. The pricing generally follows typical trends, with higher prices and lower price points (per square foot) for progressively larger homes.
Product Min. Lot Size/ PA/ No. Units % ofType Product Parcel Valued(2) Mix Size Base Price PSF
4 Courtyard L22a-ii 59 3.07% 2,000 $899,334 $4505 SFD 45 x 105 L11d, L22a-i 52 2.70% 2,200 $1,018,167 $4636 SFD 60 x 105 L11c 67 3.48% 2,650 $1,212,500 $458
10 Courtyard P4a, P4c 70 3.64% 2,950 $1,284,000 $43516 SFD 70 x 110 P10a 44 2.29% 4,000 $1,492,667 $37317 SFD 70 x 100 P1f, P2 81 4.21% 3,650 $1,492,667 $40918 SFD 75 x 110 P1d, P1e 62 3.22% 4,100 $1,740,167 $42419 SFD 80 x 110 P6a 76 3.95% 4,500 $2,028,667 $45120 SFD 85 x 120 P1c 86 4.47% 4,600 $2,097,000 $45621 SFD 100 x 120 P1b, P7a, P11b, P12a 51 2.65% 5,200 $2,464,834 $47422 SFD 120 x 150 P1a, P7b, P11a 39 2.03% 5,900 $2,935,500 $49829 Courtyard (8 pack) T12b 80 4.16% 1,600 $727,167 $45430 Zero Lot Line T12d 96 4.99% 2,000 $851,667 $42631 SFD 45 x 100 T1d, T3A 66 3.43% 2,800 $1,096,841 $39232 SFD 50 x 100 T11a 100 5.20% 3,200 $1,262,334 $39433 SFD 60 x 100 T1a, T1b, T2a 51 2.65% 3,950 $1,539,167 $390
Attached 1 Mid-Rise Flats L11a, L11b 136 7.07% 1,125 $570,313 $5072 Row TH L14b, L15, L22a-iii 101 5.25% 1,725 $743,750 $4313 Luxury Triplex L14a 100 5.20% 1,900 $827,500 $4369 Luxury Attached P4b, P5a 85 4.42% 2,250 $966,667 $430
26 Garden Flats/TH T3b 85 4.42% 1,200 $518,625 $43227 Brownstone Villas T9a 112 5.82% 1,575 $686,375 $43628 Townhomes (Camden) T12a 112 5.82% 1,375 $608,875 $44351 Willowhaven T12c 112 5.82% 1,664 $731,334 $440
Totals 1,923 100.00% (1) Heritage Fields El Toro LLC 2007 Overlay Plan; April 17, 2007. (2) Utilized for appraisers' planning area valuation analyses.
Heritage Fields Master Plan, Irvine, CaliforniaWeighted Average
DEVELOPER'S PRELIMINARY PRODUCT & PRICING ASSUMPTIONS BY PRODUCT TYPE(1)
The ensuing discussion analyzes recent pricing trends in Orange County, the subject’s Central submarket, and comparative submarkets. This is followed by more specific pricing for active or recently active projects in master-plans and stand-alone subdivisions in these areas relative to the subject’s proposed pricing. ORANGE COUNTY NEW HOME PRICING OVERVIEW Based on a 1st quarter 2007 survey by Hanley Wood, the average new attached home price in Orange County was $540,365, or $383 per square foot. The Central submarket, with an average attached home price of $544,531 and $373 per square foot, was the 3rd least affordable submarket on an overall price and
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a price point basis (per square foot) out of five submarkets. The $373 per square foot figure was 3% lower than the county average of $383 per square foot. Of note is that the average size of an attached home in the subject’s submarket was 70 square feet (5%) larger than the county average, which would explain, in part, the difference in price points as a larger size typically correlates to a lower price per square foot. An overview of detached product indicated an average new detached home price in Orange County of $1,162,420, or $367 per square foot. The Central submarket, with an average detached home price of $947,064 and $366 per square foot, was the most affordable submarket on an overall price and 2nd least affordable submarket (out of five submarkets) on an price point (per square foot) basis. The $366 per square foot figure was virtually identical to the county average of $367 per square foot. Of note is the average size of a detached home in the subject’s submarket was 552 square feet (17%) smaller than the county average. The smaller size typically correlates to a higher price per square foot.
Submarket Price Size PSF Submarket Price Size PSFCoastal North $3,120,680 3,727 $770 Inland South $600,752 1,755 $343Inland South $1,355,716 4,000 $340 Coastal South $564,107 1,300 $417Coastal South $1,221,057 3,578 $345 Central $544,531 1,498 $373
North $1,125,920 3,581 $318 Coastal North $502,592 1,061 $474Central $947,064 2,618 $366 North $475,120 1,316 $361
Detached Totals $1,162,420 3,170 $367 Attached Totals $540,365 1,428 $383 Source: Hanley Wood (1st Quarter 2007)
NEW PRODUCT PRICING SUMMARY BY SUBMARKETOrange County
Detached Housing (Averages) Attached Housing (Averages)
The Central submarket represents a competitive submarket in Orange County when considering overall price, price per square foot, and home size. In general, the Central submarket is priced lower than the coastal submarkets and higher than the other inland submarkets, which would be expected given the relative desirability of the various locations.
The submarket’s central Orange County location, with a variety of pricing and price points, allows it to be competitive with the majority of competing submarkets that attract a similar buyer profile. The Central submarket is offering a mix of stand-alone projects and housing in larger master-planned communities with companion amenities such as new schools, parks, infrastructure, etc. Overall, the submarket’s central location near to major employment centers has resulted in similar to higher price points compared to most other submarkets within the Orange County region. CENTRAL SUBMARKET NEW HOME PRICING OVERVIEW The subject property is located in the city of Irvine in the Central submarket. Based on the 1st quarter 2007 active project survey by Hanley Wood, the average new attached home price in the submarket was $544,531, or $373 per square foot and the average new detached home price in the submarket was $947,064, or $366 per square foot.
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Although specific average pricing data were not available for the city of Irvine, this city’s average pricing for detached and attached product is above the average pricing for the Central submarket due to the downward influence of other cities such as Tustin, Yorba Linda, Orange and Santa Ana on the overall submarket average pricing. The lower pricing of these cities compared to Irvine is expected given their greater distance from Irvine’s major employment centers and/or inferior quality product. ORANGE COUNTY DETACHED PRICING – BY LOT SIZE The price point research was further refined to reflect the regional Orange County detached product by lot size. As exhibited in the following table, the weighted average detached home price ranged from about $810,117 to $2,855,885 and $344 to $554 per square foot, depending on lot size category. Overall, the weighted average was about $1,338,000, or $393 per square foot. The weighted average home sizes ranged from 2,356 to 5,158 square feet. The data revealed increasing home prices on larger lot sizes, due to the larger home sizes that can be accommodated, and higher price points for the homes on larger lots due to the progressively better quality typically constructed. The median prices were slightly lower than the averages, ranging from about $797,000 to $1,538,000, or $1,229,000 overall. Based on the average absorption information, sales rates were generally consistent for all of the lot and product sizes, with slightly higher rates on the smaller lot sizes (lower prices) and slightly lower rates on the larger lots (higher prices), which would be expected due to the larger buyer pool and availability of product at the lower prices.
Minimum Median # of SalesLot Size Price Size PSF Price Projects Rate
10,000-14,999 $2,855,885 5,158 $554 $1,484,975 6 2.826,500-9,999 $1,726,225 4,157 $415 $1,537,945 9 1.315,500-6,499 $1,367,831 3,736 $366 $1,370,000 13 2.724,500-5,499 $1,129,579 3,179 $355 $1,140,500 12 2.713,500-4,499 $958,522 2,773 $346 $937,291 7 3.46
0-3,499 $810,117 2,356 $344 $796,500 13 2.00Totals/Avg $1,337,653 3,403 $393 $1,228,873 60 2.45
(1) Per Hanley Wood Query (Active projects 1st Quarter 2007)
DETACHED PRICING SUMMARY BY LOT SIZE-ORANGE COUNTY(1)
Heritage Fields Master Plan, Irvine, CaliforniaAverage
CENTRAL SUBMARKET DETACHED PRICING – BY LOT SIZE The price point research was further refined to reflect the Central submarket product by lot size. As exhibited in the following table, the weighted average detached home price ranged from about $757,000 to $2,085,000 and $316 to $553 per square foot, depending on lot size category. The overall weighted average was about $1,036,000, or $356 per square foot. The weighted average home sizes ranged from 2,090 to 3,770 square feet. The median price was slightly lower ranging from about $720,000 to $1,910,000, or $985,000 overall. Overall pricing generally increased with lot and product size. Atypical was the trend of price points (per square foot basis) increasing with lot and product size. This atypical trend and additional fluctuations within the range were primarily caused by locational and product
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differences. Notable is that there was only one project within the largest lot size category and only 2 to 7 projects on the other categories, which tended to result in less conclusive data than for Orange County overall that had a larger pool of projects reporting information. Typical of market trends, however, the absorption rates in the Central submarket were generally higher for the lower-priced product and slower for the higher-priced product.
Minimum Median # of SalesLot Size Price Size PSF Price Projects Rate
10,000-14,999 $1,275,000 3,709 $344 $1,285,000 1 0.506,500-9,999 $2,085,056 3,770 $553 $1,910,113 2 0.635,500-6,499 $1,416,621 3,974 $356 $1,416,025 2 2.384,500-5,499 $1,115,262 3,142 $355 $1,118,000 7 2.933,500-4,499 $899,878 2,850 $316 $907,990 3 4.67
0-3,499 $757,133 2,090 $362 $719,980 7 2.02Totals/Avg $1,036,098 2,911 $356 $984,995 22 2.52
(1) Per Hanley Wood Query (Active projects 1st Quarter 2007)
Average
DETACHED PRICING SUMMARY BY LOT SIZE-CENTRAL SUBMARKET(1)
Heritage Fields Master Plan, Irvine, California
COMPETITIVE PROJECTS AND PRICING The reasonableness of the developer’s preliminary proposed pricing was investigated using several sources of information. As mentioned earlier, the developer’s preliminary pricing was based on a market study prepared for the proposed Heritage Fields master-plan by Real Estate Economics (REE), of Irvine, California, dated December 2006. However, of greater relevance to this appraisal was a subsequent market analysis for Heritage Fields prepared by The Concord Group, of Newport Beach, California, dated April 2007. The more recent market study provided a better indication of market trends as of the subject’s date of value. A copy of The Concord Group’s in-depth market study in its entirety (titled, “Market Analysis And Product Program Validation For The Heritage Fields Master-planned Community in Irvine, California”) is in the Addenda to this appraisal report. In addition to The Concord Group’s market study the appraisers also conducted a survey of actively selling and/recently sold out projects in the subject’s market area. The appraisers’ survey was utilized to ascertain the reasonableness of The Concord Group’s market study and to support reasonable indications of attached and detached pricing trends for the Heritage Fields Master-plan product. The Concord Group’s market study (“market study”) analyzed the primary market area (PMA) of Orange County, as well as several submarkets including the South Inland CMA that incorporates Irvine and the proposed Heritage Fields project. The market study surveyed more than 40 active projects in the subject’s market area. The results of the market study’s findings, as well as the study’s pricing recommendations for the subject’s proposed product types in relation to the active projects, are illustrated in the graphs on the next 12 pages. A location map showing the locations of the majority of the projects in the nearby master-plans follows the graphs.
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The appraisers also surveyed active projects in the subject’s market area based on information provided through Hanley Wood Market Intelligence and our primary research as of April 2007 and May 2007. Nearly all of the projects surveyed by the appraisers were included in The Concord Group’s market study. The results of the appraisers’ survey are shown in Tables A (attached product) and B (detached product) that follow the market study graphs and location map. The information compiled in the appraisers’ survey (product size and pricing, minimum lot sizes, and absorption rates) was virtually identical to that in The Concord Group’s market study. Given the similarity in the information, the appraisers accepted the results of the market study survey information.
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V A L U A T I O N S E R V I C E S 1 0 1
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$589
,990
$352
$372
WA
nahe
imH
arbo
r Lof
ts on
the
Prom
enad
eLe
e H
omes
16-D
ec-0
612
912
117
2.70
6.00
988
2,27
2$3
85,0
00$6
43,0
00$2
83$3
90
XC
ypre
ssLa
Sal
le S
treet
Gle
nB
onan
ni D
evel
opm
ent
5-A
ug-0
613
121
1.36
0.00
1,07
01,
325
$449
,000
$539
,000
$407
$420
YC
ypre
ssLi
ncol
n Sq
uare
Nev
is H
omes
19-A
ug-0
663
603
7.19
-1.5
01,
150
1,52
1$4
45,0
00$5
05,0
00$3
32$3
87
ZSa
nta
Ana
Lofts
at t
he C
ity P
lace
Bisn
o D
evel
opm
ent C
o.11
-Jun
-05
7241
311.
812.
501,
595
1,82
5$7
27,6
10$8
18,9
90$4
49$4
56
AA
Gar
den
Gro
veLo
tus W
alk
Olso
n C
ompa
ny3-
Feb-
0715
916
143
5.66
5.50
957
1,64
2$3
49,0
00$4
89,0
00$2
98$3
65
BB
Ora
nge
Man
ches
ter W
alk
Olso
n C
ompa
ny5-
Mar
-06
1818
01.
301.
501,
633
1,63
3$5
79,9
90$5
79,9
90$3
55$3
55
CC
Sant
a A
naM
onte
rey
Vill
asPa
cific
a C
ompa
nies
3-D
ec-0
527
224
527
14.5
32.
5051
01,
000
$251
,900
$364
,900
$365
$494
DD
Stan
ton
Pala
zzo
Tayl
or W
oodr
ow H
omes
10-J
un-0
610
637
693.
476.
501,
179
1,78
6$4
41,0
00$5
55,0
00$3
11$3
74
EESa
nta
Ana
Park
at C
ity P
lace
Bisn
o D
evel
opm
ent C
o.11
-Jun
-05
7016
540.
711.
001,
819
2,49
4$7
40,9
90$8
38,9
90$3
36$4
07
FFIr
vine
Plaz
aO
pus W
est C
onstr
utio
n C
o.13
-Nov
-04
202
192
106.
50-1
.50
1,17
54,
290
$600
,000
$3,6
04,9
14$8
40$5
11
GG
Sant
a A
naPr
omen
ade
Poin
tePo
inte
of V
iew
, LLC
19-A
ug-0
627
80
278
0.00
0.00
1,00
42,
528
$550
,000
$1,6
00,0
00$6
33$5
48
HH
Sant
a A
naSa
ntia
go S
treet
Lof
tsLe
nnar
Hom
es26
-Mar
-05
108
4662
1.83
0.50
1,53
42,
292
$522
,912
$709
,840
$310
$341
IIA
nahe
imSo
uthh
aven
Tow
nhom
es a
t Mag
nolia
Lan
eK
B H
ome
29-J
ul-0
676
5323
5.86
6.00
1,03
81,
767
$412
,990
$564
,365
$319
$398
Min
0.00
-3.5
051
0--
-$2
51,9
00--
-$2
39--
-
Max
14.5
315
.00
---
4,29
0--
-$3
,604
,914
---
$615
Size
Ran
gePr
ice
Ran
gePS
F R
ange
TA
BL
E A
Bas
eH
ome
Bas
e
Ran
ges
Mas
ter
Plan
Are
as
Ran
ges
Stan
d-al
one/
Mis
c.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 1 0 2
Ope
ned
No.
No.
No.
Abs
.A
bs.
Min
.
Ref
Loc
atio
nPr
ojec
tB
uild
erSa
les
Lots
Sold
Uns
old
/Mo.
Rec
ent
Lot
Siz
e
ATu
stin
Asto
ria a
t Col
umbu
s Squ
are
Will
iam
Lyo
n H
omes
15-J
ul-0
610
219
832.
004.
004,
100
2,80
13,
648
$854
,990
$928
,990
$255
$305
BIr
vine
Bou
gain
illea
at P
orto
la S
prin
gsK
B H
ome
15-J
ul-0
664
1054
1.05
1.00
N/A
v1,
670
2,04
2$7
51,2
70$7
96,3
05$3
90$4
50
CIr
vine
Cam
pani
le a
t Nor
thpa
rk S
quar
eC
alifo
rnia
Pac
ific
Hom
es5-
Nov
-05
6850
182.
812.
503,
200
1,94
92,
460
$794
,000
$919
,000
$374
$407
DTu
stin
Can
tara
at C
olum
bus G
rove
Lenn
ar H
omes
13-M
ay-0
668
635
5.44
3.50
4,90
02,
580
3,10
9$9
10,0
00$9
70,0
00$3
12$3
53
ETu
stin
Cia
ra a
t Col
umbu
s Gro
veW
illia
m L
yon
Hom
es22
-Jul
-06
6728
393.
021.
506,
200
3,10
14,
517
$1,2
60,0
00$1
,416
,025
$313
$406
FIr
vine
Dec
ada
at P
orto
la S
prin
gsC
alifo
rnia
Pac
ific
Hom
es15
-Jul
-06
9114
771.
471.
50N
/Av
1,43
71,
750
$580
,000
$648
,000
$370
$404
GTu
stin
Gab
les a
t Col
umbu
s Squ
are
Lenn
ar H
omes
15-J
ul-0
684
4539
4.74
3.50
4,90
02,
125
4,19
1$8
65,0
00$1
,249
,000
$298
$407
HIr
vine
Lant
ana
at C
olum
bus G
rove
Will
iam
Lyo
n H
omes
27-A
ug-0
510
267
353.
346.
004,
000
2,41
72,
803
$814
,990
$889
,000
$317
$337
IIr
vine
Las C
olin
as a
t Por
tola
Spr
ings
Tayl
or W
oodr
ow H
omes
22-J
ul-0
675
1461
1.51
1.50
5,00
02,
717
3,38
3$1
,114
,000
$1,2
92,0
00$3
82$4
10
JIr
vine
Los A
rbol
es a
t Por
tola
Spr
ings
Tayl
or W
oodr
ow H
omes
22-J
ul-0
659
1049
1.08
1.50
3,20
02,
003
2,38
3$8
22,4
60$9
61,2
62$4
03$4
11
KTu
stin
Mad
ison
at C
olum
bus G
rove
KB
Hom
e29
-Jul
-06
8426
582.
882.
504,
000
2,59
22,
879
$907
,990
$974
,990
$339
$350
LIr
vine
Man
zani
ta a
t Por
tola
Spr
ings
Ric
hmon
d A
mer
ican
Hom
es15
-Jul
-06
749
650.
953.
00N
/Av
2,20
22,
829
$852
,980
$913
,500
$323
$387
MIr
vine
Mill
e Fl
eurs
at W
oodb
ury
Stan
dard
Pac
ific
Hom
es13
-Nov
-04
136
129
74.
374.
005,
000
3,17
43,
648
$1,2
65,0
00$1
,595
,500
$437
$399
NO
rang
eO
liveg
rove
at R
iver
bend
Lenn
ar H
omes
19-A
ug-0
610
023
772.
753.
003,
200
2,04
82,
478
$699
,000
$790
,000
$319
$341
OIr
vine
Palo
ma
at P
orto
la S
prin
gsB
rook
field
Hom
es22
-Jul
-06
8811
771.
19-0
.50
N/A
v1,
723
2,53
0$7
57,6
00$8
80,5
00$3
48$4
40
PO
rang
ePe
bble
Cre
ek a
t Riv
erbe
ndC
ente
x H
omes
7-O
ct-0
613
612
124
1.78
-0.5
02,
000
1,72
02,
232
$628
,800
$689
,990
$309
$366
QO
rang
eR
ockf
ern
at R
iver
bend
Lenn
ar H
omes
21-O
ct-0
660
2931
4.62
6.50
2,00
01,
411
1,92
6$5
67,0
00$6
67,0
00$3
46$4
02
RIr
vine
Serr
a at
Por
tola
Spr
ings
Stan
dard
Pac
ific
Hom
es28
-Sep
-06
5518
372.
563.
005,
700
3,43
14,
084
$1,4
72,0
00$1
,607
,000
$393
$429
SO
rang
eTh
istle
woo
d at
Riv
erbe
ndC
ente
x H
omes
18-N
ov-0
661
3229
5.97
3.50
N/A
v1,
301
1,70
8$5
53,9
90$6
36,9
90$3
73$4
26
TIr
vine
Vic
ara
at Q
uail
Hill
Ric
hmon
d A
mer
ican
Hom
es17
-Apr
-04
108
108
02.
962.
506,
500
2,90
64,
589
$1,9
10,1
13$2
,501
,000
$545
$657
UIr
vine
Vie
ntos
at P
orto
la S
prin
gsC
alifo
rnia
Pac
ific
Hom
es15
-Jul
-06
153
2912
43.
053.
00N
/Av
975
1,40
5$4
02,2
01$5
65,0
00$4
02$4
13
VIr
vine
Vill
a R
osa
at W
oodb
ury
Lenn
ar H
omes
3-Ju
n-06
8338
453.
490.
004,
500
2,61
53,
161
$1,1
16,0
00$1
,148
,000
$363
$427
WTu
stin
Wes
tbou
rne
at C
olum
bus G
rove
Lenn
ar H
omes
17-J
un-0
659
4514
4.32
5.00
5,00
03,
004
3,82
2$1
,118
,000
$1,1
97,0
00$3
13$3
72
Min
0.95
2,00
097
5--
-$4
02,2
01--
-$2
55--
-
Max
5.97
6,50
0--
-4,
589
---
$2,5
01,0
00--
-$6
57
XC
ypre
ssC
ove
CSI
Con
struc
tion
12-S
ep-0
510
100
0.51
0.50
2,90
02,
240
2,44
9$6
94,9
87$7
44,4
42$3
04$3
10
YTu
stin
Mah
ogan
y at
Nor
th T
ustin
HQ
T Pa
rtner
s1-
Sep-
0514
122
0.60
0.50
10,0
003,
709
4,67
6$1
,275
,000
$1,4
65,0
00$3
13$3
44
ZLa
Pal
ma
Partr
idge
Circ
lePa
rtrid
ge H
omes
13-S
ep-0
510
73
0.36
0.00
5,00
02,
422
2,71
8$8
85,0
00$9
29,8
88$3
42$3
65
AA
Sant
a A
naR
etre
atSh
ea H
omes
19-N
ov-0
536
1917
1.10
0.00
7,70
03,
153
3,82
5$1
,050
,990
$1,1
30,9
90$2
96$3
33
Min
0.36
2,90
02,
240
---
$694
,987
---
$296
---
Max
1.10
10,0
00--
-4,
676
---
$1,4
65,0
00--
-$3
65
Min
0.00
00
---
$0--
-$0
---
Max
5.97
10,0
00--
-4,
676
---
$2,5
01,0
00--
-$6
57
Ran
ges
Mas
ter
Plan
Are
as
TA
BL
E B
Bas
eH
ome
Bas
e
CO
MPE
TIT
IVE
DE
TA
CH
ED
PR
OJE
CT
S A
ND
PR
ICIN
GH
erita
ge F
ield
s Mas
ter P
lan,
Irvi
ne, C
alifo
rnia
Ran
ges
Size
Ran
gePr
ice
Ran
gePS
F R
ange
Tot
al
Ran
ges
Stan
d-al
one/
Mis
c.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 1 0 3
After analyzing the data, certain trends were noted. Compared to other Orange County submarkets, there were more attached and detached projects within the subject’s submarket, which was to be expected given its overall size and central location. Overall, the subject’s submarket had similar to higher price points than the North submarket and lower price points than the North Coastal submarket. This is expected given the subject is closer to employment centers than the North submarket and further from the coast than the North Coastal submarket. Within the subject’s submarket, projects within master-plan communities were similar to higher in overall price points than stand-alone projects. This is typical given the additional amenities and homogeneous living environment offered in master-plans. The market study charts show a fairly consistent trend in pricing from low to high for progressively larger home sizes and in price points from high to low for progressively larger home sizes. Notable in all the charts is that the developer’s pricing is in line with the competitive base pricing and price points. Overall, the market study’s attached and detached base subject pricing is in the upper half of the range when compared to the currently active projects within the submarket and surrounding areas. This would be expected given the subject’s excellent location and amenities that would warrant above-average pricing. The market study’s pricing estimates for the majority of the subject’s attached products are approximately 1% to 4% above the developer’s pricing, indicating a relatively strong demand for more moderate-priced housing compared to single family product. The Concord Group estimated lower pricing than the developer’s pricing for only two of the attached projects (luxury attached and triplex; product lines 3 and 9) at 1% to 5% lower, respectively. Overall, the developer’s preliminary detached base pricing was slightly high when compared to the currently active projects within the submarket and surrounding areas, which was supported by The Concord Group’s market study. With the exception of product line 16 (SFD 70 x 110 lots), the market study estimated pricing for all of the subject’s detached product types to be approximately 1% to 6% below the developer’s preliminary estimated pricing. The Concord Group’s estimated pricing for product line 16 is 15% higher than the developer’s pricing. After analyzing the subject’s competing market, The Concord Group’s pricing recommendations were within the price ranges for the active subdivisions in the area and were considered to be well supported. Thus, the appraisers accepted The Concord Group’s pricing recommendations for all of the subject’s product types. The home pricing assumptions used in this appraisal for the subject’s detached and attached product types, which coincide with The Concord Group’s recommendations, are summarized in the Market Value “At Completion” – Planning Areas/Parcels section later in this report. It must be noted that product lines 7, 8, 24 and 25 were not compared to the market given that product lines 7 and 8 are non-revenue generating product (ethic and faculty housing), and product lines 24 and 25 involve affordable units and have regulated set pricing.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 1 0 4
ASSESSMENT RISK In addition to estimating pricing for the subject product types, The Concord Group also assessed the market risk for Heritage Fields, based on the health of the national home market, local employment trends, the subject’s competitive market area (CMA), the characteristics of the Heritage Fields project, and future supply trends. The risk assessment’s primary points are summarized as follows (details are in The Concord Group’s market study in the Addenda of the appraisal). In spite of the nationwide housing downturn, sales volumes in the subject’s CMA are healthy compared to the national average. Orange County is a major economic engine in Southern California, with consistent positive employment growth since 1994 and positive forecasts (albeit at a slower pace) for 2007 and 2008. During the past year approximately 40% of the county’s new home sales occurred in the subject’s CMA, with average new home prices approximately 10% higher than the county average. Prices and absorption rates have declined somewhat during the past year. Although builder home price concessions are prevalent, the concessions comprise a small percentage of the home prices. In regard to Heritage Fields, the project benefits from significant financial support from private and government organizations; the master-plan calls for a wide diversity of product that will create considerable synergy; the Great Park is envisioned as an iconic community landmark; and the lifestyle appeal of the Great Park and related amenities will provide a competitive advantage during market fluctuations. The risk assessment did note the potential for considerable additional units coming on line in the next several years, with several projects offering competition to the subject’s proposed product types. However, demand for new homes in Orange County is projected to remain strong over the next five years. The Concord Group’s overall assessment risk for Heritage Fields was 2.2 out of 5.0, or “low to moderate.” The reader is urged to review the market study in the Addenda to the appraisal. Product Line 1-Mid Rise Luxury Flats-(Planning Areas L11, L11a, L11b) Lennar Homes has proposed 271 mid-rise luxury flats with a weighted average product size of 1,125 square feet with estimated base pricing of $570,313, or $507 per square foot. The luxury flats are located in the Lifelong Learning District, adjacent to the Great Park and single family residences. A market study provided by the developer from The Concord Group dated April 2007 estimated an average base price of $575,000, or $511 per square foot for a 1,125 square foot unit. This product line is the densest project of the master-plan and offers minimal premium potential. After considering various elements relating to location and appeal, the developer’s proposed pricing for this product line was concluded to be inline with the market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $575,000 or $511 per square foot for product line 1, which is 0.82% higher than the developer’s estimate. Product Line 2-Row Townhomes (Planning Areas L14b, L15, L22a-iii) Lennar Homes has proposed 232 row townhomes with a weighted average product size of 1,725 square feet with estimated base pricing of $743,750, or $431 per square foot. The townhomes are located in the Lifelong Learning District, adjacent to the Great Park, a luxury triplex and single family residences. A market study provided by the developer from The Concord Group dated April 2007 estimated an average
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 1 0 5
base price of $753,000, or $437 per square foot for a 1,725 square foot unit. After considering various elements relating to location and appeal, the developer’s proposed pricing for this product line was concluded to be inline with the market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $753,000 or $437 per square foot for product line 2, which is 1.2% higher than the developer’s estimate. Product Line 3-Luxury Triplex (Planning Area L14a) Lennar Homes has proposed 100 luxury triplex homes with a weighted average size of 1,900 square feet and an estimated average base price of $827,500, or $436 per square foot. The luxury triplex is located in the Lifelong Learning District, adjacent to multifamily residences and the Great Park. A market study provided by the developer from The Concord Group dated April 2007 estimated an average base price of $819,000, or $431 per square foot for a 1,900 square foot unit. This product line has a moderate density and an above average location. The developer’s pricing was deemed reasonable given the subject’s new product and Irvine location which is considered one of the major employment centers in Orange County. After considering various elements relating to location and appeal, the developer’s proposed pricing for this product line was concluded to be inline with the market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $819,000 or $431 per square foot for product line 3, which is 1.0% lower than the developer’s estimate. Product Line 4-Courtyard Villa (SFRs) - (Planning Area L22a-ii) Lennar Homes has proposed 59 single family residences with a weighted average product size of 2,000 square feet and estimated base pricing of $899,334 or $450 per square foot. The units are located in the Lifelong Learning District proximate to the Great Park. The product line is low in density and has average size units. According to the Concord Group Market Study, the estimated average base price for this product is $884,000 or $442 per square foot for a 2,000 square foot unit. After considering various elements relating to location and appeal, the developer’s proposed pricing for this product line was concluded to be inline with the market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $884,000 or $442 per square foot for product line 4, which is 1.7 % lower than the developer’s estimate. Product Line 5-SFD 45 x 105 lots (Planning Areas L, L11d, L22a-i) Lennar Homes has proposed 72, 4,725 minimum square foot lots and a 2,200 square foot product with estimated base pricing of $1,018,167,or $463 per square foot. The lots are located in the Lifelong Learning District adjacent to the Great Park. The product line has a moderate density and average premium potential. A market study provided by the developer from The Concord Group estimated an average base price of $954,000, or $434 per square foot for a 2,200 square foot unit. After considering various elements relating to location and appeal, as well as an internal comparison, the developer’s proposed pricing for this product line was concluded to be higher than the market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 1 0 6
pricing of $954,000 or $434 per square foot for product line 5, which is 6.3 % lower than the developer’s estimate. Product Line 6-SFD 60 x 105 (Planning Area L11c) Lennar Homes has proposed 67, 6,300 square foot minimum lots with a 2,650 square foot product and estimated base pricing of $1,212,500, or $458 per square foot. The homes are located in the Lifelong Learning District, bordered on the west by the Great Park. The product line has a low density and above average premium potential which will result in a higher price point. The market study provided by the developer from The Concord Group estimated an average base price of $1,169,000, or $441 per square foot for a 2,650 square foot unit. The developer’s proposed pricing for this product line was concluded to be slightly higher than the market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $1,169,000 or $441 per square foot for product line 6, which is 3.6 % lower than the developer’s estimate Product Line 7-Ethic Housing (Planning Area L24) This product line will include 165 units on 22.2 acres and is not a revenue generating event. Product Line 8-Faculty Housing (Planning Area L10) This product line will include 60 units on 15 acres and is not a revenue generating event. Product Line 9-Luxury Attached (South) - (Planning Areas P4b, P5a) Lennar Homes has proposed 145 luxury attached units with a product size of 2,250 square feet and estimated base pricing of $966,667, or $430 per square foot. The units are located in the Park District, north of the golf course and east of the Great Park. The location of the units adjacent to the park and the golf course will result in a higher price point than standard condominium flats or townhomes. The market study provided by the developer from The Concord Group dated April 2007 estimated a price of $916,000, or $407 per square foot for a 2,250 square foot unit. After considering various elements relating to location and appeal, the developer’s proposed pricing for this product line was concluded to be higher than market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $916,000 or $407 per square foot for product line 9, which is 5.2 % lower than the developer’s estimate Product Line 10-Luxury Courtyard (South)-Detached (Planning Areas P4a, P4c) Lennar Homes has proposed 137 luxury courtyard detached units with a product size of 2,950 square feet and estimated base pricing of $1,284,000, or $435 per square foot. The luxury units are located in the Park District, directly east of the Great Park. The low density and park adjacent location will result in a higher price point than standard detached single family homes. The market study provided by the developer from The Concord Group estimated a price of $1,249,000, or $423 per square foot for a 2,950 square foot unit. After considering various elements relating to location and appeal, the developer’s proposed pricing for this product line was concluded to be slightly higher than the market parameters for
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the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $1,249,000 or $423 per square foot for product line 10, which is 2.7% lower than the developer’s estimate. Product Line 16-SFD 70 x 110 lots (Planning Area P10a) Lennar Homes has proposed 44, 7,700 minimum square foot lots with an average product size of 4,000 square feet and estimated base pricing of $1,492,667 or $373 per square foot. The units are located in the Park District, golf course adjacent. The product line’s low density, large units and golf course adjacent location will result in a significantly higher price point than standard detached product. A market study provided by the developer from the Concord Group dated April 2007 estimated a price of $1,714,000, or $429 per square foot for a 4,000 square foot unit. After considering various elements relating to location and appeal, the developer’s proposed pricing for this product line was concluded to be lower than the market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $1,714,000 or $429 per square foot for product line 16, which is 15% higher than the developer’s estimate. Product Line 17-SFD 70 x 100 lots (Planning Areas Plf and P2) Lennar Homes has proposed 161, 7,000 minimum square foot lots with a 3,650 square foot product and estimated base pricing of $1,492,667 or $409 per square foot. The units are located in the Park District, directly north of the Great Park. The product line’s low density, large units and park adjacent location will result in a higher price point than standard detached product. A market study provided by the developer from the Concord Group dated April 2007 estimated a price of $1,483,000, or $406 per square foot for a 3,650 square foot unit. After considering various elements relating to location and appeal, the developer’s proposed pricing for this product line was concluded to be inline with the market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $1,483,000 or $406 per square foot for product line 17, which is .65% lower than the developer’s estimate. Product Line 18 - SFD 75 x 110 lots (Planning Areas Pld, Ple) Lennar Homes has proposed 124, 8,250 minimum square foot lots with product having a weighted average size of 4,100 square feet and estimated base pricing of $1,740,167, or $424 per square foot. The lots are located in the Park District, directly south of the El Toro Wildlife Refuge. The product line has very low density, large units and above average view potential, which will result in a higher price point than standard detached product. A market study provided by the developer from the Concord Group dated April 2007 estimated $1,739,000, or $424 per square foot for a 4,100 square foot unit. After considering various elements relating to location and appeal, as well as an internal comparison, the developer’s proposed pricing for this product line was concluded to be inline with the market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $1,739,000 or $424 per square foot for product line 18, which is .07% lower than the developer’s estimate.
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Product Line 19-SFD – 80 x 110 lots (Planning Area P6a) Lennar Homes has proposed 76, 8,800 minimum square foot lots with product a weighted average size of 4,500 square feet and estimated base pricing of $2,028,667, or $451 per square foot. The units are located in the Park District, directly south of the El Toro Wildlife Refuge and west of the Great Park and golf course. The product line has very low density, large units and above average view potential, which will result in a higher price point. The market study provided by the developer from the Concord Group dated April 2007 estimated $2,014,000, or $448 per square foot for a 4,500 square foot unit. After considering various elements relating to location and appeal, as well as an internal comparison, the developer’s proposed pricing for this product line was concluded to be inline with the market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $2,014,000, or $448 per square foot for product line 19, which is .72% lower than the developer’s estimate. Product Line 20-SFD 85 x 120 lots (Planning Area Plc) Lennar Homes has proposed 86, 10,200 minimum square foot lots with an average product size of 4,600 square feet and estimated base pricing of $2,097,000, or $456 per square foot. The units are located in the Park District, directly west of the El Toro Wildlife Refuge. The product line has very low density, large units and above average view potential, which will result in a higher price point. A market study provided by the developer from the Concord Group dated April 2007 estimated $2,042,000, or $444 per square foot for a 4,600 square foot unit. After considering various elements relating to location and appeal, as well as an internal comparison, the developer’s proposed pricing for this product line was concluded to be slightly higher than the market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $2,042,000, or $444 per square foot for product line 20, which is 2.6% lower than the developer’s estimate. Product Line 21 – SFD 100 x 120 lots (Planning Areas Plb, P7a, P11b, P12a) Lennar Homes has proposed 190, 12,000 minimum square foot lots and a product size of 5,200 square feet with weighted average pricing of $2,464,834, or $474 per square foot. The lots are located adjacent to the Great Park and golf course in the Park District. The product line has very low density, large units and above average view potential, which will result in a higher price point. A market study provided by the developer from the Concord Group dated April 2007 estimated $2,406,000, or $463 per square foot for a 5,200 square foot unit. After considering various elements relating to location and appeal, as well as an internal comparison, the developer’s proposed pricing for this product line was concluded to be inline with the market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $2,406,000, or $463 per square foot for product line 21, which is 2.4% lower than the developer’s estimate. Product Line 22 – SFD 120 x 150 lots (Planning Areas Pla, P7b, P11a) Lennar Homes has proposed 137, 18,000 minimum square foot lots and a product size of 5,900 square feet with weighted average pricing of $2,935,500, or $498 per square foot. The lots are located adjacent to
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the Great Park in the Park District. The product line has very low density, very large units and above average view potential, which will result in a higher price point. A market study provided by the developer from the Concord Group dated April 2007 estimated $2,797,000, or $474 per square foot for a 5,900 square foot unit. After considering various elements relating to location and appeal, as well as an internal comparison, the developer’s proposed pricing for this product line was concluded to be higher than the market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $2,797,000, or $474 per square foot for product line 22, which is 4.7% lower than the developer’s estimate. Product Line 24 – Apartments – Affordable (Low) (Planning Area T10a) Per the Development Disposition Agreement with the City of Irvine, Lennar Homes has specific affordable housing requirements that need to be met with the Heritage Fields Master-plan. The designated sale prices are established by affordable housing guidelines based on the area median income (AMI) in Orange County. For this product line, the developer has proposed 392 affordable units. This product line is intended to meet the affordable housing requirements and is not a revenue generating event. Product Line 25 – Apartments – Affordable (Planning Area T8) Per the Development Disposition Agreement with the City of Irvine, Lennar Homes has specific affordable housing requirements that need to be met with the Heritage Fields Master-plan. The designated sale prices are established by affordable housing guidelines based on the area median income (AMI) in Orange County. For this product line, the developer has proposed 117 affordable units. This product line is intended to meet the affordable housing requirements and is not a revenue generating event. Product Line 26 – Garden Flats / Townhomes (Planning Area Tb3) Lennar Homes has proposed 85 garden flats and townhomes with a weighted average size of 1,200 square feet and an average base price of $518,625 or $432 per square foot. The units are located in the Transit Oriented District, adjacent to the Great Park. This product line is one of the densest and has a smaller average unit size, which will result in a lower price point. A market study provided by the developer from The Concord Group dated April 2007 estimated an average base price of $538,000, or $448 per square foot for a 1,200 square foot unit. After considering various elements relating to location and appeal, the developer’s proposed pricing for this product line was concluded to be lower than the market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $538,000 or $448 per square foot for product line 26, which is 3.7% higher than the developer’s estimate. Product Line 27 – Brownstone Villas (Planning Area T9a) Lennar Homes has proposed 112 brownstone villas with a weighted average size of 1,575 square feet and an average base price of $686,375 or $436 per square foot. The units are located in the Transit Oriented District, adjacent to the Great Park in the southern portion of the Heritage Fields community. The product line has a high density and minimal premium potential. A market study provided by the developer from
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The Concord Group dated April 2007 estimated an average base price of $688,000, or $437 per square foot for a 1,575 square foot unit. After considering various elements relating to location and appeal, the developer’s proposed pricing for this product line was concluded to be inline with the market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $688,000 or $437 per square foot for product line 27, which is .24% higher than the developer’s estimate. Product Line 28 – Townhomes (Camden) (Planning Area T12a) Lennar Homes has proposed 112 townhomes with a weighted average size of 1,375 square feet and an average base price of $608,875 or $443 per square foot. The units are located in the Transit Oriented District in the southernmost portion of the Heritage Fields community. This product line is one of the densest projects and has minimal premium potential, which will result in a lower price point. A market study provided by the developer from The Concord Group dated April 2007 estimated an average base price of $613,000, or $446 per square foot for a 1,375 square foot unit. After considering various elements relating to location and appeal, the developer’s proposed pricing for this product line was concluded to be inline with the market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $613,000 or $446 per square foot for product line 28, which is .68% higher than the developer’s estimate. Product Line 29 – Courtyard – 8 Pack - (Planning Area T12b) Lennar Homes has proposed 80, 2,400 minimum square foot lots-8-pack and a 1,600 square foot product with a weighted average price of $727,167, or $454 per square foot. The developer has indicated these lots as single family detached product. These lots are located in the Transit Oriented District. This product line has a moderate density and minimal premium potential. A market study provided by the developer from The Concord Group dated April 2007 estimated $699,000, or $437 per square foot for a 1,600 square foot unit. After considering various elements relating to location and appeal, the developer’s proposed pricing for this product line was concluded to be higher than the market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $699,000 or $437 per square foot for product line 29, which is 3.9% lower than the developer’s estimate. Product Line 30 – Zero Lot Line (Planning Area T12d) Lennar Homes has proposed 96, 3,300 minimum square foot lots with a product size of 2,000 square feet and weighted average pricing of $851,667, or $426 per square foot. The lots are located in the Transit Oriented District and are single family detached product. The product line has a moderate density, average size units and minimal view potential, which will result in a lower price point A market study provided by the developer from the Concord Group dated April 2007 estimated $826,000, or $413 per square foot for a 2,000 square foot unit. After considering various elements relating to location and appeal, as well as an internal comparison, the developer’s proposed pricing for this product line was concluded to be slightly higher than the market parameters for the subject’s Central submarket. Thus, the
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appraisers concurred with The Concord Group’s average base pricing of $826,000, or $413 per square foot for product line 30, which is 3.0% lower than the developer’s estimate. Product Line 31 – SFD 45 x 100 lots (Planning Areas Tld, T3A) Lennar Homes has proposed 100, 4,500 minimum square foot lots with a product size of 2,800 square feet and weighted average pricing of $1,096,841, or $392 per square foot. The lots are located in the Transit Oriented District and are adjacent to the Great Park. The product line has a moderate density and above average premium potential. A market study provided by the developer from the Concord Group dated April 2007 estimated $1,065,000, or $380 per square foot for a 2,800 square foot unit. After considering various elements relating to location and appeal, as well as an internal comparison, the developer’s proposed pricing for this product line was concluded to be higher than the market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $1,065,000, or $380 per square foot for product line 31, which is 2.9% lower than the developer’s estimate. Product Line 32 – SFD 50 x 100 lots (Planning Area T11a) Lennar Homes has proposed 100, 5,000 minimum square foot lots with a product size of 3,200 square feet and weighted average pricing of $1,262,334, or $394 per square foot. The lots are located in the Transit Oriented District in the southernmost portion of the Heritage Fields community. The product line has a moderate density and average premium potential. A market study provided by the developer from the Concord Group dated April 2007 estimated $1,197,000 or $374 per square foot for a 3,200 square foot unit. After considering various elements relating to location and appeal, as well as an internal comparison, the developer’s proposed pricing for this product line was concluded to be higher than the market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $1,197,000, or $374 per square foot for product line 32, which is 5.2% lower than the developer’s estimate. Product Line 33 – SFD 60 x 100 lots (Planning Areas T1a, T1b, T2a) Lennar Homes has proposed 194, 6,000 minimum square foot lots with a product size of 3,950 square feet and weighted average pricing of $1,539,167, or $390 per square foot. The lots are located in the Transit Oriented District, adjacent to the Great Park, in the southernmost portion of the Heritage Fields community. The product line has a low density and above average premium potential. A market study provided by the developer from the Concord Group dated April 2007 estimated $1,510,000 or $382 per square foot for a 3,950 square foot unit. After considering various elements relating to location and appeal, as well as an internal comparison, the developer’s proposed pricing for this product line was concluded to be inline with the market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $1,510,000, or $382 per square foot for product line 33, which is 1.9% lower than the developer’s estimate.
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Product Line 51 -Willowhaven (Planning Area T12c) Lennar Homes has proposed 112 triplexes with a weighted average size of 1,664 square feet and an average base price of $731,334 or $440 per square foot. The units are located in the Transit Oriented District, in the southernmost portion of the Heritage Fields community. The product line has a high density and average premium potential. A market study provided by the developer from The Concord Group dated April 2007 estimated an average base price of $739,000, or $444 per square foot for a 1,664 square foot unit. After considering various elements relating to location and appeal, the developer’s proposed pricing for this product line was concluded to be inline with the market parameters for the subject’s Central submarket. Thus, the appraisers concurred with The Concord Group’s average base pricing of $739,000 or $444 per square foot for product line 51, which is 1.0% higher than the developer’s estimate
The appraisers’ hypothetical base home pricing is summarized in the following chart:
Product Min. Lot Size/ PA/ No. Units % ofType Product Parcel Valued Mix Size Base Price PSF
4 Courtyard L22a-ii 59 3.07% 2,000 $884,000 $4425 SFD 45 x 105 L11d, L22a-i 52 2.70% 2,200 $954,000 $434
6 SFD 60 x 105 L11c 67 3.48% 2,650 $1,169,000 $44110 Courtyard P4a, P4c 70 3.64% 2,950 $1,249,000 $42316 SFD 70 x 110 P10a 44 2.29% 4,000 $1,714,000 $429
17 SFD 70 x 100 P1f, P2 81 4.21% 3,650 $1,483,000 $40618 SFD 75 x 110 P1d, P1e 62 3.22% 4,100 $1,739,000 $424
19 SFD 80 x 110 P6a 76 3.95% 4,500 $2,014,000 $44820 SFD 85 x 120 P1c 86 4.47% 4,600 $2,042,000 $44421 SFD 100 x 120 P1b, P7a, P11b, P12a 51 2.65% 5,200 $2,406,000 $463
22 SFD 120 x 150 P1a, P7b, P11a 39 2.03% 5,900 $2,797,000 $47429 Courtyard (8 pack) T12b 80 4.16% 1,600 $699,000 $43730 Zero Lot Line T12d 96 4.99% 2,000 $826,000 $413
31 SFD 45 x 100 T1d, T3A 66 3.43% 2,800 $1,065,000 $38032 SFD 50 x 100 T11a 100 5.20% 3,200 $1,197,000 $374
33 SFD 60 x 100 T1a, T1b, T2a 51 2.65% 3,950 $1,510,000 $382Attached
1 Mid-Rise Flats L11a, L11b 136 7.07% 1,125 $575,000 $511
2 Row TH L14b, L15, L22a-iii 101 5.25% 1,725 $753,000 $4373 Luxury Triplex L14a 100 5.20% 1,900 $819,000 $4319 Luxury Attached P4b, P5a 85 4.42% 2,250 $916,000 $407
26 Garden Flats/TH T3b 85 4.42% 1,200 $538,000 $44827 Brownstone Villas T9a 112 5.82% 1,575 $688,000 $437
28 Townhomes (Camden) T12a 112 5.82% 1,375 $613,000 $44651 Willowhaven T12c 112 5.82% 1,664 $739,000 $444
Totals 1,923 100.00% (1) Heritage Fields El Toro LLC 2007 Overlay Plan.
Heritage Fields Master Plan, Irvine, CaliforniaWeighted Average
PRODUCT & PRICING ASSUMPTIONS BY PRODUCT TYPE(1)
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SUMMARY The appraisers’ projected base pricing generally followed the typical trend of higher pricing and lower price points for progressively larger homes. However, several product types on the largest lot sizes had price points at the upper end of the range due to the proposed high quality of the residences, consistent with other large lot subdivisions. In addition, several different subject product types are proposed for planning areas having similar lot sizes in order to minimize direct competition between the subdivisions. For example, Product Type 6 has an average proposed base price of $1,169,000, or $441 per square foot, on 6,300 square foot minimum lots, compared to an average base price of $1,510,000, or $382 per square foot, for Product Type 33 on 6,000 square foot minimum lots. The appraisers’ proposed product and pricing for the subject, based on the developer’s product proposal and The Concord Group’s pricing recommendations, were well supported per an analysis of the most competitive comparable projects. The subject’s estimated detached base pricing, shown in the following summary chart, ranged from $884,000 to $2,797,000, or $380 to $474 per square foot. It was noted that the highest price and price point were for Product Type 22 due to the large home size (average of 5,900 square feet) and better quality construction in this price range. The projected prices are higher than the average detached home price in the Central submarket of $947,064 and $366 per square foot, as well as that for Orange County of $1,162,420 and $367 per square foot. The subject’s estimated attached base pricing ranged from $575,000 to $916,000, or $407 to $511 per square foot. These prices are higher than the average attached home price in the Central submarket of $544,531 and $373 per square foot, as well as that for Orange County of $540,365 and $383 per square foot. The subject’s pricing would be expected to be higher than the averages for the submarket and the county given the subject’s master-plan location in Irvine and the above-average appeal that would be generated by the Great Park and other amenities (golf courses and open space) in Heritage Fields.
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Product Min. Lot Size/ PA/ No. Units % ofType Product Parcel Valued Mix Size Base Price PSF
4 Courtyard L22a-ii 59 3.07% 2,000 $884,000 $4425 SFD 45 x 105 L11d, L22a-i 52 2.70% 2,200 $954,000 $4346 SFD 60 x 105 L11c 67 3.48% 2,650 $1,169,000 $441
10 Courtyard P4a, P4c 70 3.64% 2,950 $1,249,000 $42316 SFD 70 x 110 P10a 44 2.29% 4,000 $1,714,000 $42917 SFD 70 x 100 P1f, P2 81 4.21% 3,650 $1,483,000 $40618 SFD 75 x 110 P1d, P1e 62 3.22% 4,100 $1,739,000 $42419 SFD 80 x 110 P6a 76 3.95% 4,500 $2,014,000 $44820 SFD 85 x 120 P1c 86 4.47% 4,600 $2,042,000 $44421 SFD 100 x 120 P1b, P7a, P11b, P12a 51 2.65% 5,200 $2,406,000 $46322 SFD 120 x 150 P1a, P7b, P11a 39 2.03% 5,900 $2,797,000 $47429 Courtyard (8 pack) T12b 80 4.16% 1,600 $699,000 $43730 Zero Lot Line T12d 96 4.99% 2,000 $826,000 $41331 SFD 45 x 100 T1d, T3A 66 3.43% 2,800 $1,065,000 $38032 SFD 50 x 100 T11a 100 5.20% 3,200 $1,197,000 $37433 SFD 60 x 100 T1a, T1b, T2a 51 2.65% 3,950 $1,510,000 $382
Attached 1 Mid-Rise Flats L11a, L11b 136 7.07% 1,125 $575,000 $5112 Row TH L14b, L15, L22a-iii 101 5.25% 1,725 $753,000 $4373 Luxury Triplex L14a 100 5.20% 1,900 $819,000 $4319 Luxury Attached P4b, P5a 85 4.42% 2,250 $916,000 $407
26 Garden Flats/TH T3b 85 4.42% 1,200 $538,000 $44827 Brownstone Villas T9a 112 5.82% 1,575 $688,000 $43728 Townhomes (Camden) T12a 112 5.82% 1,375 $613,000 $44651 Willowhaven T12c 112 5.82% 1,664 $739,000 $444
Totals 1,923 100.00% (1) Heritage Fields El Toro LLC 2007 Overlay Plan.
Heritage Fields Master Plan, Irvine, CaliforniaWeighted Average
PRODUCT & PRICING ASSUMPTIONS BY PRODUCT TYPE(1)
PRODUCT ABSORPTION ATTACHED PRODUCT Per the appraisers’ competitive project survey (Table A) monthly project absorption rates for attached product ranged up to about 16 sales per month. The average and median absorption rates for the 20 projects surveyed in master-plans were approximately 4 sales per month. The projects located in master-plans revealed a central tendency of between 3 and 6 sales per month. The absorption rates for the 20 stand-alone projects surveyed in Table A ranged up to approximately 15 sales per month, with an average and median of approximately 3 sales per month. The higher absorption rates in the master-plan projects were attributed to superior marketing and amenities that are generally associated with these types of large developments. Recent absorption rates (past 3 months) in both the master-plan and stand-alone projects were mixed, with an equal number of projects reporting slower absorption than the overall absorption rates (since opening for sale) as those reporting more rapid absorption than the overall absorption rates.
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For the most part smaller, less expensive product sells more quickly than larger, more expensive product, which would be expected as effective demand is greater for lower priced product and decreases as pricing increases. In addition, there is typically a more limited supply of higher priced product, which is the case in the subject’s submarket and overall region. The Concord Group projected sustained absorption rates for each of the subject’s proposed attached product types, ranging from 4.0 to 6.0 sales per month, which was slightly higher than the absorption rates reported in the competitive projects. The appraisers concurred with the market study absorption projections for several reasons. The subject product will be located in one of the most appealing master-plans in central Orange County, with above-average amenities and excellent access and proximity to employment centers. In addition, the subject’s product is not anticipated to be available for sale until 2009 at the earliest. In spite of the relatively slow current market conditions, based on historical trends in the real estate market absorption rates could reasonably be expected to accelerate in the coming years. Thus, the market study’s absorption rate projections were considered reasonable and were accepted for purposes of this analysis. DETACHED PRODUCT Per the appraisers’ competitive project survey (Table B) monthly project absorption rates for detached product ranged up to about 6 sales per month. The average and median absorption rates for the 23 projects surveyed in master-plans were approximately 3 sales per month. The projects located in master-plans revealed a central tendency of between 3 and 4 sales per month. The absorption rates for the 4 stand-alone projects surveyed in Table B were considerably lower, ranging up to approximately 1 sale per month, with an average and median of less than 1 sale per month. Obviously, a master-plan location has a positive effect on a detached project’s absorption potential. As for the attached product, the higher absorption rates in the master-plan projects were attributed to superior marketing and amenities that are generally associated with these types of large developments. Recent absorption rates (during the past 3 months) in both the master-plan and stand-alone projects were mixed, with a similar number of projects reporting slower absorption than the overall absorption rates (since opening for sale) as those reporting more rapid absorption than the overall absorption rates. For the most part smaller, less expensive product sells more quickly than larger, more expensive product, for similar reasons as stated for attached product. The Concord Group projected sustained absorption rates for each of the subject’s proposed detached product types, ranging from 2.0 to 5.0 sales per month, which was slightly higher than the absorption rates reported in the competitive projects. Again, the appraisers concurred with the market study absorption projections due to the subject’s appealing location and amenities, and the likelihood of absorption rate increases in coming years based on historical real estate cycles. Thus, the market study’s absorption rate projections were considered reasonable and were accepted for purposes of this analysis.
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PRODUCT ABSORPTION SUMMARY The appraisers’ absorption rate projections are summarized in the following chart. Consistent with market trends, the lower-priced product (attached and small lot detached) has the highest absorption rate projections, in a range of 4.0 to 6.0 sales per month. Several of the median lot size products also have above-average absorption rate projections. This reflects the appeal of single family detached housing in the subject’s market compared to attached product, in spite of somewhat higher base pricing. The slowest absorption rates of 2.0 to 3.5 sales per month applied to the higher-priced product on the larger single family lot sizes. The slowest rate of 2.0 sales per month was projected for Product Type 22, which has an average base price of $2,797,000 and an 18,000 square foot minimum lot size, consistent with market trends of slower absorption for higher priced product due to the limited number of qualified buyers. Effective absorption, which reflects the average sales rate based on the actual number of projected months of sales (from initial release to final closings; see planning area valuation section to follow), ranged from 1.95 to 4.86 sales per month, depending on the planning area and product type. The reconciled sustained and effective absorption rates were within the range indicated by the market data, which takes into account a continuing supply of direct competition to the subject, as well as the pricing and product delineation within the Heritage Fields Master-plan. Detailed absorption and development schedules for each planning area can be found in the Addenda.
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Product Minimum Wtd. Avg. Wtd. Avg.Type Lot Size Home Size Base Price Sustained Effective
4 Courtyard 2,000 $884,000 5.00 3.695 SFD 45 x 105 2,200 $954,000 4.50 3.256 SFD 60 x 105 2,650 $1,169,000 3.50 2.91
10 Courtyard 2,950 $1,249,000 3.50 3.0416 SFD 70 x 110 4,000 $1,714,000 3.50 2.59
17 SFD 70 x 100 3,650 $1,483,000 4.00 3.3818 SFD 75 x 110 4,100 $1,739,000 3.50 2.9519 SFD 80 x 110 4,500 $2,014,000 3.00 2.81
20 SFD 85 x 120 4,600 $2,042,000 3.00 2.8721 SFD 100 x 120 5,200 $2,406,000 2.50 2.2222 SFD 120 x 150 5,900 $2,797,000 2.00 1.95
29 Courtyard (8 pack) 1,600 $699,000 5.50 4.4430 Zero Lot Line 2,000 $826,000 4.50 3.8431 SFD 45 x 100 2,800 $1,065,000 4.30 3.47
32 SFD 50 x 100 3,200 $1,197,000 4.00 3.5733 SFD 60 x 100 3,950 $1,510,000 4.00 3.40
Attached
1 Mid-Rise Flats 1,125 $575,000 6.00 4.862 Row TH 1,725 $753,000 5.00 4.04
3 Luxury Triplex 1,900 $819,000 5.50 4.359 Luxury Attached 2,250 $916,000 4.00 3.2726 Garden Flats/TH 1,200 $538,000 6.00 4.47
27 Brownstone Villas 1,575 $688,000 5.00 4.1528 Townhomes (Camden) 1,375 $613,000 5.50 4.4851 Willowhaven 1,664 $739,000 4.80 4.00
Minimum --- 1,125 $538,000 2.00 1.95Maximum --- 5,900 $2,797,000 6.00 4.86
Averages --- 2,563 $1,103,369 4.25 --- (1) Detailed absorption and development schedules found in Addenda.
PRODUCT ABSORPTION RATES BY PRODUCT TYPE(1)
Heritage Fields Master Plan, Irvine, CaliforniaMonthly Absorption
PLANNING AREA ABSORPTION AND CAPTURE Based on the master development phasing plan, critical path, proposed land use mix, and forecasted project absorption rates, a project sequencing schedule was formulated. The appraisers assigned anticipated prospective dates of completion for the individual planning areas/parcels. Prospective dates of completion were formulated so as to prevent substantial intra-project competition and to be compatible with the master phasing infrastructure construction plan. The development plan allows several non-competing projects to open simultaneously. With the wide variety of attached and detached product lines within the subject, there was only moderate direct competition amongst product lines. This strategy continues throughout the project life cycle for the various for-sale planning areas/parcels within each neighborhood.
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The appraisers reviewed the master developer’s critical path in formulating the development timing for both revenues and costs. The developer re-confirmed that the timing in their latest plan remains fairly consistent with their expectations. The developer’s latest plan has residential land sale revenue events occurring from the 4th quarter 2007 through the 3rd quarter 2014. The appraisers considered the developer’s timing for the residential product reasonable and market supported given our estimates of absorption and capture. However, due to initial delays in development and delivery, the appraisers did move back residential land sale events scheduled for 2007 to the 1st quarter 2008. The schedule for remaining residential land sale events were similar to those presented in the latest plan, including various “rolling option” events for the higher-priced Park District planning areas.
Qtr Lot Cumulative Qtr Lot CumulativeQtr Ending Sales Lot Sales Qtr Ending Sales Lot Sales
1 Sep-07 0 0 18 Dec-11 34 3,3322 Dec-07 0 0 19 Mar-12 97 3,4293 Mar-08 512 512 20 Jun-12 31 3,4604 Jun-08 420 932 21 Sep-12 26 3,4865 Sep-08 148 1,080 22 Dec-12 6 3,4926 Dec-08 137 1,217 23 Mar-13 32 3,5247 Mar-09 125 1,342 24 Jun-13 18 3,5428 Jun-09 289 1,631 25 Sep-13 18 3,5609 Sep-09 19 1,650 26 Dec-13 18 3,578
10 Dec-09 18 1,668 27 Mar-14 18 3,59611 Mar-10 720 2,388 28 Jun-14 18 3,61412 Jun-10 555 2,943 29 Sep-14 11 3,62513 Sep-10 52 2,995 30 Dec-14 0 3,62514 Dec-10 143 3,138 31 Mar-15 0 3,62515 Mar-11 143 3,281 32 Jun-15 0 3,62516 Jun-11 11 3,292 33 Sep-15 0 3,62517 Sep-11 6 3,298 34 Dec-15 0 3,625
Totals --- 3,625 3,625
Total Number Residential Lots 3,625Total Number Non-Market Residential Lots 734Total Number Market Rate Residential Lots 2,891Total Development Period (Qtrs) 34Average Absorption Lots/Annum (All Units) 426Average Absorption Lots/Annum (Market Rate Units) 340Total Lot Sales Development Period (Qtrs) 27Average Absorption Lots/Annum (All Units) 537Average Absorption Lots/Annum (Market Rate Units) 428
RESIDENTIAL LAND ABSORPTION SUMMARYHeritage Fields (El Toro MCAS)
Based upon a total development duration time period of 34 quarters, the project would average 426 lot sales per annum. If excluding the non-market rate housing, the average would be 537 lot sales per annum. Based upon a lot sales development duration time period of 27 quarters, the project would average 340 lot sales annually. If excluding the non-market rate housing, the average would be 428 lot sales annually.
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The developer’s capture projections assume the overall community will be able to support an average of 600 market-rate home sales per year, plus affordable homes/rentals. A survey of larger area master-plans in the submarket indicated that capture rates, defined here as annual homes sales in a specific master-plan, have ranged from around 100 to over 500 units. Capture rates had been increasing since the recessionary years of the early 1990s, but have declined during the past year due to decreasing demand. Per a survey of market participants, most developers of larger master-plans anticipate an average of 200 to 400 sales per year. Said capture rates typically reflect sales from an average of four to eight simultaneous selling projects averaging 3.0 to 6.0 sales per month. However, depending upon the location and product, annual sales and the number of selling projects can be above/below these averages.
In 2005, the Central submarket of Orange County captured 2,807 net sales. In 2006, the figure was 24% lower at 2,128 net sales. In the 1st quarter, there were reportedly 596 net sales, which if annualized at the same rate would suggest nearly 2,400 net sales in 2007. Given softening demand, this figure is unlikely. If assuming the submarket averages 2,000 net sales per annum, the subject sales (market rate units) would encompass approximately 17% of the submarket (340 / 2,000). Given Orange County continues to approach build-out, this figure is substantiated. Heritage Hills will, in all likelihood, be one of only several active master-plans at the time its product becomes available and should have moderate competition. In addition, Heritage Hills will offer a diverse range of product types and sizes which should assist in above average absorption. Accordingly, the projected sales rate for the subject, per the formulated development and sales schedule, represented a reasonable rate of overall capture of the Central submarket and overall Orange County activity. Projections reflect average stabilized absorption and capture through the development period. As past years have demonstrated, however, housing markets are cyclical and projections over the long-term are conjectural.
CONCLUSIONS Market conditions and elements of supply and demand support the proposed residential land uses for Heritage Hills. The subject's submarket continues to exhibit moderate residential sales activity albeit with some softening in the last year. Demand is adequate to provide for reasonable absorption of new product provided the product is priced competitively and aggressively marketed. It appears the supply of housing in the Orange County market will be constrained over the coming years as the availability of developable land diminishes. However, the forecasted population growth, expanding economy, increasing employment opportunities, and rising household income levels suggest demand should exceed supply for the foreseeable future. Provided economic conditions do not deteriorate and/or interest rates do not increase substantially, demand for product in the submarket should remain moderate, which is further evidenced by absorption in area housing developments. Slowing absorption over the last year and pending uncertainty would suggest that absorption forecasts should be on the conservative side. The subject's proposed residential land use mix is sufficiently broad as to allow capture of a relatively wide range of household income levels. As compared to existing and planned communities in the vicinity, Heritage Hills would match favorably and competitively to said communities.
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R&D LAND MARKET ANALYSIS The subject property will include R&D land area both within the LLD and within the TOD. The majority of this land area will be concentrated within the TOD with approximately 113.2 net acres. This area is located primarily north of the 5 Freeway between Alton Parkway and Bake Parkway. Additionally, there are two larger parcels located on the northern portion of the LLD along Irvine Boulevard close to the 133 Freeway. There is also a smaller parcel close to Trabuco Road. The total R&D acreage within the LLD is 68.6 net acres. The total R&D acreage within the development is 182.1 net acres. Lennar intends on selling this land area to R&D users and local developers. The discussion below gives an overview of the Orange County Flex/R&D market with additional discussion relating to the South Orange County submarket where the subject is located. Lastly, we will discuss how the subject property relates to its market area and our estimates of revenue and absorption. FLEX / R&D MARKET DATA The market data for this flex / research and development (R&D) market analysis report was attained from the CoStar Group, Inc. Flex market property subtype is defined as and not limited too R&D, office service, high technology and most specialized uses (excluding warehouse and manufacturing). Due to the wide-ranging classification of the flex property type, all market information concerning research and development property specifically are based on the data gathered from the larger spectrum of the flex property type supplied by CoStar. CURRENT TRENDS Conditions in Orange County’s flex / research and development market remained strong through the first quarter 2007 despite an increase in overall vacancy over the previous quarter. Broad-based growth in industries varying from communications to pharmaceuticals has led to a tight market with limited amount of available space. Tenants have found it difficult to find space that meets their exact needs, and many have found that they must compromise.
• The vacancy rate for the first quarter of 2007 decreased fifty basis points over the same period a year ago, from 5.5 percent in first quarter 2006 to 5.0 percent in first quarter 2007.
• Direct average rents continued to trend upward in comparison to first quarter 2006 with rents up
18.1 percent to reach $14.22 per square foot per-year, net. Despite a stabilization in vacancy over last year, the overall trend-line represents a tightening market as rents are driven upward.
• Regardless of low vacancies and increasing rents, new construction remains low due to a shortage
of space. With the specialty driven flex / research and development property unique for each tenant, the broad array of industry located in Orange County maintains strong demand for flex / R&D property.
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FLEX / R&D INVENTORY BY SUBMARKET Orange County First Quarter 2007
0 25 50 75 100 125 150 175 200 225 250
SOUTH COUNTY
GREATER AIRPORT AREA
WEST COUNTY
NORTH COUNTY
CENTRAL COUNTY
FLEX / R&D Space (00,000,sf)
Available Space
Occupied Space
Under Construction
Source: CoStar, Cushman & Wakefield Analytics
MARKET CHARACTERISTICS The Orange County flex / research and development market contains approximately 70.4 million square feet of space. Orange County is divided into five geographic areas. The greatest concentration of research and development space in Orange County is in the Greater Airport Area, followed by South County, both of which are considered Orange County’s first tier industrial areas. Each of the five industrial areas is well located along the county’s freeway system. Presented on the following table are the flex / research and development market statistics for Orange County as a whole and each of its submarkets, as of first quarter 2007.
Market/SubmarketIndustrial Inventory
AvailableSpace
OverallVacancy
RateUnder Const.
YTD Const. Compl.
Direct Wgt Avg Asking
RentOrange County 70,369,238 3,144,039 5.0% 96,685 83,242 $14.22
South County 21,342,310 1,137,529 5.9% 28,204 43,095 $15.55
Greater Airport Area 23,431,207 1,098,531 5.0% 0 22,393 $13.65 West County 6,027,732 66,846 1.5% 0 0 $10.94 North County 9,608,337 316,683 4.5% 52,495 0 $12.04 Central County 9,959,652 524,450 5.4% 15,986 17,754 $12.72
Source: CoStar, Cushman & Wakefield Analytics
Flex / R&D Market Statistics by SubmarketOrange County PMSA
First Quarter 2007
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VACANCY The flex / R&D vacancy rate in Orange County has been declining consistently since it last peaked during mid-year 2004 at 9.9 percent. By year-end 2006, the vacancy rate had dropped to 4.7 percent, and remained committed at this low rate through the first quarter of 2007.
• Orange County’s lowest vacancy rate on record occurred during fourth quarter 2006 with a 4.7 percent vacancy, although first quarter 2007 vacancy rate has risen 30 basis points over last quarter, it remains the lowest on record (last 10 years).
• Through first quarter 2007, the West County submarket posted a 1.5 percent vacancy rate, the
lowest in Orange County. Conversely, South County recorded the highest rate in Orange County’s flex / R&D market with a vacancy of 5.9 percent.
VACANCY RATE AND AVERAGE ASKING RENT BY YEAR Orange County Flex / R&D Market, 2000 – 2007 Q1
$0.00
$3.00
$6.00
$9.00
$12.00
$15.00
$18.00
00 01 02 03 04 05 06 07Q1
Ask
ing
Ren
t (ps
f)
0%
3%
6%
9%
12%
15%
18%
Overall V
acancy Rate
Direct Average Asking Rent Overall Vacancy Rate
Source: CoStar, Cushman & Wakefield Analytics
ASKING RENTS Since year-end 2002, the direct average asking rent for flex / R&D space has been rising steadily. During second quarter, 2005 rents reached $11.49 per square foot, surpassing the pervious high in first quarter 2001. Since then rents have progressed upward every quarter. As with all previous quarter direct average rents since mid-quarter 2005, first quarter 2007 posted historically high rents, this quarter recorded rents at $14.22 per square foot.
• With the first quarter vacancy rate holding stable at a low 5.0 percent, and near-term new supply limited, landlords have been able to apply aggressive increases in asking rents.
• The West County submarket is the most affordable with a direct average asking rent of $10.94
per square foot; consequently, West County has the lowest vacancy rate of 1.5 percent.
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• The South County submarket has the highest direct average asking rents at $15.55 per square foot with the greatest vacancy rate at 5.9 percent. South County direct average rent outpaces the Orange County direct average rent by 9.3 percent.
LEASING ACTIVITY Through first quarter 2007, flex / R&D leasing activity totaled 0.9 million square feet, equating to 1.3 percent of the market’s existing inventory. As a percent of its own inventory, the South County had the greatest leasing activity at 1.9 percent, while West County lagged the overall market with leasing activity totaling only 0.4 percent of its inventory. The table below list the significant leases signed during first quarter 2007.
Building Address Submarket Tenant Size (sf)
39 Tesla South County Vizio 27,30012 Chrysler South County Express Systems 24,94011 Vanderbilt South County Felt Racing 10,9736 Journey South County Siemens Engy & Auto 8,2511503-1511 Orangethorpe Ave North County Viking Co 7,7041265-1275 S Lewis St North County Point One Technologies 7,407
Source: CoStar, Cushman & Wakefield Analytics
Significant Flex / R&D Market Lease TransactionsOrange County PMSA
First Quarter 2007
ABSORPTION Absorption in first quarter 2007 was a negative 111,945 square feet, the first regression in absorption six quarters. This transition is more of a correction rather than a trend due to sound market fundamentals.
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• Negative absorption was experienced in all Orange County submarkets except West County,
which posted 86,567 square feet of absorption.
• While first quarter absorption levels have headed in a correctional pattern, demand for space remains strong and the flex / R&D market should remain tight during the forthcoming year.
COMPLETIONS & ABSORPTION vs. VACANCY Orange County Flex / R&D Market, 2000 – 2007 Q1
-800.0
-300.0
200.0
700.0
1,200.0
1,700.0
2,200.0
00 01 02 03 04 05 06 07Q1
Com
plet
ions
&O
vera
ll N
et A
bsor
ptio
n (m
sf)
0%
2%
4%
6%
8%
10%
12% Overall V
acancy Rate
Completions Overall Net Absorption Overall Vacancy Rate
Source: CoStar, Cushman & Wakefield Analytics
SOUTH COUNTY ABSORPTION The South County submarket (following graph) recorded a negative 88,266 square feet of absorption through first quarter 2007, the first weakening in absorption since second quarter 2004 where absorption activity registered negative 447,795 square feet. The increase in available space is credited to large blocks of space coming onto the market due to recent lease expirations. Historically, the South County submarket absorbs vacant space relatively quick, with current trends pointing toward a slight weakening in absorption and vacancy through year-end 2007. Greater absorption and decreasing vacancies are expected by year-end 2008 and the years ahead.
• South County’s strongest recorded year-end absorption was in 2000 with 932,645 square feet, and 2005 with 813,485 square feet.
• The weakest year-end absorption was recorded in 1997 with negative 152,348 square feet, and
2002 with negative 69,949 square feet.
• In comparison to the Orange County market, the South County submarket absorption cycle follows closely to that of the aggregate Orange County market.
• Steady demand for Flex/R&D space in South County will continue to drive up asking rents and
overall inventory, while absorption is expected to rebound.
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COMPLETIONS & ABSORPTION vs. VACANCY South County Flex / R&D Market, 2000 – 2007 Q1
-200.0
0.0200.0
400.0600.0
800.01,000.0
1,200.0
00 01 02 03 04 05 06 07Q1
Com
plet
ions
&O
vera
ll N
et A
bsor
ptio
n (m
sf)
0%
2%4%
6%8%
10%12%
14% Overall V
acancy Rate
Completions Overall Net Absorption Overall Vacancy Rate
Source: CoStar, Cushman & Wakefield Analytics
The table below reflects South County’s historical year-end data from 1996 through first quarter 2007.
YearYear-end
Inventory (000)
Direct Average
Asking Rent
Overall Vacancy
RateCompletions
(000)Overall Net
Absorption (000)96 16,983.0 $9.99 5.6% 0.0 0.097 17,235.2 $9.74 7.9% 252.2 (152.3)98 17,937.6 $10.75 8.8% 719.3 487.899 18,907.0 $10.88 10.1% 969.4 634.600 19,682.0 $11.10 8.9% 775.0 932.601 20,262.1 $11.85 10.0% 580.1 299.702 20,623.8 $11.49 12.0% 361.7 (69.9)03 20,720.5 $12.44 11.8% 306.5 125.304 20,854.8 $12.69 10.1% 134.3 473.705 21,148.4 $12.48 7.5% 293.6 813.506 21,299.2 $14.83 5.3% 204.1 596.8
07Q1 21,342.3 $15.55 5.9% 43.1 (88.3)
Flex/R&D Market Factors by YearSouth County Submarket1996 - First Quarter 2007
Source: CoStar, Cushman & Wakefield Analytics
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CONSTRUCTION Construction activity has been quite restrained since 2002, considering the tight market conditions of the past five years. Despite the high level of demand and increased rental rates, developers have not delivered significant quantities of new flex / R&D space. Since the beginning of 2002, only 2.2 million square feet of flex / R&D space have been completed throughout Orange County.
• In addition to last quarter’s 22,269 square feet of new space in Orange County, and another 83,242 square feet completed this quarter, new projects currently under construction make up a modest 96,685 square feet.
• New construction activity has been limited due to the scarcity of available land combined with
escalating construction costs. FLEX / R&D MARKET OUTLOOK The Orange County flex / R&D market can be expected to maintain its strength in the near term, given a positive economic outlook and support from increasing international trade volumes. Low vacancy rates and the accompanying upward pressure on rental rates is expected to persist.
• The volume of leasing transactions, however, will likely subside mostly due to a lack of readily available space.
• With the supply of available land for all industrial/flex space in Orange County diminishing due
to rezoning, the viability of infill and renovation projects could heighten. HERITAGE FIELDS – R&D LAND As mentioned earlier, the total R&D acreage within the development is 182.1 net acres. Lennar intends on selling this land area to users and local developers. Based upon our conversations with Mr. Kevin Hanson, Senior Vice President, Commercial Property Group with LNR Property Corporation, the R&D land area will have an overall FAR of 32% to 35% based upon the entitlements currently in place with the City of Irvine. This equates to a total building improvement area of 1.6 million square feet for the TOD and 1 million square feet of improvements for the LLD for a total of 2.6 million square feet for the entire development. The developer has indicated that a CFD estimate of $4.00 per square foot would be an additional load on the commercial land. In our conversations with local area brokers, they indicated that the subject is well positioned to absorb the projected demand for new R&D space within the South Orange County market. The Irvine Spectrum (adjacent) and South Orange County are mostly built-out. Future R&D demand will be attracted to the subject’s central location and the proposed amenities and existing retail amenities. These brokers indicated that the subject parcels would most likely sell in the $30.00 to $40.00 per square foot range based on size and location. Additionally, they projected absorption of the subject acreage at 20 to 25 acres per year. We have considered this information for both our revenue and absorption estimates for the subject.
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In estimating our absorption of the subject R&D land area, we have considered the historical overall average net absorption for Flex/R&D space for the last 10 years within South Orange County. The R&D market has a tendency to go through peaks and valleys so we also examined the overall average net absorption per year for our analysis. The South Orange County market absorbed 4,141,749 square feet between 1st quarter 1997 and 4th quarter 2006 for an overall average net absorption of 414,175 square feet per year. As mentioned previously, the South Orange County market is mostly built-out with very little land available for R&D development. Consequently, we have assumed that the subject would capture approximately 75% of the future demand for R&D space. Utilizing 75% of the South Orange County historical average absorption for R&D space equates to 310,631 square feet per year of potential R&D capture for the subject. The subject has approximately 2.6 million square feet of entitlements for future R&D development. This would equate to an absorption rate for the subject of 8.37 years. Given the subject has approximately 182.1 acres for R&D space; the average absorption would be 21.76 acres annually. These absorption projections were incorporated into the “as is” valuation (to follow). The developer 2007 Overlay Business Plan Revenue Timing shows a much quicker sell-off of the subject parcels. This plan shows initial sales in November 2007 and final lot sales in May 2011. (Please see the R&D absorption chart on the following page). The plan indicates that approximately 5.9 acres will be delivered in 2007, 41.1 acres in 2008, 75.1 acres in 2009 and 60 acres in 2010. The developer’s estimates seem aggressive given historical absorption of R&D space within the South Orange County market. Part of the explanation may lie with the fact that their revenue estimates for the R&D land appear to be below the current market. Given this pricing, it is conceivable that the land could be sold off faster but probably somewhere between their current estimates and our projections. However, we have mirrored the developer’s sequencing in our absorption schedule for the subject, delivering the acreage in the same order as the developer over the total development period. Overall, we project that the subject is well positioned to capture future R&D land demand within the South Orange County market. The residential development and retail amenities provided by the Heritage Fields master-plan should contribute to this future success. Moreover, the subject’s centralized location along both the 5 and 405 freeways should appeal to both R&D users wishing to construct an R&D facility as well as local developers looking for speculative opportunities.
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Periods Qtrs. Acreage Delivery Acreage Delivery1 Sep-07 0.0 0.02 Oct-07 0.0 0.03 Nov-07 1.9 2.0 2.0 5.9 1.9 2.0 2.0 5.94 Dec-07 0.0 0.05 Jan-08 0.0 0.06 Feb-08 0.0 0.07 Mar-08 0.0 0.08 Apr-08 0.0 0.09 May-08 0.0 0.010 Jun-08 0.0 0.011 Jul-08 0.0 0.012 Aug-08 0.0 0.01 Sep-08 0.0 0.02 Oct-08 30.3 30.3 0.03 Nov-08 0.0 0.04 Dec-08 0.0 0.05 Jan-09 0.0 30.3 30.36 Feb-09 0.0 0.07 Mar-09 0.0 0.08 Apr-09 0.0 0.09 May-09 3.2 1.6 1.5 1.8 1.3 1.4 10.8 0.010 Jun-09 0.0 0.011 Jul-09 0.0 10.8 10.812 Aug-09 0.0 0.01 Sep-09 2.5 2.5 2.5 2.52 Oct-09 0.0 0.03 Nov-09 0.0 0.04 Dec-09 0.0 0.05 Jan-10 0.0 0.06 Feb-10 1.1 1.4 1.4 1.4 2.0 1.1 1.6 1.5 11.5 11.5 11.57 Mar-10 35.9 35.9 0.08 Apr-10 4.1 2.4 3.2 3.7 2.7 2.6 1.6 1.9 3.0 25.2 0.09 May-10 0.0 0.010 Jun-10 0.0 0.011 Jul-10 0.0 0.012 Aug-10 0.0 0.01 Sep-10 0.0 0.02 Oct-10 0.0 0.03 Nov-10 3.3 1.6 1.8 1.9 1.9 3.0 13.5 0.04 Dec-10 0.0 0.05 Jan-11 0.0 0.06 Feb-11 1.5 2.6 1.9 2.3 2.9 1.6 1.1 1.2 15.1 0.07 Mar-11 0.0 0.08 Apr-11 0.0 0.09 May-11 1.6 1.7 0.6 1.6 1.5 1.7 1.1 1.1 5.0 4.1 1.5 1.4 1.4 2.8 1.4 1.4 1.5 31.4 0.010 Jun-11 0.0 0.011 Jul-11 0.0 0.012 Aug-11 0.0 0.01 Sep-11 0.0 0.02 Oct-11 0.0 35.9 35.93 Nov-11 0.0 0.04 Dec-11 0.0 0.05 Jan-12 0.0 0.06 Feb-12 0.0 0.07 Mar-12 0.0 0.08 Apr-12 0.0 0.09 May-12 0.0 0.010 Jun-12 0.0 0.011 Jul-12 0.0 0.012 Aug-12 0.0 0.01 Sep-12 0.0 0.02 Oct-12 0.0 0.03 Nov-12 0.0 0.04 Dec-12 0.0 25.2 25.25 Jan-13 0.0 0.06 Feb-13 0.0 0.07 Mar-13 0.0 0.08 Apr-13 0.0 0.09 May-13 0.0 0.010 Jun-13 0.0 0.011 Jul-13 0.0 0.012 Aug-13 0.0 13.5 13.51 Sep-13 0.0 0.02 Oct-13 0.0 0.03 Nov-13 0.0 0.04 Dec-13 0.0 0.05 Jan-14 0.0 0.06 Feb-14 0.0 0.07 Mar-14 0.0 0.08 Apr-14 0.0 0.09 May-14 0.0 15.1 15.110 Jun-14 0.0 0.011 Jul-14 0.0 0.012 Aug-14 0.0 0.01 Sep-14 0.0 0.02 Oct-14 0.0 0.03 Nov-14 0.0 0.04 Dec-14 0.0 0.05 Jan-15 0.0 0.06 Feb-15 0.0 0.07 Mar-15 0.0 0.08 Apr-15 0.0 0.09 May-15 0.0 0.010 Jun-15 0.0 0.011 Jul-15 0.0 0.012 Aug-15 0.0 0.01 Sep-15 0.0 0.02 Oct-15 0.0 31.4 31.43 Nov-15 0.0 0.04 Dec-15 0.0 0.05 Jan-16 0.0 0.06 Feb-16 0.0 0.07 Mar-16 0.0 0.08 Apr-16 0.0 0.09 May-16 0.0 0.010 Jun-16 0.0 0.011 Jul-16 0.0 0.012 Aug-16 0.0 0.0
182.1 182.1
Heritage Fields - R&D Land Revenue TimingC&W EstimatesLennar 2007 Overalay Business Plan Revenue Timing (Quarterly)
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AUTO CENTER LAND MARKET ANALYSIS The subject property is a proposed auto center location known as Autoland at Heritage Fields. The focus of this analysis is to discuss local demographic characteristics, retailing trends within the automobile industry; dealership profit centers; historical and forecasted automobile sales trends; and the subject's competitive position. AUTOMOBILE INDUSTRY RETAILING TRENDS Automobile dealerships have undergone considerable changes since their inception. The first dealerships were small businesses usually located in downtown areas. As cars became more affordable and dealers carried a wider selection of models, dealerships transitioned from small showrooms to larger sites that were specifically designed for auto sales and service. Dealerships also began to locate in suburban areas, to follow population growth and to secure larger, less costly sites. Two trends changed automobile retailing during the 1960s and 1970s. The first was a rapidly increasing number of imported car brands being marketed in the United States. Many of these manufacturers desired dealership locations adjacent to existing domestic dealerships in order to gain market acceptance and exposure. This led to the development of “auto rows,” in which several different dealerships were located along the same arterial, in close proximity to each other. The “auto row” was generally not a planned development. It usually contained a variety of retail/commercial uses mixed in with the automobile dealerships. The second major change was the elimination of the requirement for domestic car dealers to market only one line of vehicles. This allowed dealership owners to market several different vehicle lines, either from a single point (dealership) or several points located along an “auto row.” During the 1980s a number of communities developed planned clusters of automobile dealership sites. These planned developments became known as “Automalls.” Through 1985, there were only a handful of Automalls located in the United States, with the majority located in the west. The Automall is distinctly different from an auto row. An Automall is a planned development that is usually highly visible and accessible from major surface and freeway arterials, has no non-automotive land uses, and has an interior roadway design that allows the consumer to shop many dealers within a small area. During the mid-to-late 1980s, a considerable number of new car lines (e.g., Hyundai, Acura, Infiniti, Lexus, and Saturn) entered the market. Many of these new lines were marketed separately from other models made by the same company, which necessitated separate dealerships, and created a strong new demand for dealer locations. This trend supported the expansion of the number of dealers during the mid and late 1980s, the majority of which were in Automalls. The success of Automalls, it is believed, is due to the synergism created by the comparison opportunities presented by multiple dealerships, which outweighs the negative ramifications associated with competition. Further, most dealers agree that without the competition, it is difficult to attract the consumer, who would prefer not to travel significant distances to investigate choices. In addition, the
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individual dealerships benefit from the purchasing power of the overall “Automall” in terms of advertising and promotion. Most cities desire Automalls due to the significant amount of retail sale taxes generated in comparison with the limited impact on municipal services. This has created a competition between cities to attract dealerships. Many cities offer incentives, which may include reducing the price of dealership land, attractive financing and sales tax rebates. To date, the majority of the Automalls developed within California have been located in suburban communities. The main reason for this is the lack of available “low cost” land to support an Automall in central city areas. A more recent occurrence in the marketing of new and used cars throughout the nation, similar to recent trends within the retailing industry towards large discount retailers, several new dealerships have developed around the “superstore” concept. CarMax is a used car superstore developed and then spun off by the electronics retailer Circuit City Stores, Inc. CarMax currently operates 80 used car superstores in 38 markets. CarMax also operates seven new car franchises, all of which are integrated or co-located with its used car superstores. During the twelve-month period ended February 28, 2007, the company retailed 337,021 used cars, which is 95 percent of the total 355,584 vehicles retailed during that period. Another leader in this trend is AutoNation, Inc. an automotive retailer that owns and operates approximately 331 new vehicle franchises at 257 dealership locations across 16 states. AutoNation has not had the level of success that CarMax has had in the used car sector. However they are heavily involved in new car sales and remain the largest auto group as noted below. Another trend is a shift to larger dealerships, as the number of facilities selling more than 750 new units per year has risen by almost 30 percent since 1994 while the number selling less than 150 units fell 22 percent during the same period. Dealer groups, a single private dealer owning multiple outlets, now comprise 40 percent of all dealership owners. In addition to the above referenced mega-dealers, there are several automotive groups that are public retailers operating multiple dealerships across the country. We have provided a financial summary of these top five public retailers below.
Number of Total Retail $Group Name Franchises in Billions
Auto Nation, Inc. 331 $18,989United Auto Group 316 $11,242Sonic Automotive, Inc. 195 $7,972Group 1 Automotive 146 $6,084Ashbury Automotive Group 132 $5,748Source: Hoover's
NEW VEHICLE SALES 2006Heritage Fields Master Plan, Irvine, California
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Capital Automotive Real Estate Services (formerly Capital Automotive REIT), better known as CARS is another player within the automotive industry. The real estate investment trust invests in properties used by automobile dealerships and other automobile-related businesses. The company usually buys the property of existing multi-franchised dealerships and then leases it back to the operator on a triple-net basis for 15 to 20 years. CARS own properties in nearly 33 states and Canada; most are in major cities. The properties include more than 500 automobile franchises representing some 45 major brands of automobiles. CARS was acquired in 2005 by clients of DRA Advisors for a reported $3.4 billion. The question remains as to whether the most recent trends will be successful or short-lived. Used car superstores have under-performed expectations, due mostly to today’s aggressive new car pricing, as well as a glut of used cars on the market. Buying a car “sight unseen” over the Internet or through a club store has an inherent disadvantage versus going to a dealership for a test drive. Internet activity has largely involved comparative pricing, with buyers still feeling more comfortable. Centralization of ownership is likely to be a growing trend, however. All of these trends point to the reduction in the number of stand-alone new car dealerships. Especially vulnerable are those stand-alone dealers that are functionally obsolete. Overall, the total number of automobile dealerships declined from a peak of 47,500 in 1951 to 22,400 in January 1999, 200 fewer than in January 1998. This trend is expected to continue as many major manufacturers have announced programs to limit the number of new dealerships or eliminate existing ones. The most prominent example of this is General Motors Corporation’s current $1 billion plan to eliminate 1,500 of its 8,500 dealers over the next five years. However, as with most trends, there are significant exceptions. High end, functionally designed stand-alone dealerships have begun to reappear, especially in upscale locations. These dealerships capture an exclusivity of location that cannot be achieved in an Automall setting, and upscale shoppers are not likely to shop at club stores or over the Internet. WARDS TOP 500 DEALERSHIPS In its 20th year, The Ward’s Dealer 500 is a list of top U.S. dealerships ranked by total revenues, including sales from new and used vehicles, finance and insurance and fixed-operations departments (service, parts and body shops). It's another record year in total revenue for the nation's top dealers on the Ward's Dealer 500. However, many dealers are losing money, others have gone out of business while others are barely hanging on, but the Ward's 500 members continue to sail along. Ward’s reports the total revenue for the group increased to a record $39 million. At first glance, the numbers seem to indicate the Ward's 500 had a strong year in 2006. Dig beneath the numbers, though, and troubling trends begins to emerge. The number of new units sold dropped by almost
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40,000, the first time that has happened in recent memory. Similarly, used vehicle sales also went down by 16,000 vehicles. If sales continue to decrease, dealers on the Ward's 500 likely will see their overall revenue drop in the next couple of years. Decreasing sales has a cascading effect on other areas of the operation, such as service, parts and financing. Sam Pack, who has two Dallas-area Ford Motor Co.-branded dealerships (ranked 46th and 131st), admits it is a challenge offsetting the impact vehicle sales has on all of the operations. “We study the markets, we are again trying to make sure that we're taking advantage of the opportunities that exist,” he says. “We aren't focused just on vehicle sales. We're respectful of the impact of vehicle sales, but we also know we have to have the revenues of all the other departments.” Pack's Carollton store gained nearly $20 million in new-revenue, while his North Richland Hills dealership lost almost $30 million in new-car sales. Despite that, Pack says 2006 was a strong year. “It was a year in which we performed from a competitive point of view at a very high level,” he says. “We were successful in growing our business and protecting our margins. We continued to gain share of the market.” Pack's dealerships saw large jumps in parts revenue and in finance and insurance sales, while service and used-car sales provided modest gains. “We were very disciplined in our approached to the market,” Pack says. Dig into the overall revenue numbers a little deeper and there is even more cause for concern. There is an increasing difference between the haves and the have-nots, even for dealerships on the Ward's 500. For example, the top 100 dealerships on the list increased their total revenue by nearly $505 million compared with 2005 revenue. But dealers, who make up the bottom 100 of the list, may want to put away the champagne glasses. Those dealerships as a group saw $556 million less in total revenue compared with 2005. One can almost predict the brand trends. Not counting the single-point Porsche dealership on the list, Toyota Motor North America Inc. dealerships led all brands with an average store revenue increase of $6.8 million, good for $139 million per store. Of course, it helps when you have Greg Penske's Longo Toyota beefing up the numbers. The El Monte, CA, dealership continues to set new thresholds year after year in both total revenue and vehicles sold. In 2006, the world's largest dealership sold more than 27,300 new and used vehicles while generating more than $703 million in total revenue. Interestingly, two domestic brands fared well improving their average per-store revenue. General Motors Corp.'s two Buick Pontiac GMC dealerships increased their per-store revenue by $3.9 million. Meanwhile, DaimlerChrysler's eight Dodge dealerships also increased their revenue by $2.5 million. But, the 11 Chrysler-Dodge-Jeep dealerships experienced a miserable year, watching their per-store revenue plummet by $9.7 million. Cadillac dealers also had it tough losing a whopping $16.9 million in average store revenue. Not surprisingly, Ford Motor Co. dealerships also suffered as average store revenue fell $3.5 million.
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So what is the bottom line for these trends? It means the ability to grow quickly is becoming the sole property of a few large dealerships or groups owning large stores. As large dealerships get bigger, their value increases, putting them out of reach of smaller and mid-sized stores. If the trend continues, it is not far-fetched to see a world in which only public dealer groups or large private investment firms have access to the type of capital that can net profitable and attractive stores. Dave Conant, who owns a large group in southern California — his Honda Superstore of Cerritos with $252 million is 18th on this year's Ward's 500 — is concerned about the trend. He questioned Irv Miller, a vice president for Toyota Motor Sales, USA Inc., during a panel in May at an American International Automobile Dealers Assn. gathering, about a Toyota dealership in Arizona that recently sold for reportedly more than $15 million. “How do you keep metro points in the hands of private dealers?” Conant asks. Miller says prices for some of their dealerships are coming down, and that Toyota would like to keep private owners in control of their dealerships as much as possible. “There will be a balance between public and private ownership of our dealerships,” Miller says. Toyota can accomplish this, and does, with strict framework agreements that dictate how many stores any one person or company can own. But over time, as private dealers find it increasingly harder to grow their portfolios; one has to wonder if the future of automotive retail will be controlled by large corporations.
1 Camry 417,104 Ford Series 796,0392 Corolla/Matrix 387,388 Silverado 636,0693 Accord 354,441 Ram Pickup 364,1774 Civic 316,638 Caravan 211,1405 Impala 289,868 Sierra 210,7366 Altima 232,457 Econoline 180,4577 Cobalt 211,449 Explorer 179,2298 Focus 177,006 Tacoma 178,3519 Taurus 174,803 Odyssey 177,919
10 Mustang 166,530 TrailBlazer 174,797Source: Ward's AutoInfoBank ©Copyright 2007, Ward's Automotive Group,a division of Prism Business Media, Inc. Redistribution prohibited.
Cars
WARD'S 10 BEST SELLING U.S. CARS AND TRUCKS12 Months 2006
Trucks
The chart above summarizes the best selling US cars and trucks in 2006. The following exhibit demonstrates how each region of the U.S. is represented in the top 500 lists for 2006. Further exhibits, courtesy of Wards Auto.Com present production and sales trends for automobiles and light trucks as of February of 2007.
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© 2007 Prism Business Media, Inc. All rights reserved.
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WARD'S North America Vehicle Production by ManufacturerMonth Calendar Year-to-Date
January January % Share Vol. January - January % Share Vol.2007 2006 Current Year-Ago % Chg. 2007 2006 Current Year-Ago % Chg.
Chrysler Group 157,551 164,495 13.0 12.6 -4.2 157,551 164,495 13.0 12.6 -4.2Ford 214,945 254,855 17.7 19.4 -15.7 214,945 254,855 17.7 19.4 -15.7GM 298,316 360,631 24.6 27.5 -17.3 298,316 360,631 24.6 27.5 -17.3Big 3 Total 670,812 779,981 55.3 59.5 -14.0 670,812 779,981 55.3 59.5 -14.0AutoAlliance 21,686 23,660 1.8 1.8 -8.3 21,686 23,660 1.8 1.8 -8.3BMW 12,160 4,779 1.0 0.4 154.4 12,160 4,779 1.0 0.4 154.4CAMI 11,877 19,043 1.0 1.5 -37.6 11,877 19,043 1.0 1.5 -37.6Honda 127,243 115,607 10.5 8.8 10.1 127,243 115,607 10.5 8.8 10.1Hyundai 21,606 18,713 1.8 1.4 15.5 21,606 18,713 1.8 1.4 15.5Mercedes 19,081 15,892 1.6 1.2 20.1 19,081 15,892 1.6 1.2 20.1Mitsubishi 7,829 6,242 0.6 0.5 25.4 7,829 6,242 0.6 0.5 25.4Nissan 98,935 98,122 8.2 7.5 0.8 98,935 98,122 8.2 7.5 0.8NUMMI 34,574 36,808 2.8 2.8 -6.1 34,574 36,808 2.8 2.8 -6.1Subaru 7,666 9,052 0.6 0.7 -15.3 7,666 9,052 0.6 0.7 -15.3Toyota 116,471 110,131 9.6 8.4 5.8 116,471 110,131 9.6 8.4 5.8Volkswagen 31,086 33,148 2.6 2.5 -6.2 31,086 33,148 2.6 2.5 -6.2Others 32,401 39,471 2.7 3.0 -17.9 32,401 39,471 2.7 3.0 -17.9Total 1,213,427 1,310,649 100.0 100.0 -7.4 1,213,427 1,310,649 100.0 100.0 -7.4Note: Current month includes some estimated Mexico production. All Mexico production actual for prior months.Source: Ward's AutoInfoBank©Copyright 2007, Ward's Automotive Group, a division of Prism Business Media Inc. Redistribution prohibited.
WARD'S North America Vehicle Production SummaryMonth Calendar Year-to-Date
January January % Share Vol. January - January % Share Vol.2007 2006 Current Year-Ago % Chg. 2007 2006 Current Year-Ago % Chg.
U.S. Car 353,484 369,635 29.1 28.2 -4.4 353,484 369,635 29.1 28.2 -4.4U.S. Light Truck 474,728 523,911 39.1 40.0 -9.4 474,728 523,911 39.1 40.0 -9.4Total Light Vehicle 828,212 893,546 68.3 68.2 -7.3 828,212 893,546 68.3 68.2 -7.3U.S. Med./Hvy. Truck 29,372 38,566 2.4 2.9 -23.8 29,372 38,566 2.4 2.9 -23.8Total U.S. Vehicle 857,584 932,112 70.7 71.1 -8.0 857,584 932,112 70.7 71.1 -8.0Canada Car 106,197 130,488 8.8 10.0 -18.6 106,197 130,488 8.8 10.0 -18.6Canada Light Truck 99,545 78,930 8.2 6.0 26.1 99,545 78,930 8.2 6.0 26.1Total Light Vehicle 205,742 209,418 17.0 16.0 -1.8 205,742 209,418 17.0 16.0 -1.8Canada Med./Hvy. Truck 4,823 5,913 0.4 0.5 -18.4 4,823 5,913 0.4 0.5 -18.4Total Canada Vehicle 210,565 215,331 17.4 16.4 -2.2 210,565 215,331 17.4 16.4 -2.2Mexico Car 92,579 91,123 7.6 7.0 1.6 92,579 91,123 7.6 7.0 1.6Mexico Light Truck 45,120 66,153 3.7 5.0 -31.8 45,120 66,153 3.7 5.0 -31.8Total Light Vehicle 137,699 157,276 11.3 12.0 -12.4 137,699 157,276 11.3 12.0 -12.4Mexico Med./Hvy. Truck 7,579 5,930 0.6 0.5 27.8 7,579 5,930 0.6 0.5 27.8Total Mexico Vehicle 145,278 163,206 12.0 12.5 -11.0 145,278 163,206 12.0 12.5 -11.0Total Car 552,260 591,246 45.5 45.1 -6.6 552,260 591,246 45.5 45.1 -6.6Total Light Truck 619,393 668,994 51.0 51.0 -7.4 619,393 668,994 51.0 51.0 -7.4Total Light Vehicle 1,171,653 1,260,240 96.6 96.2 -7.0 1,171,653 1,260,240 96.6 96.2 -7.0Total Med./Hvy. Truck 41,774 50,409 3.4 3.8 -17.1 41,774 50,409 3.4 3.8 -17.1Total Vehicle 1,213,427 1,310,649 100.0 100.0 -7.4 1,213,427 1,310,649 100.0 100.0 -7.4Note: Current month includes some estimated Mexico production. All Mexico production actual for prior months.Source: Ward's AutoInfoBank©Copyright 2007, Ward's Automotive Group, a division of Prism Business Media Inc. Redistribution prohibited.
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WARD'S U.S. Light Vehicle Sales SummaryMonth Calendar Year-to-Date
January % Share DSR. January - January Vol.2007 2006 Current Year-Ago % Chg. 2007 2006 % Chg.
Domestic Cars 346,575 419,034 31.9 36.8 -20.6 346,575 419,034 -17.3Import Cars 161,374 139,221 14.9 12.2 11.3 161,374 139,221 15.9Total Cars 507,949 558,255 46.8 49.0 -12.7 507,949 558,255 -9.0Domestic Light Trucks 474,762 491,256 43.7 43.1 -7.2 474,762 491,256 -3.4Import Light Trucks 103,579 90,443 9.5 7.9 9.9 103,579 90,443 14.5Total Light Trucks 578,341 581,699 53.2 51.0 -4.6 578,341 581,699 -0.6Domestic Light Vehicles 821,337 910,290 75.6 79.9 -13.4 821,337 910,290 -9.8Import Light Vehicles 264,953 229,664 24.4 20.1 10.8 264,953 229,664 15.4Total Light Vehicles 1,086,290 1,139,954 100.0 100.0 -8.5 1,086,290 1,139,954 -4.7Source is country of manufacture. Domestics are from U.S., Canada, Mexico. Imports are from overseas. Light vehicles are cars and light trucks (GVW Classes 1-3, under 14,001 lbs.). DSR is daily sales rate. Source: Ward's AutoInfoBank©Copyright 2007, Ward's Automotive Group, a division of Prism Business Media Inc. Redistribution prohibited.
WARD'S U.S. Light Vehicle Sales by CompanyMonth Calendar Year-to-Date
January % Share DSR. January - January Vol.2007 2006 Current Year-Ago % Chg. 2007 2006 % Chg.
Chrysler Group 156,308 155,465 14.4 13.6 -3.5 156,308 155,465 0.5Ford 161,246 201,577 14.8 17.7 -23.2 161,246 201,577 -20.0GM 244,717 293,241 22.5 25.7 -19.9 244,717 293,241 -16.5Big 3 Total 562,271 650,283 51.8 57.0 -17.0 562,271 650,283 -13.5Honda 100,790 98,394 9.3 8.6 -1.7 100,790 98,394 2.4Hyundai 27,721 30,208 2.6 2.6 -11.9 27,721 30,208 -8.2Isuzu 695 931 0.1 0.1 -28.3 695 931 -25.3Kia 22,524 18,110 2.1 1.6 19.4 22,524 18,110 24.4Mazda 19,265 18,177 1.8 1.6 1.7 19,265 18,177 6.0Mitsubishi 9,383 7,469 0.9 0.7 20.6 9,383 7,469 25.6Nissan 82,663 75,910 7.6 6.7 4.5 82,663 75,910 8.9Subaru 12,074 12,384 1.1 1.1 -6.4 12,074 12,384 -2.5Suzuki 8,179 7,210 0.8 0.6 8.9 8,179 7,210 13.4Toyota 175,850 160,624 16.2 14.1 5.1 175,850 160,624 9.5Asia Total 459,144 429,417 42.3 37.7 2.6 459,144 429,417 6.9BMW 21,811 22,218 2.0 1.9 -5.8 21,811 22,218 -1.8Mercedes 17,071 12,483 1.6 1.1 31.3 17,071 12,483 36.8Porsche 2,984 3,232 0.3 0.3 -11.4 2,984 3,232 -7.7Volkswagen 23,009 22,321 2.1 2.0 -1.0 23,009 22,321 3.1Europe Total 64,875 60,254 6.0 5.3 3.4 64,875 60,254 7.7Total Light Vehicles 1,086,290 1,139,954 100.0 100.0 -8.5 1,086,290 1,139,954 -4.7Light vehicles are cars and light trucks (GVW Classes 1-3, under 14,001 lbs.). DSR is daily sales rate. Source: Ward's AutoInfoBank©Copyright 2007, Ward's Automotive Group, a division of Prism Business Media Inc. Redistribution prohibited.
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DEALERSHIP BRANDING A recent phenomenon over the last decade has been the branding of dealership facilities. This is a new trend that is primarily affecting newly built dealerships. This is accomplished by the use of unique design characteristics that distinguish one facility carrying a particular car line from another. Manufacturers such as Mercedes Benz, Lexus, Nissan, Volkswagen, and GM have mandated the use of certain design features as a part of the facility. These range from minor details like use of particular color schemes on the showroom interiors to the direction of the actual construction quality of the building (i.e., Lexus which has pre-formed concrete on its showroom buildings and Mercedes-Benz that has aluminum cladding called alucabond on the exterior of its dealerships). These aesthetic and architectural features are designed to enhance the image of each of the individual brands. However, the cost of these building characteristics may not translate into value for the dealerships. In fact, in extreme cases the additional features may make the dealership less marketable to potential buyers at a later date that may want to market another line of vehicles. As such, functional obsolescence is a distinct possibility that must be considered during the appraisal process. REGIONAL AUTOMOBILE DEALERSHIP RETAIL SALES Similar to the nation overall, the onset of the recession in the late 1980s and early 1990s caused a decline in consumer spending, especially on big ticket items such as cars and homes. The overall result of the decline in sales was an oversupply of new car dealerships. The better conceived and strategically located dealerships within Automalls and established auto rows proved most resilient to the recession. Older and less functional dealerships did not survive. However, despite the recent economic recovery, level new car sales and a trend toward centralized operations indicate that there will not be a significant increase in the number of new automotive dealerships. More likely, new dealerships will be constructed within Automalls to replace one or more nearby stand-alone dealerships. It should be noted that vehicle sales are most directly related to the business operation of a dealership. Increasing or decreasing sales are typically attributable to changes in business operations rather than factors associated with the real estate. DEMOGRAPHIC CHARACTERISTICS Demographically, Southern California is considered one of the best locations in the country for automotive sales and service facilities. Southern California’s large population, high household income, and reliance on private vehicles for transportation are all desirable for the automotive industry. To assess local area demographics, we have referenced statistics within a one-, three- and five-mile radius from the subject property. These radii were selected as representing, respectively, the subject’s immediate area, primary trade area, and maximum protected trade area. The demographics statistics are provided by Claritas, Inc.
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1-Mile 3-Mile 5-MileRadius Radius Radius
Population2000 Estimate 745 73,581 229,1772006 Estimate 772 75,292 248,1132011 Projection 797 77,290 264,277Households2000 Estimate 294 30,569 87,7932006 Estimate 297 30,887 93,7212011 Projection 302 31,452 98,869Average HH Income2000 Estimate $83,806 $69,502 $81,4832006 Estimate $79,764 $76,903 $93,9962011 Projection $86,087 $83,125 $102,798
AUTOLAND AT HERITAGE FIELDSBake Parkway and 5 Freeway
Irvine, California
As shown above, the population within a one-mile radius is relatively low. This is because of the undeveloped nature of the local surroundings and the mostly office/industrial uses nearby. However, the population within a three-mile radius is relatively high. This is because of the mostly build-out nature of the larger area with lots of residential development nearby. The table demonstrates that within the three-mile radius the population has grown by 1,711 (2.33% growth) since 2000. Moreover, the population within a five-mile radius is over three times that of the three-mile radius. The average household income within a three-mile radius is below the average for the County. The population in a five-mile radius (where most potential customers are estimated to reside) is large enough to support a number of dealerships, as well. Overall, the area’s demographics are supportive of a successful new car dealership. COMPETITION/COMPETITIVE POSITION OF THE SUBJECT The subject property is located adjacent to the Irvine Auto Center within the Heritage Fields master-plan. The subject property benefits by having good exposure along the north side of the 5 Freeway and access/exposure along Bake Parkway. Presently, competition within a ten-mile radius includes 46 dealerships. To determine the supply of locally competitive new car dealers, we consulted an internet directory. It showed the following listings for new car dealers within a ten-mile radius of the subject. There are 46 automobile line-makes considered primary competition to the subject property. This is important because within the State of California a new auto dealership franchise cannot locate within 10 miles of another franchise of the same make. Vehicle Code section 3062(a)(1) gives a dealer the right to protest an additional dealership or relocation of an existing dealership of the same line-make within a ten-mile radius of the protesting dealers dealership. This statute requires that the manufacturer or distributor must first give written notice to the New Motor Vehicle Board in Sacramento and to the dealerships of the “same line-make” within the “relevant market area.”
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No. Name Location Community
1 Tuttle Click Ford Lincoln Mercury 43 Auto Center Drive Irvine
2 Tuttle Click Jeep Eagle Dodge 40 Auto Center Drive Irvine
3 Foothill Ranch Dodge 81 Auto Center Drive Foothill Ranch
4 Mercedes Benz of North America 9 Whatney Irvine
5 Power Nissan Irvine 30 Auto Center Drive Irvine
6 GMC Irvine 11 Auto Center Drive Irvine
7 Power Chevrolet Irvine 21 Auto Center Drive Irvine
8 Fladeboe Volkswagen 20 Auto Center Drive Irvine
9 Irvine BMW 9881 Research Drive Irvine
10 Power Toyota 9101 Research Drive Irvine
11 Land Rover North America 1 Premier Place Irvine
12 Foothill Ranch Chevrolet 70 Auto Center Drive Foothill Ranch
13 Foothill Ranch Chrysler Jeep 81 Auto Center Drive Foothill Ranch
14 Jeep's R Us 3231 Laguna Canyon Road Laguna Beach
15 Lexus Mission Viejo 28242 Marguerite Parkway Mission Viejo
16 Allen Cadillac GMC Truck 28332 Camino Capistrano Laguna Niguel
17 Family Honda 29961 Santa Margarita Parkway Rancho Santa Margarita
18 Infiniti Mission Viejo 28471 Marguerite Parkway Irvine
19 Toyota Rancho Santa Margarita 22722 Avenida Empressa Rancho Santa Margarita
20 Santa Margarita Ford 30031 Santa Margarita Parkway Irvine
21 Mercedes Benz of Laguna Niguel 1 Star Drive Rancho Santa Margarita
22 Land Rover Mission Viejo 28662 Marguerite Parkway Mission Viejo
23 Saab of Mission Viejo 28730 Marguerite Parkway Mission Viejo
24 Acura of Mission Viejo 28802 Marguerite Parkway Mission Viejo
25 Tustin Cadillac 50 Auto Center Drive Tustin
26 Tustin Lexus 45 Auto Center Drive Tustin
27 Tustin Toyota 44 Auto Center Drive Tustin
28 Tustin Chevrolet 16 Auto Center Drive Tustin
29 Heritage Lincoln Mercury 28 Auto Center Drive Tustin
30 Tustin Nissan 30 Auto Center Drive Tustin
31 Infiniti Tustin 33 Auto Center Drive Tustin
32 Tustin Chrysler Jeep Dodge 40 Auto Center Drive Tustin
33 Tustin Acura 9 Auto Center Drive Tustin
34 Power Ford Tustin 2 Auto Center Drive Tustin
35 Joe Macpherson Oldsmobile 5 Auto Center Drive Tustin
36 Tustin Buick and Pontiac 1 Auto Center Drive Tustin
37 Newport Lexus 3901 MacArthur Boulevard Newport Beach
38 Fletcher Jones Motor Cars 3300 Jamboree Road Newport Beach
39 Land Rover Newport Beach 1540 Jamboree Road Newport Beach
40 Honda Santa Ana 1505 Auto Mall Drive Santa Ana
41 Crevier BMW 1500 Auto Mall Drive Santa Ana
42 Commonwealth Volkswagen & Audi 1450 Auto Mall Drive Santa Ana
43 Bauer Jaguar 1455 Auto Mall Drive Santa Ana
44 Orange County Volvo 1400 S. Dan Gurney Drive Santa Ana
45 Saturn of Santa Ana 1350 Auto Mall Drive Santa Ana
46 Power Audi of Newport Beach 445 East Coast Highway Newport Beach
AUTOMOBILE DEALERSHIPSPrimary Competition (10 mile radius)
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PRIMARY COMPETITION MAP
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As seen from the chart there would be very few opportunities for a buyer to establish a new franchise at this location as most of the makes are represented within a 10-mile radius from the subject. Consequently, the most likely buyer would be a dealership group within the 10-mile radius that already has an existing franchise that would like to have another point within their own trade area. In our conversations with the listing broker, Ms. Allison Schneider, with CBRE most of the potential buyers for the subject have been auto related uses such as RV, high end auto custom groups, or used vehicle sales. Aside from the above primary competition, automobile dealerships are also available in other neighboring cities. Based upon our inspection of the subject property and its surrounding environs, the subject's immediate neighborhood is recognized by local customers as a primary automobile sales and service destination.
Subject’s Marketability In comparison to the current market and competition, the subject property is considered to represent a good auto center location. The subject is directly north of the 5 Freeway and should be marketable to a number of auto related entities. (Please see proposed site plan below).
The Irvine Auto Center is located just southeast from the subject parcels. It currently contains 14 vehicle makes (The Lincoln Mercury site shown below was recently purchased by a high end used car dealership). Additionally, not included within this list are Irvine BMW and Power Toyota both located southwest of the 5 Freeway in Irvine. The center is an established auto retailing location that should appeal to other new car dealership operators that may wish to have a presence in the Irvine area but are already a part of the local trade area or from an existing dealership within the auto center looking for additional land area. The one disadvantage of the Irvine Auto Center has been its lack of adequate patron
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parking area along Auto Center Drive. Consequently, other auto centers in the local area (i.e. Santa Ana, Tustin) and auto row areas within South Orange County have increased sales where the Irvine Auto Center has not seen the growth of some of these other areas. Existing dealers within the auto center could benefit from additional offsite parking area.
Based on our conversations with market participants the primary disadvantage with the subject property is the limited building area allocated to the site based on its existing zoning. Most new car dealerships require larger facilities to adequately house sales with service and parts. As seen from the list of primary dealership competition, the local area is saturated with existing auto dealerships within 10 miles of the subject. However, there are very few alternatives for auto related uses within the South Orange County area because of the built out nature of the market. The subject should absorb fairly quickly once brought to market.
Currently, there is an offer of $45.00 per square foot for the subject Parcel 5 that is located along the 5 Freeway and is 4.3 acres in size. Additionally, there is an RV dealership that has offered $40.00 per square foot for Parcel 4. At this point in time discussions are still preliminary as the subject land will not be available until mid next year. Additionally, the developer may pursue re-subdividing the site with smaller parcels as demand has been strongest for 2 acre parcels given the limitations on building area with the overall site. The developer is having ongoing discussions with the City of Irvine regarding this issue. We have taken all of this information into account with our revenue and timing assumptions for the subject.
The subject's location at the junction of the 5 and 405 Freeways is supportive of an auto center at this location. Additionally, it is located in an established auto retailing location. Overall, it is our opinion that the subject is well positioned in its marketplace and will be a viable automobile center location over the short- and long-term.
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OVERVIEW OF SUBJECT EDUCATION/INSTITUTIONAL LAND USE Associated with the objectives for providing a variety of educational resources that appeal to the full spectrum of future residents of the Heritage Fields project and the larger Irvine and Orange County communities, the Great Park Plan and ultimately the project plan for Heritage Fields includes a total of 238.5 acres concentrated in the Lifelong Learning District of the Heritage Fields MPS. According to the Overlay Plan, a maximum of 1,460,000 square feet of improvements classified as educational uses may be constructed on the land parcels that are designated for institutional uses in addition to 731,300 square feet of improvements that are classified as institutional/cultural uses. The overall FAR for the maximum density permitted across institutional/cultural and educational improvements on the parcels that are designated for educational land uses is 0.21 FAR The concept of the Lifelong Learning District was addressed in the Property Description section. The intent of the district is to provide for land uses that will provide not only primary and secondary educational facilities for the new residents generated by the housing elements of the project, but more importantly, provide for uses that could support higher education such as colleges, universities, trade and technical schools as well as corporate educational and training facilities. The LLD is further expected to act as an incubator for the Research and Development Uses intended for the TODD district. According to the developer’s/owner’s 2007 business plan, all of the Educational land use parcels were expected to be sold by May 2011. We considered the terms of two written proposals we reviewed for educational land within the subject project. The first proposal is from California State University, Fullerton (January 17, 2007) discussing the acquisition of a 20-acre parcel in the Lifelong Learning District for $30 million. This equates to $34.43 per square foot of land area prior to considerations for the CFD assessment of $4.00 per square foot. However, the proposal includes one of the existing buildings (Building 829) from the former Air Base, which is currently occupied by CSUF’s Irvine campus. This proposal includes an existing facility in which California State University, Fullerton is an occupant. A second proposal was received from Lutheran High South (April 17, 2007). The letter expressed the school’s interest in purchasing approximately 35 acres in the Lifelong Learning District for $146 per square feet of FAR and requests 225,000 to 250,000 square feet of FAR. MARKETPLACE FOR EDUCATIONAL LAND The Exposition land use classification is a fairly unique land use designation that is based on one of the main “themes” underlying the Great Park plan which establishes the land uses for the subject Heritage Fields MPC. Typically, municipalities due not zone land specifically for educational or cultural purposes. In some instances, special purpose zoning classifications are established, but most often educational institutions such as private schools, trade schools, and cultural organizations acquire land through a typical market-based transaction or the land/real estate is donated to the organization. Public schools
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acquire sites through both market based transactions and eminent domain as well as requiring set-asides for sites in large-scale developments such as the subject Heritage Fields project. As such, there is no truly defined, efficient marketplace for the purchase and sale of land intended specifically for educational or cultural purposes. Cultural and educational land uses are not typically income producing properties that are purchased by investors. Instead, these assets are purchased, owned and operated by the users themselves. Due to the special purpose nature of this land use, there is no readily available market data from which to develop and analysis and draw conclusions for the subject educational and cultural land use parcels. Instead, we have investigated similar uses throughout Southern California to demonstrate, in a case study format, the “market” for such land uses in the region. Our search focused on the existing public schools in the City of Irvine, the institutions of higher education found in Orange County, as well as several trade schools that are located in Orange County. PRIMARY AND SECONDARY EDUCATION The table on the following page summarizes the public schools located in the City of Irvine based on information published by the school district. Total public school enrollment totals approximately 26,630 students in 22 elementary schools, seven middle schools and five high schools. Primary and secondary education is augmented through a number of private schools. Based on information we collected in the course of our research another 700 students are served by private primary and secondary schools.
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PUBLICElementary Schools Enrollment AddressAlderwood Basics Plus 646 2 Alderwood, Irvine, CA 92604Bonita Canyon 524 1 Sundance Drive, Irvine, CA 92603Brywood 584 1 Westwood, Irvine, CA 92620Canyon View 860 12025 Yale Court, Irvine, CA 92620College Park 628 3700 Chaparral, Irvine, CA 92606Culverdale 628 2 Paseo Westpark, Irvine, CA 92614Deerfield 522 2 Deerfield Ave, Irvine, CA 92604Eastshore 554 155 Eastshore, Irvine, CA 92604El Camino Real 335 4782 Karen Ann Ln, Irvine, CA 92604Greentree 454 4200 Manzanita , Irvine, CA 92604Meadow Park 580 50 Blue Lake South, Irvine, CA 92614Northwood 488 28 Carson, Irvine, CA 92620Oak Creek 711 1 Dove Creek, Irvine, CA 92618Plaza Vista 878 670 Paseo Westpark, Irvine, CA 92606Santiago Hills 551 29 Christamon West, Irvine, CA 92720Springbrook 469 655 Springbrook North, Irvine, CA 92614Stone Creek 387 2 Stone Creek, Irvine, CA 92714Turtle Rock 782 5151 Amalfi Dr., Irvine, CA 92612University Park 521 4572 Sandburg Way, Irvine, CA 92612Vista Verde 680 5144 Michelson Dr., Irvine, CA 92612Westpark 566 25 San Carlo, Irvine, CA 92614Westwood Basics Plus 387 1 Liberty, Irvine, CA 92620Middle Schools Enrollment AddressLakeside 668 3 Lemongrass, Irvine, CA 92714Plaza Vista 878 670 Paseo Westpark, Irvine, CA 92606Rancho San Joaquin 842 4861 Michelson Dr., Irvine, CA 92612South Lake 624 655 W. Yale Loop, Irvine, CA 92714Sierra Vista 947 2 Liberty, Irvine, CA 92620Venado 753 4 Deerfield Ave., Irvine, CA 92604Vista Verde 680 5144 Michelson Dr., Irvine, CA 92612High Schools Enrollment AddressIrvine 1,802 4321 Walnut Ave., Irvine, CA 92714Northwood 2,060 4515 Portola Pkwy, Irvine, CA 92620Creekside 193 311 West Yale Loop, Irvine, CA 92604University 2,182 4771 Campus Dr., Irvine, CA 92612Woodbridge 2,266 2 Meadowbrook, Irvine, CA 92714
Total Public School Enrollment 26,630
PRIVATEElementary SchoolsIFAA 55 17052 Gillette Avenue, Irvine, CA, 92614New Horizon Elementary School 159 1 Truman Street, Irvine, CA, 92620Tarbut V'Torah Community Day School (K-12) NA 5200 Bonita Canyon Road, Irvine, CA
High SchoolsLutheran South High School (1st class: 2007-08) 170 4947 Alton Parkway, Irvine, CA 92604Tarbut V'Torah Community Day School (K-12) 330 5 Federation Way, 92603
Total Private School Enrollment: 714
City Total 27,344
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HIGHER EDUCATIONOrange County Community CollegesOrange Coast College 22,694 2701 Fairview Rd.
Costa Mesa, CA 92626
Santa Ana College 25,231 1530 W.17th Street Santa Ana, California 92706
Fullerton College 19,669 321 East Chapman AvenueFullerton, California 92832
Saddleback College 18,248 28000 Marguerite ParkwayMission Viejo, CA 92692
Golden West College 13,000 15744 Golden West StreetHuntington Beach, CA 92647
Santiago Canyon College 11,943 8045 E. Chapman Ave.Orange, CA 92869
Irvine Valley College 10,417 5500 Irvine Center DriveIrvine, CA 92618-4399
Coastline Community College 9,322 11460 Warner AvenueFountain Valley, CA 92708
UniversitiesCalifornia State University Fullerton 35,921 PO Box 34080
Fullerton, CA 92834-9480
University of California Irvine 24,807 204 Administration BuildingIrvine, CA 92697-1075
Chapman University 5,353 One University DriveOrange, CA 92866
Vanguard University of Southern California 2,219 55 Fair DriveCosta Mesa, CA 92626-9601
Hope International University 660 2500 East Nutwood AvenueFullerton, CA 92831-3199
Trade SchoolsITT Technical Institute: Anaheim 825 525 North Muller
Anaheim, CA 92801
Laguna College of Art and Design 310 2222 Laguna Canyon RdLaguna Beach, CA 92651
Interior Designers Institute 500 1061 Camelback RoadNewport Beach, CA 92660-3228
Maric College: Anaheim 140 1360 South Anaheim BoulevardAnaheim, CA 92805
Total Higher Education Enrollment 201,259
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California State University, Fullerton Per the 2005 enrollment figures, Fullerton is the largest of the California State Universities and second only to UCLA in California in size The University was founded in 1957 and in the fall of 2005 achieved an enrollment of more than 35,000 students. Princeton Review highlighted Fullerton’s College of Business and Economics, the largest in the state and fourth largest nationally, placing its business school as one of the best 237 in the nation. The University is also ranked 1st on the west coast for musical theater and 8th in the United States. The University offers 55 undergraduate and 49 graduate degrees, as well as one joint doctorate in education. The primary campus has 21 permanent buildings including a 109,000 square foot Performing Arts Center, Paulina June & George Pollak Library, Cobb Residence Halls, an apartment complex for 396 students, the Kinesiology and Health Science Building, a 10-story College Park Building, and the Titan Student Union which contains a 1,200-seat events pavilion, small theater, food court, pub, bowling alley and conference rooms. Current construction projects include the Steven G. Mihaylo Hall, future home of the College of Business and Economics, and a student recreation center. University of California, Irvine The University of California, Irvine (UCI) is located on approximately 1,500 acres in the city of Irvine, adjacent Newport Beach and the San Joaquin Freshwater Marsh Reserve. UCI reports a current student enrollment of approximately 25,000. UCI provides undergraduate and graduate degrees, including a wide array of masters and doctorate degrees. UCI has one of the most popular business schools in Southern California and will be opening a law school in 2009. The campus has more than 200 buildings serving undergraduate and graduate needs for its more than 25,000 students, 1,800 faculty, and 8,600 staff. Major structures include: the 48,000 square foot Arnold and Mabel Beckman Center of the National Academies; the Irvine Barclay Theatre; the Claire Trevor School of the Arts with a number of theaters and galleries; the 22,000 square foot Bren Events Center, the 158-acre office and research University Research Park (currently under expansion to 2.4 million square feet) with tenants like Blizzard Entertainment, Skyworks Solutions, Cisco, and Center for Educational Partnerships; and an observatory. Santa Ana Community College Located on 65 acres in Santa Ana, the college serves a student body of over 25,000 students and offers over 300 subjects leading to the associate degree in the sciences, arts, or vocational certificates of competency. The college was founded in 1915, making it the fourth oldest community college in California. The employees consist of 992 part-time and 245 full-time faculty members, 380 part-time and 223 full-time employees, and 30 administrative members. The college offers nearly 200 degrees in a wide range of disciplines. Orange Coast College Situated in Costa Mesa, Orange Coast College was founded in 1948 and enrolls nearly 23,000 students each semester. The college offers more than 130 academic and career programs, including one of the nation’s largest and most acclaimed public nautical programs. Associate of the Arts degrees are offered in Photography, Business Data Processing, Accounting, Business, Construction, Agriculture, Aircraft
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Maintenance Technology, Child Development, Electronics, Heating, Ventilation, and Air-Conditioning, Machining, and Welding. There are also many complete, transferable lower-division undergraduate programs. The college is one of the leading transfer colleges in the state. Fullerton College Fullerton College, established 1913, is California’s oldest community college situated on 83 acres near the Riverside and Orange Freeways. The college currently enrolls nearly 20,000 students and employs just over 1,100 faculty and staff. The college offers 90 associate degree and 111 vocational certificate programs. Saddleback College Adjacent the Interstate 5 in Mission Viejo, California, Saddleback College provides a variety of classes to its more than 18,000 students. Saddleback College offers a wide range of programs in Advanced Technology and Applied Sciences, including courses in Aviation, Marine Science, Computer Science and Fashion Design. The college is also has a reputable science department offering quality programs in physics and chemistry. Application to the Subject Property Based on our research of public and private schools in the City of Irvine, we estimated that approximately 27,344 students are currently enrolled in primary and secondary educational institutions in the City of Irvine. Based on the most current population estimate for the City published by Claritas, Inc. primary and secondary school enrollment is equal to approximately 0.14 students per capita in the City of Irvine as illustrated in the following table. Based on the per capita ratio of students to population, we considered the “demand” for educational uses that could be generated over the next five years based on population growth estimates forecast by Claritas, and assuming that the per capita ratio would remain constant. Based on this analysis, approximately 5,101 new students will generate demand for new educational facilities in the City of Irvine over the next five years.
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Irvine 2006 Estimated Population 189,775Approximate School Enrollment (2007) 27,344Per Capita 0.14
2006-2011 Est. Pop. Growth 3.48%
2007 Population 196,379School Enrollment 28,2962008 Population 203,213School Enrollment 29,2802009 Population 210,285School Enrollment 30,2992010 Population 217,603School Enrollment 31,3542011 Population 225,175School Enrollment 32,445
Increase in # of Students 5,101Total % change 18.65%
We applied a similar methodology for estimating possible demand for the subject’s educational land by considering the per capita ratio of students throughout Orange County. Again, based on our research, intuitions of higher education, including trade and technical schools, totals 201,259 students representing approximately 0.07 students per person in Orange County. Based on population growth estimates published by Claritas, Inc., an estimated 11,105 students will demand facilities for higher education in Orange County over the next five years.
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Orange County2006 Estimated Population 3,037,571Approx. Higher Education Enrollment 201,259Per Capita 0.07
2006-2011 Est. Pop. Growth 1.08%
2007 Population 3,070,377Total Higher Edu. Enrollment 203,4332008 Population 3,103,537Total Higher Edu. Enrollment 205,6302009 Population 3,137,055Total Higher Edu. Enrollment 207,8502010 Population 3,170,935Total Higher Edu. Enrollment 210,0952011 Population 3,205,181Total Higher Edu. Enrollment 212,364
Increase in # of Students 11,105Total % change 5.52%
According to the project EIR for the subject, the project entitlements are anticipated to result in a population of approximately 9,000 residents in the Heritage Fields MPC. Based on the population/student housing ratios discussed above, the population increase anticipated for the project would contribute to the demand for educational facilities to accommodate 1,893 students upon project build out. However, project-generated demand is not the only source of demand for the subject’s educational land uses, particularly for facilities of higher education. Considering the 9,000 new residents of the Heritage Fields project, the pro rata share of the overall Irvine population is approximately 4 percent of the 2011 forecast population. The subject’s 9,000 new residents also represent 0.28 percent of the forecast (2011) population of Orange County. If the subject project were to capture its pro rata share of primary/secondary and higher education students generated from forecast population growth, in addition to the 1,893 students in demand the project itself generates, an additional demand of 235 students would be created for a total demand of 2,128 students over the next five years (2007-2011). As previously referenced, the subject’s overlay plan includes a maximum development capacity of 7,800 students in 1,452,600 square feet of improvements, in addition to 731,300 square feet of institutional improvements. The letters of intent we have reviewed have indicated there exists a marketplace for educational sites within the subject development. However, the capacity of the overall project for educational and cultural land uses is significant. Based on our analysis set forth above, we estimate that the subject’s absorption period would exceed five years, and would in fact fall in the range of approximately 10 years from our date of value. We recognize that demand for the subject’s educational
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land may be robust in the early phases of the development, particularly from private intuitions that are currently in the marketplace for well located, affordable sites. However, due to the somewhat limited pool of users for these sites, the typical capital structure of these organizations, their governance, and the timeframe in which they can execute a significant transaction, we have estimated an absorption timeframe that is more in line with the indications of demand suggested by population growth trends and concluded an eight year timeframe from the date of value was appropriate for the subject. We estimated the final revenue event for the educational/cultural land parcels would occur in October 2015. OFFICE MARKET ANALYSIS CURRENT CONDITIONS The Orange County office market continued to experience shifts in activity in the first quarter of 2007.
• The overall vacancy rate decreased through the first quarter of 2007 by 60 basis points to 9.1 percent, when compared to last quarter’s vacancy rate of 9.7 percent, but remains 20 basis points above first quarter 2006 vacancy rate of 8.9 percent.
• Absorption was active for the first quarter of 2007, with a positive 323,400 square feet absorbed, yet well below the 891,300 square feet absorbed in first quarter 2006.
• The overall average asking rent has increased 10.6 percent in the past year to $2.40 per square foot per month, up from first quarter 2006’s $2.17 per square foot.
MARKET CHARACTERISTICS The Orange County office market contains 74.3 million square feet of space, which ranks the market among the top 15 in the nation, on par with that of San Francisco County, Seattle-Bellevue and Central New Jersey. The majority of its office space, 41.8 million square feet or roughly 56 percent of Orange County’s total inventory, is located outside of its Central Business District (CBD) within its Non-CBD submarkets. The other 44 percent of the county’s inventory is located in its four CBD office submarkets.
• Orange County’s largest major office submarket by far is its CBD, which is comprised of 32.5 million square feet of office space. Located in proximity to the interchange of Highway 55 and Interstate 405, it includes the cities of Costa Mesa, Irvine, Newport Beach and the southern portion of Santa Ana.
• Orange County’s other sizable office markets are Central County and South County, containing 17.9 and 14.5 million square feet of space, respectively.
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OFFICE INVENTORY BY MAJOR SUBMARKET Orange County, 2007 Q1
0 5 10 15 20 25 30 35
CBD
South County
West County
Central County
North County
Office Space (msf)
Available Space
Under Construction
Occupied Space
CBDNon-CBD
Source: Cushman & Wakefield Research, Cushman & Wakefield Analytics
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Market/Submarket Inventory Overall
Vacancy Direct
Vacancy
YTD Const. Compl.
YTD Overall Net
Abs.Under Const.
Direct Wtd Avg Class A
Rent
Overall Avg Rent
CBD Total (Greater Airport Area) 32,520,463 10.4% 7.2% 31,909 35,946 2,258,054 $3.06 $2.59 South Santa Ana 1,888,406 14.2% 11.4% 0 -19,340 0 $2.83 $2.67
Costa Mesa 5,038,793 10.5% 9.3% 31,909 6,039 0 $3.05 $2.63 Newport Beach 6,736,591 8.8% 6.0% 0 99,305 0 $3.14 $3.12 Irvine (No Spectrum) 18,856,673 10.6% 6.7% 0 -50,058 2,258,054 $3.09 $2.47 Non-CBD Total 41,847,321 8.2% 6.7% 69,969 287,454 1,167,364 $2.75 $2.18 South County Total 14,492,853 9.4% 8.3% 44,147 28,612 1,167,364 $2.68 $2.38 Irvine Spectrum 5,840,819 8.2% 7.3% 44,147 41,379 624,364 $3.12 $2.25 Lake Forest/R.S.Margarita 2,425,123 14.4% 12.7% 0 -108,950 0 $2.76 $2.35 Laguna Hills/Aliso Viejo 3,826,098 7.0% 5.2% 0 76,610 480,000 $2.91 $2.38 Laguna Niguel/Laguna Beach 315,556 6.6% 5.9% 0 8,118 0 $2.60 $2.61 Mission Viejo 1,255,862 11.7% 11.3% 0 -3,890 63,000 $2.90 $2.58 S.J.Cap./S.Clemente/D.P./C.B. 829,395 12.6% 12.6% 0 15,345 0 N/A $2.68 West County Total 3,934,349 6.2% 5.4% 0 91,404 0 $2.64 $2.09 Seal Beach 295,019 0.0% 0.0% 0 11,883 0 N/A N/AWestminster 241,400 8.3% 6.0% 0 26,505 0 N/A $1.94 Huntington Beach 1,081,201 6.3% 5.8% 0 26,561 0 $2.67 $2.31 Fountain Valley 550,097 8.6% 8.6% 0 0 0 N/A $2.29 Garden Grove 496,486 8.5% 8.1% 0 -22,062 0 N/A $1.83 Los Alamitos/Stanton 266,502 1.8% 1.8% 0 2,375 0 N/A $1.70 Cypress 1,003,644 6.0% 4.5% 0 46,142 0 $2.25 $1.96 Central County Total 17,971,028 8.6% 6.3% 0 175,588 0 $2.65 $2.05 Park Center Area 2,841,905 3.8% 3.8% 0 46,311 0 $2.66 $2.26 Stadium Center 3,478,720 11.3% 5.2% 0 22,353 0 $2.52 $2.09 The City Area 2,188,764 4.3% 3.9% 0 -18,281 0 $2.59 $2.59 Main Place Area 2,282,014 7.2% 5.5% 0 -30,297 0 $3.04 $2.35 Tustin (South of I-5) 588,820 9.5% 9.5% 0 69,742 0 N/A $1.61 Santa Ana 2,395,783 5.8% 4.3% 0 29,820 0 N/A $1.89 North/East Anaheim 2,142,694 17.1% 11.5% 0 224 0 $1.90 $1.92 East Orange 224,805 0.0% 0.0% 0 13,093 0 N/A N/ACivic Center Area 1,827,523 12.3% 12.3% 0 42,623 0 $1.90 $1.79 North County Total 5,449,091 4.7% 4.5% 25,822 -8,150 0 $2.61 $1.97 Fullerton 1,018,825 0.1% 0.1% 0 25,006 0 N/A $1.61 Brea/LaHabra 3,287,610 6.6% 6.3% 0 -61,655 0 $2.61 $1.98 Placentia/Yorba Linda 221,978 5.3% 3.1% 0 0 0 N/A $1.95 Buena Park/La Palma 920,678 3.1% 3.1% 25,822 28,499 0 $2.55 $1.92 Orange County PMSA 74,367,784 9.1% 6.9% 101,878 323,400 3,425,418 $2.97 $2.40
Source: Cushman & Wakefield Research, Cushman & Wakefield Analytics
Office Market Statistics by SubmarketOrange County
First Quarter 2007
VACANCY Orange County’s overall vacancy rate has been on the decline since 2002. The Non-CBD market’s vacancy rate peaked during 2001 at 18.1 percent, while the CBD peaked at 19.2 percent during 2002. Since then, both markets have seen annual vacancies decline dramatically. At first quarter-end 2007, the overall vacancy rate was up 20 basis points from one year earlier, but remained tight.
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• As of first quarter 2007, Orange County’s overall office vacancy rate was 9.1 percent. During the quarter, the CBD’s overall vacancy rate decreased 40 basis points to 10.4 percent while the overall vacancy rate for the Non-CBD markets encountered a quarterly decrease of 60 basis points to 8.2 percent.
• Within the Non-CBD markets, South County had the highest overall vacancy rate of 9.4 percent, while North County had the lowest overall vacancy rate, remaining at 4.7 percent.
• The East Orange submarket in Central County and the Seal Beach submarket in West County, with just over 500,000 square feet of combined inventory, had no space available as of first quarter-end. Following closely behind the latter mentioned submarkets is the Fullerton submarket in North County, with just over one million square feet of inventory and a razor thin vacancy rate of 0.1 percent. These submarkets posted the lowest first quarter vacancy rates in the county.
OVERALL VACANCY RATE VS OVERALL ASKING RENT 2000 – 2007 Q1
Orange County CBD
$15.00
$20.00
$25.00
$30.00
$35.00
00 01 02 03 04 05 06 07Q1
Ave
rage
Ask
ing
Ren
t (ps
f)
0%
5%
10%
15%
20%
25%
Overall V
acancy Rate
Overall Average Asking Rent Overall Vacancy Rate
Orange County Non-CBD
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
00 01 02 03 04 05 06 07Q1
Ave
rage
Ask
ing
Ren
t (ps
f)
0%
5%
10%
15%
20%
25% Overall V
acancy Rate
Overall Average Asking Rent Overall Vacancy Rate
Source: Cushman & Wakefield Research, Cushman & Wakefield Analytics
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ASKING RENTS The current scarcity of space, particularly for full floor availabilities in the CBD, has prompted landlords to both raise asking rents (over $3.00 per square foot per month in certain buildings) and reduce concession packages.
• The average asking rent in the CBD climbed 5.7 percent to $2.59 per square foot per month, when compared to the asking rents in the same quarter last year at $2.45 per square foot.
• In the Non-CBD markets, the average rental rate as of first quarter 2007 was $2.18 per square foot per month—10.7 percent above the first quarter 2006 rate of $1.97 per square foot.
• In the CBD, the Newport Beach submarket had the highest average asking rent at $3.12 per square foot per month, and likewise had the highest direct Class A rent of $3.14 per square foot per month.
• In the Non-CBD markets, the S.J. Cap./S. Clemente/D.P./C.B submarket in South County had the highest average asking rent at $2.68 per square foot per month. Irvine Spectrum had the highest direct Class A rent at $3.12 per square foot per month.
LEASING ACTIVITY Leasing activity was healthy for the first quarter of 2007 totaling 1.8 million square feet, yet well off the pace set in the first quarter of 2006.
• Through the first quarter of 2007, Orange County’s leasing activity totaled 953,900 and 912,900 square feet between the CBD and Non-CBD markets, respectively.
• The 1.8 million square feet of leasing activity in the first quarter 2007 has fallen below the pace set in first quarter 2006 and 2005, when activity totaled 2.4 and 3.9 million square feet, respectively.
Building Address Submarket Tenant Size (sf)19520 Jamboree Irvine WL Homes 69,507
2 MacArthur Place/Twin Towers Irvine Best Rate Funding 23,11418101 Von Karman Irvine Premium Business Centers 22,097
Significant Office Market Lease TransactionsOrange County Office Market
First Quarter 2007
Source: Cushman & Wakefield Research, Cushman & Wakefield Analytics ABSORPTION In the first quarter of 2007 the Orange County office market posted a positive 323,400 square feet of absorption, well of the pace set in the first quarter of 2006. The majority of the absorption, 89 percent of the total for the quarter, was within non-CDB territory, while only 35,946 square feet was absorbed in the CDB.
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• After the 2001 recession, the Orange County office market continued to improve, and in 2003 and
2004 recorded absorption of 2.1 and 2.0 million square feet respectively. However, since that time absorption levels have been decreasing with a yearly average of 1.1 million square feet absorbed thru year-end 2006.
• Since 2001, absorption in the CBD has averaged 0.4 million square feet annually while the Non-CBD market has averaged 0.9 million square feet annually.
Since 2002, first quarter absorption has averaged 374,610 square feet, as of first quarter 2007, absorption remains on par with the historical average posting 323,400 square feet of absorption through the quarter.
2000 – 2007 Q1 Orange County CBD
-0.5
0.0
0.5
1.0
1.5
2.0
00 01 02 03 04 05 06 07Q1
Com
plet
ions
&O
vera
ll N
et A
bsor
ptio
n(m
sf)
0%
5%10%
15%
20%
25%
Overall V
acancy Rate
Completions Overall Net Absorption Overall Vacancy Rate
n/a n/a
Orange County Non-CBD
-1.0
-0.5
0.0
0.51.0
1.5
2.0
2.5
00 01 02 03 04 05 06 07Q1
Com
plet
ions
&O
vera
ll N
et A
bsor
ptio
n(m
sf)
0%
5%10%
15%
20%
25%
Overall V
acancy Rate
Completions Overall Net Absorption Overall Vacancy Rate
n/a n/a
Source: Cushman & Wakefield Research, Cushman & Wakefield Analytics
CONSTRUCTION After several quarters of decreasing levels of available space and increasing rents, speculative construction has become a factor in the county’s office market. In recent years, new projects have required a significant amount of preleasing activity in order to receive the necessary construction
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financing. In addition, the extremely high cost of new construction has many developers unwilling to undertake significant risk of long periods of vacancy after completion.
• During first quarter 2007, construction completions within Orange County totaled 101,900 square feet, 31 percent of which was delivered in the CBD.
• Office space under construction has increased sharply since last year with over 3.4 million square feet underway compared to 2.7 million square feet the same quarter last year. The limited available office space over the last few years has resulted in a surge of construction that is expected to continue through 2009.
• Future construction projects consist of a proposed 2.4 million square feet of office space throughout Orange County.
OFFICE-USING EMPLOYMENT In 2006, Orange County’s growth rate in office-using employment fell below the average for the Top 100 metro areas (Top 100) for the first time since 1999.
• Between 1996 and 2006, Orange County’s office-using employment increased at an average annual rate of 3.6 percent—far outpacing the Top 100 average of 2.0 percent.
• Between year-end 2006 and 2011, Orange County’s growth in office-using employment is forecast to slow to an average of 1.7 percent per year—just below the Top 100’s projected growth rate of 1.9 percent.
• Orange County’s office-using employment is concentrated in the center of the county north of the split of Interstates 5 and 405. The market areas with relatively high shares of office employment include the Greater Airport Area, from Irvine to Fountain Valley; South County near Lake Forest and Laguna Hills; and Central County, near the cities of Orange, Santa Ana, Tustin and Garden Grove.
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OFFICE-USING EMPLOYMENT CONCENTRATION BY ZIP CODE Orange County
First Quarter 2007 Estimates
Source: Claritas, Cushman & Wakefield Analytics
OFFICE MARKET OUTLOOK Over the course of this year, the Orange County office leasing market is expected to experience its current path by tightening further. Office vacancies are anticipated to remain in the single digits along with a steady rise in rents.
• Orange County’s construction pipeline remains modest relative to expected demand; new product coming online is expected to exhibit asking rental rates in excess of $40.00 per square foot annually.
• With vacancy rates holding steady and 3.4 million square feet of new office space coming online during 2007 and 2008, construction is expected to slow over the next five years until enough space is absorbed to warrant any new large scale development.
• The office market in Orange County is expected to continue to thrive due to a diversity of industries within the market and a highly skilled labor pool.
• As Orange County remains a desirable location for office operations, including corporate headquarters, the long-term outlook for the office market is quite positive.
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RETAIL MARKET & TRADE AREA ANALYSIS TRADE AREA OVERVIEW A retail center’s trade area contains people who are likely to patronize that particular retail center. These customers are drawn by a given class of goods and services from a particular tenant mix. A center’s fundamental drawing power comes from the strength of the major tenants as well as the regional and local tenants which complement and support the anchors. A successful combination of these elements creates a destination for customers seeking a variety of goods and services while enjoying the comfort and convenience of an integrated shopping environment. In order to define and analyze the subject’s market potential, it is important to first establish the boundaries of the trade area from which the subject retail center may draw its customers. In some cases, defining the trade area may be complicated by the existence of other retail facilities on main thoroughfares within the trade areas that are not clearly defined or whose trade areas overlap with that of the subject. We have made certain reasonable assumptions of the extent of the boundaries of the primary and secondary trade areas this area based upon physical, demographic, and geographic data available. MARKET OVERVIEW The Orange County Metro Statistical Area (MSA) retail market is a diverse compilation of strip and convenience centers, neighborhood, community, and regional shopping centers, and other retail property types. Neighborhood centers are the smallest type of shopping center, generally with a gross leaseable area of less than 100,000 square feet. Typical anchors include supermarkets, pharmacies and personal services. Community centers consist of 100,000 to 300,000 square feet and usually contain one junior department store, a variety store or discount department store, a supermarket and specialty stores. The Orange County MSA is comprised of five submarkets. The following charts illustrate the layout of the Orange County MSA submarkets and the retail data for each of the submarkets segregated by anchored and non-anchored centers. The subject property is located in the Central submarket of the greater Orange County retail market.
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ORANGE COUNTY RETAIL MARKET
1. South
2. Coastal
3. Central
4. West
5. North
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ORANGE COUNTY RETAIL MARKET OVERVIEW The Orange County neighborhood and community shopping center sector had another good year. Although the vacancy rate rose 1.2% points since 2005 to reach 3.1% as of first quarter 2007, Orange County remains among the lowest of the top markets tracked by Reis. The average asking rent rose 7.9% from 2005 to $30.45 per square foot, while the average effective rent rose 7.2% to $27.98 per square foot.
Orange County MSA Retail 1Q07 Submarket Snapshot
SubmarketInventory
(Buildings)Inventory (SF/Units)
Asking Rent $ CRD % Vac %
Free Rent (mos)
Expenses $ (Commercial)
Lease Term (yrs)
Leasing Commission % TI's
ANCHORSouth 62 3,841,000 $20.76 -6 2.0 3.50 $6.67 11 3.5 $8.59Coastal 37 3,047,000 $24.52 -4 1.2 2.60 $6.93 11 4.0 $5.54Central 56 3,899,000 $16.95 -5 3.1 3.10 $5.20 11 3.8 $7.53West 62 4,614,000 $16.26 -6 3.3 2.40 $4.61 12 3.4 $7.79North 31 2,598,000 $19.38 -3 0.1 2.10 $4.98 12 2.7 $7.28ANCHOR TOTALS: 248 17,999,000 $19.57 1.9 2.74 $5.68 11 3.5 $7.35
NONANCHORSouth 90 5,035,000 $36.16 -5 3.7 2.20 $6.67 5 3.1 $5.71Coastal 44 2,885,000 $36.60 -2 4.7 2.40 $6.93 5 3.5 $4.94Central 89 4,558,000 $26.74 -5 4.6 2.90 $5.20 5 3.5 $6.12West 88 4,955,000 $26.04 -3 3.1 2.10 $4.61 4 3.5 $8.04North 38 1,865,000 $27.43 -4 3.7 2.00 $4.98 5 3.1 $6.61NONANCHOR TOTALS: 349 19,298,000 $30.59 4.0 2.32 $5.68 5 3.3 $6.28
ORANGE COUNTY MSA: 597 37,297,000 $25.08 3.0 2.53 $5.68 8 3.4 $6.82Source: REIS 1Q07
INVENTORY/SUPPLY According to REIS, the Orange County MSA comprises over 37.3 million square feet of neighborhood and community center gross leaseable area (GLA), with a first quarter 2007 vacancy rate of approximately 3.1%. The following chart illustrates the growth in inventory for neighborhood and community centers over the past eleven years in the MSA.
Neighborhood and Community Centers Orange County MSA
Year Inventory (SF/Units) Completions Vac % Vacant Stock Occupied Stock
Net Absorption
Constr/ Absorp
Abs/ Occ Stk %
1996 34,000,000 1,279,000 5.9 2,001,000 31,999,000 1,295,000 0.99 4.001997 34,095,000 274,000 4.9 1,656,000 32,439,000 440,000 0.62 1.401998 34,807,000 712,000 4.3 1,483,000 33,324,000 885,000 0.81 2.701999 35,024,000 86,000 3.8 1,329,000 33,695,000 371,000 0.23 1.102000 35,227,000 102,000 3.5 1,234,000 33,993,000 298,000 0.34 0.902001 35,727,000 318,000 4.2 1,503,000 34,224,000 231,000 1.38 0.702002 36,181,000 454,000 4.0 1,451,000 34,730,000 506,000 0.90 1.502003 36,413,000 232,000 4.2 1,542,000 34,871,000 141,000 1.65 0.402004 36,742,000 329,000 2.8 1,015,000 35,727,000 856,000 0.38 2.402005 36,835,000 93,000 1.9 705,000 36,130,000 403,000 0.23 1.102006 37,240,000 405,000 3.0 1,125,000 36,115,000 -15,000 -27.00 0.001Q07 37,297,000 57,000 3.1 1,142,000 36,155,000 40,000 1.43 0.10
Source: REIS 1Q07
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Of the total GLA, neighborhood centers account for over 19.0 million square feet and a vacancy rate of 2.8%. The following chart illustrates the growth in inventory over the past eleven years for neighborhood centers in the MSA.
Neighborhood CentersOrange County MSA
Year Inventory (SF/Units) Completions Vac % Vacant Stock Occupied Stock
Net Absorption
Constr/ Absorp
Abs/ Occ Stk %
1996 17,761,000 437,000 6.5 1,148,000 16,613,000 445,000 0.98 2.701997 18,035,000 274,000 5.0 899,000 17,136,000 523,000 0.52 3.101998 18,163,000 128,000 4.1 737,000 17,426,000 290,000 0.44 1.701999 18,174,000 11,000 3.8 693,000 17,481,000 55,000 0.20 0.302000 18,276,000 102,000 3.8 694,000 17,582,000 101,000 1.01 0.602001 18,290,000 14,000 4.0 729,000 17,561,000 -21,000 -0.67 -0.102002 18,393,000 103,000 3.4 627,000 17,766,000 205,000 0.50 1.202003 18,453,000 60,000 2.9 532,000 17,921,000 155,000 0.39 0.902004 18,782,000 329,000 2.3 437,000 18,345,000 424,000 0.78 2.302005 18,875,000 93,000 1.6 311,000 18,564,000 219,000 0.43 1.202006 18,992,000 117,000 2.5 478,000 18,514,000 -50,000 -2.34 -0.301Q07 19,049,000 57,000 2.8 527,000 18,522,000 8,000 7.13 0.00
Source: REIS 1Q07 Of the total GLA, community centers account for over 18.2 million square feet and a vacancy rate of 3.4%. The following chart illustrates the growth in inventory over the past eleven years for community centers in the MSA.
Community Centers Orange County MSA
Year Inventory (SF/Units) Completions Vac % Vacant Stock Occupied Stock
Net Absorption
Constr/ Absorp
Abs/ Occ Stk %
1996 16,239,000 842,000 5.3 853,000 15,386,000 850,000 0.99 5.501997 16,060,000 0 4.7 757,000 15,303,000 -83,000 0.00 -0.501998 16,644,000 584,000 4.5 746,000 15,898,000 595,000 0.98 3.701999 16,850,000 75,000 3.8 636,000 16,214,000 316,000 0.24 1.902000 16,951,000 0 3.2 540,000 16,411,000 197,000 0.00 1.202001 17,437,000 304,000 4.4 774,000 16,663,000 252,000 1.21 1.502002 17,788,000 351,000 4.6 824,000 16,964,000 301,000 1.17 1.802003 17,960,000 172,000 5.6 1,010,000 16,950,000 -14,000 -12.29 -0.102004 17,960,000 0 3.2 578,000 17,382,000 432,000 0.00 2.502005 17,960,000 0 2.2 394,000 17,566,000 184,000 0.00 1.002006 18,248,000 288,000 3.5 647,000 17,601,000 35,000 8.23 0.201Q07 18,248,000 0 3.4 615,000 17,633,000 32,000 0.00 0.20
Source: REIS 1Q07 VACANCY TRENDS The previous charts illustrate the vacancy rates in neighborhood and community centers and for the Orange County MSA. Overall vacancy levels for the MSA have decreased slightly from 4.2% at year-end 2003 to 2.8% at year-end 2004 to and to an even lower rate at 1.9% as of year-end 2005. By year-end 2006 the overall vacancy rate increased to 3.0% and as of first quarter 2007, the increase in vacancy
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edged up to 3.1%. Vacancy remains extremely low in the MSA as the vacancy rate has been below 5.0% since 1997, and historically in our data range, vacancy remains on the low of the spectrum. Vacancy for both the neighborhood and community centers in the MSA is expected to increase over the next five years, exceeding to 4.5% by 2011, according to the Reis forecast. Forecasted absorption is expected to trail new completions, however it will not do so by a significant amount, and vacancy will increase in the foreseeable future. The following chart illustrates vacancy projections for the MSA and the submarket from 2007 to 2011.
Neighborhood and Community Centers Orange County MSAProjected Changes in the Market
Year Inventory (SF/Units) Completions Vac %
Vacant Stock
Occupied Stock
Net Absorption
2007 37,815,000 575,000 3.5 1,335,000 36,480,000 365,0002008 38,362,000 547,000 3.9 1,487,000 36,875,000 395,0002009 38,879,000 517,000 4.1 1,600,000 37,279,000 404,0002010 39,390,000 511,000 4.5 1,790,000 37,600,000 321,0002011 39,900,000 510,000 4.5 1,800,000 38,100,000 500,000
Source: REIS 1Q07 CONSTRUCTION According to REIS, neighborhood and community center development has been steady in Orange County within the last five years. The 405,000 square feet completed in 2006 was the largest addition to the inventory since 2002, although in the 1990s, annual completion volumes in excess of one million square feet were common. The 2000 to 2006 period saw an annual average of just 276,143 square feet completed and vacancy continued to fall. With just 57,000 square feet of neighborhood and community center space under construction at first quarter 2007, a much larger completion volume of 575,000 square feet is forecast through the end of the year. Beginning in 2007, however, supply is forecast to take a slight lead over demand, with an average just over one-half million square feet per year during the 2007 to 2010 forecast period. Below is a chart of projects for the MSA as of first quarter 2007.
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Orange County MSA Retail 1Q07 New Construction ListingsProperty Name Secondary Type Street Address City Submarket Year Mo. SF/Units StatusWESTGATE PLAZA Community BEACH BLVD @ LINCOLN AVE ANAHEIM Central 2009 6 300,000 3.PlannedDISTRICT AT TUSTIN LEGACY (RETAIL) Lifestyle NWC JAMBOREE RD @ BARRANCA PKWY/RED HILLTUSTIN Central 2007 5 1,000,000 2.Under Constr.CRAZY HORSE SQUARE Neighborhood S GRAND AVE @ 55 FRWY SANTA ANA Central 2008 3 55,000 3.PlannedCITY PLACE (RETAIL) Neighborhood N MAIN ST @ E MEMORY LN SANTA ANA Central 2007 3 57,000 1.CompleteUNNAMED BANK @ CENTURY STADIM PROMENADE Free Standing KATELLA AVE @ MAIN ST ORANGE Central 0 0 10,000 3.PlannedORCHARD HILLS VILLAGE CENTER Neighborhood CULVER DR @ PORTOLA PKWY IRVINE Central --- --- 130,000 3.PlannedUNNAMED RETAIL CENTER Neighborhood 1671 W KATELLA AVE @ S EUCLID ST ANAHEIM Central 0 0 13,800 3.PlannedA-TOWN Mixed Use S STATE COLLEGE BLVD @ E GENE AUTRY WAY/EANAHEIM Central 2016 2 200,000 3.PlannedWOODBURY VILLAGE Power Center IRVINE BLVD @ SAND CANYON AVE IRVINE Coastal 2007 2 417,540 1.CompleteSOUTH COAST FURNISHINGS CENTRE Outlet Center 3333 HYLAND RD @ SUNLAND LN COSTA MESA Coastal 2007 7 300,000 2.Under Constr.BEL MARE Neighborhood DOVER DR @ E COAST HWY NEWPORT BEACH Coastal 2008 9 56,000 3.PlannedDIAMOND JAMBOREE SHOPPING CENTER Neighborhood SWC ALTON PKWY @ JAMBOREE RD IRVINE Coastal 2007 8 112,000 2.Under Constr.IMPERIAL PROMENADE Community W IMPERIAL HWY @ S IDAHO ST LA HABRA North 2007 9 216,000 2.Under Constr.LA FLORESTA VILLAGE Mixed Use VALENCIA AVE @ E IMPERIAL HWY BREA North 2009 10 113,000 3.PlannedPROVIDENCE CENTER PH II Neighborhood W BASTANCHURY RD @ LAGUNA RD FULLERTON North 2008 1 8,000 3.PlannedN/A Neighborhood NWC ORANGETHROPE AVE @ S EUCLID ST FULLERTON North 2007 11 70,000 3.PlannedCROSSROADS SHOPPING CENTER PH II Community 3200-3360 YORBA LINDA @ N BRADFORD AVE FULLERTON North --- --- 15,000 1.CompleteMARBLEHEAD PH II Outlet Center I-5 @ AVENIDA VISTA HERMOSA SAN CLEMENTE South --- --- 250,000 4.ProposedTALEGA VILLAGE CENTER Neighborhood SWC AVENIDA VISTA HERMOSA @ AVENIDA TALEGSAN CLEMENTE South --- --- 110,000 3.PlannedMARBLEHEAD PH I Outlet Center I-5 @ AVENIDA VISTA HERMOSA SAN CLEMENTE South --- --- 350,000 4.ProposedHEADLANDS Neighborhood 33971 SELVA RD @ PACIFIC COAST HWY DANA POINT South --- --- 35,000 3.PlannedTHE ARBOR Community EL TORO RD @ ROCKFIELD BLVD LAKE FOREST South 2006 12 157,000 1.CompleteORCHARD AT SADDLEBACK Power Center 23662 EL TORO RD LAKE FOREST South 2006 11 275,000 1.CompleteRANCHO MARKETPLACE Community ARTESIA BLVD @ I-5 BUENA PARK West 2008 4 325,000 3.PlannedBELLA TERRA Regional 7777 EDINGER AVE @ BEACH BLVD HUNTINGTON BEACH West --- --- 777,000 1.CompleteSEAL BEACH CENTER PH II Community PACIFIC COAST HWY @ MAIN ST SEAL BEACH West --- --- 60,000 2.Under Constr.GARDEN GROVE GALLERIA Mixed Use GARDEN GROVE BLVD @ BROOKHURST WAY GARDEN GROVE West 2008 9 130,000 2.Under Constr.BROOKHURT TRIANGLE Neighborhood BROOKHURST ST @ GARDEN GROVE BLVD GARDEN GROVE West 2009 3 40,000 3.PlannedBEACH CLIFF MARKET PH II Neighborhood 19021-19121 BEACH BLVD @ GARFIELD AVE HUNTINGTON BEACH West 2006 9 100,000 1.CompleteTHE STRAND Mixed Use PACIFIC COAST HWY @ 5TH ST HUNTINGTON BEACH West 2008 2 65,000 2.Under Constr.MAGNOLIA POINT Neighborhood MAGNOLIA ST @ MCFADDEN AVE WESTMINSTER West 2006 10 16,808 1.CompletePACIFIC CITY (RETAIL) Mixed Use 1ST ST @ PACIFIC COAST HWY/ATLANTA AVE HUNTINGTON BEACH West 2008 5 166,100 3.PlannedBEACHMONT PLAZA PH Community 10011-10111 AVE @ BROOKHURST DR HUNTINGTON BEACH West --- --- 111,000 1.CompleteHARBOR TOWN/COUNTRY PH II Community NWC HARBOR BLVD @ GARDEN GROVE BLVD GARDEN GROVE West 2006 12 5,000 1.Complete
Source: REIS 1Q07 RENTAL RATE TRENDS According to information compiled by Reis, average asking rental rates for community centers in the MSA have consistently increased over the past several years. The greatest growth in asking rental rates occurred in 1998 at 6.9% and in 2006 where a 6.2% growth was realized. The lowest growth occurred in 1999 at 2.0%. Effective rents have also historically consistently increased with the greatest growth in 1998 at 6.5%. The lowest effective rent increase was in 1996 when growth was reported at 2.5% over the prior year.
Community Centers Orange County MSAHistorical Asking & Effective Rents
YearAsking Rent
$ % Chg Eff Rent $ % ChgGr Rev/ Unit $
1996 $21.24 2.30 $19.65 2.5 $20.121997 $21.71 2.20 $20.30 3.3 $20.691998 $23.20 6.90 $21.61 6.5 $22.161999 $23.67 2.00 $22.26 3.0 $22.782000 $24.86 5.00 $23.37 5.0 $24.072001 $25.80 3.80 $23.99 2.7 $24.652002 $26.99 4.60 $24.87 3.7 $25.742003 $27.95 3.60 $25.61 3.0 $26.382004 $29.33 4.90 $27.10 5.8 $28.392005 $30.25 3.10 $28.02 3.4 $29.592006 $32.12 6.20 $29.66 5.9 $30.981Q07 $32.46 1.1 $29.84 0.6 $31.37
Source: REIS 1Q07 Asking rents in neighborhood centers have consistently increased between 1996 and 2006. The greatest growth in the submarket was seen in 2006 when asking rents rose 7.1% from the previous year. Effective
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rents, like asking rents, have been fluctuating. The greatest growth in effective rent was in 2006 when effective rents increased 6.9%. The last two years effective rents have increased significantly, rising 5.9% in 2004 and 2004. The first quarter 2007 data demonstrates continued growth in both asking and effective rental rate trends at 1.5 and 1.0%, respectively.
Neighborhood Centers Orange County MSAHistorical Asking & Effective Rents
YearAsking Rent
$ % Chg Eff Rent $ % ChgGr Rev/ Unit $
1996 $18.74 1.0 $17.33 1.1 $17.531997 $19.15 2.2 $17.90 3.3 $18.201998 $20.41 6.6 $19.03 6.3 $19.581999 $20.51 0.5 $19.28 1.3 $19.732000 $21.52 4.9 $20.24 5.0 $20.702001 $22.06 2.5 $20.48 1.2 $21.182002 $22.70 2.9 $20.91 2.1 $21.932003 $23.81 4.9 $21.77 4.1 $23.122004 $25.07 5.3 $23.11 6.2 $24.492005 $26.24 4.7 $24.25 4.9 $25.812006 $28.11 7.1 $25.93 6.9 $27.401Q07 $28.53 1.5 $26.20 1.0 $27.74
Source: REIS 1Q07 As illustrated by the following chart, asking rents in the MSA for combined Neighborhood and Community Centers are projected to grow at rates slightly lower than the rate of growth during 2006. Effective rents, like asking rents, are projected to grow steadily, though again at lower rates than those seen in 2006. Data from Reis does not separate neighborhood and community centers for projected rents.
Neighborhood & Community Centers Orange County MSAProjected Asking & Effective Rents
Asking Rent $ % Chg Eff Rent $ % Chg
Gr Rev/ Unit $
2007 $31.70 5.4 $29.15 5.0 $30.582008 $33.14 4.5 $30.36 4.2 $31.862009 $34.45 4.0 $31.42 3.5 $33.032010 $35.77 3.8 $32.51 3.5 $34.142011 $37.21 4.0 $33.95 4.4 $35.53
#
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NEIGHBORHOOD AND COMMUNITY CENTERS - DATA CONCLUSION The tight 37.3 million square foot Orange County neighborhood and community center sector remains tight which exerts upward pressure on rents. The Orange County market not only has low single digit vacancy, with an average of less than 2% vacancy of anchor spaces in many submarkets, but also has the consistency of rent gains from year to year and even quarter to quarter. The area had the upper tier on rent gain of the top markets tracked by Reis in first quarter 2007 and some of the lowest vacancy rates, although new development remains limited throughout the Orange County MSA. CONCLUSION We have analyzed the retail trade history and profile of the subject's region and primary trade area in order to make reasonable assumptions as to the continued performance of the property. A metropolitan and locational overview was presented which highlighted important points about the study area. Demographic and economic data specific to the trade area were also presented. The data is useful in giving quantitative dimensions of the total trade area, while our comments serve to provide qualitative insight into this market. A compilation of this data provides the basis for our projections and forecasts particular to the subject property. The following summarizes our key conclusions. The Orange County retail real estate market has shown healthy rental growth and solid occupancy. For the neighborhood and community center segment of the market, Reis reports a first quarter 2007 vacancy rate of 3.1%, up 10 basis points from the prior quarter, and up 120 basis points from year-end 2005, which had a vacancy rate of 1.9%, the lowest on record in the MSA. Reis reports that rent increased by an average of about 1.6% in each of the four quarters of 2006, with the fourth quarter featuring respective gains of 1.4% in both asking and effective rents. With few exceptions, the average asking rent has risen by between 0.7% and 2.0% in every quarter since early 2002. The year 2007 will mark a shift in the supply-demand dynamic for neighborhood and community center space, at least to a small extent. During the 2000 to 2004 period, net absorption averaged 400,000 square feet per year, somewhat more than the increase in supply. During 2006 the negative 15,000 square feet of net absorption fell far short of the increase in supply, and increasing overall vacancy slightly. Beginning in 2007, however, supply is forecast to continue its slight lead over demand, with the former averaging over 532,000 square feet per year and the latter 497,000 square feet per year during the 2007 to 2011 forecast period. Despite its recent weakness, the Orange County economy remains one of the nation’s largest. Its diverse economy includes major industries such as service-producing, aerospace, defense, high-tech manufacturing, electronics and government which help buffer losses in any one sector. APPLICATION TO THE SUBJECT PROPERTY We have considered the macro level market trends as well as the subject’s submarket performance relative to the greater Orange County retail market. We have weighed the market trend against the
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planned retail component of the subject Heritage Fields project and have reached the following conclusions. The subject Heritage Fields project is entitled for 225,000 square feet of retail development. This represents 0.60% of the total Orange County retail inventory and 2.66% of the subject’s Central submarket’s current inventory. The subject’s retail land area per the overlay plan totals 40.5 acres in the LLD and the TODD. The overall retail density for the subject’s retail component is 0.127:1 FAR. According to information compiled by REIS, a total of 1,883,000 square feet of new retail space is currently under construction in the Orange County market. Another 2,231,900 square feet is planned or proposed. However, only 242,000 square feet of the 2,231,900 square feet of planned/proposed retail space is located in Irvine. These figures are not inclusive of the subject’s 225,000 square feet. The owner/developer’s business plan contemplates delivery of the subject’s retail space as follows:
Parcel Use C&W Value/SF Total Value
Lennar Est. Absorption
C&W Est. Absorption Acres
L17 Retail $30.00 $25,613,280 Sep-09 Sep-09 19.6 L20 Retail $35.00 $14,026,320 Oct-09 Oct-09 9.2 L21 Retail $35.00 $6,403,320 Jun-08 Jun-08 4.2 T1c Retail $35.00 $9,100,000 Feb-10 Feb-10 6.0 T12e Retail $40.00 $2,696,960 Dec-07 Jun-08 1.5
Given the strength of the Orange County retail market, and in consideration of the limited supply anticipated for the subject’s Irvine area, it is our opinion that the developer’s contemplated timing for delivery of the subject’s retail component (superpads) is reasonable. We have therefore estimated absorption of the subject’s retail component consistent with the timing set forth in the developer’s 2007 adopted business plan with one minor exception. The ownership/developer estimates a December 2007 absorption for a small 1.5-acre parcel within the TODD. To the best of our knowledge, as of the date of the appraisal, there were no offers or letters of intent for this parcel. The timing of delivery/sale seems aggressive based on the current status of the project and the lack of a contract in place as of the date of the appraisal. We therefore extended the developer’s forecast absorption by six months for this parcel, which we have estimated will be absorbed in June 2008. OVERVIEW OF ORANGE COUNTY AGRICULTURE Historically, agriculture was one of the dominant industries in Orange County. Much of the land was in agricultural production dominated by citrus and fruit production. Over the course of the last century, agricultural land uses gave way to more profitable enterprises as the Orange County area developed. Agricultural uses are still found throughout Orange County; however, large scale production has greatly
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diminished. In fact, in many instances, agriculture is viewed as an “interim” as opposed to a primary land use. The subject Heritage Fields project features 177.4 acres within the Lifelong Learning District that have been dedicated for agricultural uses. Due to the nature of the project, and the history of the entitlements, for the purposes of our analysis we have considered the agricultural uses as permanent uses within the context of the project. Although agriculture is not a high-profile industry in Orange County, the Farm Bureau estimates that it contributes more than $300 million to the local economy. When all economic factors are considered, including payroll, purchase of goods and transportation, agriculture has a total value to the local economy of $1 billion. In compliance with the California Food and Agricultural Code Section 2279, the Agricultural Commissioner compiles Orange County agricultural production information. We reviewed a copy of the 2005 Crop Report prepared by the Orange County Agricultural Commission, which we have summarized below. The report is based on basic crop and plant production data collected from many sources including grower surveys, regulatory and inspection data, shipment data, and industry assessments. The total gross value of Orange County agricultural products for the year 2005 (most current report available) was $312,336,287 representing a 6% increase compared to the 2004 overall income. Agricultural production values are based upon the “free on board” packed price at the first point of delivery, and include cost of production, harvesting, and preparation for market. Gross values, therefore, do not reflect net returns to the producer. Federal incentive, conservation and other support payments are excluded from this report. The following are highlights of the 2005 Orange County Crop Report:
1. Strawberry value decreased by 15% with a reduction in acreage. 2. Nursery stock value increased by 14% to $240,609,723. 3. Avocado value decreased by 22% due to a decrease in production. 4. Vegetable production, acreage and value decreased.
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2004 2005Percentage
Change
Animal Industry $305,570 $430,933 41%
Apiculture $95,595 $98,886 3%
Field $1,116,608 $1,147,727 3%
Nursery $211,438,660 $240,609,723 14%
Tree Fruit $62,379,756 $53,449,570 -14%and Berry Crops
Vegetables $18,226,782 $16,599,448 -9%
Total $293,562,971 $312,336,287 6%
Source: 2005 Crop Report
Strawberry value decreased by 15% with a reduction in acreage. Avocado value was down 22% in 2005 due to a decrease in production.
Apiary income showed an increase of $3,291 in 2005. Orange County apiary owners reported an
increase of 3% in the total value of apiary products.
Nursery stock and cut flowers continue to rank first in Orange County agricultural production. Gross returns increased by $29,171,063 from the previous year. The total nursery stock and cut flower income was $240,609,723. Shipments of nursery stock to other states continued to help this industry.
The total value of livestock production was increased by $125,363. This was 41% more than the
income for 2004. This was in part due to the favorable weather conditions allowing a longer time for the cattle to graze in Orange County. The total income from livestock was $430,933.
The total value for the vegetable crops was $16,599,448. This is a decrease of 9% from 2004.
Key crops include green beans, cabbage and peppers.
Total field crop value increased by $31,119. This increased the overall value of the field crops by 3%.
The California Department of Conservation tracks agricultural land use throughout the various counties in California. According to their most recent report (2004), the amount of agricultural land continued to decrease in Southern California overall, and in Orange County in particular due to increased urbanization. Since a 1998-2000 study, nearly 6,800 acres of farmland and grazing land have been removed from agricultural categories in Los Angeles, Ventura and Orange counties, while 5,339 acres were added to the urban total. Since the 1990 survey, more than 130,000 acres have been removed from agricultural uses in the five-county Southern California area while urbanization claimed more than 144,000 acres. Over the 1990-
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2002 period, new urbanization in the greater Los Angeles area was equivalent to the size of all 16 Orange County cities from the Los Angeles County line south to Costa Mesa and east to Anaheim/Yorba Linda. Annually, this equates to new urban land acreage larger than the city of Thousand Oaks. In Orange County, 4,609 acres of new urban land were developed on a mixture of irrigated farmland and non-agricultural land. Urbanization accounted for almost all the net decrease of 3,348 acres in agricultural categories. Since 1990, Orange County gained just over 25,000 urban acres as it lost 9,400 farmland acres. Orange County cities reported that 9,920 acres have been committed to non-agricultural uses due to the approval of subdivision maps, the sale of bonds for infrastructure, or other permanent commitments. The agricultural land in these Southern California and in Orange County specifically will continue to face development pressure in the foreseeable future. Public subsidies and financial assistance programs are in place to encourage continued agricultural uses in urbanizing areas. Land use “dedications” such as the designation in Heritage Fields are an example. Through the Department of Conservation, the state offers programs that provide financial incentives to keep land in agricultural use. The California Farmland Conservancy Program makes grants available to local governments, land trusts or resource conservation districts to purchase permanent agricultural conservation easements from willing landowners. These easements prohibit future development. Farmland Security Zone and Williamson Act contracts provide potential tax breaks to landowners who commit to keeping their land in agricultural use for periods of 20 or 10 years, respectively. Enrollment in the Williamson Act – a voluntary program that gives landowners potential property tax breaks in exchange for a 10-year commitment to maintain agricultural or open-space uses – dropped by 33 percent between 1991 and 2002 in the five-county Southern California area. Removing land from a Williamson Act contract is often a precursor to development. According to the California Department of Food and Agriculture, Ventura County remained in the top 10 counties for gross agricultural value at more than $1.16 billion in 2002, while Riverside County was in the number 11 position at $1.06 billion. San Bernardino, Orange and Los Angeles counties had a combined 2002 production value of $1.25 billion. Through the Department of Conservation, the state offers programs that provide financial incentives to keep land in agricultural use. The California Farmland Conservancy Program makes grants available to local governments, land trusts or resource conservation districts to purchase permanent agricultural conservation easements from willing landowners. These easements prohibit future development. Farmland Security Zone and Williamson Act contracts provide potential tax benefits to landowners who commit to keeping their land in agricultural use for periods of 20 or 10 years, respectively. APPLICATION TO THE SUBJECT PROPERTY As previously referenced, the subject Heritage Fields project features 177.4 acres dedicated for agricultural land uses. While the analysis above demonstrates a continued decline in the amount of land
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available fore agriculture, the economics of agriculture in the county suggest that there is growth in the industry (6 percent between 2004 and 2005). The value of agricultural land that can be put to a “higher and better use” often outweighs the economic returns that can be generated from agricultural production. However, the agricultural data suggest that agriculture is a viable land use, particularly considering the subsidies that are available. In contrast to much of the A-zoned land in Orange County, the subject’s agricultural parcels do not possess an alternative use. Therefore, due to the nature of the project entitlements, the highest and best use of these parcels is for agricultural production. The subject’s 177.4 acres represents less than 1/10th of one percent (0.70) percent of the 25,133 total “bearing” agricultural acres in Orange County according to the 2005 Crop Report. This increase in inventory is very minimal, and given the overall increase in the value of production, it is our opinion that the subject’s agricultural land will be absorbed at the rate forecast by the subject ownership/developer as outlined in their adopted 2007 business plan.
Parcel Land Use $/Acre Value Delivery Acreage Net Acreage L1 Agriculture $60,000 Aug-10 143.0 141.3 L2 Agriculture $85,000 Aug-10 21.9 21.9 T4 Agriculture $85,000 Jul-09 12.5 12.5
OVERVIEW OF SUBJECT EXPOSITION LAND USE Associated with the objectives for providing a variety of recreational and open space uses, the Great Park Plan and ultimately the project plan for Heritage Fields includes a 215.7-acre land parcel that is designated “Exposition” land use. This parcel, identified as L27, is located in the Lifelong Learning District. According to the Overlay Plan, a maximum of 708,000 square feet of improvements may be constructed on the Exposition parcel. The permitted uses are referred to in the project EIR as “commercial recreational” uses. Commercial recreational uses may include performance and concert venues, fairgrounds, convention and exposition centers, demonstration shows, training venues and a variety of other recreation and learning activities. We were not provided with a description of the developer’s/owner’s specific plans for the Exposition parcel, if any such plans are available. To the best of our knowledge, there are no letters of interest or contracts in place for this parcel as of the date of value. According to the developer’s/owner’s 2007 business plan, the Exposition parcel was intended for disposition in September 2011. MARKETPLACE FOR EXPOSITION LAND The Exposition land use classification is a highly specialized designation that is somewhat unique to the Heritage Fields plan. Due to the special purpose nature of this land use, there is no readily available market data from which to develop and analysis and draw conclusions for the subject parcel. Instead, we have investigated similar uses throughout Southern California to demonstrate, in a case study format, the
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“market” for such land uses in the region. Our search resulted in a number of venues that “bracket” the size of the subject Exposition site and the scale of the entitlements. The key venues are discussed below. All of the data from projects that we considered most applicable are summarized on the accompanying exhibit. Orange County
Orange County Performing Arts Center600 Town Center Drive Opened 1986 3,000-seat Segerstrom HallCosta Mesa, CA 92626 Orange County Performing Arts Center 2,000-seat Renee and Henry Segerstrom Concert Hall
500-seat multi-functional Samueli Theater250-seat Founders Hall46,000 sq. ft. community plaza
Anaheim Convention Center800 West Katella Avenue Opened 1967 1.7 million sq. ft.Anaheim, CA 92802 City of Anaheim 815,000 sq. ft. of exhibition space
Verizon Wireless Amphitheater8808 Irvine Center Drive Opened 1981 Seating capacity of 16,085Irvine, CA 92618 Operated by SFX Entertainment Reserved 10,174
Lawn-seating 5,911Los Angeles County
Los Angeles Convention Center1201 South Figueroa Street Opened 1971 720000 sq. ft. of exhibition spaceLos Angeles, CA 90015 Last Expansion 1993 147,000 sq. ft. of meeting room space
Owned and Operated by the City of Los Angeles 5,600 On-site Parking SpacesConstruction of Convention Center Hotel (private) currently underway
Staples Center1111 S. Figueroa Street Owned and Controlled by AEG Seats up to 20,000Los Angeles, CA 90015 Opened 10/1999 950,000 sq. ft.
Cost approx. $375 Million
Walt Disney Concert Hall151 S. Grand Ave. Los Angeles Philharmonic Association 293,000 sq. ft.Los Angeles, CA 90012 3.6 acre complex Seats 2,265 people
Completed 2003
Dorthy Chandler PavilionLos Angeles Opera, Music Center Dance Opened 12/1964 Seats 3,197 people135 N. Grand AvenueLos Angeles, CA 90012
Royce HallUCLA Completed 1929 191,547 sq. ft.Los Angeles, CA 90024 Restored 1997 Seats 1,833 people
Cerritos Center for the Performing Arts12700 Center Court Drive Opened 01/1993 154,000 sq. ft.Cerritos, CA 90703 City of Cerritos Up to 1,.800 seat arena
Pasadena Conference Center300 East Green Street Built 1931 Auditorium Seats 3,029 peoplePasadena, CA 91101 City of Pasadena Conference Building
28,000 sq. ft.Exhibition Building 31,200 sq. ft. of exhibition space15,000 sq. ft. annex adjacent
San Diego County
San Diego Convention Center111 West Harbor Drive Opened 11/1989 204,114 sq. ft. of meeting spaceSan Diego, CA 92101 Expansion 09/2001 284,494 sq. ft. of prefunction, lobby, and registration areas
San Diego Theaters Inc 615,701 sq. ft. of exhibition space
Copley Symphony Hall750 B Street Built 1929 as a 68,000 sq. ft. Luxury Movie Theater Seats 2,252 peopleSan Diego, CA 92101
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Convention Centers Anaheim Convention Center The Anaheim Convention Center is the largest convention center on the west coast with a total 1.4 million square feet. Space is categorized and allocated within three major categories: 815,000 square feet of exhibition space, 200,000 square feet of pre-function space, and 130,000 square feet of ballroom and meeting space. The convention center was completed in 1967 and has since undergone three substantial expansions. The project is adjacent to the Disneyland Resort, a recreational resort complex with three hotels, two theme parks, and a shopping, dining, and entertainment area. The Disneyland hotel, the oldest of the three, was opened in 1955 and provides 990 rooms in three high-rise towers as well as unparalleled conference facilities. Disney’s Grand Californian Hotel and Paradise Pier Hotel offer 745 rooms and 489 rooms, respectively. Los Angeles Convention Center The Los Angeles Convention Center is located in Downtown Los Angeles and hosts 350 annual events such as the Greater Los Angeles Auto Show. Its events attract 2.5 million visitors annually, generate secondary client spending in excess of $1 billion, and generates 12,000 hospitality and service sector jobs. The center was opened in 1971 with over 210,000 square feet of exhibition space and went through major expansion projects in 1993 and 1997. Currently the center offers 720,000 square feet of exhibition space, 147,000 square feet of meeting rooms with a 299 seat presentation theater, and on site parking for 5,600 vehicles. The center has suffered due to the lack of convention hotel rooms in proximity to the center. Currently under construction is a convention center hotel with both Ritz-Carlton and J.W. Marriott flags that is intended to bolster the ability of Los Angeles to attract convention business. The hotel project has been heavily subsidized by the City of Los Angeles. San Diego Convention Center The San Diego Convention Center is situated in the Marina District of Downtown San Diego and, per 2005 statistics, hosts 224 events annually. For the same 2005 period, these events generated $1.2 billion in regional economic impact and $25.5 million in hotel room and sales tax revenues. The facility opened in November 1989 and currently features 615,701 square feet of exhibition space, 204,114 square feet of meeting space, and 284,494 square feet of pre-function, lobby, and registration areas. The convention center is within walking distance of 90 restaurants, 35 nightclubs, and 100 retail shops. There are an estimated 7,500 first-class hotel rooms within a mile of the convention center, which is located approximately 10 minutes from the airport. PERFORMANCE VENUES Orange County Performing Arts Center The Orange County Performing Arts Center, located in Costa Mesa, is home to the Pacific Symphony Orchestra, Opera Pacific, the Philharmonic Society of Orange County, and the Pacific Chorale. The center officially opened in 1986 and today has several theaters of various sizes and a 46,000 square feet community plaza. The largest of the theaters are Segerstrom Hall, an opera style house with 3,000 seats and the Renee and Segerstrom Concert Hall with 2,000 seats. The two smaller theaters, Samueli Theater and Founders Hall, seat 500 and 250, respectively.
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Verizon Wireless Amphitheater Currently Verizon Wireless is Orange County’s largest amphitheater with a total capacity in excess of 16,000 spectators (10,174 reserved and 5,911 lawn). The site is located in Irvine, adjacent the 405 freeway and opposite the subject property. The amphitheater was opened in 1981 and is operated by SFX Entertainment. The venue has recently hosted some of the top acts in popular music including 311, Roger Waters, Michael Jackson, Mary J Blige, Britney Spears, Kelly Clarkson, Aerosmith, Tina Turner, NSYNC, and No Doubt. Cerritos Center for the Performing Arts The Cerritos Center for the Performing Arts, opened January 1993, is a 154,000 square feet entertainment and music venue located in the Cerritos Towne Center. The flexible theater is capable of six different stage configurations, ranging from a 1,800-seat arena to a 900-seat recital hall setting. The center is owned and operated by the City of Cerritos. Staples Center Staples Center is a sports arena in Downtown Los Angeles. The center opened in October 1999 and is home to the Los Angeles Lakers, the Los Angeles Clippers, the Los Angeles Sparks, the Los Angeles Kings, and the Los Angeles Avengers. Major live music concerts and events such as ice skating and the X Games are also held in this multi-function space. The center hosts more than 250 events and almost 4 million visitors a year. Staples Center measures approximately 950,000 square feet of total space and has a seating capacity of 20,000. Staples Center is privately owned and operated by Anschutz Entertainment Group. Walt Disney Concert Hall The Walt Disney Concert Hall, designed by world-famous architect Frank Gehry, opened in October 2003 and is home to the Los Angeles Philharmonic Orchestra and the Los Angeles Master Chorale. The concert hall is situated on 3.6 acres, a full city block, at the intersection of First Street and Grand Avenue in the Bunker Hill District of Downtown Los Angeles. The concert hall is approximately 293,000 square feet, seats 2,265, and has two outdoor amphitheaters. Funding for the construction of the concert hall was initiated in 1987 with a gift of $50 million from the late Lillian Disney, to which was added other gifts and accumulated interest bringing the Disney family's total contribution to over $100 million. Many corporate, foundation, and individual partners, along with the State of California, contributed to the project’s capital campaign and additional funding was provided by The Los Angeles Philharmonic. The County of Los Angeles provided the land and significant additional funding to finance the six-level subterranean parking garage. Pasadena Conference Center The three building Pasadena Conference Center was built in 1931 and is currently going through an expansion project featuring 85,000 square feet of exhibition space, 28 breakout rooms, a new 25,000 square feet ballroom, and a 17,000 square feet restored, historic ballroom. The 3,029-seat auditorium is home to the People’s Choice Awards and the Pasadena Symphony Orchestra.
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Copley Symphony Hall The Copley Symphony Hall in San Diego was constructed in 1929 as the 68,000 square feet luxury movie theater, Fox Theater. The hall has a seating capacity of 2,252 and is home to the San Diego Symphony. Dorothy Chandler Pavilion The Dorothy Chandler Pavilion in downtown Los Angeles, opened December 1964, seats 3,197 people and is home to the Los Angeles Opera and Music Center Dance. Application to the Subject Property While the Exposition land use nomenclature pre-supposes convention or exposition type uses, our research indicates that a successful convention or exposition-type venue that draws regional and national convention business demands hotel accommodations in close proximity to the venue. Our research into similar uses, convention or exposition uses in particular, suggests that typically, quasi-governmental agencies or authorities are established to construct and operate convention or exposition-type facilities in major markets. Los Angeles and San Diego, for example, both have quasi-governmental authorities that developed the convention centers in these cities. The Heritage Fields plan does not include specific plans for hotel uses, which would limit the appeal of such a facility for this type of business. Furthermore, as of the date of value, there are no plans for the formation of an operating entity that would develop and operate such a venue at the subject property. A possible use for the subject’s designated Exposition property could be an event area that would host live music performances or other public arts and entertainment events. As demonstrated by the discussion above, there are many facilities like these in Southern California. Due to the costs of construction, high operating costs, and the scarcity of land and corresponding land prices, such venues are generally not economically viable without government subsidy, corporate ownership/sponsorship or private contributions. The developer’s 2007 adopted business plan estimates a revenue event/sale of the subject’s 215.7-acre Exposition parcel will occur in September 2011, or approximately 4.5 years from our date of value. As demonstrated anecdotally in the discussion above, significant public venues such as that contemplated for the subject (708,000 square feet is approved) are delivered to the Southern California region on a sporadic basis that can be measured in decades. The complexity of these developments, the scale of the construction projects themselves, and the magnitude of the investment require a structured arrangement, typically involving public and private entities as well as large donors and/or corporate sponsorships to come to fruition. To the best of our knowledge, such a structure is not currently in place nor contemplated for the subject’s Exposition parcel. We assume that such an entity, if formed, would not have the capability to purchase a site for a project prior to having a structure and some degree of financing commitments in place.
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As the subject’s Exposition land is also categorized as “recreational” it is conceivable that a professional or semi-professional sports area would be suitable for the property from a land use perspective. Locations for sports teams are a highly complex matter involving multiple layers of government stakeholders as well as the team franchises themselves. Investigation of this particular use for the subject is beyond the scope of our expertise and this assignment; however, we note that the size of the subject’s Exposition parcel and the magnitude of the approvals (708,000) would likely be suitable for such a venue. For these reasons, and in consideration of the most recent examples in Southern California, we have estimated that it will require approximately five years to structure and begin implementation of a strategy for the development of a commercial recreation facility on the subject’s Exposition parcel. We have, therefore, extended the owner's/developer’s timeframe by one year to September 2012. This extension also considers the status of the implementation of the balance of the Heritage Fields project as of 2012. The improvements to the infrastructure, the completion of the vertical construction of the earlier phases, and the critical mass resulting from new residents and businesses will add to the viability of a community serving commercial recreational use at this location.
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HIGHEST AND BEST USE COMMENTARY The appraisers must properly develop highest and best use conclusions of a property from two perspectives: 1) as if vacant, and 2) as if improved as proposed. Highest and best use can be defined as:
1. Highest & Best Use - The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility and maximum profitability. 2. Highest & Best Use As Vacant - Among all reasonable, alternative uses, the use that yields the highest present land value, after payments are made for labor, capital, and coordination. The use of a property based on the assumption that the parcel of land is vacant or can be made vacant by demolishing any improvements. 3. Highest & Best Use As Improved - The use that should be made of a property as it exists. An existing property should be renovated or retained as is so long as it continues to contribute to the total market value of the property, or until the return from a new improvement would more than offset the cost of demolishing the existing building and constructing a new one. 9
HIGHEST AND BEST USE AS VACANT LEGAL PERMISSIBILITY The subject is the Phase I portion of the 4-phase development of the Legacy Park Master-plan, the vital central portion of the MCAS Tustin Specific Plan. This specific plan stems from the MCAS Tustin Reuse Plan which was adopted October 31, 1996 and amended on September 8, 1998. The Final Joint Environmental Impact Statement/Environmental Impact Report (FEIS/EIR) was adopted by the Tustin City Council on January 16, 2001. The MCAS Tustin Specific Plan was adopted by City Council Ordinance No. 1257 on February 3, 2003. Subsequently, Tustin Legacy Community Partners, LLC, and the city of Tustin proposed modifications to the MCAS Tustin Specific Plan which entailed a proposed zone change, MCAS Tustin Specific Plan Amendment 05-002. The zone change 05-002 was approved by the Tustin City Council on April 3, 2006 per Resolution No. 06-43. MCAS Tustin Specific Plan Amendment was adopted on April 17, 2006 with the Tustin Legacy Disposition and Development Agreement (Master Development) approved by the Tustin City Council on May 4, 2006. Permitted uses and development standards shall be in accordance with the MCAS Tustin Specific Plan/Reuse Plan.
9Appraisal Institute, The Dictionary of Real Estate Appraisal, (AI, Chicago, IL: 2002), p. 135-136.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
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Item DateEl Toro Base Closed July 1999
Measure W Adopted March 2002
Final EIR Certified May 2003
Zoning Established September 2003
Property Annexed into City of Irvine January 2004
Navy Issues Invitation for Bid (IFB) November 2004
Heritage Fields, LLC Purchased Property July 12, 2005
Development Agreement (Ordinance No. 05-10) July 12, 2005
ENTITLEMENTSHeritage Fields Master Plan, Irvine, California
The property includes approved Tentative Tract Map 17026 provided by the developer with a copy located in the Addenda. Notable is that the tentative map approval is pending the developer meeting typical conditions of approval by the city of Tustin. This is typical of master-planned communities in the area and not anticipated to unduly hinder the subject’s development as proposed. It is recommended that the client have available a copy of the Tentative Map(s) Conditions of Approval and retain appropriate legal council to review said document to assess the impact of the Conditions in their lending decisions.
PHYSICALLY POSSIBLE The topography of the subject property is flat terrain. Proposed road improvements and utility connections are in place, adjoin the subject's perimeter, or will be available via extensions from existing mains. Geotechnical investigations indicate that development of the subject is physically possible, provided the conclusions and recommendations of the study are incorporated into planning and construction. Per extensive studies, there are no soils, hazardous waste, geotechnical, biological, environmental, archeological, or paleontological conditions that would preclude development as proposed. Residential development is common in the area and the site was not reported to vary substantially in site characteristics from other improved properties. Thus, to the best knowledge of the appraisers, the legally permitted land uses were physically possible.
FINANCIALLY FEASIBLE The ongoing sales activity for master-plans and entitled land throughout Southern California and Orange County would indicate that an element of profit exists between costs of development and final sale revenues, providing acquisition of land at market prices and development at anticipated construction costs.
As demonstrated in the market value “as is” section, the discounted cash flow indicated a total property value of negative $5,899,945. Of note is that the Phase I “as is” value reflects the heavy burden of extensive backbone and local infrastructure costs that will not only benefit the subject’s Phase I portion but the remaining 3 phases. While the costs are incurred up front, the additional value of future phases are not included in the “as is” value of Phase I. Therefore, the subject land, Phase 1 of Legacy Park Master-plan, as a stand alone entity based on the current allocation of costs and projected revenues has no supportable value.
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Under the 20% IRR assumption, the implied static profit was $44,310,928, or 13.45% of land sale revenues. Said profit would equate to 15.54% of the total costs including the indicated negative land basis. Note that this analysis was nonleveraged. Thus, the actual return on equity, or cash-on-cash, would be higher if the investment was financed. However, given the negative land value basis, financing would have to consider future revenues to some extent to support the potential of value within the subject land. Assuming all costs of development were financed, and a developer could secure a land acquisition loan of some magnitude, the cash-on-cash return could be 40%±. Per a survey of active market participants involved in the acquisition and development of similar properties, these rates of return would be adequate to attract investment into a development project such as Legacy Park Master-plan (Phase I). Note that the profit indicators are for master land development only and do not reflect any additional profit from construction of product in the individual planning areas. MAXIMALLY PROFITABLE Based on the previous discussion, the Legacy Park Master-plan (Phase I) project as proposed via the Area Plan and Tentative Tract Map was considered to be a market acceptable plan, and would bring the highest return to the land in obtainable revenues (with consideration for the entire master-plan), and is the maximally profitable use of the subject site as vacant. Finally, as previously discussed in this report, the subject’s submarket is being developed with new master-planned projects. Considering the current and proposed infrastructure and the trend in development of vacant land in this area, a residential project is appropriate and conforming to the area and is the Highest and Best Use of the site as vacant. HIGHEST AND BEST USE AS IMPROVED OR AS PROPOSED The proposed land use, per the current and/or pending entitlements, was also found to meet the criteria of Highest and Best Use (see “as vacant” discussion). MOST PROBABLE BUYER The most probable buyer of the subject property, “as is,” “as proposed,” or “as improved,” would require a buyer that could support a large equity investment. The most probable buyer profile for a project such as the subject would include larger regional and national developers and/or builders, which often joint venture with various equity partners.
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MARKET VALUE “AT COMPLETION” - PLANNING AREAS / PARCELS This initial analysis involved estimating the market value of specific planning areas/parcels within the Heritage Fields Master-plan. The development and/or sales comparison approaches were utilized in estimating the market value for each planning area/parcel. Four of the superpad parcels include affordable low income housing and ethic and faculty housing (L10, L24, T8 and T10a) totaling 734 units. Typical of master-plan communities and affordable housing requirements, each parcel or portion is essentially a “cost” of development and are not revenue generating from land sale proceeds. These parcels would likely be transferred to an affordable housing developer. The following assumptions were deemed reasonable for the analyses and valuation of the larger project as a whole and reflect the currently intended build-out proposal on the part of the developer. DEVELOPMENT METHOD (RESIDENTIAL LAND) The development method is used by developers to determine the price they can afford to pay for land assuming certain costs, gross sales, and return considerations. This approach "backs out" a value for the land, taking into account anticipated sales revenues of the proposed homes, costs of construction, absorption projections, lending criteria, and return expectations. Basically, it is the inverse of the cost approach, which results in a residual to land value indication. In this case, the appraisers developed “generic” build-out models for each respective planning area/parcel by minimum lot and/or product type. Note that the planning areas/parcel designations are consistent with the developer’s pro forma. Thus, 24 residential residual models were formulated, reflecting the 24 various product proposals where a development method analysis was applicable. Individual planning area development approach assumptions, development and sales schedules, static models, and yield (discounted cash flow) models can be found in the Addenda. The following information summarizes the content and conclusions of the comprehensive analyses.
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Product Planning Area/ Total No. of Units Product Wtd. Avg. PropertyType Parcel Units Valued Home Size (1) Condition Development Sales Comparison
4 L22a-ii 59 59 Courtyard 2,000 Superpad Yes Yes5 L11d, L22a-i 72 52 SFD 45 x 105 2,200 Superpad Yes Yes6 L11c 67 67 SFD 60 x 105 2,650 Superpad Yes Yes10 P4a, P4c 137 70 Courtyard 2,950 Superpad Yes Yes16 P10a 44 44 SFD 70 x 110 4,000 Superpad Yes Yes17 P1f, P2 161 81 SFD 70 x 100 3,650 Superpad Yes Yes18 P1d, P1e 124 62 SFD 75 x 110 4,100 Superpad Yes Yes19 P6a 76 76 SFD 80 x 110 4,500 Superpad Yes Yes20 P1c 86 86 SFD 85 x 120 4,600 Superpad Yes Yes21 P1b, P7a, P11b, P12a 190 51 SFD 100 x 120 5,200 Superpad Yes Yes22 P1a, P7b, P11a 137 39 SFD 120 x 150 5,900 Superpad Yes Yes29 T12b 80 80 Courtyard (8 pack) 1,600 Superpad Yes Yes30 T12d 96 96 Zero Lot Line 2,000 Superpad Yes Yes31 T1d, T3A 100 66 SFD 45 x 100 2,800 Superpad Yes Yes32 T11a 100 100 SFD 50 x 100 3,200 Superpad Yes Yes33 T1a, T1b, T2a 193 51 SFD 60 x 100 3,950 Superpad Yes Yes
Total Detached Lots… 1,722 1,0801 L11a, L11b 271 136 Mid-rise Flats 1,125 Superpad Yes Yes2 L14b, L15, L22a-iii 232 101 Row TH 1,725 Superpad Yes Yes3 L14a 100 100 Luxury Triplex 1,900 Superpad Yes Yes9 P4b, P5a 145 85 Luxury Attached 2,250 Superpad Yes Yes26 T3b 85 85 Garden Flats/TH 1,200 Superpad Yes Yes27 T9a 112 112 Brownstone Villas 1,575 Superpad Yes Yes28 T12a 112 112 Townhomes (Camden) 1,375 Superpad Yes Yes51 T12c 112 112 Willowhaven 1,664 Superpad Yes Yes
Total Attached Units… 1,169 843Total Residential… 2,891 1,923 (1) Hypothetical product assumptions based on Heritage Fields 2007 Overlay Business Plan.
PLANNING AREA MARKET VALUATIONHeritage Fields Master Plan, Irvine, California
Approach To Value
STATIC ANALYSES In the static method, total costs, expenses, and profit were deducted from the total aggregate of retail revenues on a straight line basis, indicating a residual to land value. The planning areas, including detached lots, attached residential units, mixed-use product, and commercial uses were analyzed assuming a “superpad” condition, which is a common method of delivering these types of sites to builders in this submarket. Base Pricing As exhibited in the following table with consideration for only those planning areas and parcels to be analyzed with the development method, the appraisers assumed average weighted base pricing from $538,000 to $2,797,000 and $374 to $511 per square foot, depending on product. Further discussion on base pricing assumptions can be found in the Market Analysis. Please refer to the market analysis for additional detail on the product line designations and pricing.
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Product Minimum Wtd. Avg. Wtd. Avg. Wtd. Avg. Total UnitsType Lot Size / Product Home Size Base Price Base PSF Valued Total(s)
4 Courtyard 2,000 $884,000 $442.00 59 $52,156,0005 SFD 45 x 105 2,200 $954,000 $433.64 52 $49,608,000
6 SFD 60 x 105 2,650 $1,169,000 $441.13 67 $78,323,00010 Courtyard 2,950 $1,249,000 $423.39 70 $87,430,00016 SFD 70 x 110 4,000 $1,714,000 $428.50 44 $75,416,00017 SFD 70 x 100 3,650 $1,483,000 $406.30 81 $120,123,00018 SFD 75 x 110 4,100 $1,739,000 $424.15 62 $107,818,00019 SFD 80 x 110 4,500 $2,014,000 $447.56 76 $153,064,00020 SFD 85 x 120 4,600 $2,042,000 $443.91 86 $175,612,00021 SFD 100 x 120 5,200 $2,406,000 $462.69 51 $122,706,00022 SFD 120 x 150 5,900 $2,797,000 $474.07 39 $109,083,000
29 Courtyard (8 pack) 1,600 $699,000 $436.88 80 $55,920,00030 Zero Lot Line 2,000 $826,000 $413.00 96 $79,296,00031 SFD 45 x 100 2,800 $1,065,000 $380.36 66 $70,290,00032 SFD 50 x 100 3,200 $1,197,000 $374.06 100 $119,700,00033 SFD 60 x 100 3,950 $1,510,000 $382.28 51 $77,010,000
Attached
1 Mid-Rise Flats 1,125 $575,000 $511.11 136 $78,200,0002 Row TH 1,725 $753,000 $436.52 101 $76,053,0003 Luxury Triplex 1,900 $819,000 $431.05 100 $81,900,000
9 Luxury Attached 2,250 $916,000 $407.11 85 $77,860,00026 Garden Flats/TH 1,200 $538,000 $448.33 85 $45,730,00027 Brownstone Villas 1,575 $688,000 $436.83 112 $77,056,00028 Townhomes (Camden) 1,375 $613,000 $445.82 112 $68,656,00051 Willowhaven 1,664 $739,000 $444.11 112 $82,768,000
Minimum --- 1,125 $538,000 $374.06Maximum --- 5,900 $2,797,000 $511.11Averages --- 2,563 $1,103,369 $430.50
(1) Hypothetical only for development approach buildout assumptions; pricing reflects May 2007$s.
HYPOTHETICAL PRODUCT BASE PRICING BY PRODUCT TYPE(1)
Heritage Fields Master Plan, Irvine, California
Lot Premiums / Options In addition to base pricing, the appraisers also included retail lot premiums for the various delineated planning areas (groups). In allocating lot premiums, consideration was given primarily to view potential, lot sizes, negative locational features, and in-project location characteristics. The developer estimated 1.0% to 5.0% of the proposed base pricing for lot premiums on average for both detached and attached product lines. The appraisers surveyed current projects within the subject submarket as detailed in the following table. Lot premiums ranged upward to $250,000 with a premium to base ratio ranging from 0.0% to 6.85% with an average of 2.19%. The majority of similar projects to the subject with flat terrain and similar locations were typically on the low end of the range at 0% to 2% per unit on average. Of the attached projects surveyed, premium estimates ranged from $0 to $50,000 for luxury attached product. For attached product, the majority of premium estimates indicated an average unit premium range of about 1% to 5% of base pricing. In all likelihood, the subject’s attached product would also have limited to moderate premium opportunities given the flat terrain and lack of significant views. However, premium
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potential could be achieved via unit locations, oversized balconies/patios, floor premiums, and proximity to amenities.
Lot Premium toProject (Central Submarket) Product Type Location Base Price Premium Base Ratio
Ciarra at Columbus Grove Detached Tustin $1,260,000 $3,000 0.24%Ellyson Pointe at Tustin Field Detached Tustin $1,259,880 $5,000 0.40%
Campanille at Northpark Square Detached Irvine $919,000 $4,000 0.44%Bennett's Place at Tustin Field Detached Tustin $999,880 $4,980 0.50%
Mille Fleurs at Woodbury Detached Irvine $1,265,000 $8,000 0.63%Westbourne at Columbus Grove Detached Irvine $1,123,000 $8,000 0.71%
Lantana at Columbus Circle Detached Irvine $874,990 $8,000 0.91%Bougainillea at Portola Springs Detached Irvine $784,440 $10,000 1.27%
Astoria at Columbus Square Detached Tustin $928,990 $14,000 1.51%Camellia at Northwood Detached Irvine $1,045,145 $20,000 1.91%
Gables at Columbus Square Detached Tustin $1,099,000 $22,000 2.00%Arezzo Detached Irvine $2,345,000 $50,000 2.13%
Cantara at Columbus Grove Detached Tustin $930,000 $22,000 2.37%Paloma at Portola Springs Detached Irvine $808,000 $20,000 2.48%Rosemoor at Woodbury Detached Irvine $1,005,000 $25,000 2.49%
Irvine Groves II Detached Irvine $820,000 $22,000 2.68%Bella Rosa Detached Irvine $821,602 $25,000 3.04%Camellia Detached Tustin $1,054,000 $42,000 3.98%
The Ledges Detached Irvine $1,500,000 $75,000 5.00%Tapestry at Quail Hill Detached Irvine $1,250,000 $70,000 5.60%Arbors at Northwood Detached Irvine $1,313,860 $77,850 5.93%
La Cima Detached Irvine $3,650,000 $250,000 6.85%Paloma at Portola Springs Duplex Irvine $788,420 $5,000 0.63%
San Carlos 10-Plex Irvine $513,997 $0 0.00%Sendero Townhomes Irvine $597,160 $2,000 0.33%
Four Quartets Townhomes Irvine $598,527 $5,000 0.84%Garland Park Townhomes Irvine $683,156 $0 0.00%
Chelsea Townhomes Irvine $1,024,817 $50,000 4.88%Granville Townhomes Irvine $794,329 $30,000 3.78%Minimum --- --- $513,997 $0 0.00%Maximum --- --- $3,650,000 $250,000 6.85%Averages --- --- $1,105,420 $30,270 2.19%
LOT PREMIUM SURVEYHeritage Fields Master Plan, Irvine, California
Based on the foregoing, the appraisers estimated the average lot premium potential for each planning area. Also taken into consideration was the intended product for each planning area. Lot premium potential tends to increase companion to an increase in product size and pricing, and vice-versa. For the most part, the proposed land use plan should result in minimal to average premium potential for the majority of the planning areas/parcels. Select oversized lots with adjacent open space would result in the highest lot premiums. The flat topography should minimize area view potential. Further, the proposed street plan should result in favorable in-project lot characteristics such as cul-de-sacs, low traffic patterns, etc. and a minimization of negative impacts. However, pending completion of grading, it was difficult to adequately quantify lot premium or discount potential resulting from views, lot size, negative factors, etc.
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Based on the survey and the subject’s flat terrain, lack of significant views, and smaller lot sizes, the appraisers estimated base detached residential lot premiums of 1% of the base price. Premiums of 2% were estimated for detached product with good locations, but average view potential. The highest premiums of 5% were estimated for detached product with golf course and park adjacent locations, larger lot sizes, low densities and above average view potential. The appraisers estimated base unit premiums of 1.0% to 1.5% of the base price for the attached product. For the luxury attached product, a premium of 5.0% was estimated. The previous survey of similar developments indicated that premium revenues of 1.0% to 5.0% of base pricing are common in Orange County. The subject’s premium potential is minimal to moderate due to the overall size of the project and the large number of product lines offering no or minimal view potential. However, the few product lines that do offer view potential (golf course and park locations) will command significant premiums. Thus, the estimated lot premium revenues were supported and fairly conservative compared with many new developments in the submarket.
Product Minimum Wtd. Avg. Lot Primary Wtd. Avg. % Avg. LotType Lot Size Home Size Elevations Views Base Price Premium Premium
4 Courtyard 2,000 n/a n/a $884,000 1.0% $8,8405 SFD 45 x 105 2,200 n/a n/a $954,000 2.0% $19,080
6 SFD 60 x 105 2,650 n/a n/a $1,169,000 2.0% $23,38010 Courtyard 2,950 n/a n/a $1,249,000 5.0% $62,450
16 SFD 70 x 110 4,000 n/a n/a $1,714,000 5.0% $85,70017 SFD 70 x 100 3,650 n/a n/a $1,483,000 5.0% $74,150
18 SFD 75 x 110 4,100 n/a n/a $1,739,000 5.0% $86,95019 SFD 80 x 110 4,500 n/a n/a $2,014,000 5.0% $100,700
20 SFD 85 x 120 4,600 n/a n/a $2,042,000 5.0% $102,10021 SFD 100 x 120 5,200 n/a n/a $2,406,000 5.0% $120,300
22 SFD 120 x 150 5,900 n/a n/a $2,797,000 5.0% $139,85029 Courtyard (8 pack) 1,600 n/a n/a $699,000 1.0% $6,99030 Zero Lot Line 2,000 n/a n/a $826,000 1.0% $8,260
31 SFD 45 x 100 2,800 n/a n/a $1,065,000 1.0% $10,65032 SFD 50 x 100 3,200 n/a n/a $1,197,000 1.0% $11,970
33 SFD 60 x 100 3,950 n/a n/a $1,510,000 1.0% $15,100Attached
1 Mid-Rise Flats 1,125 n/a n/a $575,000 1.5% $8,6252 Row TH 1,725 n/a n/a $753,000 1.0% $7,530
3 Luxury Triplex 1,900 n/a n/a $819,000 1.0% $8,1909 Luxury Attached 2,250 n/a n/a $916,000 5.0% $45,80026 Garden Flats/TH 1,200 n/a n/a $538,000 1.5% $8,070
27 Brownstone Villas 1,575 n/a n/a $688,000 1.5% $10,32028 Townhomes (Camden) 1,375 n/a n/a $613,000 1.5% $9,195
51 Willowhaven 1,664 n/a n/a $739,000 1.0% $7,390Minimum --- 1,125 --- --- $538,000 $6,990Maximum --- 5,900 --- --- $2,797,000 $139,850
Averages --- 2,563 --- --- $1,103,369 $33,806 (1) Hypothetical only for development approach buildout assumptions; pricing reflects May 2007$s.
HYPOTHETICAL PRODUCT LOT PREMIUM SCHEDULE BY PRODUCT TYPE(1)
Heritage Fields Master Plan, Irvine, California
The developer has estimated average option revenues of 3%± of the base price for all detached and attached product labeled “EI Revenue Pick-up.” Ordinarily, Lennar Homes offers “Everything’s Included” (EI) for their potential buyers. “Everything’s Included” refers to the level of upgrades that ordinarily come standard with each production home. However, in the Heritage Fields pro forma Lennar Homes included this revenue
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V A L U A T I O N S E R V I C E S 1 8 5
source as a separate item, and was not included in the base pricing. Typical option revenue percentages for option upgrades in the subject’s market have averaged 5% to 10% over the last few years with upper-priced homes usually at the higher end of the range and vice versa due to the general affordability and buyer profile at each end of the spectrum. With the housing market downturn over the last year or so, average option revenues at the lower end of the range are more reasonable. Considering the foregoing, average net options revenues of 3% of the base price for each planning area/parcel, or $4,000 to $19,000 per unit, depending on planning area/parcel, were considered reasonable at this preliminary stage of development.
Product Minimum Wtd. Avg. Wtd. Avg. Avg, Options Avg. Options Avg. Net OptionsType Lot Size Home Size Base Price Revenues Costs Revenue
4 Courtyard 2,000 $884,000 $26,520 $19,958 $6,5625 SFD 45 x 105 2,200 $954,000 $28,620 $21,694 $6,9266 SFD 60 x 105 2,650 $1,169,000 $35,070 $26,224 $8,846
10 Courtyard 2,950 $1,249,000 $37,470 $27,963 $9,50716 SFD 70 x 110 4,000 $1,714,000 $51,420 $39,416 $12,004
17 SFD 70 x 100 3,650 $1,483,000 $44,490 $33,001 $11,48918 SFD 75 x 110 4,100 $1,739,000 $52,170 $39,159 $13,01119 SFD 80 x 110 4,500 $2,014,000 $60,420 $44,931 $15,489
20 SFD 85 x 120 4,600 $2,042,000 $61,260 $45,339 $15,92121 SFD 100 x 120 5,200 $2,406,000 $72,180 $54,779 $17,40122 SFD 120 x 150 5,900 $2,797,000 $83,910 $64,930 $18,980
29 Courtyard (8 pack) 1,600 $699,000 $20,970 $15,562 $5,40830 Zero Lot Line 2,000 $826,000 $24,780 $18,271 $6,50931 SFD 45 x 100 2,800 $1,065,000 $31,950 $23,908 $8,042
32 SFD 50 x 100 3,200 $1,197,000 $35,910 $26,443 $9,46733 SFD 60 x 100 3,950 $1,510,000 $45,300 $34,379 $10,921
Attached
1 Mid-Rise Flats 1,125 $575,000 $17,250 $12,599 $4,6512 Row TH 1,725 $753,000 $22,590 $16,630 $5,960
3 Luxury Triplex 1,900 $819,000 $24,570 $18,093 $6,4779 Luxury Attached 2,250 $916,000 $27,480 $20,347 $7,13326 Garden Flats/TH 1,200 $538,000 $16,140 $11,950 $4,190
27 Brownstone Villas 1,575 $688,000 $20,640 $15,149 $5,49128 Townhomes (Camden) 1,375 $613,000 $18,390 $13,497 $4,89351 Willowhaven 1,664 $739,000 $22,170 $16,272 $5,898
Minimum --- 1,125 --- $16,140 $11,950 $4,190Maximum --- 5,900 --- $83,910 $64,930 $18,980
Averages --- 2,563 --- $33,101 $24,674 $8,427 (1) Hypothetical only for development approach buildout assumptions; pricing reflects May 2007$s.
HYPOTHETICAL PRODUCT OPTIONS SCHEDULE BY PRODUCT TYPE(1)
Heritage Fields Master Plan, Irvine, California
Model Premiums Each planning area was assumed to have a 3-home model complex (one model per base floor plan). Model home decorating/upgrade/merchandising budgets of $133,333 to $700,000 per model were incorporated into the assumptions depending on planning area/parcel.
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V A L U A T I O N S E R V I C E S 1 8 6
Developers typically anticipate a 60% to 100% recovery of permanent model upgrades (i.e. floor coverings, wall coverings, appliances, landscaping, etc.). Commonly, marketable model upgrades are approximately 50% of the total model home budget. For example, assuming a $200,000 average model home budget, 50%, or $100,000, would be “marketable” permanent upgrades. Of this, a 60% to 100% recovery is expected, or $60,000 to $100,000. A review of model home sales indicated typical model premiums ranging from $50,000 to $200,000, depending upon home size. The appraisers allocated model unit premiums from $59,000± to $280,000±, depending on the assumed model upgrade budget (discussion to follow), as shown next.
Product No of Units Minimum Wtd. Avg. Wtd. Avg. Avg. Model Premium to No. Model Prem.Type Valued Lot Size Home Size Base Price Premium Base Ratio Models Total(s)
4 59 Courtyard 2,000 $884,000 $97,240 11.00% 3 $291,7205 52 SFD 45 x 105 2,200 $954,000 $95,400 10.00% 3 $286,2006 67 SFD 60 x 105 2,650 $1,169,000 $116,900 10.00% 3 $350,70010 70 Courtyard 2,950 $1,249,000 $124,900 10.00% 3 $374,70016 44 SFD 70 x 110 4,000 $1,714,000 $171,400 10.00% 3 $514,20017 81 SFD 70 x 100 3,650 $1,483,000 $148,300 10.00% 3 $444,90018 62 SFD 75 x 110 4,100 $1,739,000 $173,900 10.00% 3 $521,70019 76 SFD 80 x 110 4,500 $2,014,000 $201,400 10.00% 3 $604,20020 86 SFD 85 x 120 4,600 $2,042,000 $204,200 10.00% 3 $612,60021 51 SFD 100 x 120 5,200 $2,406,000 $240,600 10.00% 3 $721,80022 39 SFD 120 x 150 5,900 $2,797,000 $279,700 10.00% 3 $839,10029 80 Courtyard (8 pack) 1,600 $699,000 $76,890 11.00% 3 $230,67030 96 Zero Lot Line 2,000 $826,000 $90,860 11.00% 3 $272,58031 66 SFD 45 x 100 2,800 $1,065,000 $117,150 11.00% 3 $351,45032 100 SFD 50 x 100 3,200 $1,197,000 $131,670 11.00% 3 $395,01033 51 SFD 60 x 100 3,950 $1,510,000 $166,100 11.00% 3 $498,300
Attached1 136 Mid-Rise Flats 1,125 $575,000 $69,000 12.00% 3 $207,0002 101 Row TH 1,725 $753,000 $82,830 11.00% 3 $248,4903 100 Luxury Triplex 1,900 $819,000 $90,090 11.00% 3 $270,2709 85 Luxury Attached 2,250 $916,000 $100,760 11.00% 3 $302,28026 85 Garden Flats/TH 1,200 $538,000 $59,180 11.00% 3 $177,54027 112 Brownstone Villas 1,575 $688,000 $75,680 11.00% 3 $227,04028 112 Townhomes (Camden) 1,375 $613,000 $73,560 12.00% 3 $220,68051 112 Willowhaven 1,664 $739,000 $81,290 11.00% 3 $243,870
Minimum 39 --- 1,125 $538,000 $59,180 10.00% --- ---Maximum 136 --- 5,900 $2,797,000 $279,700 12.00% --- ---Averages --- --- 2,563 $1,103,369 $127,875 11.59% --- ---
(1) Hypothetical only for development approach buildout assumptions; pricing reflects May 2007$s.
HYPOTHETICAL PRODUCT MODEL PREMIUM SCHEDULE BY PRODUCT TYPE(1)
Heritage Fields Master Plan, Irvine, California
Summary of Aggregate Retail Revenues As exhibited in the following table, average home pricing (including base pricing, lot and model premiums, and options) ranged from $564,299 to $3,042,275 and $390 to $535 per square foot, depending on product. The overall average is $1,119,011, or $437 per square foot. This is generally inline with the previous base pricing indications of $255 to $657 per square foot for detached product and $312 to $634 for attached product for those comparables most similar to the subject in location and product. As would be expected due to lot premiums, model premiums, and options, the price per square foot is toward
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the middle of the overall base price range of $255 to $657. Further discussion on product pricing assumptions can be found in the Market Analysis section of the report. Predevelopment Costs A cost of 0.5% of revenues was estimated for predevelopment, architecture and acquisition costs. After a market comparison and review of the developer’s pro forma, this cost was considered to be reasonable for the subject. Backbone Infrastructure / Mass Grading / Majors Reimbursements The subject planning areas (detached lots, commercial and attached units) were assumed to be in superpad condition with all offsites installed, rough grading having occurred, and master development in-place. Accordingly, major backbone infrastructure, master development, common area costs, and companion reimbursements were not included in the planning area valuation but were recognized in the forthcoming “as is” valuation for the entire property.
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V A L U A T I O N S E R V I C E S 1 8 8
Prod
uct
No
of U
nits
Min
imum
Wtd
. Avg
.B
ase
Lot
Net
Mod
elG
ross
Ave
rage
Ave
rage
Typ
eV
alue
dL
ot S
ize
Hom
e Si
zeR
even
ues
Prem
ium
sO
ptio
nsPr
emiu
ms
Rev
enue
sPe
r U
nit
Pric
e PS
F4
59C
ourty
ard
2,00
0$5
2,15
6,00
0$5
21,5
60$1
,564
,680
$291
,720
$54,
533,
960
$924
,304
$462
.15
552
SFD
45
x 10
52,
200
$49,
608,
000
$992
,160
$1,4
88,2
40$2
86,2
00$5
2,37
4,60
0$1
,007
,204
$457
.82
667
SFD
60
x 10
52,
650
$78,
323,
000
$1,5
66,4
60$2
,349
,690
$350
,700
$82,
589,
850
$1,2
32,6
84$4
65.1
610
70C
ourty
ard
2,95
0$8
7,43
0,00
0$4
,371
,500
$2,6
22,9
00$3
74,7
00$9
4,79
9,10
0$1
,354
,273
$459
.08
1644
SFD
70
x 11
04,
000
$75,
416,
000
$3,7
70,8
00$2
,262
,480
$514
,200
$81,
963,
480
$1,8
62,8
06$4
65.7
017
81SF
D 7
0 x
100
3,65
0$1
20,1
23,0
00$6
,006
,150
$3,6
03,6
90$4
44,9
00$1
30,1
77,7
40$1
,607
,133
$440
.31
1862
SFD
75
x 11
04,
100
$107
,818
,000
$5,3
90,9
00$3
,234
,540
$521
,700
$116
,965
,140
$1,8
86,5
35$4
60.1
319
76SF
D 8
0 x
110
4,50
0$1
53,0
64,0
00$7
,653
,200
$4,5
91,9
20$6
04,2
00$1
65,9
13,3
20$2
,183
,070
$485
.13
2086
SFD
85
x 12
04,
600
$175
,612
,000
$8,7
80,6
00$5
,268
,360
$612
,600
$190
,273
,560
$2,2
12,4
83$4
80.9
721
51SF
D 1
00 x
120
5,20
0$1
22,7
06,0
00$6
,135
,300
$3,6
81,1
80$7
21,8
00$1
33,2
44,2
80$2
,612
,633
$502
.43
2239
SFD
120
x 1
505,
900
$109
,083
,000
$5,4
54,1
50$3
,272
,490
$839
,100
$118
,648
,740
$3,0
42,2
75$5
15.6
429
80C
ourty
ard
(8 p
ack)
1,60
0$5
5,92
0,00
0$5
59,2
00$1
,677
,600
$230
,670
$58,
387,
470
$729
,843
$456
.15
3096
Zero
Lot
Lin
e2,
000
$79,
296,
000
$792
,960
$2,3
78,8
80$2
72,5
80$8
2,74
0,42
0$8
61,8
79$4
30.9
431
66SF
D 4
5 x
100
2,80
0$7
0,29
0,00
0$7
02,9
00$2
,108
,700
$351
,450
$73,
453,
050
$1,1
12,9
25$3
97.4
732
100
SFD
50
x 10
03,
200
$119
,700
,000
$1,1
97,0
00$3
,591
,000
$395
,010
$124
,883
,010
$1,2
48,8
30$3
90.2
633
51SF
D 6
0 x
100
3,95
0$7
7,01
0,00
0$7
70,1
00$2
,310
,300
$498
,300
$80,
588,
700
$1,5
80,1
71$4
00.0
4A
ttac
hed
113
6M
id-R
ise F
lats
1,12
5$7
8,20
0,00
0$1
,173
,000
$2,3
46,0
00$2
07,0
00$8
1,92
6,00
0$6
02,3
97$5
35.4
62
101
Row
TH
1,72
5$7
6,05
3,00
0$7
60,5
30$2
,281
,590
$248
,490
$79,
343,
610
$785
,580
$455
.41
310
0Lu
xury
Trip
lex
1,90
0$8
1,90
0,00
0$8
19,0
00$2
,457
,000
$270
,270
$85,
446,
270
$854
,463
$449
.72
985
Luxu
ry A
ttach
ed2,
250
$77,
860,
000
$3,8
93,0
00$2
,335
,800
$302
,280
$84,
391,
080
$992
,836
$441
.26
2685
Gar
den
Flat
s/TH
1,20
0$4
5,73
0,00
0$6
85,9
50$1
,371
,900
$177
,540
$47,
965,
390
$564
,299
$470
.25
2711
2B
row
nsto
ne V
illas
1,57
5$7
7,05
6,00
0$1
,155
,840
$2,3
11,6
80$2
27,0
40$8
0,75
0,56
0$7
20,9
87$4
57.7
728
112
Tow
nhom
es (C
amde
n)1,
375
$68,
656,
000
$1,0
29,8
40$2
,059
,680
$220
,680
$71,
966,
200
$642
,555
$467
.31
5111
2W
illow
have
n1,
664
$82,
768,
000
$827
,680
$2,4
83,0
40$2
43,8
70$8
6,32
2,59
0$7
70,7
37$4
63.1
8M
inim
um39
---
1,12
5$5
64,2
99$3
90.2
6M
axim
um13
6--
-5,
900
$3,0
42,2
75$5
35.4
6A
vera
ges
---
---
2,56
3$1
,103
,369
$33,
806
$33,
101
$127
,875
---
$1,1
19,0
11$4
36.6
0 (1
) Hyp
othe
tical
onl
y fo
r dev
elop
men
t app
roac
h bu
ildou
t ass
umpt
ions
; pri
cing
refle
cts M
ay 2
007$
s.
AG
GR
EG
AT
E R
ET
AIL
RE
VE
NU
ES
BY
PR
OD
UC
T T
YPE
(1)
Her
itage
Fie
lds M
aste
r Pla
n, Ir
vine
, Cal
iforn
ia
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 1 8 9
Hard Construction Costs The appraisers reviewed several cost breakdowns from other residential subdivisions appraised throughout Orange County. These cost breakdowns reflected direct hard construction costs from approximately $75 to $150 per square foot for detached residential product and $100 to $150 per square foot for attached residential product, varying primarily with quality, product size, and subdivision location.
DIRECT CONSTRUCTION COSTS(1)
Heritage Fields Master Plan, Irvine, CaliforniaProduct No of Units Minimum Wtd. Avg. Average Direct
Type Valued Lot Size Home Size Per Unit Cost (psf)4 59 Courtyard 2,000 $884,000 $865 52 SFD 45 x 105 2,200 $954,000 $786 67 SFD 60 x 105 2,650 $1,169,000 $77
10 70 Courtyard 2,950 $1,249,000 $9016 44 SFD 70 x 110 4,000 $1,714,000 $10117 81 SFD 70 x 100 3,650 $1,483,000 $10118 62 SFD 75 x 110 4,100 $1,739,000 $10119 76 SFD 80 x 110 4,500 $2,014,000 $10020 86 SFD 85 x 120 4,600 $2,042,000 $10121 51 SFD 100 x 120 5,200 $2,406,000 $10522 39 SFD 120 x 150 5,900 $2,797,000 $10729 80 Courtyard (8 pack) 1,600 $699,000 $8630 96 Zero Lot Line 2,000 $826,000 $8131 66 SFD 45 x 100 2,800 $1,065,000 $8732 100 SFD 50 x 100 3,200 $1,197,000 $8433 51 SFD 60 x 100 3,950 $1,510,000 $84
Attached1 136 Mid-rise Flats 1,125 $575,000 $1242 101 Row TH 1,725 $753,000 $933 100 Luxury Triplex 1,900 $819,000 $869 85 Luxury Attached 2,250 $916,000 $91
26 85 Garden Flats/TH 1,200 $538,000 $9327 112 Brownstone Villas 1,575 $688,000 $9328 112 Townhomes (Camden) 1,375 $613,000 $8651 112 Willowhaven 1,664 $739,000 $83
Minimum 39 --- 1,125 $538,000 $77Maximum 136 --- 5,900 $2,797,000 $124Averages --- --- 2,563 $1,103,369 $94
(1) Directs do not include individual lot landscaping, fencing, or indirects. Per the developer, direct costs (excluding option upgrade costs) were estimated at $77 to $107 per square foot for the detached residential product and $83 to $124 per square foot for the attached residential product. For the most part, all other variables being the same, smaller product generally costs more to build on a per square foot basis than larger product due to economies of scale. Typically, however, the higher costs generally associated with more amenitized larger product will more than offset the economies of scale. Based on the subject's assumed product lines and pricing in comparison to other cost breakdowns, and per information from other market participants, the appraisers reconciled direct construction costs of $77 to $124 per square foot. These estimated direct costs were inline with the local
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 1 9 0
market indications. Note that direct costs do not include onsite indirects (supervision, general conditions, temporary utilities, etc.), nor individual lot landscape and fencing. Indirect Construction Costs Indirect construction costs, including such items as onsite water, utilities, temporary power, general labor, supervision, etc., were estimated on a cost per square foot of livable area basis. The appraisers reviewed indirect construction costs from similar projects in Southern California. The market survey indicated that costs from similar projects ranged from $3.00 to $8.00 per square foot, varying primarily with project size, development duration, and subdivision location. For the subject planning areas, indirect costs were estimated at $4.00 per square foot, which was reasonable and consistent with indirect costs experienced in other projects in the area. Intract Land Development / Development Impact Fees The subject planning areas were assumed to be in a superpad condition with all offsites installed and master development in-place. Builders (buyers) of the lots would be responsible for final intract land development and development impact fees at permit. Per the budget provided by the developer, intract land development costs range from $11,000 to $161,765 per lot, depending on planning area/parcel. It should be noted that the developer’s intracts are on the high end of the range of $15,000 to $60,000 per unit typically seen by the appraisers. The developer indicated that their estimates were in line with other Orange County projects and may be high due to increasing costs over the last two years. With this in consideration, intract costs were deemed to be slightly high but reasonable given the range of lot sizes. Fees at permit, exclusive of building permit/plan check fees, ranged from $4,844 to $21,518 per lot depending upon planning area/parcel, and averaged $10,900 per lot. Note that the fees at permit figures do not include building permit and plan check fees, which were included as an additional construction cost category. The appraisers relied upon the estimates provided in the developer’s cost analysis, which were assumed to be reasonably true and correct.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 1 9 1
Product No of Units Minimum Wtd. Avg. Intract Per Lot Fees @ Per Lot Builders' Per LotType Valued Lot Size Home Size Costs Basis Permit Basis Totals Basis
4 59 Courtyard 2,000 $2,950,000 $50,000 $285,796 $4,844 $3,235,796 $54,8445 52 SFD 45 x 105 2,200 $2,200,016 $42,308 $315,120 $6,060 $2,515,136 $48,3686 67 SFD 60 x 105 2,650 $3,838,564 $57,292 $406,020 $6,060 $4,244,584 $63,352
10 70 Courtyard 2,950 $3,007,830 $42,969 $879,410 $12,563 $3,887,240 $55,53216 44 SFD 70 x 110 4,000 $3,025,000 $68,750 $727,760 $16,540 $3,752,760 $85,29017 81 SFD 70 x 100 3,650 $5,062,500 $62,500 $1,265,463 $15,623 $6,327,963 $78,123
18 62 SFD 75 x 110 4,100 $4,608,088 $74,324 $1,041,724 $16,802 $5,649,812 $91,12619 76 SFD 80 x 110 4,500 $5,971,396 $78,571 $1,356,600 $17,850 $7,327,996 $96,42120 86 SFD 85 x 120 4,600 $7,883,362 $91,667 $1,557,632 $18,112 $9,440,994 $109,77921 51 SFD 100 x 120 5,200 $5,610,000 $110,000 $1,003,884 $19,684 $6,613,884 $129,684
22 39 SFD 120 x 150 5,900 $6,308,835 $161,765 $839,202 $21,518 $7,148,037 $183,28329 80 Courtyard (8 pack) 1,600 $1,833,360 $22,917 $820,160 $10,252 $2,653,520 $33,16930 96 Zero Lot Line 2,000 $2,200,032 $22,917 $1,084,800 $11,300 $3,284,832 $34,217
31 66 SFD 45 x 100 2,800 $2,669,106 $40,441 $884,136 $13,396 $3,553,242 $53,83732 100 SFD 50 x 100 3,200 $4,508,200 $45,082 $1,444,400 $14,444 $5,952,600 $59,52633 51 SFD 60 x 100 3,950 $2,750,022 $53,922 $836,859 $16,409 $3,586,881 $70,331
Attached
1 136 Mid-Rise Flats 1,125 $1,496,000 $11,000 $658,784 $4,844 $2,154,784 $15,8442 101 Row TH 1,725 $1,851,633 $18,333 $489,244 $4,844 $2,340,877 $23,1773 100 Luxury Triplex 1,900 $4,583,300 $45,833 $484,400 $4,844 $5,067,700 $50,677
9 85 Luxury Attached 2,250 $4,250,000 $50,000 $909,500 $10,700 $5,159,500 $60,70026 85 Garden Flats/TH 1,200 $1,374,960 $16,176 $680,000 $8,000 $2,054,960 $24,17627 112 Brownstone Villas 1,575 $2,200,016 $19,643 $1,008,000 $9,000 $3,208,016 $28,64328 112 Townhomes (Camden) 1,375 $1,711,136 $15,278 $952,000 $8,500 $2,663,136 $23,778
51 112 Willowhaven 1,664 $2,369,248 $21,154 $1,030,400 $9,200 $3,399,648 $30,354Minimum 39 --- 1,125 --- $11,000 --- $4,844 --- $15,844Maximum 136 --- 5,900 --- $161,765 --- $21,518 --- $183,283Averages --- --- 2,563 --- $43,818 --- $10,900 --- $54,719
BUILDERS' INTRACTS & FEES BY PRODUCT TYPEHeritage Fields Master Plan, Irvine, California
Landscape / Fencing (Individual Lots) Product pricing was assumed to reflect standard side/rear-yard fencing and front yard landscaping. Non-house construction costs vary substantially between projects depending on landscape requirements, fencing, offsite requirements, etc. Allowances of $3,000 to $10,000 per lot are common in similar subdivisions. Based on a review of subdivision cost budgets, an allowance of $5,000 to $10,000 per non-model production lot, depending on planning area and lot size, was deemed reasonable for side/rear-yard wood or wrought iron view fencing, front yard landscaping, and/or other site improvements. For the subject, the attached product was estimated to have minimal, if any, non-house construction costs and no costs were allocated. Any costs that would be incurred are assumed to be included in the developer’s direct costs. The costs were deemed reasonable given the early development stage.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 1 9 2
Product No of Units Minimum Wtd. Avg. Wtd. Avg. Non-HouseType Valued Lot Size Home Size Base Price Construction (Per Unit)
4 59 Courtyard 2,000 $884,000 $5,0005 52 SFD 45 x 105 2,200 $954,000 $5,0006 67 SFD 60 x 105 2,650 $1,169,000 $6,50010 70 Courtyard 2,950 $1,249,000 $5,00016 44 SFD 70 x 110 4,000 $1,714,000 $5,000
17 81 SFD 70 x 100 3,650 $1,483,000 $5,00018 62 SFD 75 x 110 4,100 $1,739,000 $6,00019 76 SFD 80 x 110 4,500 $2,014,000 $6,00020 86 SFD 85 x 120 4,600 $2,042,000 $10,00021 51 SFD 100 x 120 5,200 $2,406,000 $10,00022 39 SFD 120 x 150 5,900 $2,797,000 $18,00029 80 Courtyard (8 pack) 1,600 $699,000 $5,000
30 96 Zero Lot Line 2,000 $826,000 $5,00031 66 SFD 45 x 100 2,800 $1,065,000 $5,00032 100 SFD 50 x 100 3,200 $1,197,000 $5,00033 51 SFD 60 x 100 3,950 $1,510,000 $6,000
Attached
1 136 Mid-Rise Flats 1,125 $575,000 Not Applicable2 101 Row TH 1,725 $753,000 Not Applicable3 100 Luxury Triplex 1,900 $819,000 Not Applicable
9 85 Luxury Attached 2,250 $916,000 Not Applicable26 85 Garden Flats/TH 1,200 $538,000 Not Applicable27 112 Brownstone Villas 1,575 $688,000 Not Applicable28 112 Townhomes (Camden) 1,375 $613,000 Not Applicable51 112 Willowhaven 1,664 $739,000 Not Applicable
Minimum 39 --- 1,125 $538,000 ---Maximum 136 --- 5,900 $2,797,000 ---Averages --- --- 2,563 $1,103,369 ---
(1) Individual lot landscaping, fencing and other.
NON-HOUSE CONSTRUCTION COSTS BY PRODUCT TYPE(1)
Heritage Fields Master Plan, Irvine, California
Building Permit / Plan Check Fees Building permit/plan check fees were estimated at $1.50 per square foot. Said cost was based on a review of building permit/plan check fees from comparable subdivisions in the Orange County area. Master Developer Profit Participation In addition to the purchase price of each residential planning area/parcel, merchant builders shall pay to the master developer 70% of all net profit (above 7% and 8%) realized from the construction of homes (after allowable deductions for merchant builder development costs, land purchase price, and a profit allowance). Based on the information provided by the developer, the appraisers utilized a 7% profit deduction on all detached product planning areas and an 8% profit deduction on all attached product planning areas. The net profit would be calculated and paid semi-annually.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 1 9 3
Calculation of this cost to the builder results in a range of $17,030 to $70,986 per unit depending on planning area. Total realized master developer profit participation is $67,147,730, or an average of $34,918 per unit.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 1 9 4
Prod
uct
No
of U
nits
Min
imum
Wtd
. Avg
.A
ppra
iser
s'(1
)D
evel
oper
(2)
Prof
it fo
rPa
rtic
ipat
ion
to
Dev
elop
er
Per
Lot
Typ
eV
alue
dL
ot S
ize
/ Pro
duct
Hom
e Si
zeE
st. P
rofit
Est
. Pro
fitD
istr
ibut
ion
Dev
elop
er(3
)D
istr
ibut
ion
Bas
is4
59C
ourty
ard
2,00
08.
00%
7.00
%$1
,817
,799
70.0
0%$1
,272
,459
$21,
567
552
SFD
45
x 10
52,
200
8.00
%7.
00%
$1,7
45,8
2070
.00%
$1,2
22,0
74$2
3,50
16
67SF
D 6
0 x
105
2,65
08.
00%
7.00
%$2
,752
,995
70.0
0%$1
,927
,097
$28,
763
1070
Cou
rtyar
d2,
950
8.00
%7.
00%
$3,1
59,9
7070
.00%
$2,2
11,9
79$3
1,60
016
44SF
D 7
0 x
110
4,00
08.
00%
7.00
%$2
,732
,116
70.0
0%$1
,912
,481
$43,
465
1781
SFD
70
x 10
03,
650
8.00
%7.
00%
$4,3
39,2
5870
.00%
$3,0
37,4
81$3
7,50
018
62SF
D 7
5 x
110
4,10
08.
00%
7.00
%$3
,898
,838
70.0
0%$2
,729
,187
$44,
019
1976
SFD
80
x 11
04,
500
8.00
%7.
00%
$5,5
30,4
4470
.00%
$3,8
71,3
11$5
0,93
820
86SF
D 8
5 x
120
4,60
08.
00%
7.00
%$6
,342
,452
70.0
0%$4
,439
,716
$51,
625
2151
SFD
100
x 1
205,
200
8.00
%7.
00%
$4,4
41,4
7670
.00%
$3,1
09,0
33$6
0,96
122
39SF
D 1
20 x
150
5,90
08.
00%
7.00
%$3
,954
,958
70.0
0%$2
,768
,471
$70,
986
2980
Cou
rtyar
d (8
pac
k)1,
600
8.00
%7.
00%
$1,9
46,2
4970
.00%
$1,3
62,3
74$1
7,03
030
96Ze
ro L
ot L
ine
2,00
08.
00%
7.00
%$2
,758
,014
70.0
0%$1
,930
,610
$20,
111
3166
SFD
45
x 10
02,
800
8.00
%7.
00%
$2,4
48,4
3570
.00%
$1,7
13,9
05$2
5,96
832
100
SFD
50
x 10
03,
200
8.00
%7.
00%
$4,1
62,7
6770
.00%
$2,9
13,9
37$2
9,13
933
51SF
D 6
0 x
100
3,95
08.
00%
7.00
%$2
,686
,290
70.0
0%$1
,880
,403
$36,
871
Atta
ched
1
136
Mid
-Rise
Fla
ts1,
125
10.0
0%8.
00%
$5,4
61,7
3370
.00%
$3,8
23,2
13$2
8,11
22
101
Row
TH
1,72
510
.00%
8.00
%$5
,289
,574
70.0
0%$3
,702
,702
$36,
660
310
0Lu
xury
Trip
lex
1,90
010
.00%
8.00
%$5
,696
,418
70.0
0%$3
,987
,493
$39,
875
985
Luxu
ry A
ttach
ed2,
250
10.0
0%8.
00%
$5,6
26,0
7270
.00%
$3,9
38,2
50$4
6,33
226
85G
arde
n Fl
ats/T
H1,
200
10.0
0%8.
00%
$3,1
97,6
9370
.00%
$2,2
38,3
85$2
6,33
427
112
Bro
wns
tone
Vill
as1,
575
10.0
0%8.
00%
$5,3
83,3
7170
.00%
$3,7
68,3
60$3
3,64
628
112
Tow
nhom
es (C
amde
n)1,
375
10.0
0%8.
00%
$4,7
97,7
4770
.00%
$3,3
58,4
23$2
9,98
6
5111
2W
illow
have
n1,
664
10.0
0%8.
00%
$5,7
54,8
3970
.00%
$4,0
28,3
87$3
5,96
8T
otal
/Avg
1,92
3--
-2,
563
8.67
%7.
33%
$95,
925,
328
70.0
0%$6
7,14
7,73
0--
-M
inim
um39
---
1,12
58.
00%
7.00
%$1
,745
,820
70.0
0%$1
,222
,074
$17,
030
Max
imum
136
---
5,90
010
.00%
8.00
%$6
,342
,452
70.0
0%$4
,439
,716
$70,
986
(1) Ap
prai
sers
' est
imat
ed m
arke
t pro
fit ra
te.
(2) M
aste
r Dev
elop
er's
stat
ed n
et b
uild
er p
rofit
cei
ling
befo
re p
rofit
par
ticip
atio
n is
real
ized
. (3
) Mas
ter d
evel
oper
pro
fit p
artic
ipat
ion:
70%
of n
et p
rofit
s rea
lized
abo
ve e
stim
ated
pro
fit c
eilin
g.
MA
STE
R D
EV
EL
OPE
R P
RO
FIT
PA
RT
ICIP
AT
ION
Her
itage
Fie
lds M
aste
r Pla
n, Ir
vine
, Cal
iforn
ia
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 1 9 5
General and Administrative Costs Management fees include typical G&A such as offsite management, administration, and overhead. The costs are generally projected as either a percentage of sales and/or a monthly allowance. A market survey indicated management fees typically range from 3.0% to 5.0% but most often 3.0%, which was used in the development method analyses.
Product No of Units Minimum Wtd. Avg. Sales Marketing G&AType Valued Lot Size Model Size Costs Costs
4 59 Courtyard 2,000 3.00% 2.00% 3.00%5 52 SFD 45 x 105 2,200 3.00% 2.00% 3.00%6 67 SFD 60 x 105 2,650 3.00% 2.00% 3.00%
10 70 Courtyard 2,950 3.00% 2.00% 3.00%16 44 SFD 70 x 110 4,000 3.00% 2.00% 3.00%
17 81 SFD 70 x 100 3,650 3.00% 2.00% 3.00%18 62 SFD 75 x 110 4,100 3.00% 2.00% 3.00%19 76 SFD 80 x 110 4,500 3.00% 2.00% 3.00%
20 86 SFD 85 x 120 4,600 3.00% 2.00% 3.00%21 51 SFD 100 x 120 5,200 3.00% 2.00% 3.00%22 39 SFD 120 x 150 5,900 3.00% 2.00% 3.00%
29 80 Courtyard (8 pack) 1,600 3.00% 2.00% 3.00%30 96 Zero Lot Line 2,000 3.00% 2.00% 3.00%31 66 SFD 45 x 100 2,800 3.00% 2.00% 3.00%
32 100 SFD 50 x 100 3,200 3.00% 2.00% 3.00%33 51 SFD 60 x 100 3,950 3.00% 2.00% 3.00%
Attached
1 136 Mid-Rise Flats 1,125 3.00% 2.00% 3.00%2 101 Row TH 1,725 3.00% 2.00% 3.00%
3 100 Luxury Triplex 1,900 3.00% 2.00% 3.00%9 85 Luxury Attached 2,250 3.00% 2.00% 3.00%
26 85 Garden Flats/TH 1,200 3.00% 2.00% 3.00%
27 112 Brownstone Villas 1,575 3.00% 2.00% 3.00%28 112 Townhomes (Camden) 1,375 3.00% 2.00% 3.00%
51 112 Willowhaven 1,664 3.00% 2.00% 3.00% (1) Sales, marketing, developer's general and administrative (as % revenues).
VARIOUS SOFT COSTS BY PRODUCT TYPE(1)
Heritage Fields Master Plan, Irvine, California
Marketing and Sales A marketing and sales budget category includes all advertising, marketing, brochures, publications, commissions, closing costs, warranties, escrow fees, and miscellaneous legal fees. A market survey indicated sales costs from similar projects were typically 3.0% to 5.0% and marketing/advertising costs ranged from 2.0% to 3.0%, depending on product, price range, joint marketing programs, etc. In this case, considering the price of the product and development/sales term, marketing costs were estimated at 2.0% of revenues. The marketing expense figure was assumed to be inclusive of a master marketing fee paid to the master developer, which contributes to the community advertising program coordinated by the master developer. Sales/closing costs of 3.00% were incorporated into the analyses.
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Model Complex Budgets Model budgets typically include the cost for decorating, sales office, upgrades, furnishings, site improvements, and customer parking. Renovation costs would be required for the removal of the sales office, front perimeter fencing, and the parking lot. Based on a review of other model budgets, and per conversations with several builders, model home decorating/upgrade/merchandising budgets of $133,333 to $700,000 per model, depending on product, were incorporated into the production lot build-out assumptions. An additional $2,500 to $5,000 per model home conversion allowance was included in the month prior to delivery of the models dependent upon product type.
Product No of Units Minimum Wtd. Avg. Number Avg Budget Avg Budget TotalType Valued Lot Size Model Size Models PSF Per Model Budget
4 59 Courtyard 2,000 3 $121.67 $243,333 $730,000
5 52 SFD 45 x 105 2,200 3 $109.09 $240,000 $720,0006 67 SFD 60 x 105 2,650 3 $110.69 $293,333 $880,000
10 70 Courtyard 2,950 3 $106.21 $313,333 $940,00016 44 SFD 70 x 110 4,000 3 $108.33 $433,333 $1,300,000
17 81 SFD 70 x 100 3,650 3 $101.37 $370,000 $1,110,00018 62 SFD 75 x 110 4,100 3 $105.69 $433,333 $1,300,000
19 76 SFD 80 x 110 4,500 3 $111.86 $503,367 $1,510,100
20 86 SFD 85 x 120 4,600 3 $111.59 $513,333 $1,540,00021 51 SFD 100 x 120 5,200 3 $115.38 $600,000 $1,800,000
22 39 SFD 120 x 150 5,900 3 $118.64 $700,000 $2,100,00029 80 Courtyard (8 pack) 1,600 3 $120.83 $193,333 $580,000
30 96 Zero Lot Line 2,000 3 $112.50 $225,000 $675,00031 66 SFD 45 x 100 2,800 3 $107.14 $300,000 $900,000
32 100 SFD 50 x 100 3,200 3 $103.13 $330,000 $990,00033 51 SFD 60 x 100 3,950 3 $105.49 $416,667 $1,250,000
Attached
1 136 Mid-Rise Flats 1,125 3 $155.56 $175,000 $525,000
2 101 Row TH 1,725 3 $115.94 $200,000 $600,0003 100 Luxury Triplex 1,900 3 $118.42 $225,000 $675,000
9 85 Luxury Attached 2,250 3 $111.11 $250,000 $750,00026 85 Garden Flats/TH 1,200 3 $111.11 $133,333 $399,999
27 112 Brownstone Villas 1,575 3 $120.63 $190,000 $570,000
28 112 Townhomes (Camden) 1,375 3 $133.33 $183,333 $549,99951 112 Willowhaven 1,664 3 $120.19 $200,000 $600,000
Minimum 39 --- 1,125 --- $101.37 $133,333 $399,999Maximum 136 --- 5,900 --- $155.56 $700,000 $2,100,000
Averages --- --- 2,563 --- $112.53 $319,376 $958,129 (1) Reflects upgrades, merchandizing, hardscape, landscape, etc.
MODEL HOME COSTS BY PRODUCT TYPE(1)
Heritage Fields Master Plan, Irvine, California
Homeowners’ Fees The developer would be required to pay association fees on unsold standing inventory in phased construction. Due to the early development stage, the developer has not formulated the Heritage Fields Master-plan community-wide association fees. Therefore, the appraisers surveyed similar master-plans within the subject’s submarket. Homeowner association (HOA) fees range from $110 to $323 per unit per month for comparative detached residential projects and from $290 to $401 per unit per month for comparative attached residential projects within the subject’s submarket. With the comparables, the study in
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
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consideration, and the costs reported by the developer, HOA fees of $115 per unit per month for the detached product and $315 per unit per month for the attached product were incorporated into all of the planning area/parcel cost budgets. Base Property Taxes and Special Assessments The developer is required to pay normal property taxes and any other assessments over the course of development. Property taxes assumed an initial purchase at the indicated value from this approach, a 1.75% overall tax rate, 2.00% annual escalations (maximum allowed by law), and a diminishing inventory. Financing / Holding Costs A typical subdivision development package usually consists of construction financing for the full hard and related soft costs at rates of .25% to 1.00% over prime with accelerated repayments based on 110% to 120% of the prorated loan per unit. As of the date of value, the prime rate was 8.25%. Interest rates were recently near historically low levels and are anticipated to be increasing over the short- and long-term. Accordingly, holding costs for the production lots were based on a total loan-to-value ratio of 75%, 110% release price, and 9.00% interest rate. Construction and land development were financed up to a maximum loan-to-aggregate retail value ratio of 75%. A land loan (draw) was included, provided total construction costs resulted in a loan-to-value ratio not exceeding the maximum. Monthly interest payments were made throughout the sell-out period until the note was paid off. Loan points and fees, or the equivalent facility fee, of 1.25% were included. Miscellaneous A miscellaneous allowance of 1.00% of sales was included for costs and contingencies not accounted for in the other cost categories. The allowance is allocated monthly over the course of development. Profit In a static analysis, a typical developer/builder will evaluate profit by deducting all construction and sell-off costs from the projected selling price of the completed units. The remaining figure represents the developer's lump sum profit figure. The developer then relates this figure back to the projected selling price, or a construction cost figure, to determine the percentage return. The ratio provides a unit of measure to judge the adequacy of the venture's profit in relation to the developer's perceived risk. The appraisers surveyed consultants, builders, and developers regarding required profit for this type of investment. Overall, a consensus was that a static analysis profit rate ranging from 7% to 12% of sales was reasonable on detached residential construction, typically at the lower end of the range. Most participants in tract housing, primarily represented by larger national builders, are anticipating 8% to 10% in static profit in this submarket. Given the site is “infill” in nature, builders would be acquiring superpads, and the competition amongst national builders for “vertical” only construction and sales programs, an 8% static profit was deemed reasonable for detached residential lot development. Attached residential development static profit rates are typically higher than standard detached production housing, normally ranging from about 10% to
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15%. We have utilized a 10% profit factor for the attached residential The appraisers’ profit rates consider development by national, regional, and local builders which are represented by the overall ranges previously mentioned. SUMMARY OF STATIC ANALYSES The indicated residual land values via the static model are exhibited in the following table. For the development method, the market value for the detached product as totally finished lots with fees was estimated by summing fees at permit with the residual land value indicated from the development method. On those planning areas/parcels with attached product, no costs to finish were applicable. Summation of the land residual finished lot figures with the costs to finish indicated finished lot/superpad values ranging from $222,166 to $1,452,531 per lot, depending on the planning area/parcel. Note that the implied superpad values include fees due at permit for detached product while the attached product superpad values do not include intracts or fees due at permit.
Product No of Units Minimum Wtd. Avg. Static Indicated Costs to Finished Per LotType Valued Lot Size / Product Home Size Profit Land Value(1) Finish(2) Lot Value(3) Basis
4 59 Courtyard 2,000 8.00% $24,162,965 $3,235,796 $27,398,761 $464,3865 52 SFD 45 x 105 2,200 8.00% $24,506,878 $2,515,136 $27,022,014 $519,6546 67 SFD 60 x 105 2,650 8.00% $38,341,635 $4,244,584 $42,586,219 $635,615
10 70 Courtyard 2,950 8.00% $42,578,056 $3,887,240 $46,465,296 $663,79016 44 SFD 70 x 110 4,000 8.00% $35,092,789 $3,752,760 $38,845,549 $882,85317 81 SFD 70 x 100 3,650 8.00% $53,727,582 $6,327,963 $60,055,545 $741,426
18 62 SFD 75 x 110 4,100 8.00% $49,311,641 $5,649,812 $54,961,453 $886,47519 76 SFD 80 x 110 4,500 8.00% $72,291,204 $7,327,996 $79,619,200 $1,047,62120 86 SFD 85 x 120 4,600 8.00% $80,692,455 $9,440,994 $90,133,449 $1,048,06321 51 SFD 100 x 120 5,200 8.00% $56,942,315 $6,613,884 $63,556,199 $1,246,20022 39 SFD 120 x 150 5,900 8.00% $49,500,664 $7,148,037 $56,648,701 $1,452,53129 80 Courtyard (8 pack) 1,600 8.00% $26,541,739 $2,653,520 $29,195,259 $364,94130 96 Zero Lot Line 2,000 8.00% $37,627,005 $3,284,832 $40,911,837 $426,16531 66 SFD 45 x 100 2,800 8.00% $30,932,087 $3,553,242 $34,485,329 $522,50532 100 SFD 50 x 100 3,200 8.00% $52,754,063 $5,952,600 $58,706,663 $587,06733 51 SFD 60 x 100 3,950 8.00% $35,151,348 $3,586,881 $38,738,229 $759,573
Attached
1 136 Mid-Rise Flats 1,125 10.00% $31,009,194 $0 $31,009,194 $228,0092 101 Row TH 1,725 10.00% $31,534,219 $0 $31,534,219 $312,2203 100 Luxury Triplex 1,900 10.00% $31,176,535 $0 $31,176,535 $311,7659 85 Luxury Attached 2,250 10.00% $29,337,468 $0 $29,337,468 $345,147
26 85 Garden Flats/TH 1,200 10.00% $18,884,095 $0 $18,884,095 $222,16627 112 Brownstone Villas 1,575 10.00% $31,083,649 $0 $31,083,649 $277,53328 112 Townhomes (Camden) 1,375 10.00% $29,311,829 $0 $29,311,829 $261,71351 112 Willowhaven 1,664 10.00% $34,896,715 $0 $34,896,715 $311,578
Minimum 39 --- 1,125 8.00% --- --- --- $222,166Maximum 136 --- 5,900 10.00% --- --- --- $1,452,531
(1) Indicated sheet-graded super pads value via static method. (2) Builder's intracts and fees @ permit (detached). (3) Implied finished lot value via static method.
STATIC RESIDUAL LAND VALUES BY PRODUCT TYPEHeritage Fields Master Plan, Irvine, California
YIELD ANALYSES The yield analysis was accomplished by applying a discounted cash flow technique. Anticipated sale revenues, loan criteria, profit, costs, expenses, etc., were projected over the total development period and periodic net cash flows were discounted on an annual basis at an appropriate discount (return) rate. The
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sum of the discounted cash flows resulted in a present value, or residual to land value. Assumptions were similar to those in the static analysis. The only cost variances were in property taxes and financing, which reflected a land basis per this model. The other major difference would be utilization of the discount rate (IRR) as opposed to static profit rate. Timing and Absorption The Development and Sales Schedules for the respective product types, included in the Addenda, provide an overview of the absorption and development assumptions for each product type. For the subject detached and attached product, the first month in the cash flows correlates to the acquisition date of the lots and planning areas/parcels in a superpad condition. Intract/offsite development was assumed in Month 1 for both attached and detached product. Model construction was scheduled for Month 4. Start of production unit construction was in Month 6 and initial release was scheduled for Month 5. Initial delivery would be in Month 11. Subsequent construction cycles for both attached and detached product were scheduled at five-month intervals. The appraisers were provided a Market Analysis and Product Program Study for the Heritage Fields Master-planned Community completed by The Concord Group dated April 10, 2007. The appraisers analyzed the subject and the competition and concurred with the absorption rates presented in the Concord Study. The product absorption rates are presented in the following table.
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Product Minimum Wtd. Avg. Wtd. Avg.Type Lot Size Home Size Base Price Sustained Effective
4 Courtyard 2,000 $884,000 5.00 3.695 SFD 45 x 105 2,200 $954,000 4.50 3.256 SFD 60 x 105 2,650 $1,169,000 3.50 2.91
10 Courtyard 2,950 $1,249,000 3.50 3.0416 SFD 70 x 110 4,000 $1,714,000 3.50 2.59
17 SFD 70 x 100 3,650 $1,483,000 4.00 3.3818 SFD 75 x 110 4,100 $1,739,000 3.50 2.9519 SFD 80 x 110 4,500 $2,014,000 3.00 2.81
20 SFD 85 x 120 4,600 $2,042,000 3.00 2.8721 SFD 100 x 120 5,200 $2,406,000 2.50 2.2222 SFD 120 x 150 5,900 $2,797,000 2.00 1.95
29 Courtyard (8 pack) 1,600 $699,000 5.50 4.4430 Zero Lot Line 2,000 $826,000 4.50 3.8431 SFD 45 x 100 2,800 $1,065,000 4.30 3.47
32 SFD 50 x 100 3,200 $1,197,000 4.00 3.5733 SFD 60 x 100 3,950 $1,510,000 4.00 3.40
Attached
1 Mid-Rise Flats 1,125 $575,000 6.00 4.862 Row TH 1,725 $753,000 5.00 4.04
3 Luxury Triplex 1,900 $819,000 5.50 4.359 Luxury Attached 2,250 $916,000 4.00 3.2726 Garden Flats/TH 1,200 $538,000 6.00 4.47
27 Brownstone Villas 1,575 $688,000 5.00 4.1528 Townhomes (Camden) 1,375 $613,000 5.50 4.4851 Willowhaven 1,664 $739,000 4.80 4.00
Minimum --- 1,125 $538,000 2.00 1.95Maximum --- 5,900 $2,797,000 6.00 4.86
Averages --- 2,563 $1,103,369 4.25 --- (1) Detailed absorption and development schedules found in Addenda.
PRODUCT ABSORPTION RATES BY PRODUCT TYPE(1)
Heritage Fields Master Plan, Irvine, CaliforniaMonthly Absorption
Sustained absorption reflects the sales period from initial product release to the date the product sells out. Effective absorption reflects the actual number of months from initial release to final close of escrow and delivery to the individual buyer(s). Overall, absorption was scheduled at a sustained rate of 2.00 to 6.00 homes per project per month, depending on product type. Detached product has sustained monthly absorptions between 2.00 and 5.50 home sales per month, with effective absorptions ranging from 1.95 to 4.44 home sales per month. Attached product has sustained monthly absorptions ranging from 4.00 to 6.00 sales per month. Effective monthly absorptions for attached product range from 3.27 to 4.86 homes per month. Typically, final absorption rates obtained from builders include the closing period. Thus, the effective absorption rates offer an additional comparison indicator. Revenue and Expense Escalation Considering the scheduled development, sales, and build-out duration, neither revenue nor expense trending was incorporated into the cash flow. Reconciled static profit and discount rates (IRR) reflected the “static” assumptions for home revenues and costs.
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Entrepreneurial Reward / Discount Rate Developer's profit and discount rate assumptions are interrelated. Profit can be included as a line item expense in the cash flow or reflected in the discount rate. There are several ways to handle entrepreneurial profit in a cash flow forecast. The two most common in this market are 1) deduction as a line item expense based on a percentage of retail sales revenues under a static residual model and 2) increase the discount rate to account for the entrepreneur’s contribution in addition to project risk under a yield residual model. As merchant developers in this market typically recognize profit and return requirements in yields to equity under a yield analysis, this method was used. Since there is no deduction for profit, the bottom line cash flow must be discounted to account for the overall required return to the property. Under these assumptions, the sum of the net cash flows, discounted appropriately, results in the amount a developer/builder could pay for the land, while realizing given profit, equity yield, and financial criteria. Yield rates for subdivision development are not generally published. Several consultants, builders, developers, and other investors were surveyed regarding yield requirements for this type of investment. Overall, a consensus was that equity internal rates of return were greatly dependent on the term of the investment. Due to costs and delays in acquiring alternative developments, short-term projects often have equity yield rates well above 40% whereas longer-term projects typically required internal rates of returns from just below 20% to over 30%. Iterating to the static method resulted in leveraged IRRs ranging from 32.16% to 52.05%. The higher IRR indications for the attached product are not unusual given the shorter build-out periods on the town home product where revenues are not obtained till the last half of the cash flow. With consideration for the above along with the projected development durations for the subject product types, the leveraged discount rates were deemed appropriate. Said rates reflect the non-trending assumption discussed above. The following table summarizes the yield residual land values and leveraged internal rates of return per product type.
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Product No. of Units Minimum Wtd. Avg. IRR(1) Indicated Costs to Finished Per LotType Valued Lot Size / Product Home Size (Leveraged) Land Value(2) Finish(3) Lot Value(4) Basis
4 59 Courtyard 2,000 49.34% $24,162,965 $3,235,796 $27,398,761 $464,3865 52 SFD 45 x 105 2,200 49.08% $24,506,878 $2,515,136 $27,022,014 $519,6546 67 SFD 60 x 105 2,650 39.03% $38,341,635 $4,244,584 $42,586,219 $635,615
10 70 Courtyard 2,950 39.80% $42,578,056 $3,887,240 $46,465,296 $663,79016 44 SFD 70 x 110 4,000 44.14% $35,092,789 $3,752,760 $38,845,549 $882,85317 81 SFD 70 x 100 3,650 37.61% $53,727,582 $6,327,963 $60,055,545 $741,42618 62 SFD 75 x 110 4,100 42.72% $49,311,641 $5,649,812 $54,961,453 $886,47519 76 SFD 80 x 110 4,500 36.48% $72,291,204 $7,327,996 $79,619,200 $1,047,62120 86 SFD 85 x 120 4,600 34.08% $80,692,455 $9,440,994 $90,133,449 $1,048,06321 51 SFD 100 x 120 5,200 38.87% $56,942,315 $6,613,884 $63,556,199 $1,246,20022 39 SFD 120 x 150 5,900 45.49% $49,500,664 $7,148,037 $56,648,701 $1,452,53129 80 Courtyard (8 pack) 1,600 44.38% $26,541,739 $2,653,520 $29,195,259 $364,94130 96 Zero Lot Line 2,000 34.07% $37,627,005 $3,284,832 $40,911,837 $426,16531 66 SFD 45 x 100 2,800 42.91% $30,932,087 $3,553,242 $34,485,329 $522,50532 100 SFD 50 x 100 3,200 32.16% $52,754,063 $5,952,600 $58,706,663 $587,06733 51 SFD 60 x 100 3,950 48.94% $35,151,348 $3,586,881 $38,738,229 $759,573
Attached
1 136 Mid-Rise Flats 1,125 42.85% $31,009,194 $0 $31,009,194 $228,0092 101 Row TH 1,725 44.50% $31,534,219 $0 $31,534,219 $312,2203 100 Luxury Triplex 1,900 46.98% $31,176,535 $0 $31,176,535 $311,7659 85 Luxury Attached 2,250 44.90% $29,337,468 $0 $29,337,468 $345,147
26 85 Garden Flats/TH 1,200 52.05% $18,884,095 $0 $18,884,095 $222,16627 112 Brownstone Villas 1,575 42.60% $31,083,649 $0 $31,083,649 $277,53328 112 Townhomes (Camden) 1,375 44.59% $29,311,829 $0 $29,311,829 $261,71351 112 Willowhaven 1,664 42.77% $34,896,715 $0 $34,896,715 $311,578
Minimum 39 --- 1,125 32.16% --- --- --- $222,166Maximum 136 --- 5,900 52.05% --- --- --- $1,452,531
(1) Implied IRR iterated to the static method. (2) Indicated superpad (sheet-graded) value via yield method. (3) Builder's intracts and fees @ permit (detached). (4) Implied superpad or finished lot value via yield method.
YIELD RESIDUAL LAND VALUES BY PRODUCT TYPEHeritage Fields Master Plan, Irvine, California
SALES COMPARISON APPROACH (RESIDENTIAL – ATTACHED AND DETACHED PRODUCT) The appraisers have analyzed the residential planning areas based on the 24 product types. In our analysis, we chose a representative planning area population for each product type. In a later section of this report, we will extrapolate our product type analysis to all residential planning areas. The residential portion of the Heritage Fields project consists of 16 detached products and 8 attached products. In the sales comparison approach we have analyzed both attached and detached land sales based on a finished lot price (detached) or superpad price (attached). Quantitative adjustments, if appropriate, were applied for property rights conveyed, terms of sale, conditions of sale, market conditions, overall tax rate, and physical characteristics. Specific adjustments were not deemed to be absolute, but were the appraisers’ attempt to account for the value contributions of the various factors in the marketplace. This analysis involved a comparison of sales, pending sales, listings, etc., to the subject’s planning areas/parcels. The appraisers gathered extensive land sale transaction data from Orange County and more specifically, the Central submarket and similar submarkets. More than 10 multi-family and 20 single
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family land transactions, listings, and/or contracts were researched and confirmed. Multi-family sales ranged from about $182,953 to over $695,000 per unit based on superpad condition. With regard to single family product, more recent finished lot prices were in the general range of $270,000 to $3,000,000, depending on specific lot size, location, etc.
ATTACHED RESIDENTIAL PRODUCT TYPES Heritage Fields includes eight attached product types. These product types are identified as Products 1, 2, 3, 9, 26, 27, 28 and 51. The following is a summary of the product types analyzed:
• Product 1 is mid-rise flats (136 units analyzed); • Product 2 is row townhouse (101 units analyzed); • Product 3 is luxury triplex (100 units analyzed); • Product 9 is luxury attached (85 units analyzed); • Product 26 is garden flats/town homes (85 units analyzed); • Product 27 is brownstone villas (112 units analyzed), • Product 28 is townhomes (112 units analyzed); • Product 51 is attached product (112 units analyzed).
A search was made for attached residential land sales in the Orange County area. Overall, eight sales were deemed relevant and specifically analyzed herein. The eight sales were analyzed on a superpad price per unit basis, which is typical for attached residential land in this market. The attached product types for Heritage Fields vary from 5.5 to 25.0 dwelling units per acre (DU/acre). For the purposes of this analysis we have grouped the attached land sales by density, specifically: low, medium and high density. The low density analysis addresses Products 3 and 9 (densities ranging from 5.5 to 6.0 DU/acre), the medium density analysis addresses Products 2, 26, 27, 28 and 51 (13.0 to 18.0 DU/acre), and the high density analysis addresses Product 1 (25.0 DU/acre). The attached land sales adjustment grids (by the three groupings) follow the discussion of the sales and the adjustment process.
Sale 1 (Tamarisk), sold at $24,559,131 or $217,337 per unit in June 2004 and closed escrow in January 2005. This is a 6.6-acre parcel located in the Irvine area, on the west side of Culver Drive, north of Freeway 5 approximately 3.54± miles northwest of the subject. The property is surrounded by residential tract homes. The density is 17.1 dwelling units per acre. The property was entitled with a tentative map and was in superpad condition at the time of sale. The seller was The Irvine Company and the buyer was William Lyon Homes. William Lyon homes intended on building 1,187 to 1,498 square foot attached product with base prices of $472,990 to $557,990. The site is planned for development with 113 attached homes.
Sale 2 (Magnolia Lane - Attached), sold at $23,443,048 or $308,461 per unit in October 2005. This is a 5.0-acre parcel, located in the Anaheim area, at 42 N. Magnolia Avenue in Anaheim approximately 17.7± miles northwest of the subject. The density is 15.2 dwelling units per acre. The property was entitled with a tentative map and was in superpad condition at the time of sale. The seller was Magnolia Lane Investment Group and the buyer was KB Home. KB Home intended on building 1,000 to 1,850 square foot attached product. The site is planned for development with 76 attached homes.
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Sale 3 (Clarendon), sold at $20,742,222 or $203,355 per unit in July 2005 and closed escrow in April 2006. This is an 8.41-acre parcel, located in the Tustin area, west of Harvard Avenue and south of Moffett Street approximately 4.34 miles northwest of the subject. The property is surrounded by new residential tract homes, as well as light industrial. Although we have not been able to confirm approval of the tentative map, we have assumed the property sold with a tentative map in place. The density is 12.1 dwelling units per acre. The property was in superpad condition at the time of sale. The seller is Moffett Meadows Partners and the buyer is William Lyon Homes. William Lyon homes intended on building 1,217 to 2,227 square foot attached product with base prices of $550,000 to $750,000. The site is planned for development with 102 attached homes.
Sale 4 (Palazzo), sold at $20,000,000 or $188,679 per unit in September 2005 and closed escrow in February 2006. This is a 6.37-acre parcel, located in the Stanton area, at 11320 Beach Boulevard approximately 17.6± miles northwest of the subject. The density is 16.6 dwelling units per acre. The property was entitled with a tentative map and was in raw condition at the time of sale. The seller was Stanton Plaza Group II and the buyer was Taylor Woodrow Homes. Taylor Woodrow Homes intended to build attached homes with an average size of 1,540 square foot attached product with an average base price of $574,715. The costs to finish this site were $25,000 per unit. The site is planned for development with 106 attached homes.
Sale 5 (Del Rio Master-plan), sold at $46,653,015 or $182,953 per unit in December 2005. This is a 16.45-acre parcel, located in the Orange area, at the northwest corner of Glassell Street and Lincoln approximately 12.8± miles northwest of the subject. The density is 15.5 dwelling units per acre. The property was entitled with a tentative map and was in superpad condition at the time of sale. The seller was Suncal Companies and the buyer was Lennar/Centex. The site is planned for development with 255 attached homes.
Sale 6 (Treo Woodbury MP), sold at $32,775,623 or $242,782 per unit in October 2003 and closed escrow in June 2004. This is a 10.4-acre parcel, located in the Irvine area, at the southeast corner of Vintage and Townsend in Irvine approximately 2.46± miles northeast of the subject. The density is 13.0 dwelling units per acre. The property was entitled with a tentative map and was in superpad condition at the time of sale. The seller was The Irvine Company and the buyer was Brookfield Homes. Brookfield Homes intended on building 1,800 to 2,100 square foot attached product. The site is planned for development with 135 attached homes.
Sale 7 (Magnolia Lane), sold at $16,783,500 or $441,671 per unit in October 2005. This parcel is located in the Anaheim area, on the west side of Magnolia Avenue, north of Lincoln Avenue approximately 18.1 miles northwest of the subject. The density is 8.8 dwelling units per acre. The property was entitled with a tentative map and was in superpad condition at the time of sale. The seller was Magnolia Lane Investment Group and the buyer was KB Home. KB Home intended on building 2,000 to 2,500 square foot attached product. The site is planned for development with 38 attached homes.
Sale 8 (Pacifica San Juan), sold at $40,310,000 or $695,000 per unit in July 2005 and closed escrow in July 2006. This parcel is located at the northeast corner of Camino las Ramblas and Via California in the
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City of San Juan Capistrano approximately 14.0± miles southeast of the subject. The density is 8.0 dwelling units per acre. The property was entitled with a tentative map in place and was in superpad condition at the time of sale. The seller was Suncal Companies and the buyer was Centex Homes. The site is planned for development with 58 attached homes. As mentioned, for the purposes of this analysis we have grouped the attached land sales by low, medium and high density. The low density analysis addresses Products 3 and 9 (densities ranging from 5.5 to 6.0 DU/acre) will be identified as Group 1. The medium density analysis addresses Products 2, 26, 27, 28 and 51 (13.0 to 18.0 DU/acre) will be identified as Group 2. The high density analysis addresses Product 1 (25.0 DU/acre) will be referred to as Group 3. Property Rights Conveyed No adjustments were warranted for property rights conveyed as all of the land data sold with fee simple property rights. Financing (Terms of Sale) None of the sales was reported to include atypical financing warranting adjustments. Conditions of Sale Sales conditions include any distress influences, less than arm’s length transactions, improvements on the site contributing to value, and other related influences that were not attributable to financing, market conditions, or physical differences. None of the sales required adjustments for condition of sale. Market Conditions (Time of Sale) The sales used in the adjustment grid analysis occurred between October 2003 and February 2006. As previously discussed, residential land prices incurred appreciation in the Orange County submarket over the 2003, 2004, and 2005 periods with a softening occurring in 2006 and 2007 due to decreasing demand. Based upon an internal comparison of the data, and an examination of current or pending prices for similar lots in the submarket, upward adjustments were warranted for the earlier sales. Overall, we applied upward adjustments for sales that occurred in 2004 of 10% and downward adjustments of 10% for sales in 2005 and 2006.
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V A L U A T I O N S E R V I C E S 2 0 6
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omes
$24,
559,
131
113
$217
,337
$217
,337
Supe
rpad
1,18
7to
1,49
8N
/Av
41.4
1%1
W/S
Cul
ver D
r. &
N/O
I-5
830-
G7
Irvin
e C
o.Ju
n-04
17.1
du/
acTe
ntat
ive
Map
$472
,990
to$5
57,9
90$5
24,8
45Irv
ine,
CA
528-
012-
16 &
17
Jan-
056.
6 ac
res
2.00
%(p
or)
M
agno
lia L
ane
-Atta
ched
Cent
ral C
ount
yK
B H
omes
$23,
443,
048
76$3
08,4
61$3
08,4
61Su
per P
ad1,
000
to1,
850
N/A
vN
/Av
242
5 N
. Mag
nolia
Ave
.76
8-B
5M
agno
lia L
ane
Inve
stm
ent
Oct
ober
-05
15.2
du/
acTe
ntat
ive
Map
N/A
vto
N/A
vN
/Av
Ana
heim
, CA
070-
171-
05 (P
ortio
n)G
roup
N/A
v5.
0 ac
res
2.00
%
Cl
aren
don
Cent
ral
Will
iam
Lyo
n H
omes
$20,
742,
222
102
$203
,355
$203
,355
Supe
rpad
1,21
7to
2,22
7N
/Av
N/A
v3
W o
f Har
vard
Ave
. & S
of M
offe
tt St
.86
0-C
3M
offe
tt M
eado
ws
Partn
ers
Jul-0
512
.1 d
u/ac
TM A
ssum
ed$5
50,0
00to
$750
,000
N/A
vTu
stin
, CA
434-
062-
09A
pr-0
68.
41 a
cres
2.00
%
Pa
lazz
oCe
ntra
lTa
ylor
Woo
drow
Hom
es$2
0,00
0,00
010
6$1
88,6
79$2
13,6
79R
awN
/Av
toN
/Av
1,54
037
.18%
411
320
Bea
ch B
lvd.
797-
J3St
anto
n Pl
aza
Gro
up II
Sep-
0516
.6 d
u/ac
Tent
ativ
e M
apN
/Av
toN
/Av
$574
,715
Stan
ton,
CA
131-
141-
08, 1
1, 1
2, 1
5, 1
6Fe
b-06
6.37
acr
es1.
70%
D
el R
io M
aste
r Pla
nCe
ntra
l Cou
nty
Lenn
ar/C
ente
x$4
6,65
3,01
525
5$1
82,9
53$1
82,9
53Su
per P
adN
/Av
toN
/Av
N/A
vN
/Av
5N
WC
Gla
ssel
l St.
& L
inco
ln76
9-G
4Su
nCal
Com
pani
esD
ec-0
515
.5 d
u/ac
Tent
ativ
e M
apN
/Av
toN
/Av
N/A
vO
rang
e, C
AN
/Av
N/A
v16
.45
acre
s2.
00%
Tr
eo, W
oodb
ury
MP
Cent
ral C
ount
yB
rook
field
Hom
es$3
2,77
5,62
313
5$2
42,7
82$2
42,7
82Su
per P
ad1,
800
to2,
100
N/A
vN
/Av
6SE
C V
inta
ge &
Tow
nsen
d86
1-A
2Irv
ine
Co.
Oct
-03
13 d
u/ac
Tent
ativ
e M
apN
/Av
toN
/Av
N/A
vIrv
ine,
CA
Trac
ts 1
6533
& 1
6539
Jun-
0410
.4 A
cres
2.00
%
M
agno
lia L
ane
Cent
ral C
ount
yK
B H
omes
$16,
783,
500
38$4
41,6
71$4
41,6
71Su
perp
ad2,
000
to2,
500
N/A
vN
/Av
7W
/S o
f Mag
nolia
Ave
., N
/O L
inco
ln A
ve.
768-
B5
Mag
nolia
Lan
e In
vest
men
tO
ct-0
58.
8 du
/ac
Tent
ativ
e M
apN
/Av
toN
/Av
N/A
vA
nahe
im, C
AN
/Av
Gro
upN
/Av
4.32
Acr
es2.
00%
Pa
cific
a Sa
n Ju
an (T
he G
arde
n)So
uth
Coun
tyCe
ntex
Hom
es$4
0,31
0,00
058
$695
,000
$695
,000
Supe
rpad
N/A
vto
N/A
vN
/Av
N/A
v8
NEC
of C
amin
o la
s Ram
blas
& V
ia C
alifo
rnia
972-
C5,C
6Su
nCal
Com
pani
esJu
l-05
8.0
du/a
cTe
ntat
ive
Map
N/A
vto
N/A
vN
/Av
San
Juan
Cap
istra
no, C
AN
/Av
Jul-0
67.
25 A
cres
2.00
%
(1) F
inis
hed
lot p
rice
s ar
e as
sum
ed to
be
net o
f CFD
reim
burs
emen
ts
Var
ious
Ave
rage
Pro
duct
Siz
e (s
f)B
ase
Pric
ing
AT
TA
CH
ED
CO
MPA
RA
BL
E L
AN
D S
AL
E S
UM
MA
RY
Her
itage
Fie
lds,
Irvi
ne, C
alifo
rnia
Var
ious
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 0 7
ATTACHED RESIDENTIAL LAND SALES MAP
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 0 8
General Location / Specific Location / Overall Tax Rate The economic, political, and social influences in a community, as well as the specific orientation of a site within a neighborhood, require consideration for possible location adjustment. All of the data were from the Orange submarket, and deemed similar in general location. Location takes into consideration the comparables’ and the subject’s physical orientation to the surrounding area, including proximity to local services and the quality and appeal of the community at large. Heritage Fields, will be a “trophy” master-planned community and will include several significant amenities such as the Great Park, golf courses, club houses, various trails, and a main street retail component. Most of the comparables used in this analysis have inferior specific location compared to the subject property. The comparables located in Tustin and Anaheim (Land Sales 2, 3, and 7) were adjusted upward 13%± to 15%±. The comparable located in Stanton was adjusted upward 35%±. The comparable located in Orange (Land Sale 5) was adjusted upward 25%±. The comparables located in Irvine (Land Sales 1 and 6) were adjusted upward 10%±. The comparables located in San Juan Capistrano (Land Sale 8) were adjusted downward 15%±. San Juan Capistrano is a superior location to the subject property due to its coastal proximity and southern Orange County location with proximity to San Diego County. This category also addresses the subject’s and the comparables’ overall tax rates. Buyers are often unwilling to pay a similar price for a home in an area having a high tax rate (resulting from CFDs or Mello Roos fees) as in an area with a low tax rate due to the additional monthly payments involved. Consequently, merchant builders typically pay lower prices for the land in high tax rate areas. As all of the comparables have similar overall tax rates as the subject (1.70%± to 2.00±) no adjustments were required in this analysis. Premium Potential The premium potential for the subject property varies with location in the master-plan. The primary premium potential for the subject property’s attached product would be associated with limited views and elevations. Overall, the subject’s attached product indicated average premium potential. All the comparables had similar premium potential and no adjustment was made for this element of comparison. Economy of Scale It would seem reasonable that in comparison to smaller-sized developments, larger-sized projects would typically sell for a slightly lower price per unit since the builder would have more extensive carrying costs. The inverse would be expected for smaller projects. Another consideration influencing this adjustment is that builders require a project of sufficient size to amortize many of the fixed costs of doing business, as well as to provide the homebuyer with ample selection. That minimum project size depends upon the particular demands and financial ability of the individual builder. The subject product types, for the attached product, vary from 85 to 136 units. The analyzed land comparables ranged from 38 to 255 lots. Note that although a smaller project would have lower overall carrying costs, it would also have higher costs in amortization of marketing expenses, models, etc. Further, some builders are willing to pay a premium to have a larger number of lots in a single location rather than a similar number of lots dispersed in several locations. Demand for residential land has also resulted in minimal, if any, economy
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 0 9
of scale discounts for larger lot count projects. In the current market, there is no measurable difference for the project sizes bracketing the subject. Density All other factors being similar, parcels with a higher density tend to have a lower price per unit, though the overall price of the land is higher. It has been our experience that only significant differences in density fall into this category. This may be due to differences in product which can offset density or possibly developers in Orange County do not differentiate most small to moderate differences in density due to the high demand for attached land in Orange County. The subject lots were divided into three categories. The low density analysis addresses Products 3 and 9 (densities ranging from 5.5 to 6.0 DU/acre) will be identified as Group 1. The medium density analysis addresses Products 2, 26, 27, 28 and 51 (13.0 to 18.0 DU/acre) will be identified as Group 2. The high density analysis addresses Product 1 (25.0 DU/acre) will be referred to as Group 3. In Group 1 the subject densities vary from 5.5 to 6.0 DU/acre. The comparables used in this analysis varied in densities from 8.0 to 13.0 DU/acre. Upward adjustments were applied to Land Sales 3 and 6 of $12,000 per unit, or 4%± to 7%± of adjusted sales price per unit. Upward adjustments of $5,000 were applied to Land Sales 7 and 8, or approximately 1%± of the adjusted sales price per unit. In Group 2 the subject densities vary from 13.0 to 18.0 DU/acre. The comparables used in this analysis varied in densities from 15.2 to 17.1 DU/acre. No adjustments were applied. In Group 3 the subject density is 25.0 DU/acre. The comparables used in this analysis varied in densities from 12.1 to 17.1 DU/acre. Downward adjustments were applied to Land Sales 1 through 4 of $15,000 per unit, or between 5%± and 8%± of adjusted sales price per unit. Proposed Product The proposed product size of the subject and comparables was also considered. For the most part, variances in proposed product are companion to the lot size adjustment. For this analysis, the proposed product of the comparables was considered similar to the subject. Entitlements It is often expected that due to risk, costs, and additional carry, lower prices would be paid for projects in the earlier stages of development (i.e., un-entitled land) than for projects closer to completion (i.e., Final Map). The subject planning areas were assumed to be in superpad condition, with tentative map approval. All of the comparable sales had tentative map approval at the time of sale and/or delivery of the lots/units to the buyer. As all the comparables have similar entitlements compared to the subject property no adjustments were applied.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 1 0
Profit Participation The subject property will be subject to a Profit Participation Agreement between the master developer (Lennar) and the prospective home builder. In addition to the purchase price of each residential planning area/parcel, merchant builders shall pay to the master developer 70% of all net profit realized from the construction of homes. The net profit shall be paid at the time of home sales. Essentially, merchant builders are obligated to acquire the land on terms where they pay the master developer 70% of net profits for distribution, after all costs (including 8% for profit). Based on the results of the development method residual analysis, various profit participation requirements resulted for the various product types. Calculation of this cost to the builder results in the following: Group 1 – a downward adjustment of 10.8%; for Group 2 – a downward 10.3% adjustment, and for Group 3 – a downward adjustment of 11.3% of the adjusted sales price per unit for those comparables that are not subject to a profit participation agreement. Entitlement Risk Due to added carrying costs and exposure risk from extended project life, it is expected that lower prices are paid for projects in earlier stages of development (i.e., unentitled land) than for projects closer to completion (i.e., final map). The risk associated with entitlements also varies upon specific market conditions at the time of sale. Entitled land in appreciating markets with strong demand would have a lower perceived risk than similar land in stabilizing or depreciating markets with little demand. It is expected that higher prices are paid for projects with lower entitlement risk relative to demand. As previously discussed, the subject is assumed to have a tentative map in place and all the comparables are entitled with tentative maps. Therefore, no adjustments were necessary for this element of comparison. Stage of Development For similar reasons to those stated above (carry costs and exposure risk from an extended project life), it is expected that lower prices are paid for projects in earlier stages of development (i.e., raw land) than for projects closer to completion (i.e., blue top and finished site). The subject is assumed to be in superpad condition. Comparables in superpad condition were considered similar to the subject property and no adjustment was warranted. Land Sale 4 is in raw condition and an upward adjustment of $10,000 or approximately 5%± of the adjusted sales price per unit was applied to this comparable. RECONCILIATION – ATTACHED RESIDENTIAL PRODUCT TYPES As previously mentioned, the subject product types were split into three groups represented by three adjustment grids. Group 1 (Products 3 and 9) applies to the subject’s lower density product between 5.5 to 6.0 DU/acre. For this group, before adjustments the sales prices for Comparables 3, 6, 7, and 8 ranged from $203,355 to $695,000 per unit, with an average of $395,702 per unit. After having applied relevant quantitative adjustments to the comparable data, the adjusted prices narrowed to $199,020 to $536,500 per unit, with an average of $358,021. All of the sales were taken into consideration and the analysis of the comparable data would suggest that a per unit value of $340,000 would be reasonable for Products 3 and 9 via the sales comparison approach.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 1 1
Group 2 (Products 2, 26, 27, 28 and 51) applies to the subject’s medium density products between 13.0 to 18.0 DU/acre. For this group, before adjustments the sales prices for Comparables 1, 2, 4, and 5 ranged from $182,953 to $308,461 per unit, with an average of $230,608 per unit. After having applied relevant quantitative adjustments to the comparable data, the adjusted price range narrowed to $188,658 to $290,615 per unit, with an average of $241,664. Most reliance was placed on Comparables 1, 2, and 4 and the analysis of the comparable data would suggest that a per unit value of $260,000 would be reasonable for Products 2, 26, 27 and 28 via the sales comparison approach. We have concluded of $265,000 for Product 51 due to its slightly larger proposed product. Group 3 (Product 1) applies to subject’s high density product at 25.0 DU/acre. For this group, before adjustments the sales prices for Comparables 1, 2, 3, and 4 ranged from $217,337 to $308,461 per unit, with an average of $235,708 per unit. After having applied relevant quantitative adjustments to the comparable data, the adjusted prices ranged narrowed to $221,071 to $273,615 per unit, with an average of $212,004. Most reliance was placed on Comparables 1, 2 and 4 and the analysis of the comparable data would suggest that a per unit value of $205,000 would be reasonable for Product 1 via the sales comparison approach. The value conclusions also reflected an internal comparison between the subject’s various product types, utilizing similar adjustments as in the adjustment grids. The adjustment grids are located on the following pages. A summary of the estimated values, for attached product, is as follows:
Product Minimum Wtd. Avg. No. of Units Reconciled Fin.Type Lot Size Home Size Valued Lot Value(1)
Attached
1 Mid-Rise Flats 1,125 136 $221,071 to $273,615 $205,0002 Row TH 1,725 101 $188,658 to $290,615 $260,0003 Luxury Triplex 1,900 100 $199,020 to $536,500 $340,000
9 Luxury Attached 2,250 85 $199,020 to $536,500 $340,00026 Garden Flats/TH 1,200 85 $188,658 to $290,615 $260,00027 Brownstone Villas 1,575 112 $188,658 to $290,615 $260,000
28 Townhomes (Camden) 1,375 112 $188,658 to $290,615 $260,00051 Willowhaven 1,664 112 $188,658 to $290,615 $265,000
(1) Attached values reflect superpads and do not include finishing costs or fees at permit.
RESIDENTIAL SALES COMPARISON LAND VALUATION BY PRODUCT TYPEHeritage Fields Master Plan, Irvine, California
Comparables’ AdjustedFinished Cost Range
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 1 2
Com
para
ble
No.
Clo
se o
f Esc
row
N/A
25-A
pr-0
68-
Jun-
04N
/Av
1-Ju
l-06
Con
tract
Dat
eN
/AJu
l-05
Oct
-03
Oct
-05
Jul-0
5 S
ale
Pric
eN
/A$2
0,74
2,22
2$3
2,77
5,62
3$1
6,78
3,50
0$4
0,31
0,00
0 P
rice
Per
Lot
"A
s Is"
N/A
v$2
03,3
55$2
42,7
82$4
41,6
71$6
95,0
00
Cos
ts To
Fin
ish (D
ev &
Fee
s)N
/Av
$0$0
$0$0
Fin
ishe
d L
ot C
ost
N/A
v$2
03,3
55$2
42,7
82$4
41,6
71$6
95,0
00
Pric
e Pe
r L
ot (U
nadj
uste
d)$2
03,3
55$2
42,7
82$4
41,6
71$6
95,0
00 P
rope
rty R
ight
sFe
eFe
e1.
00Fe
e1.
00Fe
e1.
00Fe
e1.
00 F
inan
cing
Ter
ms
Mar
ket
Mar
ket
1.00
Mar
ket
1.00
Mar
ket
1.00
Mar
ket
1.00
Con
ditio
ns o
f Sal
eM
arke
tM
arke
t1.
00M
arke
t1.
00M
arke
t1.
00M
arke
t1.
00 M
arke
t Con
ditio
ns4-
May
-07
Jul-0
50.
90Ju
n-04
1.10
Oct
-05
0.90
Jul-0
50.
90 S
um o
f Adj
ustm
ents
---0.
901.
100.
900.
90 A
djus
ted
Pric
e Pe
r Lot
---$1
83,0
20$2
67,0
61$3
97,5
04$6
25,5
00 O
vera
ll Ta
x R
ate±
1.75
%2.
000%
$02.
000%
$02.
000%
$02.
000%
$0Pr
ice
Per
Lot
(Adj
uste
d)$1
83,0
20$2
67,0
61$3
97,5
04$6
25,5
00
Com
pari
sons
Loc
atio
n Ir
vine
, CA
Tusti
n, C
A$2
4,00
0Ir
vine
, CA
$27,
000
Ana
heim
, CA
$60,
000
San
Juan
Cap
istra
no, C
A($
94,0
00)
Pre
miu
m P
oten
tial
Ave
rage
Sim
ilar
$0Si
mila
r$0
Sim
ilar
$0Si
mila
r$0
Eco
nom
y of
Sca
le/P
roje
ct S
ize
85 to
100
102
$013
5$0
38$0
58$0
Min
imum
Lot
Siz
e±/D
imen
sions
5.5
to 6
.0 D
U/A
c12
du/
ac$1
2,00
013
du/
ac$1
2,00
08.
8 du
/ac
$5,0
008
du/a
c$5
,000
Pro
pose
d Pr
oduc
t (sf
±)1,
900
to 2
,250
1,21
7 to
2,2
27$0
1,80
0 to
2,1
00$0
2,00
0 to
2,5
00$0
N/A
v$0
Ent
itlem
ents
Ass
umed
TM
Tent
ativ
e M
ap A
ssum
ed$0
Tent
ativ
e M
ap$0
Tent
ativ
e M
ap$0
Tent
ativ
e M
ap$0
Pro
fit P
artic
ipat
ion
10.8
%N
one
($20
,000
)N
one
($29
,000
)N
one
($43
,000
)Y
es$0
Ent
itlem
ent R
iskLo
wLo
w$0
Low
$0Lo
w$0
Low
$0
Sta
ge o
f Dev
elop
men
tA
ssum
ed S
uper
pad
Supe
rpad
$0Su
perp
ad$0
Supe
rpad
$0Su
perp
ad$0
Net
Phy
sica
l Adj
ustm
ents
$16,
000
$10,
000
$22,
000
($89
,000
)
Pric
e Pe
r L
ot (A
djus
ted)
$199
,020
$277
,061
$419
,504
$536
,500
Per
Lot
(Bef
ore
Adj
ustm
ents
)L
ow$2
03,3
55H
igh
$695
,000
Ave
rage
$395
,702
Per
Lot
(Aft
er A
djus
tmen
ts)
Low
$199
,020
Hig
h$5
36,5
00A
vera
ge$3
58,0
21
Rec
onci
led
"Fin
ishe
d" L
ot V
alue
$340
,000
Her
itage
Fie
lds,
Irvi
ne, C
alifo
rnia
- G
roup
1 (L
ow D
ensi
ty)
LA
ND
CO
MPA
RA
BL
E A
DJU
STM
EN
T G
RID
68
73
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 1 3
Com
para
ble
No.
Clo
se o
f Esc
row
N/A
1-Ja
n-05
15-F
eb-0
6N
/Av
N/A
v C
ontra
ct D
ate
N/A
Jun-
04Se
p-05
Oct
-05
Dec
-05
Sal
e Pr
ice
N/A
$24,
559,
131
$20,
000,
000
$23,
443,
048
$46,
653,
015
Pri
ce P
er L
ot "
As I
s"N
/Av
$217
,337
$188
,679
$308
,461
$182
,953
Cos
ts To
Fin
ish (D
ev &
Fee
s)N
/Av
$0$2
5,00
0$0
$0 F
inis
hed
Lot
Cos
tN
/Av
$217
,337
$213
,679
$308
,461
$182
,953
Pric
e Pe
r L
ot (U
nadj
uste
d)$2
17,3
37$2
13,6
79$3
08,4
61$1
82,9
53 P
rope
rty R
ight
sFe
eFe
e1.
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$239
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$192
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$277
,615
$164
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vine
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$57,
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$238
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$290
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45
21
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 1 4
Com
para
ble
No.
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se o
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ontra
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rice
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12
34
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 1 5
DETACHED RESIDENTIAL PRODUCT TYPES Heritage Fields includes 16 detached product types. These product types are identified as Products 4, 5, 6, 10, 16, 17, 18, 19, 20, 21, 22, 29, 30, 31, 32 and 33. The following is a summary of the product types analyzed:
• Product 4 is a courtyard product with a lot size of 4,750± square feet (59 units analyzed) • Product 5 is single family residential product with a lot size of 4,725 square feet (52 units
analyzed) • Product 6 is single family residential product with a lot size of 6,300 square feet (67 units
analyzed) • Product 10 is a courtyard product with a lot size of 4,424± square feet (70 units analyzed) • Product 16 is single family residential product with a lot size of 7,700 square feet (44 units
analyzed) • Product 17 is single family residential product with a lot size of 7,000 square feet (81 units
analyzed) • Product 18 is single family residential product with a lot size of 8,250 square feet (62 units
analyzed) • Product 19 is single family residential product with a lot size of 8,800 square feet (76 units
analyzed) • Product 20 is single family residential product with a lot size of 10,200 square feet (86 units
analyzed) • Product 21 is single family residential product with a lot size of 12,000 square feet (51 units
analyzed) • Product 22 is single family residential product with a lot size of 18,000 square feet (39 units
analyzed) • Product 29 is 8-pack courtyard product with a lot size of 2,400± square feet (80 units analyzed) • Product 30 is zero lot line product with a lot size of 3,300± square feet (96 units analyzed) • Product 31 is single family residential product with a lot size of 4,500 square feet (66 units
analyzed) • Product 32 is single family residential product with a lot size of 5,000 square feet (100 units
analyzed) • Product 33 is single family residential product with a lot size of 6,000 square feet (51 units
analyzed)
There has been considerable land sales activity for production home lots in the Orange County area. The most recent sales, or pending sales from the Central submarket and comparable submarkets were deemed to be the best available and most appropriate for comparison to the subject’s production lot product types. A search was made for detached residential land sales in the Orange County area. Overall, nineteen sales were deemed relevant and specifically analyzed herein. Of these, the majority were incorporated into individual adjustment grids representing the various minimum lot size classes of the subject’s product. Specifically, the detached land sales were grouped, by size, into five adjustment grids for analysis. The
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 1 6
minimum lot sizes examined included (1) 2,400 to 3,300 square feet; (2) 4,424 to 5,000 square feet; (3) 6,000 to 7,000 square feet; (4) 8,250 to 10,200 square feet; and (5) 12,000 to 18,000 square feet. The comparable sales were analyzed on a finished cost per lot basis, with fees, the typical unit of comparison for bulk residential lot sales. Quantitative adjustments, if appropriate, were applied for property rights conveyed, terms of sale, conditions of sale, market conditions, overall tax rate, and physical characteristics. Specific adjustments were not deemed to be absolute, but were the appraisers’ attempt to account for the value contributions of the various factors in the marketplace. The discussion of the sales, the adjustment process and the adjustment grids for the subject’s various minimum lot sizes are at the end of this section. Sale 1 (Marble Mountain - Alexandria) represents the June 2005 sale of 67 lots located at the southwest corner of Harvard Avenue and Warner Avenue in Irvine, approximately 3.7± miles northwest of the subject. The reported finished price was $604,077 per lot for 4,500 minimum square foot lots. The lots were reportedly in raw condition and delivered with a Tentative Map. The preliminary home sizes were estimated at 2,770 to 3,168 square feet with pricing unavailable. Lot premiums are average due to the level terrain and non-elevated views. Sale 2 (Bungalows at Bay Street) represents the March July 2005 sale that closed escrow in November 2005 of 32 lots located on the east side of Bay Street, north of Newport Boulevard in Costa Mesa, approximately 9.2± miles northwest of the subject. The reported finished price was $512,500 per lot for 3,500 minimum square foot lots. The lots were to be delivered in a raw condition with a Tentative Map. The preliminary home sizes and pricing were estimated at 2,180 to 2,474 square feet and from $855,000 to $890,500. Lot premiums are average due to the level terrain and non-elevated views. Sale 3 (Heritage Village) represents the April 2005 sale of 104 lots located at the Bristol Street and Memory Lane in Santa Ana, approximately 10.3± miles northwest of the subject. The reported finished price was $425,000 per lot for 3,300 minimum square foot lots. The lots were to be delivered in a finished condition with a Tentative Map. Lot premiums are average due to the level terrain and non-elevated views. Sale 4 (Vista Del Verde – Village IV-PA V) represents the pending sale (January 2006 estimated contract date) of 105 lots located north of Brooklyn Avenue and east of Casa Loma in the Vista Del Verde master-plan (TM 16549 - portion) in Yorba Linda, approximately 16.3 miles northwest of the subject. The reported finished price was $550,000 per lot for 4,400 minimum square foot lots. The lots were to be delivered in a blue-top condition with Final Map. The preliminary home sizes were estimated at 2,977 to 3,038 square feet with pricing unavailable. Lot premiums are average due to non-elevated views. Sales 5 and 6 (Tapestry) involves the September 2004 purchase by the Olson Company of 111 lots (4,200 minimum square feet lot size) located at the northwest corner of East Lambert Road and North Idaho Street in La Habra, approximately 21.3± miles northwest of the subject. The lots were acquired in a raw land condition with pending entitlements. The original purchase in 2004 included a finished lot price of
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 1 7
$270,000 per lot. The subsequent purchase (Sale 6) in March 2005 (December 2004 contract date) by Shea Homes included a finished lot price of $383,185 per lot. The paired sale indicates a 42% increase in price estimated to be attributable to market conditions (time of sale) and advancement of entitlements. The preliminary home product sizes and prices were not available. Lot premiums would be average due to the level terrain and limited elevated views. Sale 7 (Pacific San Juan - Harbor Vista) represents the February 2006 sale of 46 lots located at the northeast corner of Camino las Ramblas and Via California in San Juan Capistrano, approximately 14.3± miles southeast of the subject. The reported finished price was $700,000 per lot for 6,500 minimum square foot lots. The lots were to be delivered in a blue top condition with Tentative Map. The preliminary home sizes were not available. However, the average reported base price is $1,517,000. Lot premiums are above average due to elevated views. Sale 8 (Pacific San Juan Vista II) represents the February 2007 sale of 44 lots located at the northeast corner of Camino las Ramblas and Via California in San Juan Capistrano, approximately 14.3 miles southeast of the subject. The reported finished price was $712,467 per lot for 6,000 minimum square foot lots. The lots were to be delivered in a blue top condition with Tentative Map. The preliminary home sizes are not available. The average reported base pricing is $1,322,000. Lot premiums are above average due to elevated views. Sale 9 (Del Rio – PA 1) represents the January 2006 purchase of 100 lots located at the northwest corner of Lincoln Avenue and Glassell Street in the Del Rio master-plan (TM 7249 - portion) in Orange, approximately 15± miles northwest of the subject. The reported finished price was $399,000 per lot for 3,250 minimum square foot lots. The lots were to be delivered in a blue top condition with Final Map ready to record. The preliminary home sizes and pricing were estimated at 2,000 to 2,250 square feet and from the high $600s to low $700s. Lot premiums are average due to the level terrain and non-elevated views. Sale 10 (Columbus Grove - Lantana) represents the June 2005 sale of 102 lots located at the northwest corner of Harvard Avenue and Warner Avenue (TM 16580 - portion) in Irvine, approximately 3.7± miles northwest of the subject. The reported finished price was $499,000 per lot for 3,800 minimum square foot lots. The lots were to be delivered in a blue top condition with Final Map. The preliminary home sizes and pricing were estimated at 2,417 to 2,803 square feet and from the low $900s. Lot premiums are average due to the level terrain and non-elevated views. Sale 11 (Vista Del Verde – Foxfield) represents the July 2004 sale of 94 lots located north of Brooklyn Avenue and west of Lakeview Avenue in the Vista Del Verde master-plan (TM 16315) in Yorba Linda, approximately 16.3± miles northwest of the subject. The reported finished price was $438,769 per lot for 5,000 minimum square foot lots. The lots were to be delivered in a blue-top condition with Final Map. The preliminary home sizes were estimated at 3,300 to 3,700 square feet with pricing unavailable. Lot premiums are above average due to elevated views.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 1 8
Sale 12 (Columbus Grove - Ciara) represents the July 2005 sale of 67 lots located at the northwest corner of Harvard Avenue and Warner Avenue (TM 16580 - portion) in Irvine, approximately 3.71± miles northwest of the subject. The reported finished price was $664,875 per lot for 7,150 minimum square foot lots. The lots were to be delivered in a blue top condition with Final Map. The preliminary home sizes and pricing were estimated at 3,054 to 4,426 square feet and from $1.2 million to $1.6 million. Lot premiums are average due to the level terrain and non-elevated views. Sale 13 (Pacific San Juan – The Valley) represents the December 2005 sale that closed escrow in November 2006 of 104 lots located at the northeast corner of Camino las Ramblas and Via California in San Juan Capistrano, approximately 14.3 miles southeast of the subject. The reported finished price was $800,000 per lot for 8,400 minimum square foot lots. The lots were to be delivered in a blue top condition with a Tentative Map. The preliminary home sizes were not available. The average base price was $1,812,000. Lot premiums are above average due to elevated views. Sale 14 (Crystal Cove – Beach Town II) represents the June 2005 sale of 20 lots located within the Beach Town II community of Crystal Cove in Newport Beach, approximately 6.4 miles southwest of the subject. The reported finished price was $2,000,000 per lot for 12,000 minimum square foot lots. The lots were to be delivered in a finished condition with a Tentative Map. The preliminary home sizes and pricing were estimated at 3,200 to 4,100 square feet and from $3.2 million to $4.6 million. Lot premiums are significantly above average due to ocean views. Sale 15 (Covenant Hills) represents the January 2004 sale of 23 lots located at the southwest corner of Antonio Parkway and Covenant Hills Drive in Ladera Ranch, approximately 11.6± miles southeast of the subject. The reported finished price was $540,000 per lot for 9,600 minimum square foot lots. The lots were to be delivered in a blue top condition with Final Map. The preliminary home sizes and pricing were unavailable. Lot premiums are above average due to elevated views. Sale 16 (Talega - Lucia) represents the August 2005 sale of 53 lots located north of Avenida Talega and east of Camino Viento Fuerto in the Talega Master-plan, approximately 20± miles southeast of the subject. The reported finished price was $1,000,000 per lot for 12,500 minimum square foot lots. The lots were to be delivered in a blue top condition with Final Map. The preliminary home sizes were estimated at 5,000 to 6,000 square feet with pricing unavailable. Lot premiums are above average due to elevated views. Sale 17 (Talega - Lucia) represents the June 2005 sale of 53 lots and is known as Planning Area 4E in the Talega Master-plan, approximately 20± miles southwest of the subject. The reported finished price was $997,000 per lot for 10,000 minimum square foot lots. The lots were to be delivered in a blue top condition with a Tentative Map. The preliminary home sizes were estimated at 5,699 to 6,070 square feet with estimated base pricing ranging from $2,123,700 to $2,489,000. Lot premiums are above average due to elevated views.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 1 9
Sale 18 (Crystal Cove – Nautilus III) represents the June 2005 sale of 20 lots located at the Nautilus III area of Crystal Cove in Newport Beach, approximately 6.5 miles southwest of the subject. The reported finished price was $2,000,000 per lot for 12,000 minimum square foot lots. The lots were to be delivered in a finished condition with Final Map. The preliminary home sizes and pricing were estimated at 3,182 to 4,102 square feet and from $3,200,000 to $4,600,000. Lot premiums are significantly above average due to ocean views. Sale 19 (Crystal Cove – Seacrest) represents the July 2005 sale of 29 lots located in the Seacrest community of Crystal Cove, approximately 6.5± miles southwest of the subject. The reported finished price was $3,000,000 per lot for 21,000 minimum square foot lots. The lots were to be delivered in a finished condition with Final Map. The preliminary home sizes and pricing were estimated at 6,519 to 7,678 square feet and from $5,800,000 to $7,900,000. Lot premiums are significantly above average due to ocean views. As mentioned, for the purposes of this analysis we have grouped the detached land sales by lot size. Specifically, the detached land sales were grouped, by size, into five adjustment grids for analysis. The minimum lot sizes examined included (1) Group 1 - 2,400 to 3,300 square feet; (2) Group 2 - 4,424 to 5,000 square feet; (3) Group 3 - 6,000 to 7,000 square feet; (4) Group 4 - 8,250 to 10,200 square feet; and (5) Group 5 - 12,000 to 18,000 square feet. COMPARISON / ADJUSTMENT PROCESS Property Rights Conveyed No adjustments were warranted for property rights conveyed as all of the land data sold with fee simple property rights. Conditions of Sale Sales conditions include any distress influences, less than arm's length transactions, improvements on the site contributing to value, and other related influences that were not attributable to financing, market conditions, or physical differences. No conditions of sale were found to exist with the comparables. Financing (Terms of Sale) Anything less than a cash equivalent basis sale might require adjustment for financing considerations. This includes below or above market interest rates, atypical payback period, buy-downs, and exchange influences. None of the sales were reported to include atypical financing warranting adjustments. Market Conditions (Time of Sale) The sales occurred between January 2004 and February 2006. As previously discussed, residential land prices incurred appreciation in the Orange County submarket over the 2003, 2004, and 2005 periods with a softening occurring in 2006 due to decreasing demand. Based upon an internal comparison of the data, and an examination of current or pending prices for similar lots in the submarket, upward adjustments were warranted for the earlier sales. According to Hanley Wood data, detached home price points (price per square foot) decreased an average of 0.06% monthly from the 3-year period starting 2nd quarter 2004
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 2 0
to the 1st quarter 2007. Monthly price decreased 0.33% monthly for 2004 (9 months data), increased 0.48% monthly for 2005, and decreased 0.02% monthly for 2006. In the first quarter of 2007 the average price per square foot was $367, a decrease of 6.85% from the prior quarter. During the same 3-year period, the average home size increased about 8.71%. Overall, we applied downward adjustments of 10% for sales in 2005 (including January 2006), and no adjustments for sales in 2006 and 2007.
Overall Tax Rate The subject’s overall tax rate is estimated to be 1.75% by the developer. The sales overall tax rates range from 1.01% to 1.20%. Variances in tax rates are interrelated with locational factors and location adjustments, if applied. Often times the negative impact of higher tax rates is offset by superior locational amenities and infrastructure. Further, those projects within a CFD and having higher tax rates continue to find strong demand as most product is being sold while under construction.
The adjustment applied to the comparables initially isolates the difference between the comparable tax rate and the subject tax rate. That tax differential is applied to the average home price of the products in the lot size class. The present worth of the annual tax differential was calculated, and further discounted at 40% to identify a land adjustment. The adjustments ranged from -$90,000 to -$25,000 depending on the tax rate and the estimated home price. General Location The economic, political, and social influences in a community, as well as the specific orientation of a site within a neighborhood, require consideration for possible location adjustment. All of the data were from Orange County submarkets, and deemed similar in general location. Specific Location Location takes into consideration the comparables’ and the subject’s physical orientation to the surrounding area, including proximity to local services and the quality and appeal of the community at large. Heritage Fields will be a “trophy” master-planned community and will include several significant amenities such as the Great Park, golf courses, club houses, various trails, and a main street retail component. The comparable located in Santa Ana was adjusted upward 15%± (Land Sale 3); in Orange upward 25%± (Land Sale 9); in Irvine upward 10%± (Land Sales 1, 10 and 12); and in Yorba Linda upward 5%± (Land Sale 4). The locations of Santa Ana, Orange, Irvine, and Yorba Linda are considered inferior to the subject location and amenity level. Comparables located in San Juan Capistrano were adjusted downward 15%± (Land Sales 7, 8 and 13); in Newport Beach downward 25%± (Land Sale 14); and in San Clemente downward 10%± (Land Sales 16 and 17). Newport Beach, San Juan Capistrano and San Clemente (Talega) are superior locations to the subject property due to their coastal proximity and/or southern Orange County location with proximity to San Diego County.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 2 1
Dat
aPr
ojec
tSu
bmar
ket
Buy
erSa
le P
rice
No.
Lot
sSa
leFi
nish
edC
ondi
tion
Ave
rage
Siz
e (s
f)L
and
Ref
.A
ddre
ssT
hom
as B
ros.
Map
Selle
rC
ontr
act D
ate
Lot
Siz
e (s
f)Pr
ice
Pric
eE
ntitl
emen
tsA
vera
ge P
rice
w/
Pric
eL
ocat
ion
APN
(s)
Clo
se o
f Esc
row
Des
crip
tion
Per
Lot
Per
Lot
(1)
Tax
Rat
ePr
emiu
ms
Rat
io
Subj
ect
Her
itage
Fie
lds
Cen
tral C
ount
yN
/AN
/AV
ario
usN
/Av
N/A
vA
ssum
ed S
uper
pad
Var
ious
N/A
v(S
F)N
EC In
ters
tate
5 &
Sta
te H
ighw
ay 1
3386
1N
/AN
/AV
ario
usA
ssum
ed T
MV
ario
usIrv
ine,
CA
Var
ious
N/A
Min
imum
1.75
%
M
arbl
e M
ount
ain
(Ale
xand
ria)
Cent
ral
Lenn
ar$3
4,70
5,13
767
$517
,987
$604
,077
Raw
2,77
0to
3,16
8N
/Av
N/A
v1
SWC
Har
vard
Ave
. & W
arne
r Ave
.86
0-C3
Tust
in V
ista
s Pa
rtner
s LL
CN
/Av
4,50
0Te
ntat
ive
Map
N/A
vto
N/A
vN
/Av
Irvin
e, C
AN
/Av
1-Ju
n-05
Min
imum
1.01
%
Bu
ngal
ows
at B
ay S
treet
Nor
th C
oast
alRi
chm
ond
Am
eric
an H
omes
$14,
000,
000
32$4
37,5
00$5
12,5
00Ra
w2,
180
to2,
474
N/A
v58
.57%
2E/
S of
Bay
Stre
et, N
/O N
ewpo
rt B
oule
vard
88
9-A
2Jo
hn A
. Dic
kM
ar-0
53,
500
Tent
ativ
e M
ap$8
55,0
00to
$890
,500
$875
,000
Cost
a M
esa,
CA
N/A
vN
ov-0
5M
inim
um1.
04%
H
erita
ge V
illag
eC
entra
l Cou
nty
MBK
Hom
es$4
4,20
0,00
010
4$4
25,0
00$4
25,0
00Fi
nish
edN
/Av
toN
/Av
N/A
vN
/Av
3Br
isto
l St.
& M
emor
y Ln
.79
9-D
6Si
lver
woo
d D
evel
opm
ent C
o., L
LCA
pr-0
53,
300
Tent
ativ
e M
apN
/Av
toN
/Av
N/A
vSa
nta
Ana
, CA
N/A
vN
/Av
Min
imum
1.06
%
V
ista
Del
Ver
de (V
illag
e IV
-PA
V)
Nor
th In
land
MBK
Hom
es$5
2,50
0,00
010
5$5
00,0
00$5
50,0
00B
lue
Top
2,97
7to
3,03
8N
/Av
N/A
v4
N o
f Bro
okly
n A
ve. &
E o
f Cas
a Lo
ma
740-
B2V
ista
Del
Ver
de II
LP
Jan-
064,
400
Fina
l Map
N/A
vto
N/A
vN
/Av
Yor
ba L
inda
, CA
TM 1
6549
(Por
tion)
Pend
ing
Min
imum
1.05
%
Ta
pest
ryN
orth
Ols
on C
ompa
ny$1
8,30
6,99
411
1$1
64,9
28$2
70,0
00Ra
wN
/Av
toN
/Av
N/A
vN
/Av
5N
WC
E. L
ambe
rt R
d. &
N. I
daho
St.
708-
C6V
oit C
omm
erci
alN
/Av
4,20
0Pe
ndin
gN
/Av
toN
/Av
N/A
vLa
Hab
ra, C
AN
/Av
Dev
elop
men
t30
-Sep
-04
Min
imum
1.05
%
Ta
pest
ryN
orth
Shea
Hom
es$3
1,50
0,00
011
3$2
78,7
61$3
83,1
85Ra
wN
/Av
toN
/Av
N/A
vN
/Av
6N
WC
E. L
ambe
rt R
d. &
N. I
daho
St.
708-
C6O
lson
Com
pany
Dec
-04
4,20
0Te
ntat
ive
Map
N/A
vto
N/A
vN
/Av
La H
abra
, CA
N/A
v18
-Mar
-05
Min
imum
1.05
%
Pa
cific
a Sa
n Ju
an (H
arbo
r Vis
ta)
Sout
h Co
asta
lLa
ing
Hom
es$3
2,20
0,00
046
$614
,200
$700
,000
Blu
e To
pN
/Av
toN
/Av
N/A
v46
.14%
7N
EC o
f Cam
ino
las
Ram
blas
& V
ia C
alifo
rnia
972-
C5,C
6Su
nCal
Com
pani
esJa
n-06
6,50
0Te
ntat
ive
Map
N/A
vto
N/A
v$1
,517
,000
San
Juan
Cap
istra
no, C
AN
/Av
Feb-
06M
inim
um1.
14%
Pa
cific
a Sa
n Ju
an (V
ista
II)
Sout
h Co
asta
lK
. Hov
nani
an$2
9,90
9,67
544
$679
,765
$712
,467
Blu
e To
pN
/Av
toN
/Av
N/A
v53
.89%
8N
EC o
f Cam
ino
las
Ram
blas
& V
ia C
alifo
rnia
972-
C5,C
6Su
nCal
Com
pani
esFe
b-07
6,00
0Te
ntat
ive
Map
N/A
vto
N/A
v$1
,322
,000
San
Juan
Cap
istra
no, C
AN
/Av
N/A
vM
inim
um1.
14%
D
el R
io (P
A 1
)Ce
ntra
lLe
nnar
$35,
594,
500
100
$355
,945
$399
,000
Blu
e To
p2,
000
to2,
250
N/A
vN
/Av
9N
WC
Lin
coln
Ave
. & G
lass
el S
t.76
9-G
4Su
nCal
/Del
Rio
LLC
N/A
v3,
250
Fina
l Map
Hig
h $6
00s
toLo
w $
700s
N/A
vO
rang
e, C
ATM
724
9 (P
ortio
n)Ja
n-06
Min
imum
1.02
%
Co
lum
bus
Gro
ve (L
anta
na)
Cent
ral
Will
iam
Lyo
n H
omes
$41,
209,
428
102
$404
,014
$499
,000
Blu
e To
p2,
417
to2,
803
N/A
vN
/Av
10N
WC
Har
vard
Ave
. & W
arne
r Ave
.86
0-C3
Mof
fett
Mea
dow
sN
/Av
3,80
0Fi
nal M
apLo
w $
900s
toN
/Av
N/A
vIrv
ine,
CA
TM 1
6580
(Por
tion)
10-J
un-0
5M
inim
um1.
01%
(1) F
inis
hed
lot p
rice
s ar
e as
sum
ed to
be
net o
f CFD
rei
mbu
rsem
ents
DE
TA
CH
ED
CO
MPA
RA
BL
E L
AN
D S
AL
E S
UM
MA
RY
Her
itage
Fie
lds,
Irvi
ne, C
alifo
rnia
Var
ious
Var
ious
Ave
rage
Pro
duct
Siz
e (s
f)B
ase
Pric
ing
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 2 2
Dat
aPr
ojec
tSu
bmar
ket
Buy
erSa
le P
rice
No.
Lot
sSa
leFi
nish
edC
ondi
tion
Ave
rage
Siz
e (s
f)L
and
Ref
.A
ddre
ssT
hom
as B
ros.
Map
Selle
rC
ontr
act D
ate
Lot
Siz
e (s
f)Pr
ice
Pric
eE
ntitl
emen
tsA
vera
ge P
rice
w/
Pric
eL
ocat
ion
APN
(s)
Clo
se o
f Esc
row
Des
crip
tion
Per
Lot
Per
Lot
(1)
Tax
Rat
ePr
emiu
ms
Rat
io
Subj
ect
Her
itage
Fie
lds
Cent
ral C
ount
yN
/AN
/AV
ario
usN
/Av
N/A
vA
ssum
ed S
uper
pad
Var
ious
N/A
v(S
F)N
EC In
ters
tate
5 &
Sta
te H
ighw
ay 1
3386
1N
/AN
/AV
ario
usA
ssum
ed T
MV
ario
usIrv
ine,
CA
Var
ious
N/A
Min
imum
1.75
%
V
ista
Del
Ver
de (F
oxfie
ld)
Nor
th In
land
Pard
ee H
omes
$37,
000,
000
94$3
93,6
17$4
38,7
69Bl
ue T
op3,
300
to3,
700
N/A
vN
/Av
11N
of B
rook
lyn
Ave
. & W
of L
akev
iew
Ave
.74
0-B
2To
ll B
roth
ers/
Aer
a LL
CN
/Av
5,00
0Fi
nal M
apN
/Av
toN
/Av
N/A
vY
orba
Lin
da, C
ATM
163
1530
-Jul
-04
Min
imum
1.05
%
C
olum
bus G
rove
(Cia
ra)
Cent
ral
Will
iam
Lyo
n H
omes
$37,
264,
127
67$5
56,1
81$6
64,8
75Bl
ue T
op3,
054
to4,
426
N/A
vN
/Av
12N
WC
Har
vard
Ave
. & W
arne
r Ave
.86
0-C
3M
offe
tt M
eado
ws
N/A
v7,
150
Fina
l Map
$1,2
00,0
00to
$1,6
00,0
00N
/Av
Irvin
e, C
ATM
165
80 (P
ortio
n)29
-Jul
-05
Min
imum
1.01
%
Pa
cific
a Sa
n Ju
an (T
he V
alle
y)So
uth
Coa
stal
KB
Hom
es$8
3,20
0,00
010
4$7
17,5
00$8
00,0
00Bl
ue T
opN
/Av
toN
/Av
N/A
v44
.15%
13N
EC o
f Cam
ino
las R
ambl
as &
Via
Cal
iforn
ia97
2-C5
,C6
SunC
al C
ompa
nies
Dec
-05
8,40
0Te
ntat
ive
Map
N/A
vto
N/A
v$1
,812
,000
San
Juan
Cap
istra
no, C
AN
/Av
Nov
-06
Min
imum
1.14
%
Cr
ysta
l Cov
e N
orth
Coa
stal
WL
Hom
es L
LC (L
aing
Lux
ury
Hom
es)
$40,
000,
000
20$2
,000
,000
2,00
0,00
0$
Fini
shed
3,20
0to
4,10
0N
/Av
61.9
4%14
Beac
h To
wn
II92
0-B
5Irv
ine
Com
pany
N/A
v12
,000
Tent
ativ
e M
ap$3
,200
,000
to$4
,600
,000
N/A
vN
ewpo
rt B
each
, CA
N/A
vJu
n-05
1.06
%
C
oven
ant H
ills
Sout
h In
land
John
Lai
ng H
omes
$12,
420,
000
23$5
40,0
00$5
40,0
00Bl
ue T
opN
/Av
toN
/Av
N/A
vN
/Av
15SW
C A
nton
io P
kwy.
& C
oven
ant H
ills
Dr.
952-
G1
DM
D L
ader
a LL
CN
/Av
9,60
0Fi
nal M
apN
/Av
toN
/Av
N/A
vLa
dera
Ran
ch, C
AN
/Av
Jan-
04M
inim
um1.
05%
Ta
lega
(Luc
ia)
Sout
h C
oast
alLa
ing
Hom
es$5
3,00
0,00
053
$1,0
00,0
00$1
,000
,000
Blue
Top
5,00
0to
6,00
0N
/Av
N/A
v16
N o
f Ave
nida
Tal
ega
& E
of C
amin
o V
ient
o Fu
erto
973-
B5
Tale
ga A
ssoc
iate
s LLC
N/A
v12
,500
Fina
l Map
N/A
vto
N/A
vN
/Av
San
Cle
men
te, C
AV
illag
e IV
Aug
-05
Min
imum
1.20
%
Ta
lega
(Luc
ia)
Sout
h C
oast
alW
L H
omes
LLC
(Lai
ng L
uxur
y H
omes
)$4
5,73
9,00
053
$863
,000
$997
,000
Blue
Top
5,69
9to
6,07
0N
/Av
43.3
5%17
Plan
ning
Are
a 4E
973-
B4
Tale
ga A
ssoc
iate
s, L
LCJu
n-05
10,0
00Te
ntat
ive
Map
$2,1
23,7
00to
$2,4
89,0
00$2
,300
,000
San
Cle
men
te, C
AN
/Av
N/A
vM
inim
um1.
20%
Cr
ysta
l Cov
eN
orth
Coa
stal
WL
Hom
es L
LC (L
aing
Lux
ury
Hom
es)
$40,
000,
000
20$2
,000
,000
$2,0
00,0
00Fi
nish
ed3,
182
to4,
102
N/A
v51
.28%
18N
autil
us II
I92
0-A
5Th
e Irv
ine
Com
pany
Jun-
0512
,000
Fina
l Map
$3,2
29,0
00to
$4,6
26,7
00$3
,900
,000
New
port
Bea
ch, C
AN
/Av
N/A
vM
inim
um1.
06%
Cr
ysta
l Cov
eN
orth
Coa
stal
Lain
g Lu
xury
Hom
es$8
7,00
0,00
029
$3,0
00,0
00$3
,000
,000
Fini
shed
6,51
9to
7,67
8N
/Av
43.4
8%19
SeaC
rest
920-
B5
The
Irvin
e Co
mpa
nyJu
l-05
21,0
00Fi
nal M
ap$5
,760
,400
to$7
,889
,300
$6,9
00,0
00N
ewpo
rt B
each
, CA
N/A
vN
/Av
Min
imum
1.06
%
(1) F
inis
hed
lot p
rice
s are
ass
umed
to b
e ne
t of C
FD r
eim
burs
emen
ts
DE
TA
CH
ED
CO
MPA
RA
BL
E L
AN
D S
AL
E S
UM
MA
RY
Her
itage
Fie
lds,
Irvi
ne, C
alifo
rnia
Ave
rage
Pro
duct
Siz
e (s
f)B
ase
Pric
ing
Var
ious
Var
ious
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 2 3
DETACHED RESIDENTIAL LAND SALES MAP
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 2 4
Premium Potential As the retail prices of future home sales are upwardly influenced by lot sizes over the minimum and view potential, these factors are important value influences for subdivision land. At this stage of development, it appears that the subject product types will have average to good premium potential. Each sale was rated for lot premium potential in comparison to the subject product types. Land Sales 7, 8 and 13 are located in the Pacifica San Juan community in San Juan Capistrano, and have minor elevations and views. For the subject product types that have good view potential (Groups 3 to 5) upward adjustments of $25,000 to $70,000 were applied to these comparables. Land Sales 16 and 17, located in the community of Talega in the City of San Clemente also have minor elevations and views. These comparables were adjusted upward between $50,000 and $70,000 for Groups 4 and 5. Land Sale 14 is located in the Crystal Cove community of Newport Beach. Sale 14 has superior elevations and views and downward adjustments of $50,000 to $70,000 were applied to this comparable. Land Sale 12 is located in Irvine and has fairly level topography with premium potential primarily attributable to lot size. An upward adjustment of $35,000 was applied to this comparable. Economy of Scale/Project Size The economy of scale adjustment assumes that in purchasing decisions a potential buyer of subdivision land would consider the carrying costs and risks associated with the development term of a project. It would seem reasonable that in comparison to smaller-sized developments, larger-sized projects would typically sell for a slightly lower price per lot since the developer would have more extensive carrying costs. The converse would be expected for smaller projects. Another consideration influencing this adjustment is that developers require a project of sufficient size to amortize many of the fixed costs of doing business, as well as to provide the home buyer with ample selection. The minimum project size depends upon the particular demands and financial ability of the individual developer. However, with the demand for entitled, ready-to-develop residential land at strong levels, a project size adjustment is nominal, if at all. The comparables involved purchases of 20 to 113 lots, compared to 39 to 100 lot populations examined at the product level for Heritage Fields. Thus, no adjustments were warranted for economy of scale. Minimum Lot Size Lot size adjustments and project density were also considered. Although “minimum” lot sizes are the typical standard for comparison, lot width and depth considerations are critical (when available) in analyzing and comparing lot sizes. In addition to adjusting for differences in minimum lot size, width, depth, and/or density, the appraisers considered the housing (size) proposed for construction on the respective sites. This rationale is reasonable in that in planned communities the master developer and merchant builder usually agree upon the product size as a condition of the sale, which often affects the ultimate price per lot. The master developer and merchant builder agree on the product size to reduce direct competition among active projects in the same community. Considering the above, the appraisers applied adjustments to several of the comparables as follows: Group 1: -$15,000 to -$10,000 (Land Sales 3, 9, and 10); Group 2: -$25,000 (Land Sale 8); Group 3: +$10,000 to +$20,000 (Land Sale 7 and 8); Group 4: -$50,000 (Land Sales 14 and 16), Group 5: +$50,000 to +$150,000 (Land Sales 13, 14, 16, and 17). Larger adjustments were required for Group 5 as the comparables used in this adjustment grid
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LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 2 5
analysis range varied from 8,400 to 12,500 square feet, whereas, the subject lot sizes range from 12,000 to 18,000 square feet. Proposed Product The proposed product size of the subject and comparables was also considered. For the most part (Groups 1 to 3), variances in proposed product size and pricing are companion to the lot size adjustment. In Group 4, the subject proposed product ranges from 4,100 to 4,600 square feet with average home prices of $1,740,000± to $2,100,000±. Adjustments of -$100,000 to $300,000 were applied to Land Sales 14, 14, 17 and 13, due to the differential in proposed product. In Group 5, the subject’s proposed product ranges from 5,200 to 5,900 square feet and $2,400,000± to $2,800,000±. Adjustments between $300,000 and $400,000 were applied to Land Sales 16, 17, and 13. Profit Participation The subject property will be subject to a Profit Participation Agreement between the master developer (Lennar) and the prospective home builder. In addition to the purchase price of each residential planning area/parcel, merchant builders shall pay to the master developer 70% of all net profit realized from the construction of homes. The net profit shall be paid at the time of home sales. Essentially, merchant builders are obligated to acquire the land on terms where they pay the master developer 70% of profits for distribution, after all costs (including 7% for profit). Based on the results of the residual analysis in the development method, calculation of this cost to the builder results in downward adjustments to the comparables with no profit participation agreement of 5%±, or -$90,000 to -$20,000. This adjustment is downward to reflect the burden the subject property carries for the profit participation. Entitlements/Risk It is often expected that due to risk, costs, and additional carry, lower prices would be paid for projects in the earlier stages of development (i.e., un-entitled land) than for projects closer to completion (i.e., Final Map). The subject product types were assumed for this analysis to have tentative map approvals. All of the comparable sales had tentative map or final map approval at the time of sale and/or delivery of the lots/units to the buyer. As all the comparables have similar entitlements compared to the subject property no adjustments were applied. Stage of Development For similar reasons to those stated above (carry costs, exposure, extended project life, etc.), it is expected that lower prices would be paid for projects in the earlier stages of development (i.e., raw land) than for projects closer to completion (i.e., finished lots). In this analysis, the subject lots were assumed to be in a superpad condition. The majority of the sales involved lots sold in a blue top or finished lot condition and rated similar to the subject in this regard. Land Sale 1 was reportedly purchased in raw or improved condition. An upward adjustment of $20,000 or approximately 4%± of the adjusted sales price, was applied to this comparable and considered reasonable for the additional risk.
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LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 2 6
RECONCILIATION – DETACHED RESIDENTIAL PRODUCT TYPES As previously mentioned, the subject detached product types were split into five groups represented by five adjustment grids. Group 1 (Products 29 and 30) applies to the subject’s smaller lot product between 2,400 and 3,300 square feet. For this group, before adjustments the sales prices for Comparables 3, 9, and 10 ranged from $399,000 to $499,000 per unit, with an average of $441,000 per unit. After having applied relevant quantitative adjustments to the comparable data, the adjusted price range narrowed to $381,500 to $436,000 per unit, with an average of $415,867. All of the sales were taken into consideration and the analysis of the comparable data would suggest that a per unit value of $410,000 would be reasonable for Products 29 and 30 via the sales comparison approach. Group 2 (Products 4, 5, 10, 31 and 32) applies to the subject lot product between 4,424 to 5,000 square feet. For this group, before adjustments the sales prices for Comparables 1, 4, and 8 ranged from $550,000 to $712,467 per unit, with an average of $622,181 per unit. After having applied relevant quantitative adjustments to the comparable data, the adjusted price range narrowed to $511,000 to $554,467 per unit, with an average of $537,379. All of the sales were taken into consideration and the analysis of the comparable data would suggest that a per unit value of $525,000 would be reasonable for Products 4, 5, 10, 31 and 32 via the sales comparison approach. Group 3 (Products 6, 16, 17 and 33) applies to subject lot product between 6,000 and 7,700 square feet. For this group, before adjustments the sales prices for Comparables 12, 7, and, 8 ranged from $664,875 to $712,467 per unit, with an average of $692,447 per unit. After having applied relevant quantitative adjustments to the comparable data, the adjusted price range narrowed to $583,000 to $613,467 per unit, with an average of $599,618. All of the sales were taken into consideration and the analysis of the comparable data would suggest that a per unit value of $590,000 would be reasonable for Product 6, 16, 17 and 33. Group 4 (Products 18, 19, and 20) applies to subject’s lot size product that ranges from 8,250 to 10,200 square feet. For this group, before adjustments the sales prices for Comparables 14, 16, 17, and 13 ranged from $800,000 to $2,000,000 per unit, with an average of $1,199,250 per unit. After having applied relevant quantitative adjustments to the comparable data, the adjusted price range narrowed to $912,000 to $1,010,000 per unit, with an average of $953,825. All comparables were considered and the analysis of the comparable data would suggest that a per unit value of $950,000 would be reasonable for Product 18, 19, and 20 via the sales comparison approach. Group 5 (Products 21 and 22) applies to subject’s lot size product between 12,000 and 18,000 square feet. For this group, before adjustments the sales prices for Comparables 14, 16, 17, and 13 ranged from $800,000 to $2,000,000 per unit, with an average of $1,199,250 per unit. After having applied relevant quantitative adjustments to the comparable data, the adjusted price range narrowed to $1,126,000 to $1,173,300 per unit, with an average of $1,160,325. All comparables were considered and the analysis
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LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 2 7
and the analysis of the comparable data would suggest that a per unit value of $1,150,000 would be reasonable for Product 21 and 22 via the sales comparison approach. The value conclusions also reflected an internal comparison between the subject’s various product types, utilizing similar adjustments as in the adjustment grids. A summary of the estimated values for detached product is as follows:
Product Minimum Wtd. Avg. No. of Units Reconciled Fin.Type Lot Size Home Size Valued Lot Value(1)(2)
4 Courtyard 2,000 59 $511,000 to $554,467 $525,0005 SFD 45 x 105 2,200 52 $511,000 to $554,467 $525,000
6 SFD 60 x 105 2,650 67 $583,000 to $613,467 $590,00010 Courtyard 2,950 70 $511,000 to $554,467 $525,00016 SFD 70 x 110 4,000 44 $583,000 to $613,467 $590,000
17 SFD 70 x 100 3,650 81 $583,000 to $613,467 $590,00018 SFD 75 x 110 4,100 62 $912,000 to $1,010,000 $950,00019 SFD 80 x 110 4,500 76 $912,000 to $1,010,000 $950,000
20 SFD 85 x 120 4,600 86 $912,000 to $1,010,000 $950,00021 SFD 100 x 120 5,200 51 $1,126,000 to $1,173,300 $1,150,00022 SFD 120 x 150 5,900 39 $1,126,000 to $1,173,300 $1,150,000
29 Courtyard (8 pack) 1,600 80 $381,500 to $436,000 $410,00030 Zero Lot Line 2,000 96 $381,500 to $436,000 $410,00031 SFD 45 x 100 2,800 66 $511,000 to $554,467 $525,000
32 SFD 50 x 100 3,200 100 $511,000 to $554,467 $525,00033 SFD 60 x 100 3,950 51 $583,000 to $613,467 $590,000
(1) Finished lot value including fees at permit. (2) Attached values do not include finishing costs or fees at permit.
RESIDENTIAL SALES COMPARISON LAND VALUATION BY PRODUCT TYPEHeritage Fields Master Plan, Irvine, California
Comparables’ AdjustedFinished Cost Range
Final adjusted detached residential land values per product type ranged from $410,000 to $1,150,000. Adjustment grids summarizing the foregoing analyses are on the ensuing pages.
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LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 2 8
Comparable No.
Close of Escrow N/A N/Av 1-Jan-06 10-Jun-05
Contract Date N/A Apr-05 N/Av N/AvSale Price N/A $44,200,000 $35,594,500 $41,209,428Price Per Lot N/Av $425,000 $355,945 $404,014
Costs To Finish (Dev & Fees) N/Av $0 $43,055 $94,986 Finished Lot Cost N/Av $425,000 $399,000 $499,000
Price Per Lot (Unadjusted) $425,000 $399,000 $499,000
Property Rights Fee Fee 1.00 Fee 1.00 Fee 1.00 Financing Terms Market Market 1.00 Market 1.00 Market 1.00
Conditions of Sale Market Market 1.00 Market 1.00 Market 1.00 Market Conditions 4-May-07 Apr-05 0.90 Jan-06 1.00 Jun-05 0.90
Sum of Adjustments --- 0.90 1.00 0.90 Adjusted Price Per Lot --- $382,500 $399,000 $449,100
Overall Tax Rate± 1.75% 1.06% ($25,000) 1.02% ($26,000) 1.01% ($26,000)Price Per Lot (Adjusted) $357,500 $373,000 $423,100
Comparisons
Location Irvine, CA Santa Ana, CA $54,000 Orange, CA $93,000 Irvine, CA $42,000
Premium Potential Average Average $0 Average $0 Average $0
Economy of Scale/Project Size Various 104 $0 100 $0 102 $0
Minimum Lot Size± / Dimensions 2,400 to 3,300 3,300 ($10,000) 3,250 ($10,000) 3,800 ($15,000)
Proposed Product (sf±) 1,600 to 2,000 N/Av $0 2,000 to 2,250 $0 2,417 to 2,803 $0
Profit Participation Yes No ($20,000) No ($20,000) No ($20,000)
Entitlements / Risk Assumed TM Tentative Map $0 Final Map $0 Final Map $0
Stage of Development Assumed Superpad Finished $0 Blue Top $0 Blue Top $0
Net Physical Adjustments $24,000 $63,000 $7,000
Price Per Lot (Adjusted) $381,500 $436,000 $430,100
Per Lot (Before Adjustments)Low $399,000
High $499,000Average $441,000
Per Lot (After Adjustments)Low $381,500
High $436,000Average $415,867
Reconciled "As Is" Lot Value $410,000
1093
LAND COMPARABLE ADJUSTMENT GRIDHeritage Fields, Irvine, California (Group 1)
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 2 9
Comparable No.
Close of Escrow N/A 1-Jun-05 Pending N/Av
Contract Date N/A N/Av Jan-06 Feb-07Sale Price N/A $34,705,137 $52,500,000 $29,909,675Price Per Lot N/Av $517,987 $500,000 $679,765
Costs To Finish (Dev & Fees) N/Av $86,090 $50,000 $32,702 Finished Lot Cost N/Av $604,077 $550,000 $712,467
Price Per Lot (Unadjusted) $604,077 $550,000 $712,467
Property Rights Fee Fee 1.00 Fee 1.00 Fee 1.00 Financing Terms Market Market 1.00 Market 1.00 Market 1.00
Conditions of Sale Market Market 1.00 Market 1.00 Market 1.00 Market Conditions 4-May-07 Jun-05 0.90 Jan-06 1.00 Feb-07 1.00 Sum of Adjustments --- 0.90 1.00 1.00
Adjusted Price Per Lot --- $543,669 $550,000 $712,467
Overall Tax Rate± 1.75% 1.01% ($38,000) 1.05% ($35,000) 1.14% ($31,000)Price Per Lot (Adjusted) $505,669 $515,000 $681,467
Comparisons
Location Irvine, CA Irvine, CA $51,000 Yorba Linda, CA $26,000 San Juan Capistrano, CA ($102,000)
Premium Potential Average Average $0 Average $0 Average $0
Economy of Scale/Project Size Various 67 $0 105 $0 44 $0
Minimum Lot Size± / Dimensions 4,424 to 5,000 4,500 $0 4,400 $0 6,000 ($25,000)
Proposed Product (sf±) 2,000 to 3,200 2,770 to 3,168 $0 2,977 to 3,038 $0 N/Av $0
Profit Participation Yes No ($30,000) No ($30,000) Yes $0
Entitlements / Risk Assumed TM Tentative Map $0 Final Map $0 Tentative Map $0
Stage of Development Assumed Superpad Raw $20,000 Blue Top $0 Blue Top $0
Net Physical Adjustments $41,000 ($4,000) ($127,000)
Price Per Lot (Adjusted) $546,669 $511,000 $554,467
Per Lot (Before Adjustments)
Low $550,000High $712,467Average $622,181
Per Lot (After Adjustments)
Low $511,000High $554,467
Average $537,379
Reconciled "As Is" Lot Value $525,000
1 4 8
LAND COMPARABLE ADJUSTMENT GRIDHeritage Fields, Irvine, California (Group 2)
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 3 0
Comparable No.
Close of Escrow N/A 29-Jul-05 1-Feb-06 N/AvContract Date N/A N/Av Jan-06 Feb-07
Sale Price N/A $37,264,127 $32,200,000 $29,909,675Price Per Lot N/Av $556,181 $614,200 $679,765
Costs To Finish (Dev & Fees) N/Av $108,694 $85,800 $32,702 Finished Lot Cost N/Av $664,875 $700,000 $712,467
Price Per Lot (Unadjusted) $664,875 $700,000 $712,467
Property Rights Fee Fee 1.00 Fee 1.00 Fee 1.00
Financing Terms Market Market 1.00 Market 1.00 Market 1.00 Conditions of Sale Market Market 1.00 Market 1.00 Market 1.00
Market Conditions 4-May-07 Jul-05 0.90 Jan-06 1.00 Feb-07 1.00 Sum of Adjustments --- 0.90 1.00 1.00
Adjusted Price Per Lot --- $598,388 $700,000 $712,467
Overall Tax Rate± 1.75% 1.01% ($55,000) 1.14% ($44,000) 1.14% ($44,000)Price Per Lot (Adjusted) $543,388 $656,000 $668,467
Comparisons
Location Irvine, CA Irvine, CA $54,000 San Juan Capistrano, CA ($98,000) San Juan Capistrano, CA ($100,000)
Premium Potential Good Average $35,000 Above Average $25,000 Above Average $25,000 Economy of Scale/Project Size Various 67 $0 46 $0 44 $0
Minimum Lot Size± / Dimensions 6,000 to 7,700 7,150 $0 6,500 $0 6,000 $20,000
Proposed Product (sf±) 2,650 to 4,000 3,054 to 4,426 $0 N/Av $0 N/Av $0 Profit Participation Yes No ($30,000) Yes $0 Yes $0
Entitlements / Risk Assumed TM Final Map $0 Tentative Map $0 Tentative Map $0 Stage of Development Assumed Superpad Blue Top $0 Blue Top $0 Blue Top $0
Net Physical Adjustments $59,000 ($73,000) ($55,000)
Price Per Lot (Adjusted) $602,388 $583,000 $613,467
Per Lot (Before Adjustments)Low $664,875
High $712,467Average $692,447
Per Lot (After Adjustments)
Low $583,000High $613,467
Average $599,618
Reconciled "As Is" Lot Value $590,000
LAND COMPARABLE ADJUSTMENT GRIDHeritage Fields, Irvine, California (Group 3)
8712
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 3 1
Com
para
ble
No.
Clo
se o
f Esc
row
N/A
1-Ju
n-05
1-A
ug-0
5N
/Av
1-N
ov-0
6C
ontra
ct D
ate
N/A
N/A
vN
/Av
Jun-
05D
ec-0
5Sa
le P
rice
N/A
$40,
000,
000
$53,
000,
000
$45,
739,
000
$83,
200,
000
Pric
e Pe
r L
otN
/Av
$2,0
00,0
00$1
,000
,000
$863
,000
$717
,500
Cos
ts To
Fin
ish (D
ev &
Fee
s)N
/Av
$0$0
$134
,000
$82,
500
Fin
ishe
d L
ot C
ost
N/A
v$2
,000
,000
$1,0
00,0
00$9
97,0
00$8
00,0
00
Pric
e Pe
r L
ot (U
nadj
uste
d)$2
,000
,000
$1,0
00,0
00$9
97,0
00$8
00,0
00
Prop
erty
Rig
hts
Fee
Fee
1.00
Fee
1.00
Fee
1.00
Fee
1.00
Fin
anci
ng T
erm
sM
arke
tM
arke
t1.
00M
arke
t1.
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arke
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00M
arke
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Con
ditio
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f Sal
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arke
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arke
t Con
ditio
ns4-
May
-07
Jun-
050.
90A
ug-0
50.
90Ju
n-05
0.90
Dec
-05
0.90
Sum
of A
djus
tmen
ts---
0.90
0.90
0.90
0.90
Adj
uste
d Pr
ice
Per L
ot---
$1,8
00,0
00$9
00,0
00$8
97,3
00$7
20,0
00
Ove
rall
Tax
Rat
e±1.
75%
1.06
%($
67,0
00)
1.20
%($
52,0
00)
1.20
%($
52,0
00)
1.14
%($
59,0
00)
Pric
e Pe
r L
ot (A
djus
ted)
$1,7
33,0
00$8
48,0
00$8
45,3
00$6
61,0
00
Com
pari
sons
Loc
atio
n Ir
vine
, CA
New
port
Bea
ch, C
A($
433,
000)
San
Cle
men
te, C
A($
85,0
00)
San
Cle
men
te, C
A($
85,0
00)
San
Juan
Cap
istra
no, C
A($
99,0
00)
Pre
miu
m P
oten
tial
Goo
dSu
perio
r($
50,0
00)
Abo
ve A
vera
ge$5
0,00
0A
bove
Ave
rage
$50,
000
Abo
ve A
vera
ge$5
0,00
0 E
cono
my
of S
cale
/Pro
ject
Siz
eV
ario
us20
$053
$053
$010
4$0
Min
imum
Lot
Siz
e± /
Dim
ensio
ns8,
250
to 1
0,20
012
,000
($50
,000
)12
,500
($50
,000
)10
,000
$08,
400
$0
Pro
pose
d Pr
oduc
t (sf
±)4,
100
to 4
,600
3,20
0 to
4,1
00($
100,
000)
5,00
0 to
6,0
00$2
00,0
005,
699
to 6
,070
$200
,000
N/A
v$3
00,0
00 P
rofit
Par
ticip
atio
nY
esN
o($
90,0
00)
No
($40
,000
)N
o($
40,0
00)
Yes
$0 E
ntitl
emen
ts / R
iskA
ssum
ed T
MTe
ntat
ive
Map
$0Fi
nal M
ap$0
Tent
ativ
e M
ap$0
Tent
ativ
e M
ap$0
Sta
ge o
f Dev
elop
men
tA
ssum
ed S
uper
pad
Fini
shed
$0B
lue
Top
$0B
lue
Top
$0B
lue
Top
$0
Net
Phy
sica
l Adj
ustm
ents
($72
3,00
0)$7
5,00
0$1
25,0
00$2
51,0
00
Pric
e Pe
r L
ot (A
djus
ted)
$1,0
10,0
00$9
23,0
00$9
70,3
00$9
12,0
00
Per
Lot
(Bef
ore
Adj
ustm
ents
)
Low
$800
,000
Hig
h$2
,000
,000
Ave
rage
$1,1
99,2
50
Per
Lot
(Aft
er A
djus
tmen
ts)
Low
$912
,000
Hig
h$1
,010
,000
Ave
rage
$953
,825
Rec
onci
led
"As I
s" L
ot V
alue
$950
,000
LA
ND
CO
MPA
RA
BL
E A
DJU
STM
EN
T G
RID
Her
itage
Fie
lds,
Irvi
ne, C
alifo
rnia
(Gro
up 4
)
1416
1317
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 3 2
Com
para
ble
No.
Clo
se o
f Esc
row
N/A
5-Ju
n-05
1-A
ug-0
5N
/Av
1-N
ov-0
6C
ontra
ct D
ate
N/A
N/A
vN
/Av
Jun-
05D
ec-0
5
Sale
Pric
eN
/A$4
0,00
0,00
0$5
3,00
0,00
0$4
5,73
9,00
0$8
3,20
0,00
0Pr
ice
Per
Lot
N/A
v$2
,000
,000
$1,0
00,0
00$8
63,0
00$7
17,5
00
Cos
ts To
Fin
ish (D
ev &
Fee
s)N
/Av
$0$0
$134
,000
$82,
500
Fin
ishe
d L
ot C
ost
N/A
v$2
,000
,000
$1,0
00,0
00$9
97,0
00$8
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FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 3 3
RECONCILIATION OF PRODUCT TYPES RESIDENTIAL LAND PRODUCT TYPES The appraisers applied two methods for estimating the finished land values for the residential product types intended for for-sale housing. As exhibited in the next table, the approaches provided various value indicators. With current and comparative land sales, the sales comparison approach is typically considered the most reliable indicator of value for subdivision land. The development method focuses on the development opportunity provided by the site under consideration and is not directly tied to the historical actions of buyers and sellers, as is the sales comparison approach. Although the subjectivity in many of these inputs tends to limit reliance on this technique, the development method is a tool relied upon by developers when estimating the amount they are willing to pay for a residential development site.
Product No. of Units Minimum Wtd. Avg. Sales Development Reconciled FinishedType Valued Lot Size / Product Home Size Comparison Method Lot Value(1)
4 59 Courtyard 2,000 $525,000 $464,386 $470,000
5 52 SFD 45 x 105 2,200 $525,000 $519,654 $520,0006 67 SFD 60 x 105 2,650 $590,000 $635,615 $630,000
10 70 Courtyard 2,950 $525,000 $663,790 $660,00016 44 SFD 70 x 110 4,000 $590,000 $882,853 $880,00017 81 SFD 70 x 100 3,650 $590,000 $741,426 $740,00018 62 SFD 75 x 110 4,100 $950,000 $886,475 $890,00019 76 SFD 80 x 110 4,500 $950,000 $1,047,621 $1,040,000
20 86 SFD 85 x 120 4,600 $950,000 $1,048,063 $1,040,00021 51 SFD 100 x 120 5,200 $1,150,000 $1,246,200 $1,200,00022 39 SFD 120 x 150 5,900 $1,150,000 $1,452,531 $1,400,00029 80 Courtyard (8 pack) 1,600 $410,000 $364,941 $370,00030 96 Zero Lot Line 2,000 $410,000 $426,165 $425,00031 66 SFD 45 x 100 2,800 $525,000 $522,505 $525,000
32 100 SFD 50 x 100 3,200 $525,000 $587,067 $580,00033 51 SFD 60 x 100 3,950 $590,000 $759,573 $750,000
Attached
1 136 Mid-Rise Flats 1,125 $205,000 $228,009 $220,0002 101 Row TH 1,725 $260,000 $312,220 $300,0003 100 Luxury Triplex 1,900 $340,000 $311,765 $320,0009 85 Luxury Attached 2,250 $340,000 $345,147 $340,000
26 85 Garden Flats/TH 1,200 $260,000 $222,166 $230,00027 112 Brownstone Villas 1,575 $260,000 $277,533 $260,00028 112 Townhomes (Camden) 1,375 $260,000 $261,713 $260,00051 112 Willowhaven 1,664 $265,000 $311,578 $290,000
Minimum 39 --- 1,125 $205,000 $222,166 $220,000Maximum 136 --- 5,900 $1,150,000 $1,452,531 $1,400,000Average --- --- --- $977,222 $1,066,006 $190,400,000
(1) Finished lot value including fees due at permit (detached), Superpad value (attached).
RECONCILED RESIDENTIAL FINISHED LAND VALUES BY PRODUCT TYPE (PER LOT BASIS) Heritage Fields Master Plan, Irvine, California
The sales comparison approach generally indicated lower finished lot values than the development method. The difference between the maximum and minimum value indications for each product group ranged from less than 0.5% (Product 31 – 4,500 square foot SFD) to 50%± (Product 16 – 7,700 square foot SFD). The finished lot value indications increased commensurate with progressively larger product type and/or lot size, as it would be reasonable to assume that larger and higher priced homes could feasibly be built on larger lot sizes.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 3 4
Attached Residential Product 1 – The appraisers examined 136 units of mid rise flat product. The sales comparison approach indicated a superpad value of $205,000 per unit, and the developmental model indicated a value of $228,009 per unit. The appraisers placed reliance on both approaches and reconciled the value at $220,000 per unit. Product 2 – The appraisers examined 101 units of row townhome product. The sales comparison approach indicated a superpad value of $260,000 per unit, and the developmental model indicated a value of $312,220 per unit. The appraisers placed more reliance on the developmental method and reconciled at $300,000 per unit. Product 3 – The appraisers examined 100 units of luxury triplex. The sales comparison approach indicated a superpad value of $340,000 per unit, and the developmental model indicated a value of $311,765 per unit. The appraisers placed greater reliance on the development method and reconciled at $320,000 per unit. Product 9 – The appraisers examined 85 units of luxury attached product. The sales comparison approach indicated a superpad value of $340,000 per unit, and the developmental model indicated a value of $345,147 per unit. The appraisers placed reliance on both approaches and reconciled at $340,000 per unit. Product 26 – The appraisers examined 85 units of garden flat townhome product. The sales comparison approach indicated a superpad value of $260,000 per unit, and the developmental model indicated a value of $222,166 per unit. The appraisers placed greater reliance on the development method and reconciled at $230,000 per unit. Product 27 – The appraisers examined 112 units of brownstone villa product. The sales comparison approach indicated a superpad value of $260,000 per unit, and the developmental model indicated a value of $277,533 per unit. The appraisers placed reliance on both approaches and reconciled at $260,000 per unit. Product 28 – The appraisers examined 112 units of townhome product. The sales comparison approach indicated a superpad value of $260,000 per unit, and the developmental model indicated a value of $261,713 per unit. The appraisers placed reliance on both approaches and reconciled at $260,000 per unit. Product 51 – The appraisers examined 112 units of attached product. The sales comparison approach indicated a superpad value of $265,000 per unit, and the developmental model indicated a value of $311,578 per unit. The appraisers placed on both approaches and reconciled at $290,000 per unit. Detached Residential For detached residential land, given the limited availability of comparative land sales in the overall Orange County submarket, the appraisers strongly considered the developmental method. However, the appraisers note the lack of 2006 land sales to support recent slowing in the residential housing market.
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V A L U A T I O N S E R V I C E S 2 3 5
Product 4 – The appraisers examined 59 lots of 4,750 square foot lot detached product. The sales comparison approach indicated a finished lot value of $525,000 per lot, and the developmental model indicated a value of $464,386 per lot. The appraisers placed greater reliance on the developmental method and reconciled at $470,000 per lot. Product 5 – The appraisers examined 52 lots of 4,725 square foot lot detached product. The sales comparison approach indicated a finished lot value of $525,000 per lot, and the developmental model indicated a value of $519,654 per lot. The appraisers placed greater reliance on the developmental method and reconciled at $520,000 per lot. Product 6 – The appraisers examined 67 lots of 6,300 square foot lot detached product. The sales comparison approach indicated a finished lot value of $590,000 per lot, and the developmental model indicated a value of $635,615 per lot. The appraisers placed greater reliance on the developmental method and reconciled at $630,000 per lot. Product 10 – The appraisers examined 70 lots of 4,424 square foot lot detached product. The sales comparison approach indicated a finished lot value of $525,000 per lot, and the developmental model indicated a value of $663,790 per lot. The appraisers placed greater reliance on the developmental method and reconciled at $660,000 per lot. Product 16 – The appraisers examined 44 lots of 7,700 square foot lot detached product. The sales comparison approach indicated a finished lot value of $590,000 per lot, and the developmental model indicated a value of $882,853 per lot. The difference between the developmental model and the sales comparison for this product type is 49.64%±. In our analysis we grouped the subject detached product by lot size. Product 16 lot size is at the high end of the range for the product group, as the next size class begins at 8,000 square feet. Due to this grouping, the sales comparison indication is skewed to the low end. For this reason, the appraisers placed greater reliance on the developmental method and reconciled at $880,000 per lot. Product 17 – The appraisers examined 81 lots of 7,000 square foot lot detached product. The sales comparison approach indicated a finished lot value of $590,000 per lot, and the developmental model indicated a value of $741,426 per lot. The appraisers placed greater reliance on the developmental method approach and reconciled at $740,000 per lot.
Product 18 – The appraisers examined 62 lots of 8,250 square foot lot detached product. The sales comparison approach indicated a finished lot value of $950,000 per lot, and the developmental model indicated a value of $886,475 per lot. The appraisers placed greater reliance on the developmental method and reconciled at $890,000 per lot.
Product 19 – The appraisers examined 76 lots of 8,800 square foot lot detached product. The sales comparison approach indicated a finished lot value of $950,000 per lot, and the developmental model indicated a value of $1,047,621 per lot. The appraisers placed greater reliance on the developmental method and reconciled at $1,040,000 per lot.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 3 6
Product 20 – The appraisers examined 86 lots of 10,200 square foot lot detached product. The sales comparison approach indicated a finished lot value of $950,000 per lot, and the developmental model indicated a value of $1,047,621 per lot. The appraisers placed greater reliance on the developmental method and reconciled at $1,040,000 per lot.
Product 21 – The appraisers examined 51 lots of 12,000 square foot lot detached product. The sales comparison approach indicated a finished lot value of $1,150,000 per lot, and the developmental model indicated a value of $1,246,200 per lot. The appraisers placed greater reliance on the developmental method and reconciled at $1,200,000 per lot.
Product 22 – The appraisers examined 39 lots of 18,000 square foot lot detached product. The sales comparison approach indicated a finished lot value of $1,150,000 per lot, and the developmental model indicated a value of $1,452,531 per lot. The appraisers placed greater reliance on the developmental method approach and reconciled value at $1,400,000 per lot.
Product 29 – The appraisers examined 80 lots of courtyard (8-pack) detached product (2,400 square foot lots). The sales comparison approach indicated a finished lot value of $410,000 per lot, and the developmental model indicated a value of $364,941 per lot. The appraisers placed greater reliance on the developmental method and reconciled at $370,000 per lot.
Product 30 – The appraisers examined 96 lots of zero lot line detached product (3,000 square foot lots). The sales comparison approach indicated a finished lot value of $410,000 per lot, and the developmental model indicated a value of $426,165 per lot. The appraisers placed greater reliance on the developmental method and reconciled at $425,000 per lot.
Product 31 – The appraisers examined 66 lots of 4,500 square foot detached product. The sales comparison approach indicated a finished lot value of $525,000 per lot, and the developmental model indicated a value of $522,505 per lot. The appraisers placed greater reliance on the developmental method and reconciled at $525,000 per lot.
Product 32 – The appraisers examined 100 lots of 5,000 square foot detached product. The sales comparison approach indicated a finished lot value of $525,000 per lot, and the developmental model indicated a value of $587,067 per lot. The appraisers placed higher reliance on the developmental method and reconciled at $580,000 per lot.
Product 33 – The appraisers examined 51 lots of 6,000 square foot detached product. The sales comparison approach indicated a finished lot value of $590,000 per lot, and the developmental model indicated a value of $759,573 per lot. The appraisers placed greater reliance on the developmental method and reconciled at $750,000 per lot. Again, it must be noted that the value conclusions for the subject’s product types were also based on an internal comparison of the various project types. While one approach was favored over the other, both
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 3 7
approaches were considered in all cases. The resulting conclusions were deemed reasonable given the progression in the proposed lot and home sizes and home pricing for the subject’s product types.
As a final check to the reasonableness of the appraisers’ conclusions, the appraisers calculated the ratio of finished lot to average home price, including option revenues, as well as lot and model premiums, for the residential products. As shown in the following chart, the ratios ranged from about 46%± to 52%± on the detached residential product and 34%± to 41%± on the attached residential product.
Planning Minimum Wtd. Avg. No. of Units Finished Lot(1) Avg. Retail Product Land/PriceArea(s) Lot Size Home Size Valued (Appraised) (Assumed) Ratio
4 Courtyard 2,000 59 $470,000 $924,304 50.85%5 SFD 45 x 105 2,200 52 $520,000 $1,007,204 51.63%6 SFD 60 x 105 2,650 67 $630,000 $1,232,684 51.11%
10 Courtyard 2,950 70 $660,000 $1,354,273 48.73%16 SFD 70 x 110 4,000 44 $880,000 $1,862,806 47.24%17 SFD 70 x 100 3,650 81 $740,000 $1,607,133 46.04%18 SFD 75 x 110 4,100 62 $890,000 $1,886,535 47.18%19 SFD 80 x 110 4,500 76 $1,040,000 $2,183,070 47.64%20 SFD 85 x 120 2,000 86 $1,040,000 $2,212,483 47.01%21 SFD 100 x 120 2,200 51 $1,200,000 $2,612,633 45.93%22 SFD 120 x 150 2,650 39 $1,400,000 $3,042,275 46.02%29 Courtyard (8 pack) 2,950 80 $370,000 $729,843 50.70%30 Zero Lot Line 4,000 96 $425,000 $861,879 49.31%31 SFD 45 x 100 3,650 66 $525,000 $1,112,925 47.17%32 SFD 50 x 100 4,100 100 $580,000 $1,248,830 46.44%33 SFD 60 x 100 4,500 51 $750,000 $1,580,171 47.46%
Attached1 Mid-rise Flats 1,125 136 $220,000 $602,397 36.52%2 Row TH 1,725 101 $300,000 $785,580 38.19%3 Luxury Triplex 1,900 100 $320,000 $854,463 37.45%9 Luxury Attached 2,250 85 $340,000 $992,836 34.25%
26 Garden Flats/TH 1,200 85 $230,000 $564,299 40.76%27 Brownstone Villas 1,575 112 $260,000 $720,987 36.06%28 Townhomes (Camden) 1,375 112 $260,000 $642,555 40.46%51 Willowhaven 1,664 112 $290,000 $770,737 37.63%
Minimum 39 1,125 39 $220,000 $564,299 34.25%Maximum 136 5,900 136 $1,400,000 $3,042,275 51.63%Average(s) --- 1,400 80 $190,400,000 $1,175,064 44.66%
(1) Finished lot values inclusive of fees and permits due at permit (detached), Superpad values do not include finishing costs or fees at permit (attached).
FINISHED LOT / AVG PRICE RATIOS BY PRODUCT TYPEHeritage Fields Master Plan, Irvine, California
In general, for attached product there was an inverse relationship between the ratio and density, i.e. the ratio goes up as density goes down. This is expected as the overall costs (construction and profit) of higher density product is higher resulting in less allocation of land value to the overall price. In addition, for detached product the ratios generally increased with increasing unit size and larger lot sizes. Typically, ratios for medium to high density product will range from 15% to 35% with high density product at the lower end. Ratios for low density product will range from 40% to 50% with the majority falling toward the middle to higher end of this range for Orange County. Overall, the subject ratios were deemed reasonable and in line with the local submarket and were within the range of ratios indicated by comparable sales. The reader should note that the assumed average retail product prices for the subject lots were based on the appraisers’ hypothetical product and pricing. Any variations in product proposals by particular product types would likely affect the land/price ratio equation.
In order to derive appropriate values for use in the “as is” valuation analysis, it was necessary to deduct the estimated intract costs and fees due at permit for the detached product types. The result of this
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 3 8
procedure was superpad lot condition planning area excluding fees due at permit, which were then utilized in the “as is” valuation of the entire property (to follow).
PAs / No. Units Minimum Wtd. Avg. Finished Total Finished Less Costs IndicatedParcels Valued Lot Size/Product Home Size Value / Unit(1) Lot Value(2) to Finish(3) Land Value(4)
Detached4 59 Courtyard 2,000 $470,000 $27,730,000 ($3,235,796) $24,494,2045 52 SFD 45 x 105 2,200 $520,000 $27,040,000 ($2,515,136) $24,524,864
6 67 SFD 60 x 105 2,650 $630,000 $42,210,000 ($4,244,584) $37,965,41610 70 Courtyard 2,950 $660,000 $46,200,000 ($3,887,240) $42,312,76016 44 SFD 70 x 110 4,000 $880,000 $38,720,000 ($3,752,760) $34,967,240
17 81 SFD 70 x 100 3,650 $740,000 $59,940,000 ($6,327,963) $53,612,03718 62 SFD 75 x 110 4,100 $890,000 $55,180,000 ($5,649,812) $49,530,18819 76 SFD 80 x 110 4,500 $1,040,000 $79,040,000 ($7,327,996) $71,712,004
20 86 SFD 85 x 120 4,600 $1,040,000 $89,440,000 ($9,440,994) $79,999,00621 51 SFD 100 x 120 5,200 $1,200,000 $61,200,000 ($6,613,884) $54,586,11622 39 SFD 120 x 150 5,900 $1,400,000 $54,600,000 ($7,148,037) $47,451,963
29 80 Courtyard (8 pack) 1,600 $370,000 $29,600,000 ($2,653,520) $26,946,48030 96 Zero Lot Line 2,000 $425,000 $40,800,000 ($3,284,832) $37,515,16831 66 SFD 45 x 100 2,800 $525,000 $34,650,000 ($3,553,242) $31,096,758
32 100 SFD 50 x 100 3,200 $580,000 $58,000,000 ($5,952,600) $52,047,40033 51 SFD 60 x 100 3,950 $750,000 $38,250,000 ($3,586,881) $34,663,119
Attached
1 136 Mid-Rise Flats 1,125 $220,000 $29,920,000 $0 $29,920,0002 101 Row TH 1,725 $300,000 $30,300,000 $0 $30,300,0003 100 Luxury Triplex 1,900 $320,000 $32,000,000 $0 $32,000,000
9 85 Luxury Attached 2,250 $340,000 $28,900,000 $0 $28,900,00026 85 Garden Flats/TH 1,200 $230,000 $19,550,000 $0 $19,550,00027 112 Brownstone Villas 1,575 $260,000 $29,120,000 $0 $29,120,000
28 112 Townhomes (Camden) 1,375 $260,000 $29,120,000 $0 $29,120,00051 112 Willowhaven 1,664 $290,000 $32,480,000 $0 $32,480,000
Attached/Detached Units 1,923 --- --- $527,296 $1,013,990,000 $0 $934,814,723
Master Developer Profit ParticipationTotal Residential Land Sale Revenue Events $934,814,723Aggregate Total Land Sale Revenue Events $934,814,723
(1) Finished lot value including fees at permit (detached), Superpad value (attached). (2) Total Finished lot value including fees at permit (detached), Superpad value (attached). (3) Builder intracts and fees due at permit (detached). (4) Superpad value (attached and detached); excluding fees due at permit.
VALUATION SUMMARY BY PRODUCT TYPEHeritage Fields Master Plan, Irvine, California
In the final step, the appraisers apply the conclusions of the product type analysis and apply it to the residential planning areas of Heritage Fields. The following table summarizes our revenue estimates.
As mentioned, Heritage Fields has 103 planning areas and 24 product types. The appraisers have analyzed the residential planning areas based on the 24 product types. In our analysis of 24 product types we chose a representative planning area population for each product type. As part of the methodology employed, for the residential planning areas, we conducted a developmental method and a sales comparison analysis for each product type, and reconciled a value indication for each product type utilizing these approaches. In the next step we are using the reconciled product type value indication and applying to all residential planning areas in the Heritage Fields Master-plan. As demonstrated in the Residential Revenues by Planning Area Summary Table, on the following page, the aggregate of land sale revenues from the various planning area valuations was $1,557,171,797.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 3 9
Neighborhood Planning Product Product HomesArea/Parcel Number Description Per Lot Total
LLD L10 8 Faculty Housing 60 --- ---(Lifelong Learning L11a 1 Mid-Rise Flats 136 $220,000 $29,920,000
District) L11b 1 Mid-Rise Flats 135 $220,000 $29,700,000L11c 6 60x105 67 $566,648 $37,965,416L11d 5 SFD 45x105 52 $471,632 $24,524,864L14a 3 Luxury Triplex 100 $320,000 $32,000,000L14b 2 Row TH 101 $300,000 $30,300,000L15 2 Row TH 101 $300,000 $30,300,000
L22a-i 5 SFD 45x105 20 $471,632 $9,432,640L22a-ii 4 Courtyard 59 $415,156 $24,494,204L22a-iii 2 Row TH 30 $300,000 $9,000,000
L24 7 ETHIC 165 --- ---Subtotal --- --- --- 1,026 --- $257,637,124
PD P1a 22 SFD 120x150 27 $1,216,717 $32,851,359(Park District) P1b 21 SFD 100x120 73 $1,070,316 $78,133,068
P1c 20 SFD 85x120 86 $930,221 $79,999,006P1d 18 SFD 75x110 62 $798,874 $49,530,188P1e 18 SFD 75x110 62 $798,874 $49,530,188P1f 17 SFD 70x100 81 $661,877 $53,612,037P2 17 SFD 70x100 80 $661,877 $52,950,160P4a 10 Courtyard 70 $604,468 $42,312,760P4b 9 Luxury Att 85 $340,000 $28,900,000P4c 10 Courtyard 67 $604,468 $40,499,356P5a 9 Luxury Att 60 $340,000 $20,400,000
P6a 19 SFD 80x110 76 $943,579 $71,712,004P7a 21 SFD 100x120 35 $1,070,316 $37,461,060P7b 22 SFD 120x150 39 $1,216,717 $47,451,963P10a 16 SFD 70x110 44 $794,710 $34,967,240P11a 22 SFD 120x150 71 $1,216,717 $86,386,907P11b 21 SFD 100x120 51 $1,070,316 $54,586,116P12a 21 SFD 100x120 31 $1,070,316 $33,179,796
Subtotal --- --- --- 1,100 --- $894,463,208
TODD T1a 33 SFD 60x100 51 $679,669 $34,663,119(Transit Oriented District) T1b 33 SFD 60x100 46 $679,669 $31,264,774
T1d 31 SFD 45x100 66 $471,163 $31,096,758T2a 33 SFD 60x100 96 $679,669 $65,248,224T3a 31 SFD 45x100 34 $471,163 $16,019,542T3b 26 Garden Flats/TH 85 $230,000 $19,550,000T8 25 Apartments 117 --- ---T9a 27 Brownstone Villa 112 $260,000 $29,120,000T10a 24 Affodable (Low) 392 --- ---T11a 32 SFD 50x100 100 $520,474 $52,047,400T12a 28 Townhome (Camden) 112 $260,000 $29,120,000T12b 29 Courtyard (8-Pack) 80 $336,831 $26,946,480T12c 51 Willowhaven 112 $290,000 $32,480,000T12d 30 Zero Lot Line 96 $390,783 $37,515,168
Subtotal --- --- --- 1,499 --- $405,071,465
Total --- --- --- 3,625 --- $1,557,171,797 (1) Hypothetical product assumptions based on Heritage Fields 2007 Overlay Business Plan.
Revenues
RESIDENTIAL REVENUES BY PLANNING AREAHeritage Fields Master Plan, Irvine, California
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 4 0
This figure represents the aggregate of superpad land values excluding fees due at permit for the 2,891 residential units for Heritage Fields. Note, the 2,891 units does not include Faculty Housing (60 units), ETHIC (165 units), Apartments (117 units), and Low Affordable Housing (392 units), which would result in the total of 3,625 units. It is especially important to note that any substantial changes in the costs to finish the lots and/or superpad parcels, basically the builder’s costs, would affect the indicated land value indications. It was assumed that the costs provided were reasonably true and correct.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 4 1
COMMERCIAL LAND PARCEL (INDUSTRIAL OFFICE / R&D) Heritage Fields includes two 30.3 to 35.9± acre sites within the LLD and various sites within the TOD ranging from 0.6 to 5± acres designated for industrial office / R&D facilities. There are a total of 68.6 acres within the LLD and 113.2 acres within the TOD. A search was made for land sales where the intended use was to develop industrial office or R&D buildings. Overall, five sales were deemed relevant and specifically analyzed herein. The five sales were analyzed on a price per square foot basis (net site area), which is typical for industrial land in this market. The industrial site sales comparison approach adjustment grid follows the ensuing discussion of the sales and the adjustment process. Sale 1, at $29.90 per square foot, sold in January of 2005, closing on June 23, 2005. The property consisted of a 22.18± acre parcel located in the Irvine Spectrum Technology Park, just west of Interstate 5, in Irvine. The area is a newly developed industrial area, which would be similar to the subject’s development, though overall superior in area. The site is being developed as a technology park with office / R&D buildings. Sale 2, at $52.29 per square foot, sold in July 2005. The property consisted of 1.44 acres, which was essentially the net acreage. The buyer is currently developing a commercial property on the site. Overall, this location is superior and is close to the freeway on-ramps to Interstate 5 and 405. The site was in a graded superpad condition at the time of sale. Sale 3, at $36.00 per square foot, was a 2.09 acre parcel which sold in May of 2005 and closed on September 30, 2005. This is a triangular shaped lot, located on the corner of Research Drive and Scientific Way, within a high-tech Industrial / R&D / Office park. The surrounding buildings are of a good quality, concrete tilt up construction, with good glass and some headquarter buildings were observed in the area. Overall, this location is superior and is close to freeway on-ramps to Interstate 5. The site, which has 2 story office buildings under construction, was in a graded superpad condition at the time of the sale. Sale 4, at $34.44 per square foot, sold in October of 2005 and closed on December 15, 2005. This was an 11.33 acre parcel with an easement and net acreage of 8.80 acres. The site, which is planned for development with several freestanding industrial office and R&D buildings, was in a graded superpad condition at the time of the sale. There was an existing church on the property, which added $0.25 per square foot to the land for demolition costs.
Sale 5, at $32.50 per square foot, sold in October 2006. The property consisted of a 1.44± acre parcel located in the Irvine Spectrum. The area is a newly developed industrial area, which would be similar to the subject’s development. The site is being developed with an office building.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 4 2
Loc
atio
nSa
le P
rice
Dat
aC
omm
unity
Buy
erSa
le D
ate
Site
Siz
eSi
te S
ize
Pric
eR
ef.
TB
Map
Cod
eSe
ller
Clo
se D
ate
APN
(s)
Prop
osed
Zoni
ng(S
F)(N
et A
cres
)pe
r SF
1SE
C o
f Bak
e Pk
wy
and
Irvi
ne C
ente
r Driv
eBa
cchu
s Com
mer
cial
$28,
888,
214
588-
211-
01In
dust
rial
GI
966,
161
22.1
8$2
9.90
Irvi
ne, C
AIr
vine
Com
mun
ity D
evel
.1-
Jan-
0558
8-21
1-02
Offi
ce P
ark
891-
C4
23-J
un-0
558
8-21
1-03
232
Tes
la W
ayM
ary
P. C
. Voo
$3,2
80,0
0058
8-20
2-11
Com
mer
cial
GI
62,7
261.
44$5
2.29
Irvi
ne, C
ATe
sla A
ssoc
iate
s, LL
CN
/A
Dev
elop
men
t89
1-C
41-
Jul-0
5
3R
esea
rch
Dr.
& S
cien
tfic
Wy.
Para
gon
Gru
ppe
$3,2
69,6
28PM
200
0-11
3-14
Indu
stria
l Offi
ceG
I90
,823
2.09
$36.
00Ir
vine
, CA
Irvi
ne C
omm
. Dev
el. C
o.1-
May
-05
R&
D89
1-D
430
-Sep
-05
410
Goo
dyea
rG
oody
ear L
and
Hol
ding
s$1
3,20
0,00
059
1-01
4-11
Indu
stria
lG
I38
3,32
88.
80$3
4.44
Irvi
ne, C
ALA
Int.
Chu
rch
of C
hrist
1-O
ct-0
559
1-01
4-13
Park
891-
F215
-Dec
-05
591-
014-
14
5E/
S of
Pos
t Roa
d, N
/O O
ak C
anyo
nTh
e Ir
vine
Com
pany
Ret
ail P
rope
rties
$2,0
32,9
4546
6-01
3-14
Offi
ce3.
1 M
ulti
62,5
521.
44$3
2.50
Irvi
ne, C
AG
CL
Prop
ertie
sN
/A
86
0-J5
1-O
ct-0
6
CO
MM
ER
CIA
L L
AN
D (R
&D
) DA
TA
SU
MM
AR
YH
erita
ge F
ield
s Mas
ter P
lan,
Irvi
ne, C
alifo
rnia
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 4 3
COMMERCIAL LAND (INDUSTRIAL / R&D) SALES MAP
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 4 4
Property Rights Conveyed No adjustments were warranted for property rights conveyed as all of the land data sold with fee simple property rights. Financing (Terms of Sale) None of the sales was reported to include atypical financing warranting adjustments. Conditions of Sale None of the sales was reported to include any conditions of sale. Market Conditions (Time of Sale) The comparable sales closed between June 2005 and October 2006. All commercial land uses have appreciated in Orange County submarket. A 12% annual adjustment was concluded based on the survey of all commercial property over the past four to five quarters (as discussed in the Market Conditions section). Adjustments are made from the date of sale. General Location Location takes into consideration the comparables’ and the subject’s physical orientation to the surrounding area, including proximity to local services and the quality and appeal of the community at large. All of the sales are rated similar in location. Specific Location Sales 1, 2 and 3 were rated superior in location with better access to the 5 and 405 freeways and local retail amenities. These sales were given a downward adjustment of 15% to 20%. The other sales were rated similar. Economy of Scale All other factors being similar, smaller parcels tend to command higher unit prices than larger parcels due to economies of scale and the more limited number of buyers that can afford to pay for larger parcels. The subject has two larger parcels (30.3 to 35.9± acre sites within the LLD). Comparable Sales 2 through 5 were adjusted upward because of their smaller size. Our adjustments ranged from 10% to 25%. Additionally, the subject includes parcels that range from .6 to 5 acres in size within the TOD (There is also a 2.5 acre parcel within the LLD). Sale 1 was given a 20% upward adjustment versus the subject smaller parcels. Utilities Utilities reflect a parcel’s accessibility to the local infrastructure. When taking into consideration utilities for commercial/institutional sites, electricity, gas, water, and sewer are all required in the typical market. All of the land comparables used in this analysis had utility services available, similar to the subject site.
Zoning / Use When analyzing this category of comparison, the appraisers took into consideration the subject’s land use designation, which allows an industrial office and R&D type product. Sales 1, 3 and 5 had similar office /
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 4 5
R&D type development, requiring no adjustment. Sale 2 is being developed with retail type uses, which fits the area. This sale is adjusted downward 10%. Sale 4 is being developed with an industrial park and was given a slight upward adjustment. Access / Exposure The subject sites are located in a master-planned community with average visibility and access. Sale 5 is located along a smaller cul-de-sac and was given a 10% upward adjustment versus the subject parcels. Stage of Development In this analysis, the subject site was assumed to be in a superpad condition. Sale 4 had an existing building that had to be demolished, adding to the cost of the land. This sale was adjusted according to the estimated costs for demolition. Community Facilities Assessment Bond assessments for the creation of infrastructure are typically passed on to the purchaser and add to the cost of the land. This additional fee is considered by the buyer as part of the land price. The subject has a $4.00 per square foot CFD. Variances in CFDs were used for the adjustments applied. RECONCILIATION – INDUSTRIAL / R&D - LARGER R&D PARCELS WITHIN LLD Before adjustments, the sales prices ranged from $29.90 to $52.29 per square foot. After having applied relevant quantitative adjustments to the comparable data, the adjusted prices ranged from $25.14 to $37.29 per square foot for the 30.3± to 35.9± acre sites within the LLD. We placed most emphasis on Sale 1 because of its similar size and Sale 5 because of its similar location and recent sale date. The data would suggest that the value of R&D land would fall in the range of $30.00 to $33.00 per square foot. After analyzing the available relevant data, a value of $30.00± per square foot was reconciled for the subject’s R&D sites in the LLD. Said value reflects the site being in a superpad condition. An adjustment grid follows this discussion. RECONCILIATION – INDUSTRIAL / R&D - R&D PARCELS WITHIN TOD Before adjustments, the sales prices ranged from $29.90 to $52.29 per square foot. After having applied relevant quantitative adjustments to the comparable data, the adjusted prices ranged from $36.34 to $45.30 per square foot for the .6 to 5.0± acre sites within the TOD. The data would suggest that the value of R&D land would fall in the range of $35.00 to $40.00 per square foot. After analyzing the available relevant data, a value of $37.00 per square foot was reconciled for the subject’s R&D sites in the TOD for the non-freeway exposed sites. A slightly higher value of $39.00 per square foot was reconciled for the freeway exposed sites. Said value reflects the site being in a superpad condition. An adjustment grid follows this discussion.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 4 6
Com
para
ble
No.
:Su
bjec
t1
23
45
Iden
tific
atio
n:Pa
rcel
s L4
and
L5
SEC
of B
ake
Pkw
y an
d Ir
vine
Cen
ter
Dri
ve32
Tes
la W
ayR
esea
rch
Dr.
& S
cien
tfic
Wy.
10 G
oody
ear
E/S
of P
ost R
oad,
N/O
Oak
Can
yon
Dat
e of
Sal
e:n/
a1-
Jan-
051-
Jul-0
51-
May
-05
1-O
ct-0
51-
Oct
-06
Sale
Pric
e:$2
8,88
8,21
4$3
,280
,000
$3,2
69,6
28$1
3,20
0,00
0$2
,032
,945
Pric
e Pe
r SF:
$29.
90$5
2.29
$36.
00$3
4.44
$32.
50C
osts
To
Fini
sh (T
o Su
perp
ad):
$0.0
0$0
.00
$0.0
0$0
.00
$0.0
0Fi
nish
ed P
SF C
ost (
Shee
t Gra
ded
Supe
rpad
):$2
9.90
$52.
29$3
6.00
$34.
44$3
2.50
Pric
e Pe
r Uni
t (U
nadj
uste
d):
$29.
90$5
2.29
$36.
00$3
4.44
$32.
50
Prop
erty
Rig
hts
Fee
Fee
1.00
Fee
1.00
Fee
1.00
Fee
1.00
Fee
1.00
Fi
nanc
ing
n/a
Mar
ket
1.00
Mar
ket
1.00
Mar
ket
1.00
Mar
ket
1.00
Mar
ket
1.00
C
ondi
tions
of S
ale
n/a
Mar
ket
1.00
Mar
ket
1.00
Mar
ket
1.00
Mar
ket
1.00
Mar
ket
1.00
M
arke
t Con
ditio
ns4-
May
-07
1-Ja
n-05
1.28
1-Ju
l-05
1.22
1-M
ay-0
51.
241-
Oct
-05
1.19
1-O
ct-0
61.
07
Sum
of A
djus
tmen
ts--
-1.
281.
221.
241.
191.
07
Adj
uste
d Pr
ice
Per S
F:--
-$3
8.40
$64.
00$4
4.80
$41.
09$3
4.83
O
vera
ll Ta
x R
ate±
---
$0.0
0$0
.00
$0.0
0$0
.00
$0.0
0A
djus
ted
Pric
e Pe
r SF:
---
$38.
40$6
4.00
$44.
80$4
1.09
$34.
83
Com
paris
ons:
G
ener
al L
ocat
ion
Ora
nge
Irvi
ne$0
.00
Irvi
ne$0
.00
Irvi
ne$0
.00
Irvi
ne$0
.00
Irvi
ne$0
.00
Sp
ecifi
c Lo
catio
nH
erita
ge F
ield
sSl
ight
ly S
uper
ior
($5.
76)
Supe
rior
($12
.80)
Supe
rior
($8.
96)
Sim
ilar
$0.0
0Si
mila
r$0
.00
Ec
onom
y of
Sca
le (A
cres
)30
.3 to
35.
9 ac
res
22.1
8$0
.00
1.44
($16
.00)
2.09
($11
.20)
8.80
($4.
11)
1.44
($8.
71)
U
tiliti
esSi
te P
erim
eter
Sim
ilar
$0.0
0Si
mila
r$0
.00
Sim
ilar
$0.0
0Si
mila
r$0
.00
Sim
ilar
$0.0
0
Zone
: Use
Indu
stria
l Offi
ce/R
&D
GI:
Offi
ce R
&D
$0.0
0G
I: C
omm
erci
al($
6.40
)G
I: In
d.O
ffice
/R&
D$0
.00
GI:
Ind
Park
$2.0
53.
1: O
ffice
$0.0
0
Acc
ess/
Expo
sure
Avg
/Mas
ter P
lan
Sim
ilar
$0.0
0Si
mila
r$0
.00
Sim
ilar
$0.0
0Si
mila
r$0
.00
Slig
htly
Infe
rior
$3.4
8
Stag
e of
Dev
elop
men
tSu
perp
adSi
mila
r$0
.00
Sim
ilar
$0.0
0Si
mila
r$0
.00
Dem
oliti
on C
osts
$0.2
5Si
mila
r$0
.00
C
omm
unity
Fac
ilitie
s Ass
essm
ent
$4.0
0/SF
$4.5
0/SF
$0.5
0$4
.50/
SF$0
.50
$4.5
0/SF
$0.5
0$2
.00/
SF($
2.00
)$4
.50/
SF$0
.50
Net
Phy
sical
Adj
ustm
ents
:($
5.26
)($
34.7
0)($
19.6
6)($
3.80
)($
4.72
)
Fini
shed
Per
SF
Cos
t (A
djus
ted)
:$3
3.14
$29.
30$2
5.14
$37.
29$3
0.10
Per
Squa
re F
oot (
Bef
ore
Adj
ustm
ents
)L
ow$2
9.90
Hig
h$5
2.29
Ave
rage
$38.
16
Per
Squa
re F
oot (
Aft
er A
djus
tmen
ts)
Low
$25.
14H
igh
$37.
29A
vera
ge$3
1.22
Rec
onci
led
Per
Squa
re F
oot V
alue
…$3
0.00
LA
ND
DA
TA
AD
JUST
ME
NT
GR
IDH
erita
ge F
ield
s M
aste
r Pl
an, I
rvin
e, C
alifo
rnia
Com
mer
cial
Lan
d (R
&D
) - P
arce
ls L
4 an
d L
5
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 4 7
Com
para
ble
No.
:Su
bjec
t1
23
45
Iden
tific
atio
n:Pa
rcel
s SE
C o
f Bak
e Pk
wy
and
Irvi
ne C
ente
r D
rive
32 T
esla
Way
Res
earc
h D
r. &
Sci
entf
ic W
y.10
Goo
dyea
rE
/S o
f Pos
t Roa
d, N
/O O
ak C
anyo
n
Dat
e of
Sal
e:n/
a1-
Jan-
051-
Jul-0
51-
May
-05
1-O
ct-0
51-
Oct
-06
Sale
Pric
e:$2
8,88
8,21
4$3
,280
,000
$3,2
69,6
28$1
3,20
0,00
0$2
,032
,945
Pric
e Pe
r SF:
$29.
90$5
2.29
$36.
00$3
4.44
$32.
50C
osts
To
Fini
sh (T
o Su
perp
ad):
$0.0
0$0
.00
$0.0
0$0
.00
$0.0
0Fi
nish
ed P
SF C
ost (
Shee
t Gra
ded
Supe
rpad
):$2
9.90
$52.
29$3
6.00
$34.
44$3
2.50
Pric
e Pe
r Uni
t (U
nadj
uste
d):
$29.
90$5
2.29
$36.
00$3
4.44
$32.
50
Prop
erty
Rig
hts
Fee
Fee
1.00
Fee
1.00
Fee
1.00
Fee
1.00
Fee
1.00
Fi
nanc
ing
n/a
Mar
ket
1.00
Mar
ket
1.00
Mar
ket
1.00
Mar
ket
1.00
Mar
ket
1.00
C
ondi
tions
of S
ale
n/a
Mar
ket
1.00
Mar
ket
1.00
Mar
ket
1.00
Mar
ket
1.00
Mar
ket
1.00
M
arke
t Con
ditio
ns4-
May
-07
1-Ja
n-05
1.28
1-Ju
l-05
1.22
1-M
ay-0
51.
241-
Oct
-05
1.19
1-O
ct-0
61.
07
Sum
of A
djus
tmen
ts--
-1.
281.
221.
241.
191.
07
Adj
uste
d Pr
ice
Per S
F:--
-$3
8.40
$64.
00$4
4.80
$41.
09$3
4.83
O
vera
ll Ta
x R
ate±
---
$0.0
0$0
.00
$0.0
0$0
.00
$0.0
0A
djus
ted
Pric
e Pe
r SF:
---
$38.
40$6
4.00
$44.
80$4
1.09
$34.
83
Com
paris
ons:
G
ener
al L
ocat
ion
Ora
nge
Irvi
ne$0
.00
Irvi
ne$0
.00
Irvi
ne$0
.00
Irvi
ne$0
.00
Irvi
ne$0
.00
Sp
ecifi
c Lo
catio
nH
erita
ge F
ield
sSl
ight
ly S
uper
ior
($5.
76)
Supe
rior
($12
.80)
Supe
rior
($8.
96)
Sim
ilar
$0.0
0Si
mila
r$0
.00
Ec
onom
y of
Sca
le (A
cres
).6
to 5
acr
es22
.18
$7.6
81.
44$0
.00
2.09
$0.0
08.
80$0
.00
1.44
$0.0
0
Util
ities
Site
Per
imet
erSi
mila
r$0
.00
Sim
ilar
$0.0
0Si
mila
r$0
.00
Sim
ilar
$0.0
0Si
mila
r$0
.00
Zo
ne: U
seIn
dust
rial O
ffice
/R&
DG
I: O
ffice
R&
D$0
.00
GI:
Com
mer
cial
($6.
40)
GI:
Ind.
Offi
ce/R
&D
$0.0
0G
I: In
d Pa
rk$2
.05
3.1:
Offi
ce$0
.00
A
cces
s/Ex
posu
reA
vg/M
aste
r Pla
nSi
mila
r$0
.00
Sim
ilar
$0.0
0Si
mila
r$0
.00
Sim
ilar
$0.0
0Sl
ight
ly In
ferio
r$3
.48
St
age
of D
evel
opm
ent
Supe
rpad
Sim
ilar
$0.0
0Si
mila
r$0
.00
Sim
ilar
$0.0
0D
emol
ition
Cos
ts$0
.25
Sim
ilar
$0.0
0
Com
mun
ity F
acili
ties A
sses
smen
t$4
.00/
SF$4
.50/
SF$0
.50
$4.5
0/SF
$0.5
0$4
.50/
SF$0
.50
$2.0
0/SF
($2.
00)
$4.5
0/SF
$0.5
0
Net
Phy
sical
Adj
ustm
ents
:$2
.42
($18
.70)
($8.
46)
$0.3
0$3
.98
Fini
shed
Per
SF
Cos
t (A
djus
ted)
:$4
0.82
$45.
30$3
6.34
$41.
40$3
8.81
Per
Squa
re F
oot (
Bef
ore
Adj
ustm
ents
)L
ow$2
9.90
Hig
h$5
2.29
Ave
rage
$38.
16
Per
Squa
re F
oot (
Aft
er A
djus
tmen
ts)
Low
$36.
34H
igh
$45.
30A
vera
ge$4
0.96
Rec
onci
led
Per
Squa
re F
oot V
alue
…$3
7.00
LA
ND
DA
TA
AD
JUST
ME
NT
GR
IDH
erita
ge F
ield
s M
aste
r Pl
an, I
rvin
e, C
alifo
rnia
Com
mer
cial
Lan
d (R
&D
) - T
OD
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 4 8
Planning Proposed No. Comparables’ Adjusted Reconciled IndicatedArea Use Acres PSF Range PSF Land Value*
L4 R&D (LLD) 30.3 $25.14 to $37.29 $30.00 $39,543,768L5 R&D (LLD) 35.9 $25.14 to $37.29 $30.00 $46,874,916
L19b R&D (LLD) 2.5 $36.34 to $45.30 $37.00 $4,029,300T13-1 R&D (TODD no f/way) 1.9 $36.34 to $45.30 $37.00 $3,013,916T13-2 R&D (TODD no f/way) 2.0 $36.34 to $45.30 $37.00 $3,223,440T13-3 R&D (TODD no f/way) 2.0 $36.34 to $45.30 $37.00 $3,223,440T14-1 R&D (TODD f/way) 4.1 $36.34 to $45.30 $39.00 $6,965,244T14-2 R&D (TODD f/way) 2.4 $36.34 to $45.30 $39.00 $4,077,216T14-3 R&D (TODD f/way) 3.2 $36.34 to $45.30 $39.00 $5,436,288T14-4 R&D (TODD f/way) 3.7 $36.34 to $45.30 $39.00 $6,285,708T14-5 R&D (TODD no f/way) 2.7 $36.34 to $45.30 $37.00 $4,351,644T14-6 R&D (TODD no f/way) 2.6 $36.34 to $45.30 $37.00 $4,190,472T14-7 R&D (TODD no f/way) 1.6 $36.34 to $45.30 $37.00 $2,578,752T14-8 R&D (TODD no f/way) 1.9 $36.34 to $45.30 $37.00 $3,062,268T14-9 R&D (TODD no f/way) 3.0 $36.34 to $45.30 $37.00 $4,835,160
T14-10 R&D (TODD no f/way) 3.2 $36.34 to $45.30 $37.00 $5,157,504T14-11 R&D (TODD no f/way) 1.6 $36.34 to $45.30 $37.00 $2,578,752T14-12 R&D (TODD no f/way) 1.5 $36.34 to $45.30 $37.00 $2,417,580T14-13 R&D (TODD no f/way) 1.8 $36.34 to $45.30 $37.00 $2,901,096T14-14 R&D (TODD no f/way) 1.3 $36.34 to $45.30 $37.00 $2,095,236T14-15 R&D (TODD no f/way) 1.4 $36.34 to $45.30 $37.00 $2,256,408T16-1 R&D (TODD no f/way) 1.1 $36.34 to $45.30 $37.00 $1,789,009T16-2 R&D (TODD no f/way) 1.4 $36.34 to $45.30 $37.00 $2,288,642T16-3 R&D (TODD no f/way) 1.4 $36.34 to $45.30 $37.00 $2,272,525T16-4 R&D (TODD no f/way) 1.4 $36.34 to $45.30 $37.00 $2,272,525T16-5 R&D (TODD no f/way) 2.0 $36.34 to $45.30 $37.00 $3,175,088T16-6 R&D (TODD no f/way) 1.1 $36.34 to $45.30 $37.00 $1,692,306T16-7 R&D (TODD no f/way) 1.6 $36.34 to $45.30 $37.00 $2,578,752T16-8 R&D (TODD no f/way) 1.5 $36.34 to $45.30 $37.00 $2,401,463T16-9 R&D (TODD no f/way) 1.5 $36.34 to $45.30 $37.00 $2,369,228
T16-10 R&D (TODD no f/way) 2.6 $36.34 to $45.30 $37.00 $4,142,120T16-11 R&D (TODD no f/way) 1.9 $36.34 to $45.30 $37.00 $3,110,620T16-12 R&D (TODD no f/way) 2.3 $36.34 to $45.30 $37.00 $3,626,370T16-13 R&D (TODD no f/way) 2.9 $36.34 to $45.30 $37.00 $4,593,402T16-14 R&D (TODD no f/way) 1.6 $36.34 to $45.30 $37.00 $2,514,283T16-15 R&D (TODD no f/way) 1.1 $36.34 to $45.30 $37.00 $1,772,892T16-16 R&D (TODD no f/way) 1.2 $36.34 to $45.30 $37.00 $1,869,595T16-17 R&D (TODD no f/way) 1.6 $36.34 to $45.30 $37.00 $2,578,752T16-18 R&D (TODD no f/way) 1.7 $36.34 to $45.30 $37.00 $2,739,924T17-1 R&D (TODD no f/way) 0.6 $36.34 to $45.30 $39.00 $1,019,304T17-2 R&D (TODD no f/way) 1.6 $36.34 to $45.30 $37.00 $2,605,829T17-3 R&D (TODD no f/way) 1.5 $36.34 to $45.30 $37.00 $2,411,778T17-4 R&D (TODD no f/way) 1.7 $36.34 to $45.30 $37.00 $2,772,158T17-5 R&D (TODD no f/way) 1.1 $36.34 to $45.30 $37.00 $1,774,181T17-6 R&D (TODD no f/way) 1.1 $36.34 to $45.30 $37.00 $1,774,181T18-1 R&D (TODD no f/way) 5.0 $36.34 to $45.30 $37.00 $8,058,600T18-2 R&D (TODD no f/way) 4.1 $36.34 to $45.30 $37.00 $6,608,052T18-3 R&D (TODD no f/way) 1.5 $36.34 to $45.30 $37.00 $2,417,580T18-4 R&D (TODD no f/way) 1.4 $36.34 to $45.30 $37.00 $2,256,408T18-5 R&D (TODD no f/way) 1.4 $36.34 to $45.30 $37.00 $2,256,408T18-6 R&D (TODD no f/way) 2.8 $36.34 to $45.30 $37.00 $4,512,816T18-7 R&D (TODD no f/way) 1.4 $36.34 to $45.30 $37.00 $2,256,408T18-8 R&D (TODD no f/way) 1.4 $36.34 to $45.30 $37.00 $2,256,408T18-9 R&D (TODD no f/way) 1.5 $36.34 to $45.30 $37.00 $2,417,580
T18-10 R&D (TODD no f/way) 3.3 $36.34 to $45.30 $37.00 $5,318,676T18-11 R&D (TODD no f/way) 1.6 $36.34 to $45.30 $37.00 $2,578,752T18-12 R&D (TODD no f/way) 1.8 $36.34 to $45.30 $37.00 $2,901,096T18-13 R&D (TODD no f/way) 1.9 $36.34 to $45.30 $37.00 $3,062,268T18-14 R&D (TODD no f/way) 1.9 $36.34 to $45.30 $37.00 $3,062,268T18-15 R&D (TODD no f/way) 3.0 $36.34 to $45.30 $37.00 $4,835,160
* Sheet-graded superpad with all perimeter offsites installed.
COMMERCIAL LAND (R&D) VALUATIONHeritage Fields, Irvine, California
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 4 9
COMMERCIAL LAND PARCELS (AUTO CENTER) The Heritage Fields TOD consists of five parcels intended for auto center uses. The total area is 27.7± acres, and includes the following: Parcel T19-1 will have 5.2 acres, Parcel T19-2 will have 5.3 acres, Parcel T19-3 will have 5.6 acres, Parcel T19-4 will have 7.3 acres and Parcel T19-5 will have 4.3 acres. Parcels 1 and 2 will have Bake Parkway access and exposure and Parcels 3, 4 and 5 will have freeway exposure. According to the developer there is 102,000 square feet of entitlements that have been allocated to the auto center uses. Auto dealership land sales are not common given the maturity of the market. The Irvine Auto Center immediately adjacent has been built-out for over a decade. Additionally, neighboring auto centers within nearby communities have also been built-out for several years. Consequently, the appraisers have searched the general Los Angeles and Orange County area for sales of similar retail land and auto dealership use land. The appraisers found four land sales that were purchased for auto dealership use and one land sale that was purchased for retail use that is within an existing auto center. The five land sales were analyzed on a price per net square foot basis, which is typical for commercial land in this market. The sales comparison approach adjustment grid follows the ensuing discussion of the sales and the adjustment process. Sale 1, at $27.00 per square foot closed on December 12, 2006. This was a 4.20-acre parcel in the Foothill Ranch area, within the Foothill Ranch auto center. The site was originally purchased for auto dealership use but has since been purchased for future retail use. The site was in rough graded condition at the time of sale and had all offsite improvements to the site. The property is vacant. Sale 2, at $30.00 per square foot, sold in January of 2005 and closed on January 31, 2006. This is the purchase of a 6.40-acre parcel in a mature commercial district along the 60 Freeway in the City of Industry. According to the buyer’s the city was motivated to sell the property at a below market rate because of future retail tax benefits to be derived by the city. The property, which was in a rough graded condition at the time of the sale, had all offsite improvements to the site. The property was improved with a Chrysler/Jeep/Dodge auto dealership. The property was improved with the auto dealership at the time of inspection.
Sale 3, at $32.39 per square foot, closed on December 1, 2005. This was the acquisition of a 1.13-acre parcel located along North Hacienda Boulevard in La Puente. The property was vacant at time of sale. The area is a mature area and was purchased for additional parking area for a nearby dealership. Sale 4, at $47.51 per square foot, closed on May 1, 2005. This was a 3.01-acre parcel located on the along the north side of East Garvey Avenue and the 10 Freeway. The area is an existing auto dealership area and the site was purchased for expansion purposes by a nearby dealership. The site will house a service/parts facility for Mercedes Benz. The site was previously developed with a motel that was demolished by the buyer. The site has excellent visibility and immediate freeway access.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 5 0
Loc
atio
nSa
le P
rice
Dat
aC
omm
unity
Buy
e rSa
le D
ate
Site
Siz
eSi
te S
ize
Pric
e R
ef.
TB
Map
Cod
eSe
ller
Clo
se D
ate
APN
(s)
Prop
osed
Zoni
ng(S
F)(N
et A
cres
)pe
r SF
1So
uth
of P
orto
la, E
ast o
f Bak
e Pa
rkw
ayK
& G
Foo
thill
II, L
LC$4
,939
,900
612-
161-
11H
old
for
Com
mer
cial
182,
952
4.20
$27.
00Fo
othi
ll R
anch
, CA
Chr
ysle
r Rea
lty C
ompa
ny L
LCN
/AC
omm
erci
al D
evel
.86
2-C
512
-Dec
-06
217
621
E. G
ale
Ave
nue
Supe
rior C
hrys
ler J
eep
Dod
ge$8
,369
,910
8264
-012
-028
Aut
o D
eale
rshi
pC
omm
erci
al27
8,99
76.
40$3
0.00
City
of I
ndus
try, C
AC
ity o
f Ind
ustry
Red
evel
opm
ent
1-Ja
n-05
678-
J4A
genc
y31
-Jan
-06
315
45 N
orth
Hac
iend
a B
lvd.
City
of L
a Pu
ente
$1,6
00,0
0084
71-0
12-0
28A
uto
Dea
lers
hip
C2
49,4
001.
13$3
2.39
La P
uent
e, C
AR
oger
R. R
ouss
et J.
N/A
v
598-
D4
1-D
ec-0
5
418
29 &
187
9 E.
Gar
vey
Ave
nue
Pens
ke R
ealty
Inc.
$6,2
21,7
5084
54-0
18-0
20, 0
21A
uto
Dea
lers
hip
C2
130,
946
3.01
$47.
51W
est C
ovin
a, C
AEl
Dor
ado
Mot
or In
nN
/Av
8454
-019
-024
, 025
59
8-J7
1-M
ay-0
5
5H
atch
er A
venu
e, N
orth
of G
ale
Hitc
hcoc
k C
omm
erci
al P
rope
rties
$2,3
10,0
0082
64-0
01-9
40, 9
41A
uto
Dea
lers
hip
M84
,942
1.95
$27.
20C
ity o
f Ind
ustry
, CA
Indu
stry
Urb
an D
evel
opm
ent
N/A
v82
64-0
12-0
28, 0
30-0
32
678-
G3
Age
ncy
8-Se
p-05
8264
-013
thru
016
8264
-012
-027
AU
TO
CE
NT
ER
LA
ND
DA
TA
SU
MM
AR
YH
erita
ge F
ield
s Mas
ter P
lan,
Irvi
ne, C
alifo
rnia
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 5 1
COMMERCIAL LAND (AUTO CENTER) SALES MAP
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 5 2
Sale 5, at $27.20 per square foot, closed on September 8, 2005. This was a 1.95-acre parcel located along Hatcher Avenue, north of Gale Avenue within the City of Industry. According to the buyer’s the city was motivated to sell the property at a below market rate because of future retail tax benefits to be derived by the city. The site will be used to develop an auto dealership. It was vacant at time of inspection. Property Rights Conveyed No adjustments were warranted for property rights conveyed as all of the land data sold with fee simple property rights. Financing (Terms of Sale) None of the sales was reported to include atypical financing warranting adjustments. Conditions of Sale The sales were considered similar in conditions of sale except for Sales 2 and 5 where the city was motivated to sell the property at a below market rate because of future retail tax benefits to be derived by the city. These sales were given upward adjustments of 10%. Also, Sale 4 which was an expansion of an existing facility and the buyers were more motivated to acquire the site than is typical. This sale was given a downward 10% adjustment. Market Conditions (Time of Sale) The comparable sold between May 2005 and December 2006. As stated earlier, all commercial land uses have appreciated in the Los Angeles and Orange County submarkets, as detailed in the Market Conditions section. A 12% annual adjustment was considered reasonable. General Location Location takes into consideration the comparables’ and the subject’s physical orientation to the surrounding area, including proximity to local services and the quality and appeal of the community at large. All of the sales were rated similar in general location. Specific Location The subject’s location adjacent to the Irvine Auto Center is considered to be superior to the older commercial districts of Sales 2, 3 and 5. Sale 1 is within Foothill Ranch which has a smaller trade area because of the mountains to one side. Sale 1 was adjusted upward 20%, while Sales 2, 3 and 5 were adjusted upward 15%. Economy of Scale All other factors being similar, smaller parcels tend to command higher unit prices than larger parcels due to economies of scale and the more limited number of buyers that can afford to pay for larger parcels. All of the sales were similar to the subject in size.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 5 3
Utilities Utilities reflect a parcel’s accessibility to the local infrastructure. When taking into consideration utilities for commercial/institutional sites, electricity, gas, water, and sewer are all required in the typical market. All of the land comparables used in this analysis had utility services available, similar to the subject site. Zoning / Use When analyzing this category of comparison, the appraisers took into consideration the subject’s land use designation, which allows auto uses including auto dealership use. Only Sale 5 was considered to have an inferior industrial zoning and was adjusted upward 10%. As mentioned previously, the subject is limited in the building square footage allowed per the existing zoning. We have made a downward adjustment to all of the comparables for this condition of 5%. Access / Exposure Sales 1, 3, and 5 were rated inferior in access and were given upward adjustments from 5% (Sale 3), 10% (Sale 5) and 20% (Sale 1). Comparable Sale 4 was rated superior in access/exposure and was given a downward adjustment of 10%. Stage of Development In this analysis, the subject site was assumed to be in a superpad condition, similar to all of the comparables. Sale 4, however, had a sizeable existing motel building, which required demolition, estimated at $1.85 per square foot. Community Facilities Assessment Bond assessments for the creation of infrastructure are typically passed on to the purchaser and add to the cost of the land. This additional fee is considered by the buyer as part of the land price. The subject has a $4.00 per square foot CFD. Variances in CFDs were used for the adjustments applied. RECONCILIATION – AUTO CENTER PARCELS Before adjustments, the sales prices ranged from $27.00 to $47.51 per square foot. After having applied relevant quantitative adjustments to the comparable data, the adjusted prices ranged from $37.19 to $44.07 per square foot. The data would suggest that the value of auto center land would fall in the range of $40.00 to $43.00 per square foot. According to the brokers currently marketing the sites there are offers in for three of the sites. The 7.3-acre site (T19-4) has an offer in at $40.00 per square foot for an RV dealership use. Parcel T19-5 has an offer in at $45.00 per square foot for a custom auto use. After analyzing the available relevant data, a value of $40.00 per square foot, was reconciled for the subject’s non-freeway exposed sites and the larger freeway site. We have concluded to a slightly higher value for the freeway exposed sites of $43.00 per square foot. Said value reflects the sites being in superpad condition. An adjustment grid follows this discussion.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 5 4
Planning Proposed No. Adjusted Reconciled IndicatedArea / Parcel Use Acres PSF Range PSF Land Value*
T19-1 Auto Ctr 5.2 $37.19 to $44.07 $40.00 $9,060,480T19-2 Auto Ctr 5.3 $37.19 to $44.07 $40.00 $9,234,720T19-3 Auto Ctr 5.6 $37.19 to $44.07 $43.00 $10,489,248T19-4 Auto Ctr 7.3 $37.19 to $44.07 $40.00 $12,719,520T19-5 Auto Ctr 4.3 $37.19 to $44.07 $43.00 $8,054,244
* Sheet-graded superpad with all perimeter offsites installed.
COMMERCIAL LAND (AUTO CENTER) VALUATIONHeritage Fields, Irvine, California
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 5 5
Com
para
ble
No.
:Su
bjec
t1
23
45
Iden
tific
atio
n:Pa
rcel
s T19
-1, 2
, 3, 4
and
5So
uth
of P
orto
la, E
ast o
f Bak
e Pa
rkw
ay17
621
E. G
ale
Ave
nue
1545
Nor
th H
acie
nda
Blv
d.18
29 &
187
9 E
. Gar
vey
Ave
nue
Hat
cher
Ave
nue,
Nor
th o
f Gal
e
Dat
e of
Sal
e (C
lose
):n/
a12
-Dec
-06
31-J
an-0
61-
Dec
-05
1-M
ay-0
58-
Sep-
05Sa
le P
rice:
$4,9
39,9
00$8
,369
,910
$1,6
00,0
00$6
,221
,750
$2,3
10,0
00Pr
ice
Per S
F:$2
7.00
$30.
00$3
2.39
$47.
51$2
7.20
Cos
ts T
o Fi
nish
(To
Supe
rpad
):$0
.00
$0.0
0$0
.00
$0.0
0$0
.00
Fini
shed
PSF
Cos
t (Sh
eet G
rade
d Su
perp
ad):
$27.
00$3
0.00
$32.
39$4
7.51
$27.
20
Pric
e Pe
r Uni
t (U
nadj
uste
d):
$27.
00$3
0.00
$32.
39$4
7.51
$27.
20
Prop
erty
Rig
hts
Fee
Fee
1.00
Fee
1.00
Fee
1.00
Fee
1.00
Fee
1.00
Fi
nanc
ing
n/a
Mar
ket
1.00
Mar
ket
1.00
Mar
ket
1.00
Mar
ket
1.00
Mar
ket
1.00
C
ondi
tions
of S
ale
n/a
Mar
ket
1.00
Red
ev. A
genc
y1.
10M
arke
t1.
00Ex
pans
ion
0.90
Rede
v. A
genc
y1.
10
Mar
ket C
ondi
tions
(Sal
e D
ate)
4-M
ay-0
712
-Dec
-06
1.05
1-Ja
n-05
1.28
1-D
ec-0
51.
171-
May
-05
1.24
8-Se
p-05
1.20
Su
m o
f Adj
ustm
ents
---
1.05
1.38
1.17
1.14
1.30
A
djus
ted
Pric
e Pe
r SF:
---
$28.
29$4
1.53
$37.
99$5
4.37
$35.
38
Ove
rall
Tax
Rat
e±--
-$0
.00
$0.0
0$0
.00
$0.0
0$0
.00
Adj
uste
d Pr
ice
Per S
F:--
-$2
8.29
$41.
53$3
7.99
$54.
37$3
5.38
Com
paris
ons:
G
ener
al L
ocat
ion
Ora
nge
Cou
nty
Foot
hill
Ran
ch$0
.00
City
of I
ndus
try$0
.00
La P
uent
e$0
.00
Wes
t Cov
ina
$0.0
0C
ity o
f Ind
ustry
$0.0
0
Spec
ific
Loca
tion
Her
itage
Fie
lds
Infe
rior
$5.6
6In
ferio
r$6
.23
Infe
rior
$5.7
0Si
mila
r$0
.00
Infe
rior
$5.3
1
Econ
omy
of S
cale
(Acr
es)
4.3
To 7
.3 A
cres
4.20
$0.0
06.
40$0
.00
1.13
$0.0
03.
01$0
.00
1.95
$0.0
0
Util
ities
Site
Per
imet
erSi
mila
r$0
.00
Sim
ilar
$0.0
0Si
mila
r$0
.00
Sim
ilar
$0.0
0Si
mila
r$0
.00
Zo
ne: U
seA
uto
Cent
er -
Aut
o D
eale
rshi
pC
omm
erci
al: F
utur
e($
1.41
)C
omm
erci
al: A
uto
($2.
08)
C2:
Aut
o($
1.90
)C2
: Aut
o ($
2.72
)M
: Aut
o$1
.77
A
cces
s/Ex
posu
reG
ood/
Mas
ter P
lan
Infe
rior
$5.6
6Si
mila
r$0
.00
Infe
rior
$1.9
0Su
perio
r($
5.44
)In
ferio
r$3
.54
St
age
of D
evel
opm
ent
Supe
rpad
Sim
ilar
$0.0
0Si
mila
r$0
.00
Sim
ilar
$0.0
0D
emol
ition
$1.8
5Si
mila
r$0
.00
C
omm
unity
Fac
ilitie
s Ass
essm
ent
$4.0
0/SF
$3.0
0/SF
($1.
00)
Non
e($
4.00
)N
one
($4.
00)
Non
e($
4.00
)N
one
($4.
00)
Net
Phy
sical
Adj
ustm
ents
:$8
.90
$0.1
5$1
.70
($10
.31)
$6.6
1
Fini
shed
Per
SF
Cos
t (A
djus
ted)
:$3
7.19
$41.
68$3
9.69
$44.
07$4
1.99
Per
Squa
re F
oot (
Bef
ore
Adj
ustm
ents
)L
ow$2
7.00
Hig
h$4
7.51
Ave
rage
$32.
82
Per
Squa
re F
oot (
Aft
er A
djus
tmen
ts)
Low
$37.
19H
igh
$44.
07A
vera
ge$4
0.93
Rec
onci
led
Per
Squa
re F
oot V
alue
…$4
0.00
LA
ND
DA
TA
AD
JUST
ME
NT
GR
IDH
erita
ge F
ield
s M
aste
r Pla
n, I
rvin
e, C
alifo
rnia
Com
mer
cial
Lan
d (A
uto
Cen
ter)
Par
cels
T19
-1, 2
, 3, 4
and
5
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 5 6
COMMERCIAL LAND PARCEL (EDUCATIONAL) One of the “cornerstone” land use designations within the Heritage Park project is “Institutional” land uses, which basically restrict development to educational-related institutions ranging from public and private schools to institutions of higher education as well as trade and technical schools. All of the Institutional uses are concentrated in the Lifelong Learning District. The total land area for Institutional uses is 238.5 acres with individual parcels ranging from 2.3 to 35.0 acres. A search was made for educational land sales throughout Southern California. Our search resulted in seven closed sales and a current offer involving sites that were purchased for the development of education-related uses such as public schools, private schools and libraries. The sales occurred between December 2004 and May 2007 and represent sites in the subject’s Orange County market as well as Los Angeles, San Diego, Riverside and Santa Barbara counties. The subject parcels that are designated for educational land uses range widely in size from 2.3 acres to 64 acres. The comparable data, in comparison, range from 0.6 acres to 7.34 acres in size. We have accounted for the wide range in size among the subject sites and accounted for the variations in size between the subject parcels and the comparables by segregating the subject parcels into three size cohorts and adjusting the comparables relative to the average size among those cohorts. We then made our conclusions for the three subject size cohorts based on these adjustments. SUMMARY OF LAND SALES (EDUCATIONAL) Sale 1 summarizes a current offer for a 5.08-acre site located in Santa Barbara, California. The site is currently improved with an auto dealership. The prospective buyer plans to demolish the existing improvements and construct a private school on the site. The property is zoned ES/PD/SD-2, which allows for residential and commercial uses. Zoning allows for the construction of 26,000 square feet. All utilities are in place. The current offer for the property is $12.6 million or $56.94 per square foot of land area. Sale 2 is the May 2007 sale of a 5.23-acre site located on the north side of San Marcos Boulevard, west of First Street, in the City of San Marcos, San Diego County. The property is identified by the San Diego Assessor as APN 219-210-40. The buyer intends to construct a high school on the site. The property was sold for $5 million or $21.95 per square foot of land area. The property was not previously developed; however, all utilities were reportedly in-place. Sale 3 corresponds to the January 2007 purchase of a 7.34-acre site located on the west side of El Fuerte Street, south of Poinsettia Lane, in the City of Carlsbad, San Diego County. The property is identified by the San Diego Assessor as APN 213-122-08 and 09. The corresponding street address is 6269 El Fuerte Street. Reportedly, the site will be constructed with an independent non-profit school for grades 7-12. The school will be constructed in phases, starting with grades 7 and 9 in 2007, grades 8 and 10 in 2008 and grades 11 and 12 will be added in 2009 and 2010. The property was purchased for $5,148,490 or $16.10 per square foot. The property was not previously developed but the site is served by utilities.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 5 7
Loc
atio
nSa
le P
rice
Dat
aC
omm
unity
Buy
erSa
le D
ate
Site
Siz
eSi
te S
ize
Pric
eR
ef.
Selle
rA
PN(s
)Pr
opos
ed U
seZo
ning
(SF)
(Net
Acr
es)
per
SF
1A
utom
otiv
e D
eale
rshi
p Si
te$1
2,60
0,00
0Sc
hool
ES/P
D/S
D-2
221,
285
5.08
$56.
94C
onfid
entia
lC
urre
nt O
ffer
Priv
ate
Sant
a B
arba
ra, C
AJu
l-07
2H
igh
Tech
Hig
h Si
teH
HT
Lear
ning
(Hig
h Te
ch H
igh
Scho
ol)
$5,0
00,0
0021
9-21
0-40
-00
Scho
olM
227,
819
5.23
$21.
95n/
s of S
an m
arco
s Blv
d, w
/o F
irst S
treet
Nov
i Pro
perti
esM
ay-0
7H
igh
Scho
olSa
n M
arco
s, C
ATr
ade
362
69 E
l Fue
rte S
treet
PRS
Acq
uisit
ion
& C
onst
ruct
ion
LLC
$5,1
48,4
9021
3-12
2-08
, 09
Scho
olPC
319,
730
7.34
$16.
10w
/s o
f El F
uerte
Stre
et s/
o Po
inse
ttia
Lane
Episc
opal
Dio
cese
of S
an D
iego
Jan-
07Pr
ivat
e Sc
hool
Car
lsbad
, CA
Cat
holic
462
01-6
223
Cot
tage
Stre
etLo
s Ang
eles
Uni
fied
Scho
ol D
istric
t$6
,600
,000
6321
-008
-008
, 009
, 011
Hig
h Sc
hool
MPD
236,
095
5.42
$27.
95w
/s o
f Cot
tage
St,
btw
n R
ando
lph
St a
nd C
ande
lon
Ave
nue
6208
Sou
th A
lam
eda
Cor
pora
tion
Mar
-06
Publ
icM
ulti-
Use
Hun
tingt
on P
ark,
CA
528
01-2
813
Foot
hill
Blv
dC
ount
y of
Los
Ang
eles
$1,4
50,0
0058
03-0
11-0
02, 0
03, 0
04, 0
05Pu
blic
Lib
rary
C3
26,3
020.
60$5
5.13
n/s o
f Foo
thill
Blv
d, b
twn
La C
resc
enta
Ave
and
Boy
er S
tC
offe
y LP
Oct
-05
La C
resc
enta
, CA
6A
mer
ican
Car
eer C
olle
geSe
dona
Cou
rt R
ealty
LLC
$4,6
44,5
0002
10-1
93-1
9Sc
hool
UC
314,
939
7.23
$14.
75w
/s of
Tur
ner A
ve. b
twn
Inla
nd E
mpi
re B
lvd
and
the
10 F
reew
aySh
elby
Offi
ce P
ark
LLC
Sep-
05O
ntar
io, C
A
735
24 W
est T
empl
e St
reet
Pueb
lo N
uevo
Dev
elop
men
t$3
,265
,000
5501
-003
-029
, 030
, 031
, 032
, 036
, 037
, 038
, 039
32,0
00M
154
,886
1.26
$59.
49s/
s of T
empl
e St
. btw
n V
irgil
Ave
and
Hoo
ver S
t.Ex
celle
nt E
duca
tion
Dev
elop
men
tM
ar-0
5Pr
ivat
e Sc
hool
Los A
ngel
es, C
A
8H
arbo
r Blv
dO
rang
e C
ount
y Ed
ucat
ion
$4,7
39,6
7614
4-43
1-01
Scho
olC
225
2,64
85.
80$1
8.76
NEC
of H
arbo
r Blv
d an
d Li
lac
Ave
LDS
Chu
rch
Dec
-04
Publ
ic H
igh
Scho
olFo
utai
n V
alle
y, C
A
ED
UC
AT
ION
AL
LA
ND
DA
TA
SU
MM
AR
YH
erita
ge F
ield
s Mas
ter P
lan,
Irvi
ne, C
alifo
rnia
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 5 8
COMMERCIAL LAND (EDUCATIONAL) SALES MAP
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 5 9
Sale 4 summarizes the March 2006 sale of a 5.42-acre site located on the west side of Cottage Street between Randolph Street and Candelon Avenue in Huntington Park, Los Angeles County. The property is identified by the Los Angeles County Assessor as APNs 6321-008-008, 009 and 011. The corresponding street address is 6201-6223 Cottage Street. The property was purchased by the Los Angeles Unified School District and will be developed with a school or school related project. The property was purchased for $6,600,000 or $27.95 per square foot. Sale 5 summarizes the October 2005 purchase of a 0.60-acre site located on the north side of Foothill Boulevard, between La Crescenta Avenue and Boyer Street in the City of La Crescenta, Los Angeles County. The property is identified by the Los Angeles County Assessor as APNs 5803-011-002, 003, 004, and 005. The corresponding street address is 2801-2813 Foothill Boulevard. The site was purchased by the County of Los Angeles and will be developed with a public library. The property was purchased for $1,450,000 or $55.13 per square foot. Sale 6 summarizes the September 2005 sale of a 7.23-acre site located on the west side Turner Avenue, between Inland Empire Boulevard and the 10 Freeway in the City of Ontario, San Bernardino County. The property is identified by the San Bernardino County Assessor as APN 0210-193-19. There is no corresponding street address. The site was purchased by Sedona Court Realty LLC. The planned development for the site is the American Career College. The property was sold for $4,644,500 or $14.75 per square foot. Sale 7 summarizes the March 2005 sale of a 1.26-acre site located on the south side of Temple Street between Virgil Avenue and Hoover Street in the City of Los Angeles, Los Angeles County. The property is identified by the Los Angeles County Assessor as APNs 5501-003-029, 030, 031, 032, 036, 037, 038 and 039. The corresponding street address is 3524 Temple Street. The buyer will construct a private school on the site. The property was purchased for $3,265,000 or $59.49 per square foot. Sale 8 summarizes the December 2004 sale of a 5.80-acre site located on the northeast corner of Harbor Boulevard and Lilac Avenue in the City of Fountain Valley, Orange County. The property is identified by the Orange County Assessor as APN 144-431-01. There is no corresponding street address. The site will be developed with a school. The property was purchased for $4,739,676 or $18.76 per square foot. SUMMARY OF ADJUSTMENTS (EDUCATIONAL) Property Rights Conveyed No adjustments were warranted for property rights conveyed as all of the land data sold with fee simple property rights. Financing (Terms of Sale) None of the sales was reported to include atypical financing warranting adjustments. Conditions of Sale None of the sales was reported to include any conditions of sale.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 6 0
Market Conditions (Time of Sale) The sales closed between December 2004 and May 2007. We have also included a current offer to purchase (current as of July 2007). The land investment market in Southern California has been dominated by demand from residential developers over the past several years. In many cases, residential developers have purchased commercially and industrially zoned land and have taken the entitlement risk to re-zone for residential uses. Due to the competition in the marketplace, land values overall have risen sharply during the timeframe represented by the comparables. As the residential market has cooled over the past 18 months, land sales prices in most markets have stabilized. Based on land investment trends, we have applied an adjustment equal to approximately 10% per year for the data included in our survey, which represents a mix of zoning types ranging from commercial to industrial to special purpose uses. Location Due to the disparity among the educational land sales in terms of location, the general location adjustment considers the macro level locational considerations for the comparable relative to the subject. This adjustment also takes into consideration the comparables’ and the subject’s physical orientation to the surrounding area, including proximity to local services and the quality and appeal of the neighborhood, and proximity to transportation. The adjustments are summarized on the accompanying adjustment grid. Economy of Scale All other factors being similar, smaller parcels tend to command higher unit prices than larger parcels due to economies of scale and the more limited number of buyers that can afford to pay for larger parcels. The subject parcels that are designated for educational land uses range widely in size from 2.3 acres to 64 acres. The comparable data, in comparison, range from 0.6 acres to 7.34 acres in size. We have accounted for the wide range in size among the subject sites and accounted for the variations in size between the subject parcels and the comparables by segregating the subject parcels into three size cohorts and adjusting the comparables relative to the average size among those cohorts. We then made our conclusions for the three subject size cohorts based on these adjustments, which are summarized in three associated adjustment grids. Utilities Utilities reflect a parcel’s accessibility to the local infrastructure. For the development of educational facilities, electricity, gas, water, and sewer are all required. All of the land comparables used in this analysis had utility services available, similar to the subject site. No adjustments are warranted. Zoning – Land Use When analyzing this category of comparison, the appraisers took into consideration the subject’s land use. The zoning for the subject parcels restricts the use to educational uses. In contrast, the comparable data has underlying zoning that allows for a range of commercial or industrial uses. Some of the commercial zones even permit residential uses by right. Therefore, all of the comparable data are superior to the subject due to the alternative uses that are permissible on the sites even through they were all purchased for educational uses. We have made downward adjustments to the comparable data as shown in the accompanying adjustment grid.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 6 1
Access / Exposure The subject educational parcels are located in the Lifelong Learning District of the master-planned community. Overall, the sites do not have extensive exposure, but will have good access and visibility from the project’s internal roadways. Overall, the district is accessible from SH 133. All of the sales are located in close proximity to major transportation corridors and have good visibility and access for the intended use. No adjustments were warranted for this category. Stage of Development In this analysis, the subject site was assumed to be in a superpad condition. Several of the comparables were improved or previously improved sites as indicated in the descriptions, while others were raw or undeveloped land that was served by municipal utilities. We applied adjustments to the comparables based on the condition of the property at the time of sale. Community Facilities Assessment Bond assessments for the creation of infrastructure are typically passed on to the purchaser and add to the cost of the land. This additional fee is considered by the buyer as part of the land price. The subject has a $4.00 per square foot CFD, which is deducted from the comparable sales which have no CFDs.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 6 2
Com
para
ble
No.
:1
23
45
67
8Id
entif
icat
ion:
Subj
ect
Aut
omot
ive
Dea
lers
hip
Site
Hig
h T
ech
Hig
h Si
te62
69 E
l Fue
rte
Stre
et62
01-6
223
Cot
tage
Str
eet
2801
-281
3 Fo
othi
ll B
lvd
Am
eric
an C
aree
r C
olle
ge35
24 W
est T
empl
e St
reet
Har
bor
Blv
d
Dat
e of
Sal
e:--
-C
urre
nt O
ffer
1-M
ay-0
71-
Jan-
071-
Mar
-06
1-O
ct-0
51-
Sep-
051-
Mar
-05
1-D
ec-0
4Sa
le P
rice:
---
$12,
600,
000
$5,0
00,0
00$5
,148
,490
$6,6
00,0
00$1
,450
,000
$4,6
44,5
00$3
,265
,000
$4,7
39,6
76Pr
ice
Per S
F:--
-$5
6.94
$21.
95$1
6.10
$27.
95$5
5.13
$14.
75$5
9.49
$18.
76
Pric
e Pe
r Uni
t (U
nadj
uste
d):
$56.
94$2
1.95
$16.
10$2
7.95
$55.
13$1
4.75
$59.
49$1
8.76
Pr
oper
ty R
ight
s--
-Fe
e0%
Fee
0%Fe
e0%
Fee
0%Fe
e0%
Fee
0%Fe
e0%
Fee
0%
Fina
ncin
g--
-M
arke
t0%
Mar
ket
0%M
arke
t0%
Mar
ket
0%M
arke
t0%
Mar
ket
0%M
arke
t0%
Mar
ket
0%
Con
ditio
ns o
f Sal
e--
-M
arke
t-5
%M
arke
t0%
Mar
ket
0%M
arke
t0%
Mar
ket
0%M
arke
t0%
Mar
ket
0%M
arke
t0%
M
arke
t Con
ditio
ns--
-C
urre
nt O
ffer
0%1-
May
-07
2%1-
Jan-
075%
1-M
ar-0
610
%1-
Oct
-05
15%
1-Se
p-05
15%
1-M
ar-0
520
%1-
Dec
-04
25%
Su
m o
f Adj
ustm
ents
---
-5%
2%5%
10%
15%
15%
20%
25%
A
djus
ted
Pric
e Pe
r SF:
---
$54.
09$2
2.39
$16.
91$3
0.75
$63.
40$1
6.96
$71.
39$2
3.45
O
vera
ll Ta
x R
ate±
---
$0.0
0$0
.00
$0.0
0$0
.00
$0.0
0$0
.00
$0.0
0$0
.00
Adj
uste
d Pr
ice
Per S
F:--
-$5
4.09
$22.
39$1
6.91
$30.
75$6
3.40
$16.
96$7
1.39
$23.
45
Com
paris
ons:
G
ener
al L
ocat
ion
(Cou
nty)
Ora
nge
Ora
nge
San
Die
goSa
n D
iego
Los A
ngel
esLo
s Ang
eles
Riv
ersid
eLo
s Ang
eles
O
rang
e
Spec
ific
Loca
tion
Irvi
neSa
nta
Bar
bara
, CA
-30%
San
Mar
cos,
CA
10%
Car
lsbad
, CA
15%
Hun
tingt
on P
ark,
CA
5%La
Cre
scen
ta, C
A0%
Ont
ario
, CA
20%
Los A
ngel
es, C
A-2
0%Fo
utai
n V
alle
y, C
A15
%
Econ
omy
of S
cale
(Acr
es)
2.3±
and
11.
9± A
cres
5.08
0%5.
230%
7.34
5%5.
420%
0.60
-20%
7.23
5%1.
26-2
0%5.
800%
U
tiliti
esSi
te P
erim
eter
0%0%
0%0%
0%0%
0%0%
Zo
ne :
Use
Educ
atio
nal
ES/P
D/S
D-2
-15%
M-5
%PC
-5%
MPD
-10%
C3
-25%
UC
-5%
M1
-10%
C2
-10%
A
cces
s/Exp
osur
eG
ood/
Mas
ter P
lan
0%0%
0%0%
0%0%
0%0%
St
age
of D
evel
opm
ent
Supe
rpad
-10%
-10%
0%0%
0%0%
0%0%
Subt
otal
- A
djus
tmen
ts-5
5%-5
%15
%-5
%-4
5%20
%-5
0%5%
C
omm
unity
Fac
ilitie
s Ass
essm
ent
$4.0
0 / S
F-$
4.00
-$4.
00-$
4.00
-$4.
00-$
4.00
-$4.
00-$
4.00
-$4.
00
Fini
shed
Per
SF
Cos
t (A
djus
ted)
:$2
0.34
$17.
27$1
5.44
$25.
21$3
0.87
$16.
36$3
1.69
$20.
62
Per
Squa
re F
oot (
Bef
ore
Adj
ustm
ents
)Lo
w$1
4.75
Hig
h$5
9.49
Ave
rage
$33.
88
Per
Squa
re F
oot (
Aft
er A
djus
tmen
ts)
Low
$15.
44H
igh
$31.
69A
vera
ge$2
2.23
Rec
onci
led
Per
Squa
re F
oot V
alue
…$2
5.00
LA
ND
DA
TA
AD
JUST
ME
NT
GR
IDH
erita
ge F
ield
s, Ir
vine
, Cal
iforn
ia
Edu
catio
nal L
and
(Com
pari
son
to S
mal
l Sub
ject
Edu
catio
nal S
ites)
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 6 3
Com
para
ble
No.
:1
23
45
67
8Id
entif
icat
ion:
Subj
ect
Aut
omot
ive
Dea
lers
hip
Site
Hig
h T
ech
Hig
h Si
te62
69 E
l Fue
rte
Stre
et62
01-6
223
Cot
tage
Str
eet
2801
-281
3 Fo
othi
ll B
lvd
Am
eric
an C
aree
r C
olle
ge35
24 W
est T
empl
e St
reet
Har
bor
Blv
d
Dat
e of
Sal
e:--
-C
urre
nt O
ffer
1-M
ay-0
71-
Jan-
071-
Mar
-06
1-O
ct-0
51-
Sep-
051-
Mar
-05
1-D
ec-0
4Sa
le P
rice:
---
$12,
600,
000
$5,0
00,0
00$5
,148
,490
$6,6
00,0
00$1
,450
,000
$4,6
44,5
00$3
,265
,000
$4,7
39,6
76Pr
ice
Per S
F:--
-$5
6.94
$21.
95$1
6.10
$27.
95$5
5.13
$14.
75$5
9.49
$18.
76
Pric
e Pe
r Uni
t (U
nadj
uste
d):
$56.
94$2
1.95
$16.
10$2
7.95
$55.
13$1
4.75
$59.
49$1
8.76
Pr
oper
ty R
ight
s--
-Fe
e0%
Fee
0%Fe
e0%
Fee
0%Fe
e0%
Fee
0%Fe
e0%
Fee
0%
Fina
ncin
g--
-M
arke
t0%
Mar
ket
0%M
arke
t0%
Mar
ket
0%M
arke
t0%
Mar
ket
0%M
arke
t0%
Mar
ket
0%
Con
ditio
ns o
f Sal
e--
-M
arke
t-5
%M
arke
t0%
Mar
ket
0%M
arke
t0%
Mar
ket
0%M
arke
t0%
Mar
ket
0%M
arke
t0%
M
arke
t Con
ditio
ns--
-C
urre
nt O
ffer
0%1-
May
-07
2%1-
Jan-
075%
1-M
ar-0
610
%1-
Oct
-05
15%
1-Se
p-05
15%
1-M
ar-0
520
%1-
Dec
-04
25%
Su
m o
f Adj
ustm
ents
---
-5%
2%5%
10%
15%
15%
20%
25%
A
djus
ted
Pric
e Pe
r SF:
---
$54.
09$2
2.39
$16.
91$3
0.75
$63.
40$1
6.96
$71.
39$2
3.45
O
vera
ll Ta
x R
ate±
---
$0.0
0$0
.00
$0.0
0$0
.00
$0.0
0$0
.00
$0.0
0$0
.00
Adj
uste
d Pr
ice
Per S
F:--
-$5
4.09
$22.
39$1
6.91
$30.
75$6
3.40
$16.
96$7
1.39
$23.
45
Com
paris
ons:
G
ener
al L
ocat
ion
(Cou
nty)
Ora
nge
Ora
nge
San
Die
goSa
n D
iego
Los A
ngel
esLo
s Ang
eles
Riv
ersid
eLo
s Ang
eles
O
rang
e
Spec
ific
Loca
tion
Irvi
neSa
nta
Bar
bara
, CA
-30%
San
Mar
cos,
CA
10%
Car
lsbad
, CA
15%
Hun
tingt
on P
ark,
CA
5%La
Cre
scen
ta, C
A0%
Ont
ario
, CA
20%
Los A
ngel
es, C
A-2
0%Fo
utai
n V
alle
y, C
A15
%
Econ
omy
of S
cale
(Acr
es)
2.3±
and
11.
9± A
cres
5.08
-20%
5.23
-20%
7.34
-15%
5.42
-20%
0.60
-30%
7.23
-15%
1.26
-30%
5.80
-20%
U
tiliti
esSi
te P
erim
eter
0%0%
0%0%
0%0%
0%0%
Zo
ne :
Use
Educ
atio
nal
ES/P
D/S
D-2
-15%
M-5
%PC
-5%
MPD
-10%
C3
-25%
UC
-5%
M1
-10%
C2
-10%
A
cces
s/Exp
osur
eG
ood/
Mas
ter P
lan
0%0%
0%0%
0%0%
0%0%
St
age
of D
evel
opm
ent
Supe
rpad
-10%
-10%
0%0%
0%0%
0%0%
Subt
otal
- A
djus
tmen
ts-7
5%-2
5%-5
%-2
5%-5
5%0%
-60%
-15%
C
omm
unity
Fac
ilitie
s Ass
essm
ent
$4.0
0 / S
F-$
4.00
-$4.
00-$
4.00
-$4.
00-$
4.00
-$4.
00-$
4.00
-$4.
00
Fini
shed
Per
SF
Cos
t (A
djus
ted)
:$9
.52
$12.
79$1
2.06
$19.
06$2
4.53
$12.
96$2
4.56
$15.
93
Per
Squa
re F
oot (
Bef
ore
Adj
ustm
ents
)Lo
w$1
4.75
Hig
h$5
9.49
Ave
rage
$33.
88
Per
Squa
re F
oot (
Aft
er A
djus
tmen
ts)
Low
$9.5
2H
igh
$24.
56A
vera
ge$1
6.43
Rec
onci
led
Per
Squa
re F
oot V
alue
…$2
0.00
LA
ND
DA
TA
AD
JUST
ME
NT
GR
IDH
erita
ge F
ield
s, Ir
vine
, Cal
iforn
ia
Edu
catio
nal L
and
(Com
pari
son
to M
ediu
m-s
ized
Sub
ject
Edu
catio
nal S
ites)
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 6 4
Com
para
ble
No.
:1
23
45
67
8Id
entif
icat
ion:
Subj
ect
Aut
omot
ive
Dea
lers
hip
Site
Hig
h T
ech
Hig
h Si
te62
69 E
l Fue
rte
Stre
et62
01-6
223
Cot
tage
Str
eet
2801
-281
3 Fo
othi
ll B
lvd
Am
eric
an C
aree
r C
olle
ge35
24 W
est T
empl
e St
reet
Har
bor
Blv
d
Dat
e of
Sal
e:--
-C
urre
nt O
ffer
1-M
ay-0
71-
Jan-
071-
Mar
-06
1-O
ct-0
51-
Sep-
051-
Mar
-05
1-D
ec-0
4Sa
le P
rice:
---
$12,
600,
000
$5,0
00,0
00$5
,148
,490
$6,6
00,0
00$1
,450
,000
$4,6
44,5
00$3
,265
,000
$4,7
39,6
76Pr
ice
Per S
F:--
-$5
6.94
$21.
95$1
6.10
$27.
95$5
5.13
$14.
75$5
9.49
$18.
76
Pric
e Pe
r Uni
t (U
nadj
uste
d):
$56.
94$2
1.95
$16.
10$2
7.95
$55.
13$1
4.75
$59.
49$1
8.76
Pr
oper
ty R
ight
s--
-Fe
e0%
Fee
0%Fe
e0%
Fee
0%Fe
e0%
Fee
0%Fe
e0%
Fee
0%
Fina
ncin
g--
-M
arke
t0%
Mar
ket
0%M
arke
t0%
Mar
ket
0%M
arke
t0%
Mar
ket
0%M
arke
t0%
Mar
ket
0%
Con
ditio
ns o
f Sal
e--
-M
arke
t-5
%M
arke
t0%
Mar
ket
0%M
arke
t0%
Mar
ket
0%M
arke
t0%
Mar
ket
0%M
arke
t0%
M
arke
t Con
ditio
ns--
-C
urre
nt O
ffer
0%1-
May
-07
2%1-
Jan-
075%
1-M
ar-0
610
%1-
Oct
-05
15%
1-Se
p-05
15%
1-M
ar-0
520
%1-
Dec
-04
25%
Su
m o
f Adj
ustm
ents
---
-5%
2%5%
10%
15%
15%
20%
25%
A
djus
ted
Pric
e Pe
r SF:
---
$54.
09$2
2.39
$16.
91$3
0.75
$63.
40$1
6.96
$71.
39$2
3.45
O
vera
ll Ta
x R
ate±
---
$0.0
0$0
.00
$0.0
0$0
.00
$0.0
0$0
.00
$0.0
0$0
.00
Adj
uste
d Pr
ice
Per S
F:--
-$5
4.09
$22.
39$1
6.91
$30.
75$6
3.40
$16.
96$7
1.39
$23.
45
Com
paris
ons:
G
ener
al L
ocat
ion
(Cou
nty)
Ora
nge
Ora
nge
San
Die
goSa
n D
iego
Los A
ngel
esLo
s Ang
eles
Riv
ersid
eLo
s Ang
eles
O
rang
e
Spec
ific
Loca
tion
Irvi
neSa
nta
Bar
bara
, CA
-30%
San
Mar
cos,
CA
10%
Car
lsbad
, CA
15%
Hun
tingt
on P
ark,
CA
5%La
Cre
scen
ta, C
A0%
Ont
ario
, CA
20%
Los A
ngel
es, C
A-2
0%Fo
utai
n V
alle
y, C
A15
%
Econ
omy
of S
cale
(Acr
es)
2.3±
and
11.
9± A
cres
5.08
-30%
5.23
-30%
7.34
-30%
5.42
-30%
0.60
-40%
7.23
-25%
1.26
-40%
5.80
-30%
U
tiliti
esSi
te P
erim
eter
0%0%
0%0%
0%0%
0%0%
Zo
ne :
Use
Educ
atio
nal
ES/P
D/S
D-2
-15%
M-5
%PC
-5%
MPD
-10%
C3
-25%
UC
-5%
M1
-10%
C2
-10%
A
cces
s/Exp
osur
eG
ood/
Mas
ter P
lan
0%0%
0%0%
0%0%
0%0%
St
age
of D
evel
opm
ent
Supe
rpad
-10%
-10%
0%0%
0%0%
0%0%
Subt
otal
- A
djus
tmen
ts-8
5%-3
5%-2
0%-3
5%-6
5%-1
0%-7
0%-2
5%
Com
mun
ity F
acili
ties A
sses
smen
t$4
.00
/ SF
-$4.
00-$
4.00
-$4.
00-$
4.00
-$4.
00-$
4.00
-$4.
00-$
4.00
Fini
shed
Per
SF
Cos
t (A
djus
ted)
:$4
.11
$10.
55$9
.52
$15.
98$1
8.19
$11.
27$1
7.42
$13.
59
Per
Squa
re F
oot (
Bef
ore
Adj
ustm
ents
)Lo
w$1
4.75
Hig
h$5
9.49
Ave
rage
$33.
88
Per
Squa
re F
oot (
Aft
er A
djus
tmen
ts)
Low
$4.1
1H
igh
$18.
19A
vera
ge$1
2.58
Rec
onci
led
Per
Squa
re F
oot V
alue
…$1
5.00
LA
ND
DA
TA
AD
JUST
ME
NT
GR
IDH
erita
ge F
ield
s, Ir
vine
, Cal
iforn
ia
Edu
catio
nal L
and
(Com
pari
son
to L
arge
Sub
ject
Edu
catio
nal S
ites)
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 6 5
RECONCILIATION – EDUCATIONAL PARCELS Before adjustments, the sales prices ranged from about $14.75 to $59.49 per square-foot with an average of $33.88 per square foot. After having applied relevant quantitative adjustments to the comparable data, inclusive of the adjustment for CFD, the adjusted prices ranged from $15.44 to $31.39 for the adjustments based on the smallest subject size cohort, $9.52 to $24.56 for the medium-sized cohort, and $4.11 to $17.42 for the large subject parcel. In addition to the comparable data, we considered the terms of two written proposals we reviewed for educational land within the subject project. The first proposal is from California State University, Fullerton dated January 17, 2007 discussing the acquisition of a 20-acre parcel in the Lifelong Learning District for $30 million. This equates to $34.43 per square foot of land area prior to considerations for the CFD assessment of $4.00 per square foot. However, the proposal includes one of the existing buildings (Building 829) from the former Air Base, which is currently occupied by CSUF’s Irvine campus. Because this proposal includes an existing facility in which the offer is an occupant, this proposal can not be considered a market based indication of the value of the underlying land. The second proposal was received from Lutheran High South dated April 17, 2007 (appraisers copy was not complete and did not include a signature page). The letter expressed the school’s interest in purchasing approximately 35 acres in the Lifelong Learning District for $146 per square feet of FAR and requests 225,000 to 250,000 square feet of FAR. The implied land pricing is therefore in the range of $32,850,000 to $36,500,000 or approximately $21.55 to $23.94 per square foot of land area. This offer is considered an indication of the market value of the subject’s educational land and we have considered this proposal in our final land value estimate. After analyzing the available relevant data, a value of $25.00 per square-foot was concluded for the smaller subject parcels, $20.00 was selected for the medium-sized subject parcels and $15.00 per square-foot was selected for the largest subject parcel. The aggregate market value is $199,003,000 (rounded) as shown in the following table. The said value reflects the site being in a superpad condition.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 6 6
Planning Proposed No. Comparables’ Adjusted Reconciled IndicatedArea Use Acres PSF Range PSF Land Value*
L6 Education 17.70 $9.52 to $24.56 $20.00 $15,420,240L7 Education 7.10 $15.44 to $31.69 $25.00 $7,731,900L8 Education 28.40 $9.52 to $24.56 $20.00 $24,742,080L9 Education 35.00 $9.52 to $24.56 $20.00 $30,492,000
L12 Education 28.10 $9.52 to $24.56 $20.00 $24,480,720L13 Education 11.90 $15.44 to $31.69 $25.00 $12,959,100L16 Education 15.20 $9.52 to $24.56 $20.00 $13,242,240L19a Education 2.30 $15.44 to $31.69 $25.00 $2,504,700L19c Education 2.60 $15.44 to $31.69 $25.00 $2,831,400L22b Education 26.00 $9.52 to $24.56 $20.00 $22,651,200L25 Education 64.20 $4.11 to $18.19 $15.00 $41,948,280
Total 238.50 $19.16 $199,003,860* Sheet-graded superpad with all perimeter offsites installed.
COMMERCIAL LAND (EDUCATIONAL) VALUATIONHeritage Fields, Irvine, California
COMMERCIAL LAND PARCELS (OFFICE) The Heritage Fields project includes 10.5± acres of office designated land within a single parcel, identified as Parcel T7 in the TODD. The office site will have a good corner location at the intersection of two of the project’s new interior arterial roadways. The office site is also in proximity to the Irvine Spectrum, a notable office node in the subject’s Irvine submarket. A search was made for land sales where the intended use was to develop office buildings. Overall, six sales were found which were deemed relevant and specifically analyzed herein. The sales were analyzed on a price per square foot basis (net site area), which is typical for commercial land in this market. We also evaluated the sales on a price per square foot of buildable area for those data items for which such information was available. SUMMARY OF LAND SALES (OFFICE) Sale 1 refers to the January 2007 sale of a 2.61-acre site located at the northwest corner of State College Boulevard and Rampart Street in the City of Orange, California. At the time of sale, the property was improved with a former hotel but the improvements were allocated no value. The location is adjacent to the Platinum Triangle and high-density residential land uses are in development in the immediate location. The site is rectangular in shape and is positioned across Rampart Street from a newly constructed apartment community. On/off ramp service to the I-5 freeway is within one block of the site. The buyer paid an all cash price of $9,700,000 or $85.32 per square foot for the site. The site is zoned C-2, Commercial, by the city of Orange. Future development plans are unknown as of the date of this appraisal. Sale 2 corresponds to the August 2006 sale of a 6.25-acre site located along the west side of Jamboree Road just south of Teller Avenue in the City of Irvine. The property was improved with a vacant industrial building. The site has a mid-block location along the west side of Jamboree Road between Michelson Drive to the north and Dupont Drive to the south. The site is considered in the “path of
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 6 7
development” and was acquired by Jamboree Hines, LLC for an all cash price of $21,350,000 or $78.42 per square foot. The site is located in the IBC-5.1 zone within the City of Irvine which allows for commercial development. Hines planned to assemble “trip” counts to the site that would allow for the eventual development of up to 250,000 square feet of office. The indicted per-buildable-square-foot sale price equals $85.40. Sale 3 refers to the August 2006 sale of a 3.12-acre site located at the southwest corner of Laguna Canyon Road and Waterworks Way in the Spectrum Area of the City of Irvine. The site was owned by Irvine Medical Plaza LLC and was sold to Irvine Medical Holdings for an all cash price of $9,329,000 or $68.66 per square foot. The buyer intended to develop a three-story medical office building and related surface parking improvements. The site is adjacent to major medical land uses including Kaiser Permanente and Irvine Medical Center, which are both approximately two blocks south. The site is in the MS zone of the city of Irvine, which allows for medical office development.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 6 8
OFF
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FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 6 9
COMMERCIAL LAND (OFFICE) SALES MAP
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 7 0
Sale 4 corresponds to the November 2005 sale of a parcel located along the north side of Katella Avenue east of Lewis Street in the City of Anaheim. The property consists of a 4.88-acre site improved with an older industrial building which was allocated no value at the time of the sale. The site is zoned ML (light manufacturing) by the City of Anaheim, but is a part of the Platinum Triangle Mixed Use Overlay Zone. The buyer intends to develop the site with a high density residential project, the scope of which has yet to be determined. The buyer paid an all cash price of $14,000,000 or $65.86 per square foot for the property. Sale 5 refers to the October 2005 sale of a prime development parcel located along the east side of Von Karman Avenue in the City of Irvine. The property consists of a 3.98-acre parcel and trip allocations for the development of roughly 159,000 square feet of office space and related parking improvements. The property was acquired in January 2005 by Sanmina for office development. However, residential development activity was very strong during 2005 and the site’s highest and best use was determined (at the time) to be for high-density residential development. Allergan Pharmaceuticals, which owns and occupies adjacent property, acquired the site from Sanmina in order to control its future development. Allergan paid an all cash price of $12,000,000 or $70.17 per square foot for the property. The price paid represents a 99.2% increase over the $6.1 million price paid just 10 months prior. Sale 6 is the June, 2005 purchase of the site for 2211 Michelson, which is currently under construction. The property was acquired by a partnership consisting of Hines and Crescent Realty, who is developing a 12-story, 265,277 square-foot office building on the site. The property is part of the larger “Irvine Business Complex,” which was previously known as “Koll Center Irvine.” The property was entitled at sale for the proposed development. The acquisition also include an undivided interest in common areas for the larger Irvine Business Complex, which results in a “grossed up” land area of 3.62 acres including the allocation of common areas. The sales price of $12,000,000 equaled $45.24 per square foot of proposed building area (rentable), and $228.44 per square foot of “pad” area including only the 1.206-acre parcel owned in fee. Including the allocated portion of the common area parcel, however, the price per square foot of land area equals $76.10 per square foot of land area (refer to accompanying summary chart). SUMMARY OF ADJUSTMENTS (OFFICE) Property Rights Conveyed No adjustments were warranted for property rights conveyed as all of the land data sold with fee simple property rights. Financing (Terms of Sale) None of the sales was reported to include atypical financing warranting adjustments. Conditions of Sale None of the sales was reported to include any conditions of sale.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 7 1
Market Conditions (Time of Sale) The comparable sales closed between June 2005 and January 2007. All commercial land uses have appreciated in Orange County submarket over this timeframe. A 10% annual adjustment was concluded based on the survey of all commercial property over the past four to five quarters (as discussed in the Market Conditions section). Adjustments are made from the date of sale. Location Location takes into consideration the comparables’ and the subject’s physical orientation to the surrounding area, including proximity to local services and the quality and appeal of the community at large. For office land sales, we have also taken into account the relative strength of the office submarket of the comparables relative to the subject’s submarket. Comparables 2, 3, 5 and 6 are located in the subject’s Irvine market; however, the relative locations of these comparables are superior to that of the subject. Comparable 1 is located in Orange, which is an inferior location, but this comparable is located adjacent to the Platinum Triangle which strengthens the specific location of this comparable. Comparable 4 is located in Anaheim which is inferior overall. Adjustments were made to the comparables as shown in the adjustment grid. Economy of Scale All other factors being similar, smaller parcels tend to command higher unit prices than larger parcels due to economies of scale and the more limited number of buyers that can afford to pay for larger parcels. The subject’s office site totals 10.5± acres. The comparables ranged in size from 1.21± to 6.25± acres, which is less than the size of the subject. The comparable sales were adjusted downward for their smaller land area relative to the subject as shown in the accompanying adjustment grid. Utilities Utilities reflect a parcel’s accessibility to the local infrastructure. For the development of professional office space, electricity, gas, water, and sewer are all required. All of the land comparables used in this analysis had utility services available, similar to the subject site. No adjustments are warranted. Zoning / Use When analyzing this category of comparison, the appraisers took into consideration the subject’s proposed land use, which will be for office development. Though land sales with different zoning classifications were utilized to value the subject site, all of the zoning classifications for the sales considered allowed for professional office development by right. Sale 4 was purchased unentitled for residential development. The buyer intended to pursue re-zoning for the site that would permit residential uses, but none were permitted at the time of sale. All of the other comparables were purchased with plans for development of office buildings or with undetermined plans. The subject property and all of the comparable data items permit office development by right. The subject; however, does not permit any uses other than office development, which is somewhat limiting relative to the comparables. Furthermore, the overall density of the subject at .35 FAR is considerably less than the comparables (for which information is available) that range from .91 to 1.68 FAR. Due to the somewhat more restrictive flexibility in use, and the lower maximum permissible density of the subject site, we have applied downward adjustments to the comparable data.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 7 2
Access / Exposure The subject sites are located in the TODD of the Heritage Fields master-planned community. Upon completion of the community’s infrastructure, the subject office site will have good visibility and access from two of the new arterials. All sales were similar in street frontage, access and exposure, and no adjustments are warranted. Stage of Development In this analysis, the subject site was assumed to be in a superpad condition, similar to all of the comparables. No adjustments were necessary. Community Facilities Assessment Bond assessments for the creation of infrastructure are typically passed on to the purchaser and add to the cost of the land. This additional fee is considered by the buyer as part of the land price. The subject has a $4.00 per square foot CFD, which is deducted from other sales which have no CFDs.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 7 3
Com
para
ble
No.
:1
23
45
6Id
entif
icat
ion:
Subj
ect
Dat
e of
Sal
e:--
-Ja
n-07
Aug
-06
Aug
-06
Nov
-05
Oct
-05
Jun-
05Sa
le P
rice:
---
$9,7
00,0
00$2
1,35
0,00
0$9
,329
,000
$14,
000,
000
$12,
150,
000
$12,
000,
000
Pric
e Pe
r SF:
---
$85.
32$7
8.42
$68.
66$6
5.86
$70.
17$7
6.10
Cos
ts T
o Fi
nish
(To
Supe
rpad
):$0
.00
$0.0
0$0
.00
$0.0
0$0
.00
$0.0
0Fi
nish
ed P
SF C
ost (
Shee
t Gra
ded
Supe
rpad
):$8
5.32
$78.
42$6
8.66
$65.
86$7
0.17
$76.
10
Pric
e Pe
r Uni
t (U
nadj
uste
d):
$85.
32$7
8.42
$68.
66$6
5.86
$70.
17$7
6.10
Pr
oper
ty R
ight
s--
-Fe
e0%
Fee
0%Fe
e0%
Fee
0%Fe
e0%
Fee
0%
Fina
ncin
g--
-M
arke
t0%
Mar
ket
0%M
arke
t0%
Mar
ket
0%M
arke
t0%
Mar
ket
0%
Con
ditio
ns o
f Sal
e--
-M
arke
t0%
Mar
ket
0%M
arke
t0%
Mar
ket
0%M
arke
t0%
Mar
ket
0%
Mar
ket C
ondi
tions
---
Jan-
075%
Aug
-06
10%
Aug
-06
10%
Nov
-05
15%
Oct
-05
15%
Jun-
0520
%
Sum
of A
djus
tmen
ts--
-5%
10%
10%
15%
15%
20%
A
djus
ted
Pric
e Pe
r SF:
---
$89.
59$8
6.26
$75.
53$7
5.74
$80.
70$9
1.32
Com
paris
ons:
G
ener
al L
ocat
ion
Ora
nge
Cou
nty
Ora
nge
Co.
0%O
rang
e C
o.0%
Ora
nge
Co.
0%O
rang
e C
o.0%
Ora
nge
Co.
0%O
rang
e C
o.0%
Sp
ecifi
c Lo
catio
nIr
vine
- H
FO
rang
e, C
A-1
5%Ir
vine
, CA
-15%
Irvi
ne, C
A-1
0%A
nahe
im, C
A10
%Ir
vine
, CA
-20%
Irvi
ne, C
A-2
0%
Econ
omy
of S
cale
(Acr
es)
10.5
acr
es2.
61-1
5%6.
25-1
0%3.
12-1
5%4.
88-1
5%3.
98-1
5%3.
62-1
5%
Util
ities
Site
Per
imet
er0%
0%0%
0%0%
0%
Zone
: U
seO
ffice
C2
-15%
IBC
-20%
MS
-10%
I (re
s. in
tent
)-3
0%IB
C-5
.1-2
0%IB
C-5
.1-2
0%
Acc
ess/
Expo
sure
Goo
d/M
aste
r Pla
n0%
0%0%
0%0%
0%
Stag
e of
Dev
elop
men
tSu
perp
ad0%
0%0%
0%0%
0%Su
btot
al-4
5%-4
5%-3
5%-3
5%-5
5%-5
5%
Com
mun
ity F
acili
ties A
sses
smen
t$4
.00
/ SF
-$4.
00-$
4.00
-$4.
00-$
4.00
-$4.
00-$
4.00
Fini
shed
Per
SF
Cos
t (A
djus
ted)
:$4
5.27
$43.
44$4
5.09
$45.
23$3
2.31
$37.
09
Per
Squa
re F
oot (
Bef
ore
Adj
ustm
ents
)L
ow$6
5.86
Hig
h$8
5.32
Ave
rage
$74.
09
Per
Squa
re F
oot (
Aft
er A
djus
tmen
ts)
Low
$32.
31H
igh
$45.
27A
vera
ge$4
1.41
Rec
onci
led
Per
Squa
re F
oot V
alue
…$4
0.00
LA
ND
DA
TA
AD
JUST
ME
NT
GR
IDH
erita
ge F
ield
s, Ir
vine
, Cal
iforn
ia
Com
mer
cial
Lan
d (O
ffic
e)
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 7 4
RECONCILIATION – OFFICE PARCELS The preceding data included six closed sales (excluding multiple sales involving the same site) in the Central Orange County market over the past two years. Four sales (2, 3, 5 and 6) are located in the Irvine submarket of the Greater Airport Area with the remaining sale (4) is in the Anaheim submarket. Four of the closed sales (2, 3, 5, and 6) were sites acquired for office development, while Sale 4 was acquired for residential use but was not entitled for that use at the time of sale. The per square foot prices based on land area range from (rounded) $66 to $85 prior to any adjustment, with the pricing for Sale 6 based on the site area including allocated interest in the common area. Excluding allocated common area, the pricing for this sale is $228 per square foot. The sales with available FAR data, or Sales 2, 5 and 6, show a range in FAR pricing from (rounded) $45 to $85. While not a precise “matched pair”, Sales 2 and 6 provide an indication of the increase in FAR pricing for office use from 2005 to 2006. Sale 6 involved the purchase of an entitled office site for $45 per FAR by a Hines entity; Sale 2 was also acquired by Hines, and involved an as-yet un-entitled site for office development in the same market location (Irvine) as Sale 6, at a significantly higher price per FAR of $85. We note that the density (FAR) for Sale 6 is higher than for Sale 2, however, which typically will result in a downward adjustment in the FAR price (and an upward adjustment in the price per land foot). After having applied relevant quantitative adjustments to the comparable data, the adjusted prices ranged from $32.31 to $45.27 per square-foot with an average of $41.41. To the best of our knowledge, the subject ownership/developer has not received any offers or letters of intent for the subject office land. We have therefore relied on the comparable data to estimate the value of the subject site. The greatest weight was given to Sales 2, 3 5 and 6 which are located in the subject’s Irvine market; however, these sales enjoy stronger locations due to their concentration in an existing, well established office market. After analyzing the available relevant data, a value of $40.00± per square foot, or a total of $18,295,000 was reconciled for the subject’s office site T7 (10.5 acres) within the TODD. Said value reflects the site being in a superpad condition. Said value also considers the $4.00 per square foot in CFD obligations attributed to commercial parcels in the Heritage Fields MPC.
Planning Proposed No. Comparables’ Adjusted Reconciled IndicatedArea Use Acres PSF Range PSF Land Value*
T7 Office 10.50 $32.31 to $45.27 $40.00 $18,295,200Total 10.50 $40.00 $18,295,200
* Sheet-graded superpad with all perimeter offsites installed.
COMMERCIAL LAND (OFFICE) VALUATIONHeritage Fields, Irvine, California
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 7 5
COMMERCIAL LAND PARCELS (RETAIL) Heritage Fields’ LLD consists of five individual parcels intended for retail uses. The total land area designated for retail uses is 40.5± acres, and includes three parcels in the LLD - L17 (19.6 acres), L20 (9.2 acres), and L21 (4.2 acres) – and two parcels in the TODD – L1c (6.0 acres) and L12e (1.5 acres). The retail parcels in the LLD will have frontage and exposure from Trabuco Road and are situated at the primary entrance to the project area from SH 133. The two retail parcels located in the TODD will most likely be improved with uses that serve the surrounding R&D and automotive development that dominates this planning area. In contrast, the retail development that is most likely for the LLD retail sites will be positioned to serve the large resident and student population in this district based on the designated land uses. We have searched the general Orange County area for sales of similar retail land sales. Our search produced very limited results. There has been a very limited investment market for retail land sales over the past several years. We have considered the terms of five comparable sales in our analysis. The sales were analyzed on a price per square foot basis (net site area), which is typical for commercial land in this market. SUMMARY OF LAND SALES (RETAIL) Sale 1 corresponds to the April 2006 sale of a 1.2-acre site located at the northeast corner of Fabricante and Alicia Parkway in the City of Newport Beach. The property is zoned NC-C, Commercial, and retail uses are permitted by right. The property was improved with a vacant freestanding retail building at the time of sale, which was intended for demolition (former auto center). The site is fully improved and served by all utilities. The property was purchased by a local buyer for $4,230,000 or $80.92 per square-foot subsequent to a formal marketing effort. Sale 2 corresponds to the February 2006 purchase of a 3.03-acre site located at the intersection of Katella Avenue and Walker Street in the City of Cypress. The property is located to the east of the Los Calamitous Race Track. The corner site features frontage on Walker Street and Katella Avenue. The property was formerly improved and is fully served by all municipal utilities. The Cypress Redevelopment Agency sold the property to Newport Beach based Jones Cypress Plaza, LP who intends to construct a small retail center on the site. The purchase price of $2,493,500 is equal to $18.89 per square foot of land area. Sale 3 corresponds to the August 2005 sale of a 20.72-acre site located at the southwest corner of Hyland Avenue and Sunflower Avenue in the City of Costa Mesa. The property fronts the San Diego Freeway, which forms the property’s southernmost boundary. The site features extensive frontage along both Hyland Avenue and Sunflower Avenue. The property is the site of a former State Farm Insurance headquarters building. State Farm sold the property to South Cost Home Furnishings of Irvine. The buyer intends to demolish the existing improvements and redevelop the site with an eight-building, 300,000 square-foot home furnishings center that will house approximately 30 retailers. The purchase price of $29,000,000 is equal to $32.13 per square-foot of land area. The property was fully improved and fully served by public utilities.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 7 6
RE
TA
IL L
AN
D D
AT
A S
UM
MA
RY
Her
itage
Fie
lds,
Irvi
ne, C
alifo
rnia
Loc
atio
nD
ata
Com
mun
ityB
uyer
Sale
Pri
ceSi
te S
ize
Site
Siz
ePr
ice
Ref
.T
B M
ap C
ode
Selle
rSa
le D
ate
APN
(s)
Prop
osed
Use
Zoni
ng(S
F)(N
et A
cres
)pe
r SF
1N
EC o
f Fab
rican
te a
nd A
licia
Par
kway
VM
A A
licia
, LLC
$4,2
30,0
0080
9-32
1-07
Ret
ail
NC
-C52
,272
1.20
$80.
9224
39 W
Coa
st H
wy
Stal
lion
15, L
LCA
pr-0
6N
ewpo
rt B
each
, CA
926
63
2C
nr o
f Kat
ella
Ave
& W
alke
r St
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ress
Pla
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83.
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ker S
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ss R
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Feb-
0624
1-09
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Ret
ail
Cyp
ress
, CA
906
3024
1-09
1-45
3SW
C o
f Hyl
and
Ave
nue
and
Sunf
low
er A
venu
eSo
uth
Coa
st H
ome
Furn
ishin
gs C
entre
, LLC
$29,
000,
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5C
osta
Mes
a, C
A 9
2626
4N
WC
of Y
oung
er D
rive
and
Kno
tt A
venu
eA
kash
Inve
stm
ents
, Inc
$1,2
00,0
0006
9-13
0-40
Ret
ail
C-S
31,9
990.
73$3
7.50
8761
Kno
tt A
venu
eSa
ddle
back
Car
was
h, L
PM
ay-0
5B
uena
Par
k, C
A 9
0620
5N
orth
side
of L
os A
lisos
Blv
d, b
twn
El T
oro
Rd
and
Mel
inda
Rd,
Sou
th o
f 241
Mila
n R
eal E
stat
e In
vest
men
ts II
I, LP
$2,0
00,0
0083
9-16
1-13
Ret
ail,
Offi
ceC
H72
,484
1.66
$27.
59Lo
s Alis
os B
lvd.
Lanc
aste
r Rea
lty H
oldi
ngs,
LPM
ar-0
583
9-16
1-14
Miss
ion
Vie
jo, C
A, 9
2691
839-
161-
17
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 7 7
COMMERCIAL LAND (RETAIL) SALES MAP
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 7 8
Sale 4 corresponds to the May 2005 sales of a 0.73-acre site located at the northwest corner of Younger Drive and Knott Avenue in the City of Buena Park. The site is the location of a former carwash that was to be demolished. The property was purchased by Akash Investments of Corona for the development of a small retail development. The purchase price of $1,200,000 is equal to $37.50 per square foot of land area. The site is rectangular in shape with frontage along both Younger Drive and Knott Avenue. The site is fully served by public utilities. The C-S zoning permits retail development by right. Sale 5 corresponds to the March 2005 sale of a 1.66-acre site located along the north side of Los Alisos Boulevard between El Toro Road and Melina Road, south of Highway 241 in the City of Mission Viejo. The site has approximately 715 feet of frontage along Los Alisos Boulevard. The property was purchased by Anaheim-based Milan Real Estate Investments III from Lancaster Realty Holdings, LP for the development of a retail and office project. Plans include the construction of three small buildings of approximately 4,000 square feet each. Two retail uses and a medical use were contemplated. The property was fully served by public utilities. The purchase price of $2,000,000 is equal to $27.59 per square foot of land area. SUMMARY OF ADJUSTMENTS (OFFICE) Property Rights Conveyed No adjustments were warranted for property rights conveyed as all of the land data sold with fee simple property rights. Financing (Terms of Sale) None of the sales was reported to include atypical financing warranting adjustments. Conditions of Sale None of the sales was reported to include any conditions of sale. Market Conditions (Time of Sale) The comparable sold between March 2005 and April 2006. No more current retail land sales transactions could be located. As stated earlier, all commercial land uses have appreciated in Orange County submarket, as detailed in the Market Conditions section. A 10% annual adjustment was considered reasonable from the date of the sale. Location Location takes into consideration the comparables’ and the subject’s physical orientation to the surrounding area, including proximity to local services and the quality and appeal of the community at large. The subject property is bracketed by the data in terms of location. Sale 1 is located in Newport Beach, which is quite superior, and Sale 2 is in Cypress, a somewhat inferior location. The subject’s “village” or neighborhood concept will result in a prime location for retail and is considered to be superior to the older commercial districts of Sales 4 and 5.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 7 9
Economy of Scale All other factors being similar, smaller parcels tend to command higher unit prices than larger parcels due to economies of scale and the more limited number of buyers that can afford to pay for larger parcels. The comparable sales bracket the subject in size, which has individual parcels ranging widely from 1.55 to 19.60 acres. We adjusted the comparable data considering the “average” size of the subject retail parcels. Subsequent to adjustment, we concluded a range of per square-foot pricing for the subject’s individual retail sites that takes into account the size variations among the parcels. Utilities Utilities reflect a parcel’s accessibility to the local infrastructure. When taking into consideration utilities for commercial/institutional sites, electricity, gas, water, and sewer are all required in the typical market. All of the land comparables used in this analysis had utility services available, similar to the subject site. No adjustments are required. Zoning / Use When analyzing this category of comparison, the appraisers took into consideration the subject’s land use designation, which allows for traditional retail development. All of the comparables were permitted for retail development by right, and were purchased with the intention of retail construction. No adjustments to the comparable data were warranted. Access / Exposure The subject sites are located in a master-planned community with average visibility and access. All of the sales were essentially similar to the subject in this respect. Stage of Development In this analysis, the subject site was assumed to be in a superpad condition, similar to all of the comparables. Costs for the demolition of existing improvements on the comparable sites that were improved are not known. Costs to demolish any existing improvements on the subject’s retail sites are also not known. Adjustments, therefore, have no been considered. Community Facilities Assessment Bond assessments for the creation of infrastructure are typically passed on to the purchaser and add to the cost of the land. This additional fee is considered by the buyer as part of the land price. The subject has a $4.00 per square foot CFD.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 8 0
Com
para
ble
No.
:1
23
45
Iden
tific
atio
n:Su
bjec
t
Dat
e of
Sal
e:--
-A
pr-0
6Fe
b-06
Aug
-05
May
-05
Mar
-05
Sale
Pric
e:--
-$4
,230
,000
$2,4
93,5
00$2
9,00
0,00
0$1
,200
,000
$2,0
00,0
00Pr
ice
Per S
F:--
-$8
0.92
$18.
89$3
2.13
$37.
50$2
7.59
Cos
ts T
o Fi
nish
(To
Supe
rpad
):$0
.00
$0.0
0$0
.00
$0.0
0$0
.00
Fini
shed
PSF
Cos
t (Sh
eet G
rade
d Su
perp
ad):
$80.
92$1
8.89
$32.
13$3
7.50
$27.
59
Pric
e Pe
r Uni
t (U
nadj
uste
d):
$80.
92$1
8.89
$32.
13$3
7.50
$27.
59
Prop
erty
Rig
hts
---
Fee
0%Fe
e0%
Fee
0%Fe
e0%
Fee
0%
Fina
ncin
g--
-M
arke
t0%
Mar
ket
0%M
arke
t0%
Mar
ket
0%M
arke
t0%
C
ondi
tions
of S
ale
---
Mar
ket
0%M
arke
t0%
Mar
ket
0%M
arke
t0%
Mar
ket
0%
Mar
ket C
ondi
tions
---
Apr
-06
12%
Feb-
0612
%A
ug-0
518
%M
ay-0
520
%M
ar-0
520
%
Sum
of A
djus
tmen
ts--
-12
%12
%18
%20
%20
%
Adj
uste
d Pr
ice
Per S
F:--
-$9
0.63
$21.
16$3
7.92
$45.
00$3
3.11
Com
paris
ons:
G
ener
al L
ocat
ion
Ora
nge
Cou
nty
Ora
nge
Co.
0%O
rang
e C
o.0%
Ora
nge
Co.
0%O
rang
e C
o.0%
Ora
nge
Co.
0%
Spec
ific
Loca
tion
Irvi
ne -
HF
New
port
Bea
ch, C
A 9
2663
-30%
Cyp
ress
, CA
906
3040
%C
osta
Mes
a, C
A 9
2626
0%B
uena
Par
k, C
A 9
0620
15%
Miss
ion
Vie
jo, C
A, 9
2691
30%
Ec
onom
y of
Sca
le (A
cres
)1.
5 to
19.
6 ac
res
1.20
-15%
3.03
-10%
20.7
210
%0.
73-2
5%1.
66-1
5%
Util
ities
Site
Per
imet
er0%
0%0%
0%0%
Zo
ne :
Use
Ret
ail
NC
-C0%
PBP
0%PD
I0%
C-S
0%C
H0%
A
cces
s/Ex
posu
reG
ood/
Mas
ter P
lan
0%0%
0%0%
0%
Stag
e of
Dev
elop
men
tSu
perp
ad0%
0%0%
0%0%
Subt
otal
-45%
30%
10%
-10%
15%
C
omm
unity
Fac
ilitie
s Ass
essm
ent
$4.0
0 / S
F-$
4.00
-$4.
00-$
4.00
-$4.
00-$
4.00
Fini
shed
Per
SF
Cos
t (A
djus
ted)
:$4
5.85
$23.
51$3
7.71
$36.
50$3
4.08
Per
Squa
re F
oot (
Bef
ore
Adj
ustm
ents
)L
ow$1
8.89
Hig
h$8
0.92
Ave
rage
$39.
41
Per
Squa
re F
oot (
Aft
er A
djus
tmen
ts)
Low
$23.
51H
igh
$45.
85A
vera
ge$3
5.53
Rec
onci
led
Per
Squa
re F
oot V
alue
…$3
0.00
to $
40.0
0
LA
ND
DA
TA
AD
JUST
ME
NT
GR
IDH
erita
ge F
ield
s, I
rvin
e, C
alifo
rnia
Com
mer
cial
Lan
d (R
etai
l)
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 8 1
RECONCILIATION – OFFICE PARCELS Before adjustments, the sales prices ranged from $18.89 to $80.92 per square foot. After having applied relevant quantitative adjustments to the comparable data, the adjusted prices ranged from $23.51 to $45.85 per square foot. Emphasis was applied to Sale 3 due to the proximity to the subject and lower net adjustment, and Sales 4 and 6 due to their lower net adjustment. The data for these three sales would suggest that the value of the subject retail land would fall in the range of $34.00 to $38.00 per square foot. After analyzing the available relevant data, a value of $35± per square foot, was reconciled for the subject’s retail sites, on average. The L7 site, at 19.6 acres, was further adjusted downward for size and we estimated a $30.00 per square-foot value for this parcel. Likewise, our conclusion was adjusted upward for Parcel T12e which is 1.55 acres in size. We estimated a per square-foot land value of $40.00 for this parcel. Said value reflects the sites being in superpad condition. A summary of the estimated retail land values by parcel is as follows.
Planning Proposed No. Comparables’ Adjusted Reconciled IndicatedArea Use Acres PSF Range PSF Land Value*L17 Retail 19.60 $23.51 to $45.85 $30.00 $25,613,280L20 Retail 9.20 $23.51 to $45.85 $35.00 $14,026,320L21 Retail 4.20 $23.51 to $45.85 $35.00 $6,403,320T1c Retail 5.97 $23.51 to $45.85 $35.00 $9,100,000T12e Retail 1.55 $23.51 to $45.85 $40.00 $2,696,960Total 40.52 $32.77 $57,839,880
* Sheet-graded superpad with all perimeter offsites installed.
COMMERCIAL LAND (RETAIL) VALUATIONHeritage Fields, Irvine, California
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 8 2
COMMERCIAL LAND PARCELS (AGRICULTURAL) Heritage Fields’ LLD consists of three individual parcels intended for agricultural uses. The total land area designated for retail uses is 175.7 acres. Two agriculturally designated parcels are located in the LLD - L1 (141.3 acres) and L2 (21.9 acres). The third parcel is locate din the TODD – T4 (12.5 acres). The agricultural parcels in the LLD form the northernmost boundary of the property and act as a buffer between the more intensely developed portions of the project and the UC Research Center and Marshburn Basin. The Agricultural parcel in the TODD is a parcel along the eastern project boundary adjacent to the golf course and the wildlife corridor. Our research suggests that a considerable amount of land sale activity involving agriculturally zoned property has occurred in Orange County as well as the neighboring counties of Los Angeles and San Diego. However, it is common practice in most jurisdictions to permit low density residential development by right in A-zoned districts. Generally speaking, home sites of one to ten acres are permitted in the A zones in various communities. The subject Agriculture sites, in contrast, have no future residential development potential. We have also reviewed a number of sites purchased for permanent open space. Again, these sales are not comparable with the subject Agricultural sites because the subject parcels afford a buyer economic opportunity and have income generating potential. We have, therefore, limited our selection of comparable sales to those with known agricultural uses that were known to be in place at the time of sale and continued in the near term. We have also included sales of agriculturally zoned land whose buyers had no near-term plans for pursuing residential development. The sales were analyzed on a price per acre basis (net site area), which is typical for large parcel agricultural land in this market. SUMMARY OF LAND SALES (AGRICULTURAL) Sale 1 corresponds to the April 2007 sale of a 33.45-acre site located along the south side of Agoura Road, west of Reyes Adobe Road in the City of Agoura Hills, Los Angeles County. The site is irregular in shape, with a rolling topography. The property was previously undeveloped. The site features 1,120 feet of frontage along Agoura Road. The property is zoned SP by the City. The property was purchased by the Conrad N. Hilton Foundation from the Tohl Family Trust subsequent to a formal marketing effort. The purchase price of $3,500,000 id equal to $104,634 per acre. The buyer purchased the property in order to construct a new 35,000 square-foot headquarters for their charitable foundation. Sale 2 corresponds to the March 2007 sale of a 106-acre site located along the south side of Bandy Canyon Road in Escondido, San Diego County. The property is zoned A70 and was previously undeveloped. The property was purchased by CGA Properties, LLC from the Fenton JB Family Trust for $3,150,000 or approximately $29,717 per acre. The property was purchased for long-term investment. The site has limited frontage along Bandy Canyon Road, but the bulk of the site is interior. Topography is rolling. Utilities are in the street but not throughout the site.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 8 3
AG
RIC
UL
TU
RE
LA
ND
SA
LE
SU
MM
AR
YH
erita
ge F
ield
s, Ir
vine
, Cal
iforn
ia
Dat
aC
omm
unity
Buy
erSa
le D
ate
Site
Siz
eSi
te S
ize
Pric
eR
ef.
Com
mun
itySe
ller
Sale
Dat
eA
PN(s
)Pr
opos
ed U
seZo
ning
(SF)
(Net
Acr
es)
per
Ac.
1s/
s of A
gour
a R
oad,
wes
t of R
eyes
Ado
be R
oad
Con
rad
N. H
ilton
Fou
ndat
ion
$3,5
00,0
0020
61-0
02-0
48Fo
unda
tion
A-S
P1,
457,
082
33.4
5$1
04,6
3430
500
Ago
ura
Roa
dTo
hl F
amily
Tru
stA
pr-0
7H
QA
gour
a H
ills,
Los A
ngel
es C
ount
y, C
A
2s/
s of B
andy
Can
yon
Roa
dC
GA
Pro
perti
es L
LC$3
,150
,000
Mul
tiple
Unk
now
nA
704,
617,
360
106.
00$2
9,71
716
7678
Ban
dy C
anyo
n R
oad
Fent
on JB
Fam
ily T
rust
Mar
-07
276-
040
Esco
ndid
o, S
an D
iego
Cou
nty,
CA
3e/
s of B
etsw
orth
Roa
d at
Aer
e R
oad
inte
rsec
tion
Ran
dall
& S
teph
anie
Sm
ith$2
,475
,000
186-
062-
03N
urse
ryA
703,
492,
205
80.1
7$3
0,87
212
131-
1213
5 B
etsw
orth
Roa
dSa
nta's
For
est N
urse
ryM
ay-0
6V
alle
y C
ente
r, Sa
n D
iego
Cou
nty,
CA
4e
and
w si
des o
f Val
ley
Cen
ter R
oad
MLS
K L
LC$1
1,66
5,00
018
8-10
0-38
, 68-
73H
orse
A70
15,7
68,7
2036
2.00
$32,
224
3222
5 V
alle
y C
ente
r Roa
dH
idde
n O
aks R
anch
LLC
Mar
-06
189-
052-
07St
able
sV
alle
y C
ente
r, Sa
n D
iego
Cou
nty,
CA
5s/s
of E
l Cam
ino
Rea
l, s/
o Sa
n D
iegu
ito R
oad
Stra
wbe
rry
Hut
LLC
$2,7
00,0
0030
4-02
0-15
Unk
now
nA
1-10
640,
768
14.7
1$1
83,5
48N
o st
reet
add
ress
Spec
trum
Dev
elop
men
tJa
n-06
San
Die
go, S
an D
iego
, CA
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 8 4
COMMERCIAL LAND (AGRICULTURE) SALES MAP
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 8 5
Sale 3 corresponds to the May 2006 sale of an 80.17-acre site located along the east side of Betsworth Road at the eastern terminus of Aere Road in Valley Center, San Diego County. The property is zoned A70 and was improved with a nursery facility (Santa’s Forest Nursery) at the time of sale. The buyer is an owner/user as was the seller. The property was purchased for $2,475,000 or $30,872 per acre. The site has 1,341 feet of frontage along Betsworth Road, which provides good access. Utilities are available throughout the property. Sale 4 corresponds to the March 2006 sale of a 362.0-acre site located along both the east and west sides of Valley Center Road in Valley Center, San Diego County. The property is zoned A70 and was improved with a horse boarding facility at the time of sale. The property was purchased by MLSK LLC of San Diego after a formal marketing effort. The buyer and seller are both owner/user investors. The property is fully served by public utilities. There are several structures on the site including two caretaker homes, a cottage, 9 apartment units, 2 barns and a 6-room bunkhouse. The purchase price of $11,665,000 is equal to $32,224 per acre. No allocation between the value (if any) of the existing improvements and the underlying land was available. Sale 5 summarizes the terms of a January 2006 sale involving a 14.71-acre site located along the south side of El Camino Real, south of San Dieguito Road in San Diego, San Diego County. The property is zoned A1-10 and was unimproved at the time of sale. The property was purchased by Strawberry Hut LLC of San Diego. Future plans for the property were undetermined. The purchase price of $2,700,000 is equal to $183,548 per acre. Topography is rolling and utilities are available in the street and may be available throughout the site. SUMMARY OF ADJUSTMENTS (AGRICULTURAL) Property Rights Conveyed No adjustments were warranted for property rights conveyed as all of the land data sold with fee simple property rights. Financing (Terms of Sale) None of the sales was reported to include atypical financing warranting adjustments. Conditions of Sale None of the sales was reported to include any conditions of sale. Market Conditions (Time of Sale) The comparable sold between January 2006 and April 2007. As stated earlier, nearly all commercial land uses have appreciated in Southern California over the past 12 months, however, the pace of appreciation for large tracts of previously undeveloped or nearly undeveloped land have not experienced the same rate of appreciation as urban infill sites with clear entitlement potential. An annual adjustment of approximately 8% per year was considered reasonable for the comparable data.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 8 6
Location Location takes into consideration the comparables’ and the subject’s physical orientation to the surrounding area, including proximity to local services and the quality and appeal of the community at large. No comparable sales were located within the subject’s Orange County market area. The data from Los Angeles is considered superior in location, while the San Diego County data is considered inferior, with the exception of Sale 5 which is located in the City of San Diego and is considered somewhat superior. The subject’s agricultural sites will be situated within the context of a comprehensive master-planned community. In comparison, the comparable sales are generally located in outlying areas with large concentrations of other similar uses. We have considered the context of the subject relative to the comparables in our overall location adjustment. Economy of Scale All other factors being similar, smaller parcels tend to command higher unit prices than larger parcels due to economies of scale and the more limited number of buyers that can afford to pay for larger parcels. The comparable sales range in size from 14.71 to 362.00 acres, which compares to the subject’s parcels ranging from 12.5 to 141.3 acres. We adjusted the comparable sales considering the 12.5 and the 21.9 acre subject parcels. Subsequent to the overall adjustment, we made a further adjustment to our per acre indication for the subject’s 141.3-acre parcel. Utilities Utilities reflect a parcel’s accessibility to the local infrastructure. When taking into consideration utilities for commercial/agricultural sites, electricity and water are generally required in the typical market; however, the entire site does not necessarily need to be fully serviced. Gas and sewer are not considered required utilities. All of the land comparables used in this analysis had utility services available, similar to the subject site. Zoning / Use When analyzing this category of comparison, the appraisers took into consideration the subject’s land use designation, which allows for agricultural uses. Unlike most of the comparable data, residential uses are not permitted in the subject’s agricultural parcels. We applied a downward adjustment to the comparable data, which have potential for development of alternative non-agricultural uses.
Access / Exposure The subject sites are located in a master-planned community with average visibility and access. All of the sales were essentially similar to the subject in this respect. Sale 1 has extensive frontage along a primary roadway in proximity to Highway 101. A downward adjustment for this comparable’s superior access was warranted.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 8 7
Stage of Development In this analysis, the subject site was assumed to be in a superpad condition. In contrast, the comparable data represents sites that are not served by the same level of infrastructure as the subject will be. We accordingly have adjusted four of the sales upward. Community Facilities Assessment Bond assessments for the creation of infrastructure are typically passed on to the purchaser and add to the cost of the land. The developer reported that the agricultural land will not be subject to additional special assessments. The comparables were similar in this respect and not adjustments were applied.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 2 8 8
Com
para
ble
No.
:1
23
45
Iden
tific
atio
n:Su
bjec
t
Dat
e of
Sal
e:--
-A
pr-0
7M
ar-0
7M
ay-0
6M
ar-0
6Ja
n-06
Sale
Pric
e:--
-$3
,500
,000
$3,1
50,0
00$2
,475
,000
$11,
665,
000
$2,7
00,0
00Pr
ice
Per S
F:--
-$1
04,6
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V A L U A T I O N S E R V I C E S 2 8 9
RECONCILIATION – AGRICULTURAL PARCELS Before adjustments, the sales prices ranged from $29,717 to $183,548 per acre. After having applied relevant quantitative adjustments to the comparable data, the adjusted prices ranged from $40,920 to $90,857 per acre and averaged $60,047 per acre. After analyzing the available relevant data, a value of $85,000± per acre, was reconciled for the subject’s smaller agricultural parcels, consistent with the upper end of the range, which corresponds to Sale 5. Sale 5 is the most similar in size to the subject’s smaller agricultural parcels. As previously mentioned we applied a further downward adjustment to this estimate to account for the larger size of subject parcel L1 and concluded at $60,000 per acre for this subject parcel. Our estimates of value for the subject agricultural parcels are summarized as follows:
Planning Proposed No. Comparables’ Adjusted Reconciled IndicatedArea Use Acres Per Ac. Range Per Ac. Land Value*
L1 Agriculture 141.30 $40,920 to $90,857 $60,000 $8,478,000L2 Agriculture 21.90 $40,920 to $90,857 $85,000 $1,861,500T4 Agriculture 12.50 $40,920 to $90,857 $85,000 $1,062,500
Total 175.70 $64,895 $11,402,000* Sheet-graded superpad with all perimeter offsites installed.
COMMERCIAL LAND (AGRICULTURE) VALUATIONHeritage Fields, Irvine, California
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COMMERCIAL LAND PARCEL (EXPOSITION) The Heritage Fields project includes a 215.7-acre parcel (L27) located in the LLD that is planned for development of an Expo Center. As discussed in the Property Description Section, the Expo Center use is limited to commercial recreation, demonstration shows, training venues and a variety of other recreation and learning activities. We have searched for sales of land throughout California that are intended for a similar use. Our search resulted in no relevant, comparable data from which to appropriately value the subject Expo Center site. Our research into similar uses suggests that typically, quasi-governmental agencies or authorities are established to construct and operate convention or exposition-type facilities in major markets. Los Angeles and San Diego, for example, both have quasi-governmental authorities that developed the convention centers in these cities. A possible use for the subject’s designated Exposition property could be an event area that would host live music performances or other public arts and entertainment events. Similar facilities exist in Southern California such as the Gibson Amphitheater at Universal Studios, the Verizon Wireless Amphitheatre in Irvine. Generally, these facilities are subject to long-term operating agreements with entities like Live Nation that specialize in booking acts and managing ticket sales and operations. Absent specific plans for the development of the subject’s Exposition-designated site that could possibly result in a valuation via land residual analysis, we have considered the land value indications from the agricultural land sales we considered previously. The value indications for the subject’s agricultural sites are in a range of $60,000 to $85,000 per acre. We applied a 15% downward adjustment to the high end of these indications to account for the size of the subject’s Exposition site, which is 215.7 acres. We applied a further downward adjustment of 5% to account for the limited use and ultimate limitations on the possible buyer pool for this type of development site. The resulting value indication for the subject Exposition site is a rounded $65,000 acre of land area or $14,020,500.
Planning Proposed No. Comparables’ Adjusted Reconciled IndicatedArea Use Acres Per Ac. Range Per Ac. Land Value*L27 Exposition 215.70 $60,000 to $85,000 $65,000 $14,020,500
Total 215.70 $65,000 $14,020,500* Sheet-graded superpad with all perimeter offsites installed.
COMMERCIAL LAND (EXPOSITION) VALUATIONHeritage Fields, Irvine, California
The owner’s business plan indicated that a September 2011 absorption or sell-off date was anticipated for the Exposition site. To the best of our knowledge, the ownership is not currently in discussions/negotiations with a possible buyer. Based on our understanding of the restricted use of this site, and given the very finite number of market buyers or the limitations of the forming of a quasi-public entity to purchase such a site, we have extended the absorption by one year.
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COMMERCIAL LAND PARCEL (CEMETERY) The Heritage Field’s project includes a 73.2-acre cemetery site within the LLD. It is our understanding that the subject ownership has negotiated the terms of a purchase and sale agreement with a buyer for this site. Due to issues of confidentiality, the ownership did not share a copy of this agreement with the appraisers. It has been represented to us that the purchase price for the 73.2 acre site is $20,054,795 or approximately $6.29 per square foot of land area. We searched for sales of land intended for use as a cemetery or other related use. Our search produced no results in the State of California. We have maintained the records of three sales in our files. The sales represent sites in Houston, TX; Aberdeen, MD and Boca Raton, FL. These sales, while not comparable to the subject for purposes of valuation, demonstrate that there is support in the marketplace for sales of cemetery sites such as the subject’s. For purposes of our analysis, we have utilized the owner/developer’s reported contract pricing and timing for the sale in our analysis.
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V A L U A T I O N S E R V I C E S 2 9 2
NATIONAL GOLF MARKET ANALYSIS OVERVIEW For the last several years, the golf industry has continued to suffer from golf course oversupply. The majority of markets throughout the United States are oversupplied and demand has been relatively flat for over five years. Golf player retention and player participation rates continue to be the challenges for the business of golf. Over the last century, the golf market has experienced three boom periods; the 1920s, the 1970s and the 1990s. In the 1990s the majority of golf course development was connected to residential developments. Two sectors that experienced very significant increases in supply were the premium daily fee and the premium private courses. The source of our national golf course market data is the National Golf Foundation (“NGF”). The NGF publishes annual reports on the supply and demand conditions for selected markets throughout the United States, with the most recent being the Golf Facilities in the U.S., 2007 Edition (incorporating data available through 2006). Despite the oversupply of golf courses many developers continue to add courses as an amenity to master-planned communities, regardless of the supply/demand characteristics of the market. In fact, 67% of all new facilities opened in 2006 were associated with real estate development, with either a hotel or master-planned community. However, new golf course construction slowed considerably in the 21st century. The National Golf Foundation (NGF) reported that in 2006, 119.5 18-hole equivalent golf courses opened, which reflects a decrease from 125 new courses opened in 2005, 146 new courses in 2004 and 171 new courses in 2003. Clearly, course openings are showing a declining trend. NGF data indicates that 283 golf courses are currently under construction, which will open in 2007-2008. The NGF estimates that 110-120 new courses will open in 2007 and between 100 and 125 courses will open annually for the next few years. Course closures are becoming an increasingly important part of the equation in terms of supply. In 2006, 146 18-hole equivalent courses closed throughout the U.S., causing a net decrease in course supply for the first time since World War II. While the trend in openings is declining, the trend in closures is increasing, up from 93.5 in 2005 and 62.5 in 2004. The primary reason for the closings is land redevelopment to residential or commercial uses, i.e. a change in highest and best use. The majority (97%) of closures were public facilities, with the majority of those facilities being executive/short courses and 9-hole facilities. With a net decrease in golf facilities, and with most being in the range of quality for beginning and intermediate golfers, some concern has been expressed about player development, and the access to lower quality public facilities that enable beginners to play. The NGF also divides the national market into nine-submarkets. The subject property is located in the State of California, which is in the Pacific market. The Pacific market includes the states of Alaska, Washington, Oregon, California, and Hawaii. This market comprises 9.3% of the total national supply of golf facilities in the United States. At the year end 2006, there were 921 golf courses (facilities) in the
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State of California, which is the second regarding the number of facilities just behind the state is Florida which has 1,075 golf courses. In the 1990-2000 decade, most of the golf club sales and investment activity was attributed to sales to owner operators or club membership upon sellout of the residential component of the overall project. Also, there were numerous sales of clubs under financial distress related to failed residential communities. There still remains a significant presence of private golf clubs located primarily in gated residential communities that will be targets for sale, either to outside operators or conversion to member ownership. Golf investment continues to be attractive to traditional golf investor/operators, but also to Wall Street due to their access to capital and their need to get higher returns than traditional real estate. Certain buyers have emerged such as KSL, formerly KSL Fairways, which purchased the ClubCorp portfolio for $1.8 billion. CNL Properties has also been a buying mode, acquiring over 20 golf courses in the last two years. The industry is speculating whether KSL/ClubCorp will be a buyer, wishing to expand its portfolio, or a seller, divesting of certain assets that do not fit their corporate model. Certainly, CNL will continue to be a buyer in the market, focusing on existing profitable facilities in markets that fit their business model. Further, it is widely known that the American Golf portfolio is likely going to be on the market in 2007. While some consolidation is occurring, the industry remains very fragmented, with over 80% of all facilities owned by small one or two property operators. Golf club financing is typically available from golf oriented lenders with strict guidelines including Textron Financial Corp., Pacific Life Insurance, CitiCapital, Bank One, Capmark, GE Capital, Wells Fargo and to a some extent, regional and local commercial banks. Bank of America was a major lender in the 1990s but closed its golf financing unit in the fall of 2000. There are a sufficient number of golf course lenders with ample funds to place in the market. In fact, traditional lenders and non-traditional lenders have been attracted to golf properties due to the relatively low returns in more traditional real estate investments. However, a significant number of facilities are not performing well, making it difficult for those properties to obtain mortgage financing. Only properties with well established levels of cash flow are attractive to the lender mentioned. Given the current economics for golf, financing for new projects will likely be even more difficult in the near term. Lenders in today’s market are seeking debt coverage ratios of 1.2 or higher on the trailing twelve months of net income, with loan to value ratios up to 75%. Properties without a consistent positive cash flow can expect L/V ratios of no more than 50% from most lenders. Several factors will influence the operating performance and desirability of golf facilities as investment real estate:
1. Demographics are growing for golfing population with 78 million "baby boomers" moving into prime golfing age;
2. Number of core golfers is declining while the number of occasional golfers is growing (women and youth);
3. Golf course owners and managers are becoming more sophisticated and courses are becoming more profit oriented;
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4. Economics and realistic operation projections (actual trailing twelve months of positive cash flow) have reentered the scene as requirements for investment.
GOLF COURSE (FACILITY) INVENTORY - 2006 The "U.S. Golf Facilities by State" on the table below, identifies the types of courses and total number of courses in each area, as of Fourth quarter 2006, as published by the National Golf Foundation.
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The table below presents the number of facilities and courses by type every 2-years from 1996-2000 and for each year from 2000-2006, the most recent available data. It is important to note that the NGF has changed its methodology and the categorization methods in 2001. In the year 2000, the NGF tracked the par-three and executive courses and included these courses in the total supply number. Most importantly in the year 2000, the NGF changed from tracking each individual golf course to tracking facilities. A facility is defined as a complex containing at least one golf course. It is important to note that the actual supply of golf courses did not decrease, the methodology changed. In addition, in 2001, the category was only public and private, not daily fee, municipal, and private. It is important to note that from 2004 to 2005 the net number of golf courses decreased by 5 facilities, and as stated the total number of facilities decreased by 62 from 2005 to 2006.
Type 1996 1998 2000 2001* 2002* 2003* 2004* 2005* 2006*Daily Fee 8,416 9,012 9,637 N/A 9,113 9,156 9,284 9,262 9,169Municipal 2,541 2,645 2,698 N/A 2,388 2,390 2,406 2,418 2,439
Private 4,746 4,708 4,773 N/A 4,326 4,353 4,367 4,372 4,382Total 15,703 16,365 17,108 15,772 15,827 15,899 16,057 16,052 15,990
*Methodology change / 2001 changes to the number of facilities not individual courses.Source: National Golf Foundation
TYPES OF GOLF COURSES 1996-2006Heritage Fields Master Plan, Irvine, California
The trend in the number of facilities is important to consider as the characteristics of supply have changed slightly. Daily fee has clearly increased as a percentage of total facilities over the eleven year study period, from 53.6% of total facilities in 1996 to 57.3% in 2006. Overall, 2004 was the peak at 16,057 facilities, with the next two years showing decreases. The daily fee class experienced the decline over the two years, whereas municipal and private facilities have actually increased. This phenomenon is consistent with the primary cause of course closures, which is real estate redevelopment. Daily fee courses are more apt to be profit oriented and cognizant of the highest and best use of the real estate, whereas private clubs owned by the membership and not as motivated by the changing real estate economics. However, 56.9% of all new courses opened in 2006 were daily fee. Industry leaders expect openings and closings to be in balance for the next few years, with no appreciable change in the number of golf facilities. During the 1990s, approximately 35 to 40 percent of all golf course development in the U.S. was a part of a residential development, and since 2000, that figure has increased to 50 to 60 percent. Additionally, of the 119.5 18-hole golf courses that opened last year, approximately sixty-nine percent were built with accompanying residential communities. The National Golf Association (NGF) also tracks the development pipeline of courses that are in planning or under construction. The chart below shows the development summary, breaking down the new, under construction and proposed golf courses as of fourth quarter 2006.
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TotalCoursesUnder
New Expansion Total New Expansion Total New Expansion Total New Expansion Total DeveopmentDaily Fee 55.5 12.5 68.0 139.5 45.5 185.0 188.0 41.5 229.5 157.5 23.0 180.5 663.0Municipal 7.5 1.5 9.0 15.5 3.0 18.5 21.0 4.5 25.5 30.5 6.0 36.5 89.5
Private 30.0 12.5 42.5 66.5 13.0 79.5 39.0 11.0 50.0 36.0 7.5 43.5 215.5Total 93.0 26.5 119.5 221.5 61.5 283.0 248.0 57.0 305.0 224.0 36.5 260.5 968.0
2006 GOLF DEVELOPMENT SUMMARY - 18 HOLE EQUIVALENTSHeritage Fields Master Plan, Irvine, California
PROPOSEDIN PLANNINGUNDER CONSTRUCTIONOPENSTATUS
The NGF has since updated their information as of 1st quarter 2007. They estimate that there are 308 courses currently under construction; 373 that are in the planning stages, and 251.5 that have been proposed (pre-planning stage). NGF estimates 120 to 140 of these 18-hole courses will open in 2006. GOLF PARTICIPATION According to data from the National Golf Foundation (NGF), the number of golfers has increased substantially since 1986 (6.3 million) while the participation levels have ranged tightly from about 10 to 12 percent. The following table illustrates the performance of the golf industry in the U.S. over the past 18 years, from 1986 to 2005.
NATIONAL GOLF TRENDS 1986-2005
Year No. of
Golfers*(thousands)
Participation Rate
Average Rounds Total Rounds
(millions) 1986 19,897 10.2% 20.2 401.9 1987 21,316 10.7% 19.6 431.0 1988 22,951 11.4% 21.1 484.4 1989 24,191 12.0% 19.4 469.0 1990 27,761 13.5% 18.1 501.6 1991 24,796 11.9% 19.3 478.6 1992 24,775 11.9% 20.4 505.4 1993 24,563 11.6% 20.3 498.6 1994 24,338 11.4% 19.1 464.8 1995 25,012 11.6% 19.6 490.2 1996 24,737 11.3% 19.3 477.4 1997 26,474 12.0% 20.7 547.2 1998 26,427 11.9% 20.0 528.5 1999 26,446 11.7% 21.3 564.1 2000 25,400 12.1% 23.1 587.4 2001 25,800 12.3% 21.4 552.0 2002 26,200 12.6% 19.2 502.4 2003 28,400 12.9% 16.8 477.0 2004 27,300 12.4% 17.6 480.3 2005 28,000 12.7% (est.) 17.3 (est.) 485.1 (est.)
Net Change 8,103 (40.73%) 2.7 (points) -2.6 (points) 78.4 (+19.5%) CAGR** 2.14% N/A N/A 0.99%
* Age 18 and above ** Compound Annual Growth Rate Source: National Golf Foundation – Trends in the Golf Industry 2005
The total number of golfers in the U.S. has been relatively consistent from 1997 through 2001, ranging from 26.2 million to 25.8 million in 2001. The number of golfers in 2003 rose to 28.4 million in 2003, then dropped again in 2004 to 27.3 million, and rose again to 28 million in 2005. The NGF estimates that the total number of golfers remains at about 28.0 million as of the 1st quarter 2007. The participation
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percentage and total rounds data was unavailable so the appraisers estimated the participation percentage by using the 2005 population and the total rounds by applying the CAGR to the 2005 total rounds. While total rounds are unavailable, the NGF tracks same-store rounds. Same-store rounds grew by 0.8% in 2006, after a 0.1% decline in 2005. Those gains made up for a 1.5% decline in 2003, but not for the 3.0% decline in 2002, the year most affected by 9/11. In 2006, the Gulf Coast and Southeastern U.S. had the largest gains by region, ranging from 3-5% growth. The West and Mountain regions had a negative 1% change in rounds. Most of the regional changes can be attributed to the areas of facility growth and weather issues. OUTLOOK Industry owners and operators are slightly more upbeat about the industry going into 2007. Based on surveys by NGF in late 2006, respondents are encouraged by the negative change in total courses, although local supply and demand characteristics may not reflect that change. The slight increase in rounds is also seen as a positive. Most operators realize that revenues will be flat to very mildly increasing, and that survival will depend upon controlling expenses and cash management. Issues such as weather, the stock market and the housing market are out of the operator’s control, but may have a significant impact on the profitability of each golf course. The golf industry continues to look to the future for the impending impact of the “baby boomer” generation. However, the oldest of the baby boomers are 60 and the real positive impact may be ten years away. Historically low course openings and stable rounds in the near term will allow operators to maintain their assets for the next few years. The industry is in agreement that the most important proactive strategy that golf operators can take is player development, by removing the game’s historical barriers to entry in order to attract the non-golfer to try the game, and by creating an environment that moves the occasional golfer to a core golfer. NATIONAL TRENDS CONCLUSION Overall, the national golf market continues to suffer from oversupply and relatively flat demand. Total rounds and total golfers in the U.S. remained relatively stable over the past two years. The western markets of California, Arizona, and Nevada have experienced improved conditions over the last two years. The period from 1990 to 2004 experienced continuous growth in the golf industry despite the recessionary economy the early 1990s. The decrease in new courses developed and the level of course closings are combining to bring slow improvement to the golf course market. Over the past few years, golf course development has shifted toward public daily fee use as opposed to private country club development, a trend which can be expected to continue due to the most recent federal tax laws, which reduces the deductibility of private country club memberships. All the figures presented are indicators of trends in the golf industry on a national basis. Consequently, local market conditions may differ from these national trends significantly. Some markets have experienced growth at even higher rates while others may have exhibited no growth or possibly some decline.
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In summary, golf continues its popularity in the United States and there is little indication that this popularity will experience a significant decline, although minor fluctuations will occur. The demographics of the U.S. population indicate that public access golf facilities will be in strong demand for at least the next 20 years, while the national and regional economies will determine the economic success of high end daily play and private membership clubs. An overview of local market conditions is a necessary aspect of the appraisal process. The market analysis forms a basis for assessing market area boundaries, supply and demand factors, and indications of financial feasibility. We have outlined the competitive facilities below. This competitive set included both public golf courses that were chosen for their locational and economic similarities. In the communities with private courses, there is typically one public course as well. COMPETITIVE FACILITIES To determine the golf facilities which were most competitive, with the subject, we selected comparable 18 and 36 hole, daily-fee courses within Orange County, more specifically, within approximately 20 miles of the subject. To verify and support this methodology, we interviewed club managers, head professionals, and general managers at each of these selected courses to determine what other courses they competed with. The facilities found to be most competitive with the subject are summarized on the charts below. The courses have a wide range of quality and pricing. Generally the older courses have the lower rates while the new courses are priced in the upper end of the range.
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V A L U A T I O N S E R V I C E S 2 9 9
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Irvi
ne, C
AM
esa
Lind
aLo
s Lag
osTh
e C
lass
icTh
e Pl
ayer
sO
rang
eRi
vers
ide
Type
Clu
bPu
blic
Publ
icPu
blic
Publ
icPu
blic
Publ
icPu
blic
Publ
icPu
blic
Publ
icPu
blic
Publ
ic
Num
ber o
f Hol
es18
1818
1818
1818
1818
1818
18Y
ear B
uilt
1968
1968
1999
1962
2001
1962
1962
1963
1928
2001
1999
1997
Yar
dage
(rea
r tee
s)5,
551/
6,54
265
426,
930
6,71
46,
856
6,24
16,
469
6,02
56,
061
6,95
16,
561
6700
Par
7072
7272
7271
7271
7172
7271
Slop
e10
711
713
612
612
512
212
311
611
013
713
513
6Ra
ting
66.1
70.7
73.3
71.2
72.3
69.1
71.1
68.6
67.7
73.6
72.7
72.7
Gre
ens F
ees -
With
Car
t--
Wee
kday
20.0
0$
27
.00
$
90
.00
$
33
.00
$
38
.00
$
44
.00
$
44.0
0$
35
.00
$
35
.00
$
10
5.00
$
58.0
0$
10
0.00
$
Fr
iday
25.0
0$
29
.00
$
11
5.00
$
38
.00
$
45
.00
$
44
.00
$
44.0
0$
N
/A35
.00
$
13
5.00
$
58.0
0$
15
0.00
$
W
eeke
nd30
.00
$
39.0
0$
115.
00$
46.0
0$
60.0
0$
52.0
0$
52
.00
$
47.0
0$
47.0
0$
135.
00$
84
.00
$
150.
00$
Twili
ght (
Afte
r 2:3
0 P.
M.)
Wee
kday
15.0
0$
17
.00
$
40
.00
$
24
.00
$
30
.00
$
29
.00
$
29.0
0$
22
.00
$
23
.00
$
75
.00
$
42.0
0$
75
.00
$
F
riday
17.0
0$
20
.00
$
55
.00
$
24
.00
$
30
.00
$
29
.00
$
29.0
0$
22
.00
$
23
.00
$
95
.00
$
42.0
0$
10
0.00
$
Wee
kend
19.0
0$
24
.00
$
55
.00
$
24
.00
$
30
.00
$
38
.00
$
38.0
0$
22
.00
$
23
.00
$
95
.00
$
52.0
0$
10
0.00
$
Su
per-
Twili
ght (
Afte
r 4:3
0 P.
N/A
14.0
0$
N/A
N/A
N/A
25.0
0$
25
.00
$
N/A
N/A
50.0
0$
42
.00
$
50.0
0$
Ann
ual R
ound
s90
,000
100,
000
90,0
0080
,000
80,0
0085
,000
90,0
0011
0,00
010
5,00
010
0,00
0W
ill N
ot D
iscl
ose
100,
000
His
toric
al T
rend
sSt
able
Stab
leSt
able
Incr
easi
ngIn
crea
sing
Stab
leSt
able
Incr
easi
ngSt
able
Incr
easi
ngW
ill N
ot D
iscl
ose
Incr
easi
ng
Com
men
tsTh
is g
olf c
ours
e pr
ovid
es a
pr
actic
e ra
nge,
di
ning
/ban
quet
faci
litie
s.
This
is a
n ol
der,
shor
ter c
ours
e w
hich
offe
rs a
rang
e, b
ar a
nd
dini
ng ro
om.
This
is a
n ol
der,
esta
blis
hed
cour
se w
ith a
driv
ing
rang
e.
The
club
hous
e in
clud
es a
di
ning
room
.
This
cou
rse
is w
ithin
a
plan
ned
com
mun
ity.
Resi
dent
s get
pre
ferr
ed te
e tim
es a
nd d
isco
unte
d ra
tes.
This
is a
cha
lleng
ing
cour
se
with
din
ing
and
banq
uet
faci
litie
s.
This
is a
goo
d go
lf co
urse
w
hich
incl
udes
a d
rivin
g ra
nge,
clu
bhou
se, l
ocke
r ro
oms,
dini
ng ro
om a
nd
banq
uet f
acili
ties.
CO
MPE
TIT
IVE
GO
LF C
OU
RSE
S
Cos
ta M
esa
Gol
f Clu
bM
ile S
quar
e G
olf C
ours
eG
reen
Riv
er G
olf C
ours
e
1701
Gol
f Cou
rse
Dri
ve10
401
War
ner
Ave
nue
5215
Gre
en R
iver
Roa
dC
osta
Mes
a, C
AFo
unta
in V
alle
y, C
AC
oron
a, C
A
This
clu
b of
fers
a d
rivin
g ra
nge,
an
d cl
ubho
use.
Bot
h co
urse
s w
ere
rede
sign
ed in
the
1980
s
The
Cla
ssic
cou
rse
was
rem
odel
ed
in 2
001/
02.
A n
ew c
lubh
ouse
was
bu
ilt in
200
2.
This
cou
rse
incl
udes
a d
rivin
g ra
nge
and
prac
tice
gree
n. T
here
is
an a
vera
ge c
lubh
ouse
, pro
shop
bar
an
d sn
ack
bar.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 0 0
Nam
e:A
nahe
im H
ills G
olf C
lub
Oak
Cre
ek G
olf C
ours
eSh
orec
liffs
Gol
f Cou
rse
Bla
ck G
olf G
olf C
ours
eW
estr
idge
Gol
f Clu
bSa
n Ju
an H
ills C
.C.
Loca
tion
6501
E. H
ohl R
anch
Roa
d1
Gol
f Clu
b R
oad
501
Ave
nida
Vaq
uero
1768
1 L
akev
iew
Ave
nue
1400
S. L
aHab
ra H
ills
Dri
ve32
120
San
Juan
Cre
ek R
oad
City
Ana
heim
, CA
Irvi
ne, C
ASa
n C
lem
ete,
CA
Yor
ba L
inda
, CA
La
Hab
ra, C
ASa
n Ju
an C
apis
tran
o, C
A
Type
Clu
bPu
blic
Publ
icPu
blic
Publ
icPu
blic
Publ
ic
Num
ber o
f Hol
es18
1818
1818
18Y
ear B
uilt
1972
1996
1996
2001
1999
1966
Yar
dage
(rea
r tee
s)6,
245
6,85
06,
140
6,75
66,
561
6295
Par
7171
7172
7271
Slop
e11
713
213
013
313
512
8Ra
ting
69.6
72.2
70.4
73.1
72.7
70.1
Gre
ens F
ees -
With
Car
t--
Wee
kday
44.0
0$
110.
00$
35
.00
$
87
.00
$
115.
00$
50
.00
$
Frid
ay54
.00
$
11
0.00
$
35.0
0$
99.0
0$
13
5.00
$
55.0
0$
W
eeke
nd59
.00
$
15
0.00
$
52.0
0$
115.
00$
16
5.00
$
68.0
0$
Tw
iligh
t
W
eekd
ay28
.50
$
75
.00
$
38
.00
$
55
.00
$
70.0
0$
39
.00
$
F
riday
33.5
0$
75.0
0$
38.0
0$
65.0
0$
85
.00
$
42.0
0$
Wee
kend
36.5
0$
90.0
0$
38.0
0$
75.0
0$
85
.00
$
47.0
0$
Su
per-
Twili
ght
N/A
45.0
0$
N/A
49.0
0$
N
/A30
.00
$
Ann
ual R
ound
s95
,000
90,0
0010
0,00
085
,000
100,
000
90,0
00
His
toric
al T
rend
sIn
crea
sing
Stab
leSt
able
Incr
easi
ngSt
able
Incr
easi
ng
Com
men
tsTh
is g
olf c
ours
e pr
ovid
es a
pr
actic
e ra
nge,
di
ning
/ban
quet
faci
litie
s.
This
cou
rse
incl
udes
a ra
nge
and
prac
tice
gree
ns.
Ther
e is
a
club
hous
e, d
inin
g ro
om,
banq
uet f
acili
ties.
This
is a
n av
erag
e co
urse
with
a
club
hous
e, p
ro sh
op, a
nd
snac
k ba
r.
This
is a
new
er c
ours
e w
ith a
cl
ubho
use,
ban
quet
faci
litie
s, di
ning
room
and
snac
k ba
r.
This
is a
cha
lleng
ing
cour
se
with
din
ing
and
banq
uet
faci
litie
s.
This
cou
rse
was
rede
sign
ed in
19
81.
The
club
hous
e in
clud
es
a pr
o sh
op, b
ar a
nd c
afé.
CO
MPE
TIT
IVE
GO
LF C
OU
RSE
SR
anch
o Sa
n Jo
aqui
nC
oyot
e H
ills G
olf C
ours
eSa
n C
lem
ente
Mun
icip
al
1 Sa
ndbu
rg W
ay14
40 E
. Bas
tanc
hury
Roa
d15
0 E
ast A
veni
da M
agda
lena
Irvi
ne, C
AFu
llert
on, C
ASa
n C
lem
ente
, CA
Publ
icPu
blic
Publ
ic
1818
1819
6419
9619
28
6,43
16,
510
6,44
772
7072
128
128
124
70.8
71.1
70.6
47.0
0$
10
0.00
$
42.0
0$
52.0
0$
11
0.00
$
42.0
0$
67.0
0$
12
5.00
$
50.0
0$
38.0
0$
65
.00
$
30
.00
$
48
.00
$
70.0
0$
30.0
0$
50.0
0$
75
.00
$
30
.00
$
28
.00
$
N/A
N/A
90,0
0010
0,00
011
0,00
0
Incr
easi
ngSt
able
Stab
le
This
cou
rse
incl
udes
a d
rivin
g ra
nge,
pra
ctic
e an
d ch
ippi
ng
gree
ns.
The
club
hous
e in
clud
es
dini
ng a
nd b
anqu
et a
reas
and
a
snac
k ba
r.
This
cou
rse
offe
rs a
driv
ing
rang
e,
prac
tice
gree
ns a
nd p
ro sh
op.
The
club
hous
e in
clud
es b
anqu
et
faci
litie
s, di
ning
room
, loc
kers
, an
d ba
r.
This
is a
n ol
der c
ours
e w
ith a
an
aver
age
club
hous
e an
d dr
ivin
g ra
nge.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 0 1
GREEN FEES Green fees for the competitive clubs range between $20.00 and $115.00 during the week, between $25.00 and $150.00 on Fridays. During the weekend, the competitive clubs range between $30.00 and $165.00. It should be noted that all the above quoted green fees include carts. The table below tabulates each range.
Green Fees - With Cart-- Low High AverageWeekday $20.00 $115.00 $59.95
Friday $25.00 $150.00 $70.50Weekend $30.00 $165.00 $81.33TwilightWeekday $15.00 $75.00 $40.93
Friday $17.00 $100.00 $46.31Weekend $19.00 $100.00 $49.83
Super-Twilight $14.00 $50.00 $35.80
Annual Rounds 80,000 110,000 94,500
AVERAGE COMPETITIVE GREEN FEESHeritage Fields Master Plan, Irvine, California
ANNUAL ROUNDS PLAYED The subject is a proposed, 27-hole, daily-fee, public golf course located at the proposed Heritage Hills master-plan in Irvine, California. We have estimated that the course will be similar to the surrounding, competitive, daily-fee courses. As presented, the annual rounds played by the competitive courses range between 80,000 and 110,000 per 18 holes. Generally, there is a connection between the overall quality of a golf course, its supporting facilities and price, and the number of rounds played. The Orange County area benefits from a year-round, mild to moderate climate, dense population, average to high household income levels, and good overall competition. Thus, the round count for courses in the market area is some of the highest in the country. CONCLUSIONS The subject is a proposed 27-hole, daily-fee, public golf course with supporting golf course facilities. It is projected to be a good quality course which is representative of the local competition with respect to length, rating, par and handicap. Additionally, we have estimated by the green fees which are in line with the market. Overall, the subject facility, as it proposed condition, will be physically similar with respect to the other daily-fee golf courses within the market. DESCRIPTION OF THE PROPOSED GOLF COURSE IMPROVEMENTS Proposed is a 306.30-acre, 27-hole, public championship golf course expected to compete with similar public, daily-fee courses within the 20 mile radius of Orange County, California. It is assumed that the fairways will have ample width, with tees and greens being build up in elevation. Also, each hole will generally will include separate tee boxes for men and women that play from three to four different distances. The yardage range for the subject should be approximately 3,200 to over 3,500 yards per nine-hole loop, varying in handicap and par. According to the development plans there will be a large driving range constructed adjacent to the golf course. The golf course irrigation system will consist of an
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 0 2
automatic, fully computer-monitored system. The course will feature cart paths around the tees and paths near the tees and greens. The master developer has budgeted $21,000,000 for golf course improvements and an additional $4,000,000 for clubhouse and recreational amenities. Additional costs, not directly associated with golf course construction but attributable to Park District parks and lakes total $19,600,000. PROPOSED IMPROVEMENTS AND SUPPORT FACILITIES Clubhouse: Based on the presented development plan the clubhouse will be
a permanent building that will contain approximately 25,000 square feet.
Maintenance Buildings: Permanent maintenance buildings will be constructed in
association with the golf course which are assumed to be adequate to host the maintenance operations of a high quality 27-hole daily fee operation.
Year Built: Course anticipated opening in 2009. On-Site Parking: A parking lot located adjacent to the clubhouse is proposed. Landscaping: The grounds will be attractively landscaped with trees, bushes,
shrubs, sod and underground irrigation. Personal Property (FF&E) Personal property typically included in the operation of the
subject consists of furniture, various fixtures, golf course maintenance equipment, office equipment and related items. We anticipate that these items will be owned by the golf course operation and are included in the going concern value stated.
AMERICANS WITH DISABILITIES ACT The Americans with Disabilities Act (ADA) became effective January 26, 1992. We have not made, nor are we qualified to make a compliance survey of this property to determine whether or not it is in conformity with the requirements of the ADA. It is possible that a compliance survey could reveal that the property is not in compliance with one or more of the requirements of the Act. If so, this fact could have a negative effect upon the value of the property. Since we have not been provided with the results of a survey, we did not analyze the results of possible non-compliance. HAZARDOUS SUBSTANCES We are not aware of the existence or nature of any potentially hazardous materials (such as formaldehyde foam insulation, asbestos insulation, radon gas emitting materials, or other potentially hazardous materials) which may on the property. We assume that the property is clean of any hazardous materials. However, we are not qualified to detect such materials and urge the client to employ an expert in the field to determine if such hazardous materials exist.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 0 3
METHODOLOGY There are three generally accepted approaches available in developing an opinion of value: the Cost, Sales Comparison and Income Capitalization approaches. We have considered each in this appraisal to develop an opinion of the market value of the subject property. In appraisal practice, an approach to value is included or eliminated based on its applicability to the property type being valued and the quality of information available. The reliability of each approach is dependent upon the availability and comparability of the market data uncovered as well as the motivation and thinking of purchasers in the market for a property such as the subject. Each approach is discussed below, and applicability to the subject property is briefly addressed in the following summary. COST APPROACH The Cost Approach is based upon the proposition that an informed purchaser would pay no more for the subject than the cost to produce a substitute property with equivalent utility. This approach is particularly applicable when the property being appraised involves relatively new improvements which represent the highest and best use of the land; or when relatively unique or specialized improvements are located on the site, for which there exist few improved sales or leases of comparable properties. In the Cost Approach, the appraisers forms an opinion of the cost of all improvements, depreciating them to reflect any value loss from physical, functional and external causes. Land value, entrepreneurial profit and depreciated improvement costs are then added resulting in a value estimate for the subject property. SALES COMPARISON APPROACH The Sales Comparison Approach utilizes sales of comparable properties, adjusted for differences, to indicate a value for the subject property. Valuation is typically accomplished using a unit of comparison such as price per square foot of building area, effective gross income multiplier or net income multiplier. Adjustments are applied to the unit of comparison from an analysis of comparable sales, and the adjusted unit of comparison is then used to derive a value for the subject property. INCOME CAPITALIZATION APPROACH This approach first determines the income-producing capacity of a property by estimating revenue from all potential sources including dues, green fees, food and beverage and merchandise sales. Deductions then are made for operating expenses necessary to operate the golf club. The resulting net operating income is divided by an overall capitalization rate to derive an opinion of value for the subject property. The capitalization rate represents the relationship between net operating income and value. This method is referred to as Direct Capitalization. Related to the Direct Capitalization Method is the Discounted Cash Flow Method. In this method, periodic cash flows (which consist of net operating income less capital costs) and a reversionary value are developed and discounted to a present value using an internal rate of return that is determined by analyzing current investor yield requirements for similar investments. This appraisal employs the Income Capitalization Approach. Based on our analysis and knowledge of the subject property type and relevant investor profiles, it is our opinion that this approach would be
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 0 4
considered applicable and/or necessary for market participants. The subject's use as an amenity makes it difficult to accurately form an opinion of external obsolescence and tends to make the Cost Approach unreliable. Investors do not typically rely on the Cost Approach when purchasing a property such as the subject of this report. Therefore, we have not utilized the Cost Approach to develop an opinion of market value. The valuation process is concluded by analyzing each approach to value used in the appraisal. When more than one approach is used, each approach is judged based on its applicability, reliability, and the quantity and quality of its data. A final value opinion is chosen that either corresponds to one of the approaches to value, or is a correlation of all the approaches used in the appraisal. SALES COMPARISON APPROACH In the Sales Comparison Approach, we developed an opinion of value by comparing the subject property with similar, recently sold properties in the surrounding or competing area. Inherent in this approach is the principle of substitution, which states that when a property is replaceable in the market, its value tends to be set at the cost of acquiring an equally desirable substitute property, assuming that no costly delay is encountered in making the substitution. By analyzing sales that qualify as arm’s-length transactions between willing and knowledgeable buyers and sellers, we can identify value and price trends. The basic steps of this approach are:
1. Research recent, relevant property sales and current offerings throughout the competitive area;
2. Select and analyze properties that are similar to the property appraised, analyzing changes in economic conditions that may have occurred between the sale date and the date of value, and other physical, functional, or locational factors;
3. Identify sales that include favorable financing and calculate the cash equivalent price;
4. Reduce the sale prices to a common unit of comparison such as price per hole and net income;
5. Make appropriate comparative adjustments to the prices of the comparable properties to relate them to the property being appraised; and
6. Interpret the adjusted sales data and draw a logical value conclusion.
In this instance, the sale prices of the comparables were reduced to those common units of comparison used by purchasers, sellers, brokers and appraisers to analyze improved properties that are similar to the subject. Of the available units of comparison we have utilized the sales price per hole, which is typically used by buyers, sellers, and brokers. As discussed, golf courses are a specialty property and sales are limited due to a number of factors. There are private, member-owner courses which very rarely ever transfer, and the private, corporate, for-profit courses represent a smaller portion of the golf course pool and also turn over on a fairly limited basis. There are municipal courses owned by cities, counties, or states which also generally never sell. Finally, the daily fee courses are the more common course which sells; however, these can be due to financial duress or the owner is looking to get out of the business.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 0 5
We have provided 38 national sales which include both public and private golf courses, throughout the region. We have not relied on these sales in order to conclude a price per hole, only to present them with the purpose to provide a supporting range of value, capitalization rates and NOI estimates. This can be clearly seen by the wide range in the price per hole value as well as the revenue and NOI/hole ranges. IMPROVED SALES ANALYSIS In the analysis of golf course sales, several comparative factors can be extracted. These include relationships to income that are utilized in the income approach, and relationships to physical characteristics that can be analyzed and adjusted for dissimilar qualities. The Sales Comparison Approach to value is based upon the principle of substitution. In theory, the purchaser of a property will pay no more than the cost of acquiring an equally desirable substitute property without undue delay. To estimate the degree of comparability between two golf courses, many judgment decisions are required. A search was made throughout the state of California and western U.S. market to obtain golf course sales that were comparable to the subject property. Geographically comparable sales were not found; therefore, we have utilized the most recent sales that would be considered comparable in terms of income relationships. In choosing comparable golf course or country club sales, it should be noted that unlike other real estate investments, intangible qualities contribute to the financial capabilities of a golf course. Because golf demand is an emotional and discretionary activity, demand for play at certain facilities may be based on the course architect, such as a Jack Nicklaus, Pete Dye, Donald Ross or Robert Trent Jones. This can be true on a regional level, such hosting a U.S. Open qualifier or PGA sectional event. The subject is somewhat affected by emotional characteristics such as these. It may be due to the course's items that cannot be adjusted for in a purely physical sense. They can only be measured through market acceptance in the form of revenue and net operating income. The subject will not have a name designer, but will have some characteristics that are memorable, scenic and enjoyable. However, for the most part, it is very similar to its direct competitors, and its characteristics can only be measured through an analysis of revenue and net operating income. Therefore, the sales comparison analysis for golf courses is heavily weighted to income and revenue comparisons. From the comparable sales, several potential relationships have been presented. Methods of comparison include the relationship of revenue sources to total revenue utilized in the Income Approach (Capitalization Rate); between sale price and revenue (Gross Income Multiplier or GIM); and price per hole and price per acre. The final two, while physical comparisons, are only meaningful when compared with income per hole or acre. Given the variances in physical characteristics and the difficulty in making adjustments, emphasis is placed on the income related characteristics of the property. PRICE PER HOLE The sales available represent transactions in the U.S. market that are considered to be similarly effected by economic conditions of the market. The sales range in date of sale from July 1998 to September 2006, and are considered to represent current market conditions for properties of this type. Green fees and
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 0 6
revenues in general have declined or remained flat in the submarket and throughout the U.S. over the past three to five years. Some courses have increased rates nominal amounts in the last year, but at levels less than their increase in expenses. Interest rates have declined, but risk has increased. Overall, the relationship of income to price is considered to have remained declined, meaning that overall capitalization rates for golf courses has declined as investors seek properties. Therefore, movement in market price is reflected in the net operating income estimate of the subject. Sales prices range from $46,111 to over $2,000,000 per hole, while the sales show a range of $5,429 to over $200,000 per hole in net operating income. Certainly the subject is not comparable to the upper end of the range; however, the revenue and income relationships are the key indicator. The subject is projected to have an NOI in Year 1 of $118,937 per hole. It is our opinion that the subject would have a price in the upper portion of the range of these sales, or about $900,000 to $1,000,000 per hole at stabilization. The value range at stabilization on a price per hole basis would be $24,300,000 to $27,000,000, say $26,000,000. Income loss prior to stabilization must then be deducted, calculated as follow:
Stabile Cash Flow $2,975,449 $2,975,449 $2,975,449Yearly Cash Flor $335,800 $1,273,306 $2,276,389
Variance $2,639,649 $1,702,143 $699,060
Total $5,040,851
INCOME LOSS PRIOR TO STABILIZATIONHeritage Fields Master Plan, Irvine, California
Thus, the value at completion, via the NOI versus price per hole method is $21,000,000 ($26,000,000 less $5,000,000). GROSS INCOME MULTIPLIER ANALYSIS: The GIM of the sales range from 0.67 to 4.52 with expense ratios ranging from 60.26% to 91.87%. The subject is expected to stabilize in Year 4 with an expense ratio of 62.2%. With an expense ratio in the lower portion of the comparable sales range, the subject GIM should be near the upper end of the range. It is our opinion that the appropriate GIM range for the subject, using a Gross Revenue of $7,861,302 is in a range of 3.00 to 3.25, shown as follows:
Gross Income Multiplier Value$7,861,302 x 3.00 = $23,583,905 Low$7,861,302 x 3.50 = $27,514,555 High
GROSS INCOME MULTIPLIER ANALYSISHeritage Fields Master Plan, Irvine, California
Based on this analysis, the stabilized market value for the subject via the GIM method is also $26,000,000. Again, deducting the income loss over the first three years of $5,000,000 rounded indicates a value at completion of $21,000,000 via the GIM method.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 0 7
Each of the methods is considered equally reliable, given the comparability of the sales. Based on the comparable sales data, the subject is estimated to have a market value at completion via the Sales Comparison Approach of $21,000,000.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 0 8
SALE
SALE
NO
.C
LUB
HO
USE
REV
ENU
E/N
OI/
PRIC
E/EX
PEN
SEN
O.
CO
UR
SE N
AM
ELO
CA
TIO
ND
ATE
PRIC
EH
OLE
SSF
PAR
YA
RD
AG
EA
CR
ESH
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HO
LEH
OLE
OA
RR
ATI
O1
RO
AD
RU
NN
ER D
UN
ES G
CTW
ENTY
NIN
E PA
LMS,
CA
Jun-
07$8
75,0
009
5,00
036
3,10
0N
/AN
/AN
/A$9
7,22
2N
/AN
/A2
AR
RO
WO
OD
GO
LF C
OU
RSE
OC
EAN
SID
E, C
AJa
n-07
$12,
992,
509
184,
941
716,
721
89.0
0N
/A$6
2,07
5$7
21,8
068.
60%
N/A
3V
ALE
NC
IA C
OU
NTR
Y C
LUB
VA
LEN
CIA
, CA
Sep-
06$3
9,50
0,00
018
45,0
0072
7,07
617
0.80
$507
,391
$201
,649
$2,1
94,4
449.
19%
60.2
6%4
TALE
GA
GO
LF C
LUB
SAN
CLE
MEN
TE, C
ASe
p-06
$17,
500,
000
189,
400
726,
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00$3
17,4
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0,84
0$9
72,2
229.
34%
71.3
9%5
MEA
DO
W L
AK
E C
CES
CO
ND
IDO
, CA
Sep-
06$7
,500
,000
1814
,000
72N
/A13
6.31
$155
,556
$38,
889
$416
,667
9.33
%75
.00%
6SI
LVER
HO
RN
GO
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LUB
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AN
TON
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XA
ug-0
6$6
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1812
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726,
922
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18$1
53,1
44$3
5,18
0$3
73,0
569.
43%
77.0
3%7
AN
THEM
GO
LF C
LUB
AN
THEM
, AZ
Sep-
06$8
,350
,000
3612
,664
727,
219/
7,24
7N
/AN
/AN
/A$2
31,9
44N
/AN
/A8
WES
TON
HIL
LS C
OU
NTR
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TON
, FL
Aug
-06
$35,
000,
000
1865
,000
727,
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307.
00N
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/A$1
,944
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N/A
N/A
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AR
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TAIN
RA
NC
HSA
N D
IEG
O, C
AA
ug-0
6$7
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18N
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6,52
917
5.15
$172
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$43,
056
$422
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10.2
0%75
.00%
10TA
NA
CU
AN
GO
LF C
LUB
LAK
E M
AR
Y, F
LJu
n-06
$3,9
00,0
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14,3
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6,91
523
5.00
$155
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$22,
222
$216
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10.2
6%85
.71%
11D
OM
INIO
N C
OU
NTR
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LUB
SAN
AN
TON
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$12,
000,
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1854
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726,
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18$3
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3$6
66,6
678.
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83.7
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NO
RTH
SH
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ay-0
6$4
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31,6
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OR
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pr-0
6$5
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INV
ERA
RR
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OU
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27,6
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9$6
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119.
52%
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LIN
KS
AT
VIC
TOR
IAC
AR
SON
, CA
Feb-
06$8
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,000
188,
540
726,
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170.
57$1
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74$6
1,55
1$4
55,5
5613
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STO
NEY
BR
OO
K E
AST
/WES
TO
RLA
ND
O, F
LFe
b-06
$7,5
00,0
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13,1
8672
7,00
037
4.00
$255
,556
$38,
333
$416
,667
9.20
%85
.00%
17C
OPP
ER C
REE
K G
OLF
CLU
BPL
EASA
NT
HIL
L, IA
Jan-
06$1
,923
,890
184,
716
726,
008
194.
00N
/AN
/A$1
06,8
83N
/AN
/A18
WED
GEW
OO
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CC
ON
RO
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XJu
l-05
$1,6
00,0
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714
9.90
$133
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$10,
858
$88,
889
12.2
2%91
.87%
19PT
AR
MIG
AN
CC
PTA
RM
IGA
N, C
OO
ct-0
4$6
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1817
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727,
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N/A
N/A
N/A
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N/A
N/A
20FO
UR
BR
IDG
ESLI
BER
TY, O
HJu
n-04
$4,1
66,0
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7.15
N/A
N/A
$231
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N/A
N/A
21M
ELR
OSE
CC
CH
ELTE
NH
AM
, PA
Mar
-05
$6,0
00,0
0018
N/A
705,
850
116.
00N
/AN
/A$3
33,3
33N
/AN
/A22
HA
RTE
FELD
NA
TIO
NA
LA
VO
ND
ALE
, PA
Dec
-04
$7,5
00,0
0018
N/A
726,
969
128.
00N
/AN
/A$4
16,6
67N
/AN
/A23
GR
EATE
BA
Y G
CSO
MER
S PO
INT,
NJ
Jun-
04$6
,752
,500
18N
/A70
6,70
516
9.00
N/A
N/A
$375
,139
N/A
N/A
24IM
NIS
CR
ON
E G
CA
VO
ND
ALE
, PA
Mar
-05
$7,0
00,0
0018
N/A
706,
630
279.
73N
/AN
/A$3
88,8
89N
/AN
/A25
LAG
O V
ISTA
GO
LF C
LUB
SLA
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VIS
TA, T
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ar-0
4$2
,400
,000
3622
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726,
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281.
10$6
6,75
1$5
,429
$66,
667
8.14
%91
.87%
26W
OO
DM
OO
R P
INES
MO
NU
MEN
T, C
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l-03
$3,7
50,0
0018
12,0
0072
6,73
4N
/AN
/AN
/A$2
08,3
33N
/AN
/A27
MEA
DO
WLA
KE
GO
LF C
LUB
MA
RB
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ALL
S, T
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pr-0
3$2
,700
,000
188,
500
726,
582
200.
00$7
2,22
2$1
6,66
7$1
50,0
0011
.11%
76.9
2%28
RIO
CO
LOR
AD
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CLU
BB
AY
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pr-0
3$8
30,0
0018
3,88
072
6,85
529
7.00
$43,
042
$7,1
00$4
6,11
115
.40%
83.5
0%29
PIN
E C
REE
K G
OLF
CLU
BC
OLO
RA
DO
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ING
S, C
ON
ov-0
2$3
,750
,000
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000
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194
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00$9
1,66
7$1
7,77
8$2
08,3
338.
53%
80.6
1%30
CA
MA
RIL
LO S
PRIN
GS
CA
MA
RIL
LO, C
ASe
p-02
$11,
000,
000
184,
000
726,
435
178.
00$1
71,0
01$4
7,88
0$6
11,1
117.
83%
72.0
0%31
NO
RTH
GA
TE F
OR
EST
HO
UST
ON
, TX
Mar
-02
$10,
850,
000
2730
,000
727,
319
132.
00$2
03,3
29$4
2,79
6$4
01,8
5210
.65%
78.9
5%32
CLU
B A
T M
ISSI
ON
DO
RA
DO
OD
ESSA
, TX
Jan-
02$2
,300
,000
1820
,000
727,
229
180.
00$1
52,7
78N
/A$1
27,7
78N
/AN
/A33
KIN
G'S
DEE
R G
OLF
CLU
BM
ON
UM
ENT,
CO
May
-02
$2,8
75,0
0018
N/A
716,
813
N/A
N/A
N/A
$159
,722
N/A
N/A
34H
EATH
ER R
IDG
E C
CA
UR
OR
A, C
OFe
b-02
$2,7
00,0
0018
N/A
705,
926
98.0
0N
/AN
/A$1
50,0
00N
/AN
/A35
QU
AIL
VA
LLEY
CC
MO
. CIT
Y, T
XFe
b-02
$9,1
25,0
0045
31,7
5272
6,81
541
5.60
$122
,541
$21,
809
$202
,778
10.7
6%82
.20%
36C
LEA
R L
AK
E G
OLF
CLU
BH
OU
STO
N, T
XFe
b-02
$2,0
43,5
0018
5,00
072
6,75
717
5.00
$74,
667
$11,
856
$113
,528
10.4
4%84
.12%
37C
OO
K'S
CR
EEK
GO
LF C
LUB
PIC
KA
WA
Y C
O.,
OH
May
-01
$4,4
50,0
0018
12,0
0072
7,07
1N
/AN
/A$3
0,22
2$2
47,2
2212
.22%
N/A
38PE
RSI
MM
ON
RID
GE
GC
LOU
ISV
ILLE
, KY
Apr
-01
$5,2
00,0
0018
15,0
3872
7,12
920
6.20
$102
,555
$30,
998
$288
,889
10.7
3%69
.77%
Min
imum
Apr
-01
$830
,000
3,88
0
36
3,10
089
.00
$43,
042
$5,4
29$4
6,11
17.
83%
60.2
6%M
axim
umJu
n-07
$39,
500,
000
65,0
00
72
7,31
941
5.60
$507
,391
$201
,649
$2,1
94,4
4415
.40%
91.8
7%A
vera
geSe
p-04
$7,7
22,8
5316
,588
716,
704
20
6.87
$166
,285
$41,
720
$409
,177
10.2
0%77
.02%
IMPR
OV
ED
GO
LF
CO
UR
SE S
AL
ES
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 0 9
INCOME APPROACH The Income Capitalization Approach reflects the subject’s income-producing capabilities. This approach is based on the assumption that value is created by the expectation of benefits to be derived in the future. Specifically estimated is the amount an investor would be willing to pay to receive an income stream plus reversion value from a property over period of time. The two common valuation techniques associated with the Income Capitalization Approach are direct capitalization and the discounted cash flow (DCF) analysis. Market value of income producing real estate is typically determined by the amount of net income the property can be expected to generate over a projected investment holding period, as well as the rates of return available to potential buyers on alternative investments. An analysis of the income generating characteristics of the property and how they impact the net income available for providing a return on, and a return of, the original investment is typically considered paramount to a potential buyer. Since the Income Approach technique is that appraisal procedure and analysis which converts anticipated benefits, in terms of dollar income to be derived from the ownership of a property, into a value estimate, this procedure has been utilized as the primary analysis for purposes of this report. As discussed, the subject is a proposed, 27-hole, daily-fee golf course with proposed permanent clubhouse; therefore, we have utilized the Discounted Cash flow analysis. Given the property type and the fact that the property represents non-stabilized operations, this technique would likely be employed by a potential purchaser of the subject. ESTIMATED INCOME AND EXPENSES The next step in this approach is to estimate revenues and expenses generated by the golf course. We have itemized the revenue and expenses to include the following.
Revenues ExpensesGreen Fees Cost of Goods Sold
Driving Ranch Golf OperationsFood & Beverage Revenue Golf Course Maintenance
Merchandise Sales Food & BeverageManagement
General & AdministrativeReal Estate Taxes
InsuranceBuilding Occupancy
REVENUE & EXPENSE CATEGORIESHeritage Fields Master Plan, Irvine, California
Each income and expense area has been discussed below and assumes prudent management for the subject in the future.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 1 0
PROJECTED GOLF ROUNDS Before making other revenues and expense projections, the primary unit of comparison and analysis for golf courses is the revenue/expense per round. At a daily fee facility the number of rounds played directly relates to the largest revenue source known as greens fees. Other revenue sources have strong connection to rounds played such as cart fees, pro shop sales and driving range fees. As noted, the subject is a proposed 27-hole, daily fee golf course located within a densely populated area, with a moderate, year-round climate. We presented 18, daily-fee, golf courses within the Orange County area which is within a 20-mile radius of the proposed golf course. They range between 80,000 and 110,000 annual rounds played. Discussions with head professionals of these courses have indicated that this range is easily attainable and if they slow down they can offer specials and increase their rounds played. We have estimated that for the Year 1 of the golf course’s opening, we have estimated 60,000 annual rounds played. From here it will be expected to increase to approximately 75,000 in Year 2, 90,000 in Year 3 and stabilize in Year 4 at approximately 100,000 annual rounds played. POTENTIAL REVENUE Income sources vary depending on the type of operation such as daily fee or public course, semi-private or private. The income associated with the proposed daily-fee golf course, generally derives its income from the greens fees, driving range, as well as food and beverage revenue, and merchandise sales. We have not been provided with any proposed budgets for the golf course; therefore, the appraisers have reconstructed an operating statement for the subject based on the competitive property income and expense performances. Green Fees As noted, we have not been presented with any potential green fees for the subject. As indicated by the presented by the competitive courses within the area indicate that typical green fees a broken down between weekdays, Friday’s, weekend, twilight, or super twilight rates and all include the cart rental. Assuming the subject as proposed is within these courses based on its yardage, par, rating and handicap, we have estimated average green fees to be approximately $56.00 per round for Year 1. This fee includes the rental of a golf cart. The per round indicator will increase yearly based on inflation. Driving Range This category is related to the income derived by the use of the driving range. Based on competitive property data, we have estimated this income category to be $3.00 per round or $180,000 in Year 1. The per round indicator will increase yearly based on inflation. Food and Beverage Revenue This category includes all food and beverage sales in the clubhouse, any snack shack, the beverage cart and vending. Based on the historical performances of competitive golf courses, we have estimated this revenue to be $10.00 per round or $600,000 in Year 1. The per round indicator will increase yearly based on inflation.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 1 1
Merchandise Sales This category includes the sales of all merchandise within the pro shop and ranges between golf balls, hats, shirts, clubs and bags, along with club repair and rental. Based on historical performances of competitive golf courses, we have estimated this income category to be approximately $4.00 per round or $240,000 in Year 1. We have estimated this category will increase yearly based on inflation. COST OF SALES Most clubs account for the cost of golf pro shop merchandise as a separate line item under a cost of good sold category. All items purchased for the golf shop are included in these costs. We have presented golf course expense comparables which indicates cost of goods sold for merchandise of between 65 and 79 percent. We have concluded a cost percentage of 72 percent of sales. Food and beverage sales are also included as a separate line item under a cost of goods sold category. All food and beverage costs are grouped as one general line item expense. In keeping with market standards, we have developed a formal cost of goods sold deduction for food and beverage sales. The expense comparables indicate a cost range of between 27 and 39 percent of the food and beverage sales. For the purposes of the subject, we have used a cost percentage of 40 percent of sales. EXPENSES We have relied on the historical expenses of confidential operating statements of other similar golf courses. We have separated the clubs expenses into four separate sections; Golf Operations, Course Maintenance, Food & Beverage, and Undistributed Expenses which includes Management, General & Administrative, Real Estate Taxes, Insurance, and Building Occupancy. Due to the subject being a proposed golf course with no historical information, along with no budget provided, we have relied on the previously presented expense comparables. A discussion of each expense category is described on the following pages.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 1 2
RE
VE
NU
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LY
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5
18 H
oles
- 20
0518
Hol
es -
2005
18 H
oles
- 20
0518
Hol
es -
2005
18 H
oles
- 20
0518
Hol
es -
2005
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 1 3
Category
C&W Year 1 Forecast Analysis
Golf Operations $600,000 Items included in this category are payroll, and payroll expenses which include the head professional, starters, and the marshalls. It also includes the repair and expenses for the maintenance of the course and includes golf course and pro shop supplies. Our estimate is based on the historical and budgeted expenses, plus expense levels at competing properties.
Course Maintenance $1,200,000 Items included in this category are payroll, and payroll expenses which include the superintendent, the assistant superintendent, the grounds crews as well as any contracted labor. It also includes all suppilies necessary for the general upkeep of the golf course. The presented expense comparables indicate a range of between 18 and 21 percent of total revenue. Due to the subject being a new course it will require a higher level of maintenence in it's first years. Therefore, we have estimated an expense of $1,200,000 or approximately 27 percent of the potential gross revenue.
Food and Beverage $300,000 This category includes all expenses for the operations of the food and beverageservice. It generally includes payroll, taxes and associates supplies. We haveestimated this cost to be approximately 50 percent of the Food and Beveragerevenue category. This amount is supported by the presented expensecomparables which indicate a range of between 35 and 65 percent.
General & AdministrativeC&W Year 1
Forecast AnalysisManagement Fee $250,000 This fee is approximately 5.5 percent of the total potential revenue figure.
General & Administrative $700,000 This category includes all dues, licensing, telephone, office supplies, bankcharges and computer support and software. This estimate is approximately 16percent of the total revenue. The expense comparables range between 7 and 17percent.
Real Estate Taxes $100,000 This category includes only the taxes associated with the golf course.
Insurance $200,000 This expense includes the liability insurance for the golf course. This estimate isapproximately 4.5 percent of the total gross revenue amount.
Building Occupancy $150,000 This category includes all utilities and maintenance of the clubhouse. It isestimated at approximately 3.4 percent of the total revenue. The expensecomparables range from 1 and 7 percent.
TOTAL EXPENSES AND NET OPERATING INCOME The Year 1 pro forma reflects total expenses, excluding reserves of $3,912,800 or approximately 89.3 percent of the potential revenue and results in a net operating income of $467,200. It should be noted that this conclusion of a high percentage of expenses and lower net operating income is not necessarily atypical for a golf course which is proposed or has been in existence for less than ten years. Often golf courses require a period of time to post positive income; it can be anywhere between 5 to 15 years, assuming they are managed professionally. This is generally due to the very high up-front capital expenditures as well as the time period in order for the course to become established. CAPITAL EXPENDITURES The subject operation includes items that require periodic replacement within the life of the property for which a reserve account should be maintained. This includes all furnishings, fixtures and equipment in the club and for course maintenance. The subject FF&E and other short lived items have been periodically replaced by ownership on a consistent basis over the last five years and the majority of FF&E appears in adequate condition.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 1 4
Historical surveys for capital reserves indicate a general range from 1% to 11% with an average of 3.4%. We have also relied upon historical periodic capital replacement at competitive properties. In addition, our estimate of capital reserves going forward is estimated to be in 3% of gross revenue. DISCOUNTED CASH FLOW ANALYSIS In order to recognize the value attributable to the projected renovation, we have used the discounted cash flow analysis (DCF). Using the DCF, we are able to model the projects increases in revenue and expenses related to the renovation of the property. The Discounted Cash Flow Analysis utilizes a discounting procedure to convert future benefits to present value based upon required rates of return on investor capital and upon specific characteristics of the subject property. This method of valuation has wide acceptance among buyers and sellers of investment quality income producing property. Based upon the assumptions utilized in the Cash Flow Analysis, a resulting net cash flow was developed which includes the sale of the property at the end of the holding period, in this case five years. The value of the property is obtained by discounting the net cash flows at a discount rate which is obtained through an analysis of and review of investor requirements as published by several reliable sources. Rates to be estimated include a discount rate (cash flows) and a terminal capitalization rate (resale). The steps utilized in the Income Approach are as follows:
• Determination of the projected investment holding period and appropriate growth rate for income and expenses;
• Estimation of annual operating income and expenses during the holding period;
• Valuation analysis, and selection of capitalization method and rates;
• Conversion of projected income benefits into value.
We believe that the marketplace would want to project the performance of the property over a 5-year holding period, followed by a hypothetical sale (reversion) at the end of this term. INVESTMENT HOLDING PERIOD The first step is to project an investment holding period. In our analysis, we projected income and expenses for the subject property for a period of five years, with the reversion based on the sixth year net income. This projection is based on an analysis of market conditions for the subject property and the fact that buyers of golf properties typically base purchase decisions and investment analysis on either a 5-or 7-year time frame.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 1 5
GROWTH RATES - INCOME AND EXPENSES In this analysis, we will present a discounted cash flow of the golf course using the scenario of the increase of green fees, rentals, food and beverage and tournament revenue. While we cannot be certain about future inflationary trends, we have utilized a growth rate assumption for the income categories at 3.0 percent. For expenses, we utilized a 3.0 percent growth rate for all expenses, except costs of goods sold, which was based on a fixed percentage of sales. These figures are supported by the PriceWaterhouseCoopers survey which indicates growth rates for income at 2.85% and the growth rates for expenses at 3.10%. The following table illustrates the assumptions used in the discounted cash flow analysis followed by the Discounted Cash Flow Analysis summary page for the subject value via the Income Capitalization Approach.
Holding Period: 5 YearsProjection Period: 6 Years
Start Date: December 1, 2006
GROWTH RATESAnnual Round Increase: 2,000
Expenses: 3.00%Real Estate Taxes: 3.00%
RATES OF RETURNInternal Rate of Return: 13.00%
Terminal Capitalization Rate: 11.00%Reversionary Sales Cost: 2.00%
DISCOUNTED CASH FLOW MODELING ASSUMPTIONSHeritage Fields Master Plan, Irvine, California
CAPITALIZATION RATE AND DISCOUNT RATE SUPPORT The selection of these rates has been supported by three main sources. First, we have displayed the 2005 PWC Korpacz survey for the National Golf Market, which is the most recent survey available. This survey has been discontinued. Despite being a bit dated, we have included it since it was always considered a very credible source and the timeframe is still meaningful. As can be seen below, the average cap rate was 10.77 percent and the average discount rate was 13.78 percent.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
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V A L U A T I O N S E R V I C E S 3 1 6
Category Spring 2005 Spring 2004Discount Rate (IRR)
Range: 9.00% to 18.00% 9.00% to 21.00%Average: 13.78% 14.00%
Overall Capitalization RateRange: 5.02% to 17.10% 4.90% to 21.20%
Average: 10.77% 10.98%Terminal Capitalization Rate
Range: 9.0% to 13.25% 8.90% to 13.25%Average: 11.00% 11.00%
Net Income MultiplierRange: 5.10 to 19.05 4.30 to 18.20
Average: 9.34 9.29Revenue Change Rate
Range: 0.50% to 5.00% 1.00% to 4.00%Average: 2.85% 2.80%
Expense Change RateRange: 1.50% to 5.00% 1.00% to 4.00%
Average: 3.10% 2.80%
KORPACZ INVESTOR SURVEY - NATIONAL GOLF MARKETHeritage Fields Master Plan, Irvine, California
* Source: PWC- Korpacz Spring, 2005 National Golf Market Investment Survey Another source of golf capitalization rates is from an internet based service named realtyrates.com. Their quarterly survey provides capitalization rates for various property types including the golf sector. As can be seen below in the first quarter of 2006 the average golf cap rate was 11.69 percent. In the second quarter of 2006 the cap rate rose to 12.02. The average 2006 golf rate was indicated to be 11.86 percent. In addition to supporting capitalization rates from investor surveys there is also a very reliable method whereby actual capitalization rates (overall rates or OARs) can be derived from transactions of golf courses. The comparable sales chart included in each of the individual golf course appraisals supplied us with overall capitalization rates when available. The chart indicated a range from a low of 7.83 percent to a high of 15.40 percent for 24 sales across the United States. The average cap rate was 10.20 percent. However, note that the most recent sales/current contracts indicate capitalization rates lower than the average in the range of 8.50% to 10.50%.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 1 7
In summarizing our capitalization rate study, the average golf capitalization rate from the three sources is as follows:
Source Cap Rate AveragePWC Korpacz 10.77%
RealtyRates.com 11.86%C&W Comparable Sales 10.20%
GOLF COURSE CAP RATESHeritage Fields Master Plan, Irvine, California
It should be emphasized that the survey results reference a wide range of golf course properties that surely differ from the subject property. We believe the general golf course quality and stable cash flow characteristics of the subject are most likely at or below the type of course assumed in the three surveys highlighted above.
Another correlation that is relevant to our capitalization rate discussion is the average rates for the hospitality or lodging industry. Since both golf and hospitality have a similar going-concern component it is reasonable to compare the hospitality asset class with golf. For instance, in the RealtyRates.com survey, lodging is running about 100 basis points below golf but still well above the non-going-concern asset classes like office and retail. Similarly, in the current PWC Korpacz lodging segment, National Full-Service Hotels are averaging 8.81 percent while the National Economy lodging segment is averaging 9.83 percent. We believe this also lends further support to the golf capitalization rates utilized by C&W.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 1 8
With respect to discount rates (IRRs), we have primarily relied on the PWC Korpacz surveys. Their 2005 golf survey indicated an average discount rate of 13.78 percent. Using the same going-concern correlation between golf and lodging for discount rates, their current lodging segment, and National Full-Service Hotel discount rates are averaging 11.35 percent while the National Economy lodging segment is averaging 12.50 percent. We have also considered the spread between the going-in capitalization rate and the IRR in the Korpacz Hospitality survey data, lending support for our capitalization/discount rate spread. We believe these indices lend further support to the discount rates utilized by C&W. Specifically, the subject property is an above average golf club with a good quality pro shop building and golf course that is in need of some capital expenditures. It has a history of a growing round activity and an annual cash flow that has been trending upward over the past three years. Given the strong physical and economic characteristics of the subject, we believe our terminal capitalization rate selection of 11.00 percent is reasonable and well supported by the market data included above.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 1 9
HERITAGE GOLF CLUBSCHEDULE OF PROSPECTIVE CASH FLOW
REVENUE ASSUMPTIONSDaily Fee Rounds 60,000 75,000 90,000 100,000 100,000 100,000Total Rounds 60,000 75,000 90,000 100,000 100,000 100,000
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6Fiscal Year Ending August 1 2009 2010 2011 2012 2013 2014REVENUERecreational Fees
Green Fees $3,360,000 $4,305,000 $5,295,150 $6,030,588 $6,181,352 $6,335,886Cart Fees 0 0 0 0 0 0Driving Range 180,000 230,625 283,669 323,067 331,144 339,422
Food and Beverage Revenue 600,000 768,750 945,563 1,076,891 1,103,813 1,131,408Merchandise Sales 240,000 307,500 378,225 430,756 441,525 452,563Other 0 0 0 0 0 0
TOTAL REVENUE $4,380,000 $5,611,875 $6,902,606 $7,861,302 $8,057,834 $8,259,280Revenue per Round 73.00$ 74.83$ 76.70$ 78.61$ 80.58$ 82.59$
OPERATING EXPENSESCost of Sales
Merchandise 172,800$ 221,400$ 272,322$ 310,145$ 317,898$ 325,846$ Food and Beverage 240,000 299,813 359,314 409,218 419,449 429,935
Golf Operations 600,000 615,000 630,375 646,134 662,288 678,845Course Maintenance 1,200,000 1,230,000 1,260,750 1,292,269 1,324,575 1,357,690Food and Beverage 300,000 369,000 425,503 484,601 496,716 509,134Undistributed Expenses
Management 250,000$ 256,250$ 262,656$ 269,223$ 275,953$ 282,852$ General & Admin 700,000 717,500 735,438 753,823 772,669 791,986Real Estate Taxes 100,000 102,500 105,063 107,689 110,381 113,141Insurance 200,000 205,000 210,125 215,378 220,763 226,282Building Occupancy 150,000 153,750 157,594 161,534 165,572 169,711
TOTAL EXPENSES 3,912,800$ 4,170,213$ 4,419,139$ 4,650,014$ 4,766,264$ 4,885,421$
NET OPERATING INCOME 467,200$ 1,441,663$ 2,483,467$ 3,211,288$ 3,291,570$ 3,373,859$
Capital Expenditures 131,400$ 168,356$ 207,078$ 235,839$ 241,735$ 247,778$
NOI after Reserves 335,800$ 1,273,306$ 2,276,389$ 2,975,449$ 3,049,835$ 3,126,081$
Expenses Ratio w/o Reserves 89.3% 74.3% 64.0% 59.2% 59.2% 59.2%Expenses Ratio w/ Reserves 92.3% 77.3% 67.0% 62.2% 62.2% 62.2%NOI per Hole $17,304 $53,395 $91,980 $118,937 $121,910 $124,958
Source: Cushman & Wakefield, Inc.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 2 0
HERITAGE GOLF CLUBDISCOUNTED CASH FLOW ANALYSIS-MARKET VALUE
DiscountNet Cash factor at Present
Year Flow 13.00% Value2009 $335,800 0.884956 $297,1682010 $1,273,306 0.783147 997,1862011 $2,276,389 0.693050 1,577,6522012 $2,975,449 0.613319 1,824,8982013 $3,049,835 0.542760 1,655,3282014 $3,126,081
Total Present Value of Cash Flows $6,352,232
VALUE OF REVERSIONTerminal NOI $3,126,081Terminal Capitalization Rate 11.00%Reversion Value $28,418,917 Less: Cost of Sale (568,378)Terminal Net Sale Proceeds $27,850,539Discount Factor 0.542760Present Value of Reversion $15,116,157Total Present Value of Cash Flow & Reversion $21,468,389
Rounded $21,470,000
Implied Per Hole $1,192,778Implied Stabilized Capitalization Rate 15.33%Implied Revenue Multiplier 2.7
Portion of DCF indication from Cash Flow 29.6%Portion of DCF indication from Reversion 70.4%
Source: Cushman & Wakefield, Inc.
RECONCILIATION WITHIN THE INCOME CAPITALIZATION APPROACH The opinion of market value via the Income Capitalization Approach is as follows:
Value Conclusion: $21,500,000 $796,296/Hole
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 2 1
MARKET VALUE “AS IS” Previously in this report the appraisers separately analyzed and valued, in current dollars, the individual planning areas and parcels intended for future land sale revenue events. The resulting “as if complete” market values for these planning areas did not take into account the additional costs of development, primarily on- and offsite land development costs, associated with the entire master development program. In this analysis, the entire property was considered as one holding. Thus, the valuation accounts for the various remaining (as of the “as is” date of value) major backbone infrastructure land development costs, common area costs, master development costs, timing for development, profit in land development, etc. for the entire development as opposed to a single planning area/parcel. Two methods of valuation to the entire property are typically considered, the sales comparison approach and the development approach. The appraisers first considered the sales comparison approach. There have been very few recent larger master-planned land sales in Orange County. One property in nearby Orange County, the former Tustin Marine Corp Air Station (Legacy Park master-plan) was negotiated for purchase by Centex Homes and Shea Homes in 2006. The total price for the 423-acre project, in a 4-phase take-down, was $236,000,000. The project is proposed for 2,105± housing units and 6.87 million square feet of commercial space. The purchase price would correlate to $558,000 per acre and/or $112,000 per proposed housing unit. Several other dated land sales were encountered in Los Angeles, Orange, Riverside and San Diego Counties that were acquired for potential master-planned development. As individual master-plans involve a unique array of planned/proposed development, it was not possible to analyze the data in an appropriate way that would render a meaningful value for the subject. Thus, a sales comparison approach to the larger property as a whole was not utilized. In this case, the development approach was deemed the appropriate method of valuation to market value “as is” as it is the most commonly applied methodology utilized by buyers and sellers of master-planned communities in their purchasing and selling decisions. DEVELOPMENT METHOD For this analysis, the appraisers utilized the yield model (discounted cash flow) of the development method. The appraisers integrated the individual market values “as if complete” of the specific neighborhoods/planning area groups into the discounted cash flow at their prospective dates of sale. A discount was then applied for the time lag between the prospective dates of sale and the date of value "as is." There are several reasons supporting the rationale for this analysis. First, it is common for developers to analyze master-plans on a neighborhood-by-neighborhood (planning area/parcel) basis. As developers typically analyze master-plans by their individual components, the appraisers concluded market values for each respective neighborhood (planning area/parcel). This valuation process allows a master developer to identify the estimated incremental value of each neighborhood (planning area/parcel) for possible sale to guest builders or for internal purposes if proceeding with their own build-out of the project. Assuming a master developer builds out all or portions of the master-plan, separate cash flows of the individual neighborhoods allow for considerations of equity partners, accounting, allocating costs, tracking profit and
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 2 2
internal rates of return, land and home construction loans, etc., for each respective planning area. This methodology also allows for any profit applicable to the master developer for master land development, if applicable. Lots can be delivered in a variety of conditions, from sheet graded to fully finished with all fees paid. For the purposes of this analysis, the appraisers valued all of the individual planning areas (excluding golf course) assuming a sheet graded superpad condition as currently intended by the master developer. The revenue event for the golf course represented an “at completion” but not yet stabilized condition. ABSORPTION / PROSPECTIVE DATES OF COMPLETION The date of market value "as is" was July 1, 2007. Utilizing the master development schedule the appraisers developed prospective dates of completion and sale for specific planning areas and parcels. The prospective dates represent the time period in which individual neighborhoods would be delivered and subsequently built out by merchant builders per the developer’s critical path timeline. The prospective dates of completion were formulated so as to limit intra-project competition and allow for absorption of inventory with maximum absorption without extensive overlapping and competition among similar product types. It was assumed that physical development of the project would proceed as projected, allowing for delivery of the neighborhoods as of the dates identified by the developer and/or appraisers for prospective dates of completion. The appraisers reviewed the master developer’s critical path in formulating the development timing for both revenues and costs. The developer re-confirmed that the timing in their latest plan remains fairly consistent with their expectations. The developer’s latest plan has land sale revenue events occurring through the 3rd quarter 2014 and costs through the 1st quarter 2015. As discussed in the market analysis, the appraisers considered the developer’s timing for the residential product reasonable and market supported given our estimates of absorption and capture. However, due to initial delays in development and delivery, the appraisers did move back residential land sale events scheduled for 2007 to the 1st quarter 2008. The schedule for remaining residential land sale events were similar to those presented in the latest plan, including various “rolling option” events for the higher-priced Park District planning areas. With regard to non-residential revenue events, the appraisers’ absorption and hence timing of land sale events was more conservative than those proposed in the latest plan. Given the large amount of R&D and Education space, many cash flow events were several quarters subsequent to those projected by the developer. Again, further elaboration on timing and absorption is found in the market analysis. Per the appraisers’ schedule, the final land sale event would occur in the 4th quarter 2015, or quarter 34 of the cash flow. Tables summarizing estimated land sale revenues and projected timing for planning area land sale revenue events follow.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 2 3
Planning Proposed Product Value Value Value Value Qtr Ending Product Density Gross Saleable Residential NumberArea Land Use Number At Completion Per Lot Per SF Per Acre Delivered Description or FAR Acres Acres Acres Units
L1 Agriculture 42 $8,478,000 $60,000 Sep-10 Agriculture 143.0 141.3L2 Agriculture 42 $1,861,500 $85,000 Sep-10 Agriculture 21.9 21.9L3 Marshburn Basin 41 Civic NAP NAPL4 R&D 36 $39,543,768 $30.00 Mar-09 R&D (LLD) 35.6 30.3L5 R&D 36 $46,874,916 $30.00 Dec-11 R&D (LLD) 42.2 35.9L6 Education 38 $15,420,240 $20.00 Dec-11 Institutional 17.7 17.7L7 Education 38 $7,731,900 $25.00 Dec-11 Institutional 7.1 7.1L8 Education 38 $24,742,080 $20.00 Dec-14 Institutional 28.4 28.4L9 Education 38 $30,492,000 $20.00 Dec-12 Institutional 35.0 35.0
L10 Residential 8 Mar-10 Faculty Housing 4.0 15.0 15.0 15.0 60L11a Residential 1 $29,920,000 $220,000 Sep-08 Mid-Rise Flats 25.0 5.5 5.5 5.5 136L11b Residential 1 $29,700,000 $220,000 Mar-10 Mid-Rise Flats 25.0 5.4 5.4 5.4 135L11c Residential 6 $37,965,416 $566,648 Jun-08 60x105 4.8 13.9 13.9 13.9 67L11d Residential 5 $24,524,864 $471,632 Jun-08 SFD 45x105 6.5 8.1 8.1 8.1 52L12 Education 38 $24,480,720 $20.00 Dec-13 Institutional 28.1 28.1L13 Education 38 $12,959,100 $25.00 Sep-11 Institutional 11.9 11.9L14a Residential 3 $32,000,000 $320,000 Jun-09 Luxury Triplex 6.0 16.7 16.7 16.7 100L14b Residential 2 $30,300,000 $300,000 Mar-11 Row TH 15.0 6.7 6.7 6.7 101L14c Park 44 Park 0.5 0.5L15 Residential 2 $30,300,000 $300,000 Mar-09 Row TH 15.0 6.7 6.7 6.7 101L16 Education 38 $13,242,240 $20.00 Sep-10 Institutional 15.2 15.2L17 Retail 34 $25,613,280 $30.00 Sep-09 Retail 19.6 19.6L18 SCE Expansion 41 Civic 0.5 0.5L19a Education 38 $2,504,700 $25.00 Jun-11 Institutional 2.3 2.3L19b R&D 36 $4,029,300 $37.00 Sep-09 R&D (LLD) 2.5 2.5L19c Education 38 $2,831,400 $25.00 Sep-09 Institutional 2.6 2.6L20 Retail 34 $14,026,230 $35.00 Dec-09 Retail 9.2 9.2L21 Retail 34 $6,403,320 $35.00 Jun-08 Retail 4.2 4.2
L22a-i Residential 5 $9,432,640 $471,632 Jun-08 SFD 45x105 6.5 3.1 3.1 3.1 20L22a-ii Residential 4 $24,494,204 $415,156 Mar-10 Courtyard 5.5 10.8 10.8 10.8 59L22a-iii Residential 2 $9,000,000 $300,000 Mar-11 Row TH 15.0 2.0 2.0 2.0 30L22a-iv Park 44 Park 3.7 3.7
L22b Education 38 $22,651,200 $20.00 Dec-15 Institutional 26.0 26.0L23 Park 44 Park 10.2 10.2L24 Residential 7 Jun-09 ETHIC 7.4 22.2 22.2 22.2 165L25 Education 38 $41,948,280 $15.00 Sep-09 Institutional 64.2 64.2L26 Cemetery 45 $20,054,795 $273,973 Sep-07 Cemetery 73.2 73.2L27 Exposition 46 $14,020,500 $65,000 Sep-12 Expo Ctr. 215.7 215.7
Total $637,546,593 936.5 923.1 116.0 1,026
P1a Residential 22 $32,851,359 $1,216,717 Jun-08 SFD 120x150 1.7 21.9 21.9 21.9 27P1b Residential 21 $78,133,068 $1,070,316 Jun-08 SFD 100x120 2.5 33.0 33.0 33.0 73P1c Residential 20 $79,999,006 $930,221 Jun-08 SFD 85x120 3.0 36.1 36.1 36.1 86P1d Residential 18 $49,530,188 $798,874 Jun-10 SFD 75x110 3.7 19.8 19.8 19.8 62P1e Residential 18 $49,530,188 $798,874 Dec-11 SFD 75x110 3.7 19.8 19.8 19.8 62P1f Residential 17 $53,612,037 $661,877 Jun-08 SFD 70x100 4.4 21.3 21.3 21.3 81P1g Fuel Mod 41 Civic 17.1 17.1P1h Neighborhood Greens 41 Civic 3.7 3.7P1i Major Roads 41 Civic 5.9 5.9P1j Orchards 41 Civic 32.7 32.7P1k Parks/Recreation 44 Park 8.5 8.5P1l Open Space - Natural 44 Park 8.2 8.2P2 Residential 17 $52,950,160 $661,877 Mar-10 SFD 70x100 4.4 21.3 21.3 21.3 80P3 Open Space 41 Civic 12.5 12.5P4a Residential 10 $42,312,760 $604,468 Jun-08 Courtyard 6.4 11.0 11.0 11.0 70P4b Residential 9 $28,900,000 $340,000 Jun-08 Luxury Att 5.5 15.5 15.5 15.5 85P4c Residential 10 $40,499,356 $604,468 Mar-10 Courtyard 6.4 10.4 10.4 10.4 67P4d Parks/Recreation 44 Park 21.4 21.4P5a Residential 9 $20,400,000 $340,000 Mar-10 Luxury Att 5.5 11.0 11.0 11.0 60P5b Parks/Recreation 44 Park NAP NAPP6a Residential 19 $71,712,004 $943,579 Jun-08 SFD 80x110 3.5 21.9 21.9 21.9 76P6b Parks/Recreation 44 Park NAP NAPP7a Residential 21 $37,461,060 $1,070,316 Dec-08 SFD 100x120 2.5 13.9 13.9 13.9 35P7b Residential 22 $47,451,963 $1,216,717 Mar-13 SFD 120x150 1.7 23.0 23.0 23.0 39P7c Parks/Recreation 44 Park 6.1 6.1P8 Parks/Recreation 44 Park 8.1 8.1P9 Parks/Recreation 44 Park 15.1 15.1
P10a Residential 16 $34,967,240 $794,710 Sep-12 SFD 70x110 4.0 11.0 11.0 11.0 44P10b Parks/Recreation 44 Park 9.6 9.6P11a Residential 22 $86,386,907 $1,216,717 Dec-08 SFD 120x150 1.7 42.0 42.0 42.0 71P11b Residential 21 $54,586,116 $1,070,316 Sep-12 SFD 100x120 2.5 20.0 20.0 20.0 51P11c Golf Facilities 43 see GC Sep-08 Golf Course 102.1 102.1P11d Parks/Recreation 44 Park 13.0 13.0P12a Residential 21 $33,179,796 $1,070,316 Jun-13 SFD 100x120 2.5 12.3 12.3 12.3 31P12b Parks/Recreation 44 Park 3.6 3.6P13 Golf Facilities 43 see GC Sep-08 Golf Course 204.2 204.2
Total $894,463,208 836.9 836.9 365.1 1,100
LAND SALE REVENUES SUMMARYHeritage Fields, Irvine, California
Long-Term Learning District
Park District
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 2 4
Planning Proposed Product Value Value Value Value Qtr Ending Product Density Gross Saleable Residential NumberArea Land Use Number At Completion Per Lot Per SF Per Acre Delivered Description or FAR Acres Acres Acres Units
T1a Residential 33 $34,663,119 $679,669 Mar-12 SFD 60x100 5.1 10.0 10.0 10.0 51T1b Residential 33 $31,264,774 $679,669 Mar-12 SFD 60x100 5.1 9.0 9.0 9.0 46T1c Retail 34 $9,100,000 $35.00 Mar-10 Retail 6.0 6.0T1d Residential 31 $31,096,758 $471,163 Mar-10 SFD 45x100 6.8 9.8 9.8 9.8 66T1e Park 44 Park 0.5 0.5T2a Residential 33 $65,248,224 $679,669 Mar-10 SFD 60x100 5.1 19.0 19.0 19.0 96T2b Park 44 Park 2.6 2.6T3a Residential 31 $16,019,542 $471,163 Mar-10 SFD 45x100 6.8 5.0 5.0 5.0 34T3b Residential 26 $19,550,000 $230,000 Mar-10 Garden Flats/TH 17.0 5.0 5.0 5.0 85T3c Park 44 Park 3.5 3.5T4 Agriculture 42 $1,062,500 $85,000 Sep-09 Agriculture 12.5 12.5T5 Civic/Public 41 Civic NAP NAPT6 Civic/Public 41 Civic NAP NAPT7 Office 35 $18,295,200 $40.00 Mar-10 Office 10.5 10.5T8 Residential 25 Jun-10 Apartments 27.9 4.2 4.2 4.2 117T9a Residential 27 $29,120,000 $260,000 Mar-08 Brownstone Villa 14.0 8.0 8.0 8.0 112T9b Park 44 Park 4.3 4.3T9c Open Space 41 Civic 2.0 2.0
T10a Residential 24 Jun-10 Affordable (Low) 20.9 18.8 18.8 18.8 392T10b Park 44 Park 0.4 0.4T11a Residential 32 $52,047,400 $520,474 Dec-10 SFD 50x100 6.1 16.4 16.4 16.4 100T11b Park 44 Park 3.2 3.2T12a Residential 28 $29,120,000 $260,000 Mar-08 Townhome (Camden) 18.0 6.2 6.2 6.2 112T12b Residential 29 $26,946,480 $336,831 Mar-08 Courtyard (8-pack) 12.0 6.7 6.7 6.7 80T12c Residential 51 $32,480,000 $290,000 Mar-08 Willowhaven 13.0 8.6 8.6 8.6 112T12d Residential 30 $37,515,168 $390,783 Mar-08 Zero Lot Line 12.0 8.0 8.0 8.0 96T12e Retail 34 $2,696,960 $40.00 Jun-08 Retail 1.5 1.5T12f Park 44 Park 3.4 3.4T15 Fly-Away COI 41 Civic NAP NAP
Total $436,226,125 185.1 185.1 134.7 1,499
T13-1 R&D 48 $3,013,916 $37.00 Dec-07 R&D (TODD no f/way) 1.9 1.9T13-2 R&D 48 $3,223,440 $37.00 Dec-07 R&D (TODD no f/way) 2.0 2.0T13-3 R&D 48 $3,223,440 $37.00 Dec-07 R&D (TODD no f/way) 2.0 2.0T14-1 R&D 47 $6,965,244 $39.00 Dec-12 R&D (TODD f/way) 4.3 4.1T14-2 R&D 47 $4,077,216 $39.00 Dec-12 R&D (TODD f/way) 2.5 2.4T14-3 R&D 47 $5,436,288 $39.00 Dec-12 R&D (TODD f/way) 3.3 3.2T14-4 R&D 47 $6,285,708 $39.00 Dec-12 R&D (TODD f/way) 3.9 3.7T14-5 R&D 48 $4,351,644 $37.00 Dec-12 R&D (TODD no f/way) 2.8 2.7T14-6 R&D 48 $4,190,472 $37.00 Dec-12 R&D (TODD no f/way) 2.7 2.6T14-7 R&D 48 $2,578,752 $37.00 Dec-12 R&D (TODD no f/way) 1.7 1.6T14-8 R&D 48 $3,062,268 $37.00 Dec-12 R&D (TODD no f/way) 2.0 1.9T14-9 R&D 48 $4,835,160 $37.00 Dec-12 R&D (TODD no f/way) 3.1 3.0T14-10 R&D 48 $5,157,504 $37.00 Sep-09 R&D (TODD no f/way) 3.3 3.2T14-11 R&D 48 $2,578,752 $37.00 Sep-09 R&D (TODD no f/way) 1.7 1.6T14-12 R&D 48 $2,417,580 $37.00 Sep-09 R&D (TODD no f/way) 1.6 1.5T14-13 R&D 48 $2,901,096 $37.00 Sep-09 R&D (TODD no f/way) 1.9 1.8T14-14 R&D 48 $2,095,236 $37.00 Sep-09 R&D (TODD no f/way) 1.4 1.3T14-15 R&D 48 $2,256,408 $37.00 Sep-09 R&D (TODD no f/way) 1.6 1.4T16-1 R&D 48 $1,789,009 $37.00 Mar-10 R&D (TODD no f/way) 1.2 1.1T16-2 R&D 48 $2,288,642 $37.00 Mar-10 R&D (TODD no f/way) 1.6 1.4T16-3 R&D 48 $2,272,525 $37.00 Mar-10 R&D (TODD no f/way) 1.5 1.4T16-4 R&D 48 $2,272,525 $37.00 Mar-10 R&D (TODD no f/way) 1.5 1.4T16-5 R&D 48 $3,175,088 $37.00 Mar-10 R&D (TODD no f/way) 2.2 2.0T16-6 R&D 48 $1,692,306 $37.00 Mar-10 R&D (TODD no f/way) 1.1 1.1T16-7 R&D 48 $2,578,752 $37.00 Mar-10 R&D (TODD no f/way) 1.7 1.6T16-8 R&D 48 $2,401,463 $37.00 Mar-10 R&D (TODD no f/way) 1.6 1.5T16-9 R&D 48 $2,369,228 $37.00 Jun-14 R&D (TODD no f/way) 1.6 1.5T16-10 R&D 48 $4,142,120 $37.00 Jun-14 R&D (TODD no f/way) 2.8 2.6T16-11 R&D 48 $3,110,620 $37.00 Jun-14 R&D (TODD no f/way) 2.1 1.9T16-12 R&D 48 $3,626,370 $37.00 Jun-14 R&D (TODD no f/way) 2.5 2.3T16-13 R&D 48 $4,593,402 $37.00 Jun-14 R&D (TODD no f/way) 3.1 2.9T16-14 R&D 48 $2,514,283 $37.00 Jun-14 R&D (TODD no f/way) 1.7 1.6T16-15 R&D 48 $1,772,892 $37.00 Jun-14 R&D (TODD no f/way) 1.2 1.1T16-16 R&D 48 $1,869,595 $37.00 Jun-14 R&D (TODD no f/way) 1.3 1.2T16-17 R&D 48 $2,578,752 $37.00 Dec-15 R&D (TODD no f/way) 1.7 1.6T16-18 R&D 48 $2,739,924 $37.00 Dec-15 R&D (TODD no f/way) 1.9 1.7T17-1 R&D 48 $1,019,304 $39.00 Dec-15 R&D (TODD no f/way) 0.6 0.6T17-2 R&D 48 $2,605,829 $37.00 Dec-15 R&D (TODD no f/way) 1.6 1.6T17-3 R&D 48 $2,411,778 $37.00 Dec-15 R&D (TODD no f/way) 1.5 1.5T17-4 R&D 48 $2,772,158 $37.00 Dec-15 R&D (TODD no f/way) 1.7 1.7T17-5 R&D 48 $1,774,181 $37.00 Dec-15 R&D (TODD no f/way) 1.1 1.1T17-6 R&D 48 $1,774,181 $37.00 Dec-15 R&D (TODD no f/way) 1.1 1.1T18-1 R&D 48 $8,058,600 $37.00 Dec-15 R&D (TODD no f/way) 5.3 5.0T18-2 R&D 48 $6,608,052 $37.00 Dec-15 R&D (TODD no f/way) 4.3 4.1T18-3 R&D 48 $2,417,580 $37.00 Dec-15 R&D (TODD no f/way) 1.6 1.5T18-4 R&D 48 $2,256,408 $37.00 Dec-15 R&D (TODD no f/way) 1.5 1.4T18-5 R&D 48 $2,256,408 $37.00 Dec-15 R&D (TODD no f/way) 1.5 1.4T18-6 R&D 48 $4,512,816 $37.00 Dec-15 R&D (TODD no f/way) 3.0 2.8T18-7 R&D 48 $2,256,408 $37.00 Dec-15 R&D (TODD no f/way) 1.5 1.4T18-8 R&D 48 $2,256,408 $37.00 Dec-15 R&D (TODD no f/way) 1.5 1.4T18-9 R&D 48 $2,417,580 $37.00 Dec-15 R&D (TODD no f/way) 1.6 1.5T18-10 R&D 48 $5,318,676 $37.00 Sep-13 R&D (TODD no f/way) 3.5 3.3T18-11 R&D 48 $2,578,752 $37.00 Sep-13 R&D (TODD no f/way) 1.7 1.6T18-12 R&D 48 $2,901,096 $37.00 Sep-13 R&D (TODD no f/way) 1.9 1.8T18-13 R&D 48 $3,062,268 $37.00 Sep-13 R&D (TODD no f/way) 2.0 1.9T18-14 R&D 48 $3,062,268 $37.00 Sep-13 R&D (TODD no f/way) 2.0 1.9T18-15 R&D 48 $4,835,160 $37.00 Sep-13 R&D (TODD no f/way) 3.2 3.0T19-1 Auto Center 37 $9,060,480 $40.00 Jun-08 Auto Ctr 5.4 5.2T19-2 Auto Center 37 $9,234,720 $40.00 Jun-08 Auto Ctr 5.5 5.3T19-3 Auto Center 37 $10,489,248 $43.00 Jun-08 Auto Ctr 5.9 5.6T19-4 Auto Center 37 $12,719,520 $40.00 Mar-09 Auto Ctr 7.6 7.3T19-5 Auto Center 37 $8,054,244 $43.00 Mar-09 Auto Ctr 4.5 4.3Total $233,151,746 148.5 140.9
GRAND TOTAL $2,201,387,672 2,107.0 2,086.0 615.8 3,625.0
Transportation Oriented District (Residential)
Transportation Oriented District (Non-Residential)
LAND SALE REVENUES SUMMARYHeritage Fields, Irvine, California
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Period Commencing July 2007 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-14 Jun-14 Sep-14 Dec-15Period (Quarterly) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 Totals
Planning Area No LotsL1 0 0L2 0 0L3 0 0L4 0 0L5 0 0L6 0 0L7 0 0L8 0 0L9 0 0L10 60 60 60L11a 136 136 136L11b 135 135 135L11c 67 67 67L11d 52 52 52L12 0 0L13 0 0L14a 100 100 100L14b 101 101 101L14c 0 0L15 101 101 101L16 0 0L17 0 0L18 0 0L19a 0 0L19b 0 0L19c 0 0L20 0 0L21 0 0
L22a-i 20 20 20L22a-ii 59 59 59L22a-iii 30 30 30L22a-iv 0 0
L22b 0 0L23 0 0L24 165 165 165L25 0 0L26 0 0L27 0 0
Totals 1,026 0 0 0 139 136 0 101 265 0 0 254 0 0 0 131 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,026
Planning Area RevenueL1 $8,478,000 $8,478,000 $8,478,000L2 $1,861,500 $1,861,500 $1,861,500L3 $0 $0L4 $39,543,768 $39,543,768 $39,543,768L5 $46,874,916 $46,874,916 $46,874,916L6 $15,420,240 $15,420,240 $15,420,240L7 $7,731,900 $7,731,900 $7,731,900L8 $24,742,080 $24,742,080 $24,742,080L9 $30,492,000 $30,492,000 $30,492,000L10 $0 $0L11a $29,920,000 $29,920,000 $29,920,000L11b $29,700,000 $29,700,000 $29,700,000L11c $37,965,416 $37,965,416 $37,965,416L11d $24,524,864 $24,524,864 $24,524,864L12 $24,480,720 $24,480,720 $24,480,720L13 $12,959,100 $12,959,100 $12,959,100L14a $32,000,000 $32,000,000 $32,000,000L14b $30,300,000 $30,300,000 $30,300,000L14c $0 $0L15 $30,300,000 $30,300,000 $30,300,000L16 $13,242,240 $13,242,240 $13,242,240L17 $25,613,280 $25,613,280 $25,613,280L18 $0 $0L19a $2,504,700 $2,504,700 $2,504,700L19b $4,029,300 $4,029,300 $4,029,300L19c $2,831,400 $2,831,400 $2,831,400L20 $14,026,230 $14,026,230 $14,026,230L21 $6,403,320 $6,403,320 $6,403,320
L22a-i $9,432,640 $9,432,640 $9,432,640L22a-ii $24,494,204 $24,494,204 $24,494,204L22a-iii $9,000,000 $9,000,000 $9,000,000L22a-iv $0 $0
L22b $22,651,200 $22,651,200 $22,651,200L23 $0 $0L24 $0 $0L25 $41,948,280 $41,948,280 $41,948,280L26 $20,054,795 $20,054,795 $20,054,795L27 $14,020,500 $14,020,500 $14,020,500
Totals $637,546,593 $20,054,795 $0 $0 $78,326,240 $29,920,000 $0 $69,843,768 $32,000,000 $74,422,260 $14,026,230 $54,194,204 $0 $23,581,740 $0 $39,300,000 $2,504,700 $12,959,100 $70,027,056 $0 $0 $14,020,500 $30,492,000 $0 $0 $0 $24,480,720 $0 $0 $0 $24,742,080 $0 $0 $0 $22,651,200 $637,546,593
DEVELOPMENT METHOD - ABSORPTION SCHEDULE
LONG-TERM LEARNING DISTRICT
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Period Commencing July 2007 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-14 Jun-14 Sep-14 Dec-15Period (Quarterly) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 Totals
Planning Area No LotsP1a 27 2 6 6 6 6 1 27P1b 73 2 6 6 6 6 6 6 6 6 6 6 6 5 73P1c 86 43 43 86P1d 62 31 31 62P1e 62 31 31 62P1f 81 41 40 81P1g 0 0P1h 0 0P1i 0 0P1j 0 0P1k 0 0P1l 0 0P2 80 40 40 80P3 0 0P4a 70 70 70P4b 85 85 85P4c 67 67 67P4d 0 0P5a 60 60 60P5b 0 0P6a 76 38 38 76P6b 0 0P7a 35 2 6 6 6 6 6 3 35P7b 39 4 6 6 6 6 6 5 39P7c 0 0P8 0 0P9 0 0
P10a 44 22 22 44P10b 0 0P11a 71 2 6 6 6 6 6 6 6 6 6 6 6 3 71P11b 51 4 6 6 6 6 6 6 6 5 51P11c 0 0P11d 0 0P12a 31 6 6 6 6 6 1 31P12b 0 0P13 0 0
Totals 1,100 0 0 0 281 12 137 24 24 19 18 185 46 52 43 12 11 6 34 0 31 26 6 32 18 18 18 18 18 11 0 0 0 0 0 1,100
Planning Area RevenueP1a $32,851,359 $2,433,434 $7,300,302 $7,300,302 $7,300,302 $7,300,302 $1,216,717 $32,851,359P1b $78,133,068 $2,140,632 $6,421,896 $6,421,896 $6,421,896 $6,421,896 $6,421,896 $6,421,896 $6,421,896 $6,421,896 $6,421,896 $6,421,896 $6,421,896 $5,351,580 $78,133,068P1c $79,999,006 $39,999,503 $39,999,503 $79,999,006P1d $49,530,188 $24,765,094 $24,765,094 $49,530,188P1e $49,530,188 $24,765,094 $24,765,094 $49,530,188P1f $53,612,037 $27,136,957 $26,475,080 $53,612,037P1g $0 $0P1h $0 $0P1i $0 $0P1j $0 $0P1k $0 $0P1l $0 $0P2 $52,950,160 $26,475,080 $26,475,080 $52,950,160P3 $0 $0P4a $42,312,760 $42,312,760 $42,312,760P4b $28,900,000 $28,900,000 $28,900,000P4c $40,499,356 $40,499,356 $40,499,356P4d $0 $0P5a $20,400,000 $20,400,000 $20,400,000P5b $0 $0P6a $71,712,004 $35,856,002 $35,856,002 $71,712,004P6b $0 $0P7a $37,461,060 $2,140,632 $6,421,896 $6,421,896 $6,421,896 $6,421,896 $6,421,896 $3,210,948 $37,461,060P7b $47,451,963 $4,866,868 $7,300,302 $7,300,302 $7,300,302 $7,300,302 $7,300,302 $6,083,585 $47,451,963P7c $0 $0P8 $0 $0P9 $0 $0
P10a $34,967,240 $17,483,620 $17,483,620 $34,967,240P10b $0 $0P11a $86,386,907 $2,433,434 $7,300,302 $7,300,302 $7,300,302 $7,300,302 $7,300,302 $7,300,302 $7,300,302 $7,300,302 $7,300,302 $7,300,302 $7,300,302 $3,650,151 $86,386,907P11b $54,586,116 $4,281,264 $6,421,896 $6,421,896 $6,421,896 $6,421,896 $6,421,896 $6,421,896 $6,421,896 $5,351,580 $54,586,116P11c see GC $0P11d $0 $0P12a $33,179,796 $6,421,896 $6,421,896 $6,421,896 $6,421,896 $6,421,896 $1,070,316 $33,179,796P12b $0 $0P13 see GC $0
Totals $894,463,208 $0 $0 $0 $178,779,288 $13,722,198 $120,626,849 $27,444,396 $27,444,396 $21,360,811 $20,144,094 $107,518,530 $41,698,240 $40,197,278 $38,487,292 $13,722,198 $12,651,882 $7,300,302 $28,415,245 $0 $24,765,094 $21,764,884 $6,421,896 $28,772,384 $20,144,094 $20,144,094 $20,144,094 $20,144,094 $20,144,094 $12,505,481 $0 $0 $0 $0 $0 $894,463,208
DEVELOPMENT METHOD - ABSORPTION SCHEDULE
PARK DISTRICT
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Period Commencing July 2007 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-14 Jun-14 Sep-14 Dec-15Period (Quarterly) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 Totals
Planning Area No LotsT1a 51 51 51T1b 46 46 46T1c 0 0T1d 66 66 66T1e 0 0T2a 96 96 96T2b 0 0T3a 34 34 34T3b 85 85 85T3c 0 0T4 0 0T5 0 0T6 0 0T7 0 0T8 117 117 117T9a 112 112 112T9b 0 0T9c 0 0
T10a 392 392 392T10b 0 0T11a 100 100 100T11b 0 0T12a 112 112 112T12b 80 80 80T12c 112 112 112T12d 96 96 96T12e 0 0T12f 0 0T15 0 0
Totals 1,499 0 0 512 0 0 0 0 0 0 0 281 509 0 100 0 0 0 0 97 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,499
Planning Area RevenueT1a $34,663,119 $34,663,119 $34,663,119T1b $31,264,774 $31,264,774 $31,264,774T1c $9,100,000 $9,100,000 $9,100,000T1d $31,096,758 $31,096,758 $31,096,758T1e $0 $0T2a $65,248,224 $65,248,224 $65,248,224T2b $0 $0T3a $16,019,542 $16,019,542 $16,019,542T3b $19,550,000 $19,550,000 $19,550,000T3c $0 $0T4 $1,062,500 $1,062,500 $1,062,500T5 $0 $0T6 $0 $0T7 $18,295,200 $18,295,200 $18,295,200T8 $0 $0T9a $29,120,000 $29,120,000 $29,120,000T9b $0 $0T9c $0 $0
T10a $0 $0T10b $0 $0T11a $52,047,400 $52,047,400 $52,047,400T11b $0 $0T12a $29,120,000 $29,120,000 $29,120,000T12b $26,946,480 $26,946,480 $26,946,480T12c $32,480,000 $32,480,000 $32,480,000T12d $37,515,168 $37,515,168 $37,515,168T12e $2,696,960 $2,696,960 $2,696,960T12f $0 $0T15 $0 $0
Totals $436,226,125 $0 $0 $155,181,648 $2,696,960 $0 $0 $0 $0 $1,062,500 $0 $159,309,724 $0 $0 $52,047,400 $0 $0 $0 $0 $65,927,893 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $436,226,125
DEVELOPMENT METHOD - ABSORPTION SCHEDULE
TRANSPORTATION ORIENTED DISTRICT (RESIDENTIAL & RETAIL)
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Period Commencing July 2007 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-14 Jun-14 Sep-14 Dec-15Period (Quarterly) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 Totals
Planning Area RevenueT13-1 $3,013,916 $3,013,916 $3,013,916T13-2 $3,223,440 $3,223,440 $3,223,440T13-3 $3,223,440 $3,223,440 $3,223,440T14-1 $6,965,244 $6,965,244 $6,965,244T14-2 $4,077,216 $4,077,216 $4,077,216T14-3 $5,436,288 $5,436,288 $5,436,288T14-4 $6,285,708 $6,285,708 $6,285,708T14-5 $4,351,644 $4,351,644 $4,351,644T14-6 $4,190,472 $4,190,472 $4,190,472T14-7 $2,578,752 $2,578,752 $2,578,752T14-8 $3,062,268 $3,062,268 $3,062,268T14-9 $4,835,160 $4,835,160 $4,835,160
T14-10 $5,157,504 $5,157,504 $5,157,504T14-11 $2,578,752 $2,578,752 $2,578,752T14-12 $2,417,580 $2,417,580 $2,417,580T14-13 $2,901,096 $2,901,096 $2,901,096T14-14 $2,095,236 $2,095,236 $2,095,236T14-15 $2,256,408 $2,256,408 $2,256,408T16-1 $1,789,009 $1,789,009 $1,789,009T16-2 $2,288,642 $2,288,642 $2,288,642T16-3 $2,272,525 $2,272,525 $2,272,525T16-4 $2,272,525 $2,272,525 $2,272,525T16-5 $3,175,088 $3,175,088 $3,175,088T16-6 $1,692,306 $1,692,306 $1,692,306T16-7 $2,578,752 $2,578,752 $2,578,752T16-8 $2,401,463 $2,401,463 $2,401,463T16-9 $2,369,228 $2,369,228 $2,369,228
T16-10 $4,142,120 $4,142,120 $4,142,120T16-11 $3,110,620 $3,110,620 $3,110,620T16-12 $3,626,370 $3,626,370 $3,626,370T16-13 $4,593,402 $4,593,402 $4,593,402T16-14 $2,514,283 $2,514,283 $2,514,283T16-15 $1,772,892 $1,772,892 $1,772,892T16-16 $1,869,595 $1,869,595 $1,869,595T16-17 $2,578,752 $2,578,752 $2,578,752T16-18 $2,739,924 $2,739,924 $2,739,924T17-1 $1,019,304 $1,019,304 $1,019,304T17-2 $2,605,829 $2,605,829 $2,605,829T17-3 $2,411,778 $2,411,778 $2,411,778T17-4 $2,772,158 $2,772,158 $2,772,158T17-5 $1,774,181 $1,774,181 $1,774,181T17-6 $1,774,181 $1,774,181 $1,774,181T18-1 $8,058,600 $8,058,600 $8,058,600T18-2 $6,608,052 $6,608,052 $6,608,052T18-3 $2,417,580 $2,417,580 $2,417,580T18-4 $2,256,408 $2,256,408 $2,256,408T18-5 $2,256,408 $2,256,408 $2,256,408T18-6 $4,512,816 $4,512,816 $4,512,816T18-7 $2,256,408 $2,256,408 $2,256,408T18-8 $2,256,408 $2,256,408 $2,256,408T18-9 $2,417,580 $2,417,580 $2,417,580
T18-10 $5,318,676 $5,318,676 $5,318,676T18-11 $2,578,752 $2,578,752 $2,578,752T18-12 $2,901,096 $2,901,096 $2,901,096T18-13 $3,062,268 $3,062,268 $3,062,268T18-14 $3,062,268 $3,062,268 $3,062,268T18-15 $4,835,160 $4,835,160 $4,835,160T19-1 $9,060,480 $9,060,480 $9,060,480T19-2 $9,234,720 $9,234,720 $9,234,720T19-3 $10,489,248 $10,489,248 $10,489,248T19-4 $12,719,520 $12,719,520 $12,719,520T19-5 $8,054,244 $8,054,244 $8,054,244Totals $233,151,746 $0 $9,460,796 $0 $28,784,448 $0 $0 $20,773,764 $0 $17,406,576 $0 $18,470,311 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $41,782,752 $0 $0 $21,758,220 $0 $0 $23,998,511 $0 $0 $0 $0 $0 $50,716,368 $233,151,746
DEVELOPMENT METHOD - ABSORPTION SCHEDULE
TRANSPORTATION ORIENTED DISTRICT (NON-RESIDENTIAL)
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 2 9
LAND SALE REVENUES As previously detailed and summarized in the preceding table, the appraisers concluded individual market values for the subject's respective residential and commercial planning areas/parcels, and any miscellaneous revenue events. These figures were integrated into the cash flow as revenues at their respective prospective dates of sale per the master absorption schedule. The aggregate of land sale revenues from the planning area valuation was $2,201,387,672. The golf course “at completion” value was $21,500,000. Thus, total proceeds were $2,222,887,672. As a matter of reference, this figure is 4.82% below the developer’s scheduled land sale proceeds were $2,335,384,907. The figure represents the aggregate of superpad parcel values for both residential and non-residential land. Again, any changes in actual lot yield and/or land development costs would affect the indicated revenue event assumptions. REVENUE APPRECIATION The marketing and sale of the planning areas will occur over an extended term. For this reason, it would be imprudent to assume no change in underlying land values that contribute to improved property values. In the late 1980s, the residential land market was characterized by rapidly appreciating values that at times exceeded 20% annually. Residential land values were observed to have substantially declined between 1990 and 1994, oftentimes exceeding a 50% decrease. During 1994, several submarkets experienced moderate increases as builders/developers appeared to be anticipating a shortage of available lots for construction. Between late 1993 and early 1995, increases of up to 20% were demonstrated in certain areas of Southern California. This trend stabilized in 1995 and into 1996. However, beginning in mid-1996 through 2005, demand for residential land ready for immediate development in desirable areas progressively increased. This situation, combined with the steadily decreasing supply of improved sites, fueled rapid price increases of residential land in most areas of Orange County. Starting in 2006 and through 2007 to-date demand substantially decreased, companion to decreasing home sales rates, home and land pricing. The majority of market participants surveyed anticipate 2007 to remain “soft” with positive movement in sales velocity, home, and land pricing sometime in 2008 or 2009. In general, the overall trend during the past two decades has been one of upward change. The observed fluctuation serves to illustrate the fact that changes in value do occur as normal economic cycles but are rarely predictable. Per historical home pricing information from Hanley Wood, price points (psf basis) for attached and detached housing in Orange County were increasing significantly into 2006 and then decreased in late 2006 and early 2007. Based on historical trends, a continuation in the rapid increase in pricing experienced from 1997-2005 would not be expected. The short-term projection is for flat pricing and/or stabilization. The long-term projections are for moderate positive growth in nearly all sectors. A general consensus, based upon interviews with builders, developer’s, and brokers active in the market, is for no major shifts in pricing in 2007 and into 2008. The majority of those interviewed suggested an anticipated recovery, and hence renewed price appreciation, in late 2008 or 2009. This anticipated trend is also presented in various published sources.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 3 0
In that the master development cash flow incorporates “land” rather than “home” sale revenues, consideration must be given to the relative price trending in underlying land resulting from the assumed home trending assumptions. As exhibited in the following table, the appraisers prepared a land sale revenues trending analysis, which incorporates pertinent assumptions relative to said trending (i.e. home prices, home price trending, profit, costs, cost trending, time frame, etc.). The analysis was specifically tailored to the appraisers’ product and cost assumptions for Heritage Fields. Per the appraisers’ assumptions, the average home price (present dollars) in the for-sale residential neighborhoods was $1,120,000± or $437± per square foot. Static profit was assumed to remain constant at about 9% of sales when considering the weighting of multiple product lines ranging from 8% to 10%. Turn-key construction costs and fees (present dollars) were assumed to be approximately $210± per square foot with consideration of a weighted average of detached and attached product within the subject project. Finally, the term of land development and land sales (to merchant builders) was assumed to be 7.25 years.
Average Home Price (Current $) $1,120,000 Static Profit 9.00%Average Price PSF (Current $) $437 Costs & Fees (Current $ PSF) $210.00Average Home Size 2,563 Time Period (Yrs) 7.25
Price Trending (Per Annum) 2.00% Price Trending (Per Annum) 3.00%Cost Trending (Per Annum) 3.00% Cost Trending (Per Annum) 3.00%
Category Current $ Trended $ Category Current $ Trended $Home Price $1,120,000 $1,292,913 Home Price $1,120,000 $1,387,675Profit ($100,800) ($116,362) Profit ($100,800) ($124,891)Costs ($538,230) ($666,865) Costs ($538,230) ($666,865)Land Value $480,970 $509,686 Land Value $480,970 $595,920Land Trending Factor 0.80% Land Trending Factor 3.00%
Price Trending (Per Annum) 4.00% Price Trending (Per Annum) 5.00%Cost Trending (Per Annum) 3.00% Cost Trending (Per Annum) 3.00%
Category Current $ Trended $ Category Current $ Trended $Home Price $1,120,000 $1,488,366 Home Price $1,120,000 $1,595,293Profit ($100,800) ($133,953) Profit ($100,800) ($143,576)Costs ($538,230) ($666,865) Costs ($538,230) ($666,865)Land Value $480,970 $687,548 Land Value $480,970 $784,852Land Trending Factor 5.05% Land Trending Factor 6.99%
LAND SALE REVENUES TRENDING ANALYSIS
Scenario 3 Scenario 4
Scenario 1 Scenario 2
Heritage Fields (El Toro MCAS)General Product & Pricing Assumptions
The two variables in each respective scenario were home and cost trending. Effective land price annual trending factors ranged from 0.80% to 6.99%, depending on the Scenario. As will be discussed further, the appraisers have assumed a cost inflation factor of 3.00%. Scenario 1 reflected an inverse revenue/cost trending situation in which cost increases were slightly higher than revenue appreciation. In this case, 2.00% revenue and 3.00% cost trending resulted in a net land trending factor of 0.80%. Scenario 2 demonstrated that the underlying land would trend similar to revenues and costs if both were assumed to be trending forward at the same rate of 3.00%.
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V A L U A T I O N S E R V I C E S 3 3 1
Scenarios 3 and 4 demonstrated that if revenue trending exceeds cost trending, the implied land trending would increase at a greater rate. A combination of 4.00% home and 3.00% cost trending assumptions indicated an underlying land appreciation rate of 5.05% (Scenario 3). Finally, if assuming more aggressive price trending at 5.00%, and cost trending at 3.00%, the inflation factor for land would increase substantially, at 6.99% (Scenario 4). Finally, and perhaps most relative to estimated trending rates, are those assumptions being made by market participants in their selling and buying decisions. The majority of more recent pro formas indicate level pricing in the immediate near-term with 3.00% to 5.00% price trending starting in 2008 or 2009. Of note is that the subject’s developer integrated a 6.00% land trending factor in the business plan. Considering the foregoing, and assuming a 4.00% positive price trending for improved residential and commercial property starting in 2009, a 5.00% land trending factor was deemed reasonable (see Scenario 3). The 5.00% per annum increase was held constant in the valuation analysis commencing in 2009 and reflects an overall trend rather than potential cyclical variances in inflation rates over an extended period of time. Increases were calculated on a compounded quarterly basis. Again, it is important to recognize that the assumed revenue trending assumptions were made companion to cost trending assumptions (to follow). OTHER REVENUES CFD Reimbursements The total budget for CFD reimbursements is $215,000,000. The developer’s plan scheduled reimbursements to commence in 2007. However, confirmation with the developer suggests reimbursements will more likely commence in the 1st quarter 2008. For the cash flow, the appraisers scheduled 2007 reimbursements for the 1st quarter 2008 and additional reimbursements one quarter subsequent to those presented in the plan. Note that the $215,000,000 CFD reimbursement figure is in addition to the schedule $201,000,000 CFD proceeds for other public related improvements (see CFD City Obligation discussion below). The appraisers have assumed the budgeted CFD figures are reasonably true and correct. Golf Course Sale “At Completion” The appraisers valued the proposed golf course “at completion” and “at stabilized occupancy.” For the master cash flow, the “at completion” value of $21,500,000 was incorporated as a sale event in the 3rd quarter 2008, the projected date of completion. This golf course revenue figure, and corresponding date, reflect the golf course value “at completion” but not yet at stabilized occupancy. It was assumed that all golf course development and construction costs were incorporated into the LLC backbone infrastructure budget provided.
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V A L U A T I O N S E R V I C E S 3 3 2
Interim Income Properties The master developer has secured various interim income streams from current and/or proposed tenancy in Heritage Hills. The income properties are managed and operated by LNR, a commercial property entity of Lennar. Per the plan, net income from these sources totals $13,112,010. The majority of this figure has already been recognized since Lennar acquired the property in 2005. Of the total, $5,798,811 is scheduled from the 3rd quarter 2007 through the 2nd quarter 2011, after which no additional income stream is anticipated. The revenue was allocated over the course of the cash flow per the developer’s schedule and reflects diminishing tenancy (income and expenses) as the project is redeveloped. The appraisers have assumed the reported income stream is reasonably true and correct and has not been provided nor reviewed leases and expenses relative. A summary of tenancy, income, and expense projections is retained in our file. MASTER-PLAN DEVELOPMENT COSTS The proposed master-planned community is subject to extensive on- and offsite development costs. Land development cost estimates were provided by the developer. The appraisers assumed the on- and offsite costs and reimbursements submitted by the developer were correct and reasonable for use in this analysis. The developer’s submitted pro forma is included in the Addenda. Engineering The total budget for non-CFD engineering costs is $47,618,055 of which $31,988,733 was reportedly remaining as of July 1, 2007. The appraisers have assumed the budgeted figures are reasonably true and correct. The remaining engineering cost was allocated over the course of the cash flow per the developer’s schedule. CFD Engineering The total budget for CFD-related engineering costs is $11,570,742 of which $7,772,963 was reportedly remaining as of July 1, 2007. The appraisers have assumed the budgeted figures are reasonably true and correct. The remaining CFD-related engineering cost was allocated over the course of the cash flow per the developer’s schedule. LLC Backbone Infrastructure The total budget for backbone land development infrastructure is $222,514,276 of which $202,581,280 was reportedly remaining as of July 1, 2007. The appraisers have assumed the budgeted figures are reasonably true and correct. The remaining backbone infrastructure cost was allocated over the course of the cash flow per the developer’s schedule. CFD Backbone Infrastructure The total budget for CFD-related backbone land development infrastructure is $155,968,635 of which $141,580,122 was reportedly remaining as of July 1, 2007. The appraisers have assumed the budgeted figures are reasonably true and correct. The remaining CFD-related backbone infrastructure cost was allocated over the course of the cash flow per the developer’s schedule.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 3 3
Real Estate Taxes & Assessments Property taxes were calculated assuming a conservative 1.75% overall tax rate, initial purchase at the indicated land basis, and subsequent diminishing inventory (planning areas) as the sites are sold. The revised annual basis (remaining inventory) was increased 2.00% per annum per California law. Planning area revenue event totals were used to revise the diminishing basis for each assessment period due to diminishing inventory. Thus, the assessment to the master developer decreases as the planning areas/parcels are delivered and released from the assessment calculation. Redemption Price Per the budget, a negotiated redemption price payable to SunCal Communities totaled $74,000,000. The redemption price was negotiated for partnership dissolution. Per the developer, the redemption price has been paid in full. Acquisition, Closing Costs, & Predevelopment A land acquisition such as the subject would warrant extensive due diligence activity pertaining to entitlement issues, feasibility studies, professional services, etc. Acquisition and closing costs include title work, escrow charges, etc. The developer’s budget totaled $2,982,790, all of which had been expended as of July 1, 2007. However, a new acquisition would still require a budget for initial pre-acquisition due diligence and closing costs. Based on a review of cost budgets from other larger development properties an allowance of $500,000 was included in the first quarter of the cash flow. Homeless Provider Agreements The total budget for various negotiated homeless provider agreements is $30,580,000 of which $29,530,000 was reportedly remaining as of July 1, 2007. The remaining agreement costs were allocated over the course of the cash flow per the developer’s schedule. Development Agreement Fees Companion to the acquisition and disposition agreement are $200,000,000 in development agreement fees due the city. Per the developer, the entire $200,000,000 budget has been paid in full. North Irvine Traffic Mitigation Fee (NITM Fee) The total budget for a North Irvine Traffic Mitigation (NITM) Fee is $85,239,600. This fee was allocated over the course of the cash flow per the developer’s schedule. Planning The total budget for project planning expenses is $5,005,000 of which $1,661,660 was reportedly remaining as of July 1, 2007. The remaining planning-related costs were allocated over the course of the cash flow per the developer’s schedule.
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V A L U A T I O N S E R V I C E S 3 3 4
Entitlements The total budget for project entitlement expenses is $5,500,000 of which $1,826,000 was reportedly remaining as of July 1, 2007. The budget was deemed reasonable and remaining entitlement-related costs were allocated over the course of the cash flow per the developer’s schedule. Financing / Holding Costs Land developers will commonly analyze property acquisitions with leveraged and/or unleveraged cash flows. In this analysis, the cash flows were prepared on an unleveraged basis and the reconciled discount rate (IRR) reflected the non-leveraged assumption. It is recognized that the developer will likely leverage the project with financing. However, as the discount rate employed reflected an unleveraged assumption the analysis correlated accordingly. General Legal The budget for legal expenses totaled $2,000,000 of which $1,000,000 was reportedly remaining as of July 1, 2007. This budget was deemed reasonable and remaining legal-related costs were allocated over the course of the cash flow per the developer’s schedule. Public Affairs (Special Projects) Developers will commonly allow a budget for public affair events, special projects, and other unforeseen expenditures relative to advancing the project accordingly. The budget for public affairs totaled $6,550,000 of which $3,630,000 was reportedly remaining as of July 1, 2007. This budget was deemed adequate and remaining special project costs were allocated over the course of the cash flow per the developer’s schedule. Income Property (Other Expenses) The master developer has secured various interim income streams from current and/or proposed tenancy in Heritage Hills. The net income previously reported as a revenue source was that “net” income after certain operating expenses relative to respective tenants. The master developer is responsible for additional interim income property operating expenses not reflected in the previous net income calculation. The budget totaled $7,006,396 of which $2,453,342 was reportedly remaining as of July 1, 2007. This figure was allocated per the developer’s schedule and reflects diminishing tenancy (income and expenses) as the project is redeveloped. A summary of tenancy, income, and expense projections is retained in our file. Caretaking Caretaking involves all expenses relative to security, project maintenance, etc. not reflected in any of the other cost categories. Caretaking expenses are often reflected as part of indirect construction and/or general conditions. The budget totaled $15,405,351 of which $12,452,415 was reportedly remaining as of July 1, 2007. The appraisers included an additional $250,000 allocated over the last four quarters in the cash flow for a total of $12,702,415. This cost was allocated over the course of the cash flow per the developer’s schedule.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 3 5
Environmental Insurance Premium The total budget for an environmental insurance policy is $8,844,882 and the entire premium has reportedly been paid as of July 1, 2007 and therefore not included in the cash flow analysis. Environmental Cleanup The total budget for yet-to-be discovered adverse environmental conditions is $10,000,000. This figure is essentially a contingency above and beyond those environmental clean-up responsibilities borne by the US Navy. This cost was allocated over the first seven quarters of the cash flow per the developer’s schedule. CFD City Obligation The developer has budgeted $33,561,229 as a future payment to cover a financial obligation to the city. As part of the development and disposition agreement the city will receive $201,000,000 in CFD-related engineering and infrastructure construction for public improvements. Per the developer’s budget, and as reflected herein, CFD engineering and backbone infrastructure total $167,539,377 ($11,570,742 + $155,968,635). This figure is $33,460,623 less than the $201,000,000 obligation. Note that the budgeted figure is $100,606 higher than the correlation presented and the developer reported it was due to various calculations not clarified. The higher, more conservative, figure was utilized in the cash flow and allocated in Quarters 13-17 per the developer’s schedule. General Liability Insurance The general liability insurance budget totaled $20,152,018 of which $17,273,652 was reportedly remaining as of July 1, 2007. The appraisers included an additional $2,323,268 allocated over the last four quarters in the cash flow ($580,817 per quarter) for a total of $20,152,018. This cost was allocated over the course of the cash flow per the developer’s schedule. Land Sales Closing Costs Land sale commissions were assumed to be minimal in that the majority of residential planning area/parcel sales within master-planned communities occur between guest builders and the master developer without broker representation. The developer has budgeted .959% for land sale closing costs. Per their key assumptions overview, this figure reflects .29% for closing costs on residential land sales and 3.00% for commissions and closing costs on non-residential land sales. With the inclusion of commercial land parcels, an allowance of 1.50% of total land sale revenues (excluding golf course) was reasonable for closing costs, legal fees, and any brokerage fees, referral fees, etc. Master Marketing / HOA As is typical in master-planned communities, the appraisers assumed a cooperative marketing program would be created to provide additional marketing for the community. The developer has budgeted total master marketing expenses at 1.00% of home sales and assumed a 100% recovery via builder co-op. In this analysis, the appraisers assumed the co-op reimbursement program would fall slightly short of the net master marketing costs. An allowance of 0.50% of sale revenues, or $11,006,938 was included and allocated over the initial 10 quarters of the cash flow, reflecting a net cost to the developer after co-op reimbursements from
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V A L U A T I O N S E R V I C E S 3 3 6
participating builders. Costs within this category also incorporated any homeowners’ fee subsidies required on the part of the master developer. In all likelihood, given the timing projected by the master developer, HOA costs would be minimal. Master Contingency The developer has included a master contingency at 20% of LLC backbone infrastructure costs. A review of other master developer budgets indicates such contingencies are typically 10% to 20% of costs. Given the scope of the project, and the other expense/cost categories, a 20% figure was deemed reasonable and included in the cash flow companion to the LLC backbone infrastructure cost expenditures. Master Management (Overhead / General & Administration) Over the duration of the project, the master developer's staff and/or hired consultants will have to oversee all aspects of the project, including planning, entitlements, development and construction oversight, land sales, master marketing, financial reporting, etc. The subject developer included this cost at 1.00% of land sale revenues. Per a review of other master developer budgets this figure was considered slightly understated and a 1.50% of land sale revenues (excluding golf course) figure was included. The management expense was allocated over the course of the cash flow with diminishing expenditures toward the end of the development duration. Development Costs Summary As summarized in the following table, remaining master development costs totaled $763,923,469. Note these cost figures do not include builder costs of intracts and residential fees due at permit, which ere passed on to guest builders and were incorporated into the individual residential planning area/parcel analyses.
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Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 3 7
MASTER DEVELOPMENT COST / EXPENSE SUMMARY
Heritage Fields (El Toro MCAS)
COST / EXPENSE (Untrended Costs in July 2007 $s) SOURCE(1) TOTALSENGINEERING DEV $31,988,733
CFD ENGINEERING DEV $7,772,963
LLC BACKBONE INFRASTRUCTURE DEV $202,581,280
CFD BACKBONE INFRASTRUCTURE DEV $141,580,122
REAL ESTATE TAXES C & W $60,179,282
REDEMPTION PRICE DEV $0
PRECLOSING / DUE DILIGENCE C & W $500,000
HOMELESS PROVIDER AGREEMENTS DEV $29,530,000
DEVELOPMENT AGREEMENT FEES DEV $0
NITM FEE DEV $85,239,600
PLANNING DEV $1,661,660
ENTITLEMENTS DEV $1,826,000
GENERAL LEGAL DEV $1,000,000
PUBLIC AFFAIRS DEV $3,630,000
INCOME PROP OTHER EXPENSES DEV $2,453,342
CARETAKING DEV $12,702,415
ENVIRONMENTAL INSURANCE DEV $0
ENVIRONMENTAL CLEAN-UP DEV $10,000,000
CFD CITY OBLIGATION DEV $33,561,229
GENERAL LIABILITY INSURANCE DEV $20,152,018
SALES / CLOSING COSTS C & W $33,020,815
MARKETING/ADV (AFTER COOP) C & W $11,006,938
MASTER CONTINGENCY DEV $40,516,256
MASTER MANAGEMENT C & W $33,020,815
TOTALS (To Superpad Lots/Parcels) $763,923,469
(1) Cushman & Wakefield (appraisers' estimate per schedule) DEV = (developer's pro forma) Costs are reflected in non-trended July 2007 $s.
COST INFLATION The development of the project will occur over an extended term. For this reason, it would be imprudent to assume no change in development costs. As detailed in the following table, the appraisers gathered historical cost information from two sources, The Engineering News Record and Marshall Valuation Service. The Marshall cost index indicated an average annual increase of 4.89% over the past 27 years ending January 2007 with an average compounded increase of 3.16% per annum. A review of the Engineering News Record (ENR) building cost index indicated an average annual increase of 4.76% over the past 25 years ending January 2005 and an average compounded increase of 3.19% per annum.
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V A L U A T I O N S E R V I C E S 3 3 8
Annual Cumulative Annual CumulativeYear Index % Increase Increase(1) Index % Increase Increase(1)
1980 1076 - - 1819 - -1981 1146 6.55% 6.55% 1941 6.71% 6.71%1982 1185 3.34% 10.11% 2097 8.04% 15.28%1983 1226 3.51% 13.98% 2234 6.53% 22.81%1984 1281 4.43% 19.03% 2384 6.71% 31.06%1985 1309 2.23% 21.67% 2417 1.38% 32.88%1986 1316 0.53% 22.32% 2428 0.46% 33.48%1987 1325 0.68% 23.14% 2483 2.27% 36.50%1988 1354 2.21% 25.87% 2541 2.34% 39.69%1989 1379 1.85% 28.20% 2598 2.24% 42.83%1990 1422 3.06% 32.12% 2634 1.39% 44.80%1991 1434 0.88% 33.28% 2702 2.58% 48.54%1992 1460 1.81% 35.70% 2751 1.81% 51.24%1993 1530 4.82% 42.24% 2834 3.02% 55.80%1994 1593 4.10% 48.07% 2996 5.72% 64.71%1995 1636 2.71% 52.08% 3111 3.84% 71.03%1996 1644 0.48% 52.81% 3111 0.00% 71.03%1997 1703 3.58% 58.28% 3203 2.96% 76.09%1998 1731 1.64% 60.87% 3364 5.03% 84.94%1999 1776 2.61% 65.06% 3391 0.80% 86.42%2000 1852 4.30% 72.15% 3456 1.92% 89.99%2001 1886 1.82% 75.30% 3539 2.40% 94.56%2002 1920 1.80% 78.46% 3574 0.99% 96.48%2003 1971 2.66% 83.20% 3623 1.37% 99.18%2004 2077 5.38% 93.05% 3693 1.93% 103.02%2005 2231 7.41% 107.36% 3984 7.88% 119.02%2006 2317 3.85% 115.35% --- --- ---2007 2495 7.68% 131.90% --- --- ---
Avg Annual Rate (Straight Avg) 4.89% 4.76% Avg Annual Rate (Compounded) 3.16% 3.19% (1) Calculated from base year 1980.
CONSTRUCTION COST INDEX ANALYSISHeritage Fields (El Toro MCAS)
------
Marshall & Swift Engineering News Record
Cost increases are also commonly tied to annual CPI increases. Over the past several years, the CPI has indicated fairly modest increases, typically 2.50%± to 3.00%±. Finally, perhaps most relative to estimated cost trending rates are those assumptions being made by market participants in their selling and buying decisions. A survey of developers and builders indicated that many are incorporating slight cost inflation trending assumptions, typically ranging from 2.00% to 4.00% as of late. Of note, the subject developer utilized a construction cost trending figure of 4.00% in the business plan. Considering the foregoing, costs for labor and materials were projected to remain flat through 2008 and increasing 3.00% per annum (compounded quarterly) commencing in 2009. DISCOUNT RATE (IRR) / IMPLIED STATIC PROFIT Finally, the appraisers considered the inclusion of profit or entrepreneurial reward for the master developer. In projects with substantial risk and costs companion to developing the master-plan, some
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V A L U A T I O N S E R V I C E S 3 3 9
form of return is appropriate to the master development position. In projects of lesser risk, proven success, lower costs of development, and/or smaller in size, profit is often attributable to construction and product sales only. Many considerations were taken into account in reconciling an appropriate rate for the subject, including the risk in development, timing, stage of development, cost of funds, etc. Risk elements can vary depending upon location and product but overall the following elements are typically weighed in determining an appropriate discount rate that can range from 15% to 25% for a residential master-planned community. Elements considered are stage of entitlements, developer demand for subject product, inventory competition, number of units, type of master development program, lot and product type, duration of the development, overall range of product pricing, maturity of the submarket, lot condition, and other items. This range of discount rates is also confirmed via published data such as Korpacz and RealtyRates.com. A survey of master developers and a review of master development pro formas indicate that most participants are typically requiring non-leveraged IRR hurdle rates at 20%± in a typical master development program of moderate risk. A survey of master developer’s land development pro formas indicates across the board use of single unleveraged discount rate regardless of positive or negative cash flows. No bifurcated rates were presented in any master developer pro formas utilized in the land basis purchase pro formas. In that a large portion of the profit is realized in construction, the internal rate of return (IRR), or discount rate, applicable to the master developer’s position must reflect any remaining applicable profit to the master developer for remaining land development, management, risk, time, etc. The discount rate would also account for the time (holding period) from the date of value “as is” to the prospective dates for each of the individual neighborhoods. The subject project is a large sized master-plan and has substantial cost obligations with regard to on- and offsite improvements. However, the project is an infill reuse site within a relatively mature submarket, base entitlements and discretionary permits are secured, and there is effective demand for the land uses detailed in the land use plan. The master developer’s risk would arise primarily from the long-term holding period and installation of on- and offsite improvements over the development term. Finally, there appears to be substantial interest in the acquisition of properties such as the subject. Results of this strong demand for residential land are narrow margins and lower required returns on equity. With regard to the subject, higher risk ratings relate to the recent softening in demand and price points (stage of market cycle) and fairly high proposed price points. However, the higher pricing is indeed common for this more coastal Orange County location. Lower risk ratings relate to the infill Orange County location, wide variety of product type, and secured entitlements and development agreements. In addition, the developer is currently processing a new plan, which if approved, would result in a much higher residential yield potentially exceeding 9,000 housing units. This “upside” should be recognized in the risk (discount rate) applied. Finally, it is common for master developer’s to integrate profit participation agreements with guest builders with provide an additional revenue stream over the course of the development duration. Indeed, the appraisers did
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consider master developer profit participation in the planning area cash flow analyses in estimating planning area “at completion” values. Participation revenues are not guaranteed but have been achievable in previous master-plans. In this case, profit participation revenues were not included as revenue events. However, given the potential upside from such revenues, the risk rating should be indicative (lower risk).
Risk Element Subject Risk RatingEntitlements Tentative Map; Final Pending Low
Product Demand by Developers Moderate ModerateSupply / Competition Infill Orange County; Limited "New" Supply Moderate
Demand Low to Moderate; Anticipated to Increase Moderate to HighProduct Type (Residential) Attached & Detached Low to ModerateProduct Type (Commercial) Office, Industrial, Retail, & Mixed-use Moderate
Development Duration 7 to 8 Years ModerateProduct Pricing Medium to Very High Moderate to High
Submarket Location Mature Area; Infill Orange County LowLot Condition Raw Infill ReUse Site ModerateMarket Cycle Down or Flat; Anticipated Upturn Moderate to High
Builder Profit Participation Excluded from master revenues. Lower due to UpsideOther Potential density increase to 9,000+ units. Lower due to Upside
Overall Subject Risk Ranking --- Low-ModerateDiscount Rate --- 18%
Low Risk 15% to 18%Moderate Risk 17% to 22%
High Risk 21% to 25%
DISCOUNT RATEHeritage Fields (El Toro MCAS)
Master Plan Product Risk / Discount Rate Ranking
The subject represents one of very few opportunities to acquire development potential land in Orange County. The Orange County infill location, current entitlements, great upside do to re-entitlement, and potential for additional participation revenues would warrant a lower discount rate moderate risk master-plans which have been typically acquired at 20%± rates. Considering these and other factors, an unleveraged IRR at the lower end of the range would be appropriate. Accordingly, 16% to 20% unleveraged discount rates would be reasonable for the subject based on a land sales model. With this in consideration, a mid-range rate of 18% was incorporated into the cash flow. Based on analysis of similar projects and past interviews with participants in large land developments this rate was sufficient to attract investment capital, considering the risk of land development and additional reward attributable to product construction and sales. Said static rate also reflects the trending assumptions for land, product, development, and construction costs. The discounted cash flow and static presentation of the revenue and cost assumptions and relative rates of return follow.
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TOTAL NUMBER OF RESIDENTIAL LOTS / UNITS 3,625 ABSORPTION (ALL UNITS) REVENUE INFLATION RATE / ANNUM 5.00% Starting Qtr 7 SALES / CLOSING / TITLE COSTS 1.50% Land Sale ProceedsTOTAL NUMBER OF NON-MARKET RATE RESIDENTIAL LOTS / UNITS 734 AVG (LOTS / ANNUM) - TOTAL PERIOD 426 COST INFLATION RATE / ANNUM 3.00% Starting Qtr 7 MARKETING / ADVERTISING (AFT BUILDER COOP) 0.50% Land Sale ProceedsTOTAL NUMBER OF MARKET RATE RESIDENTIAL LOTS / UNITS 2,891 AVG (LOTS / ANNUM) - DEVELOPMENT PERIOD 537 UNLEVERAGED DISCOUNT RATE (NPV) 18.00% Per Annum MASTER DEVELOPER CONTINGENCY 20.00% LLC Backbone Infr.TOTAL DEVELOPMENT PERIOD (QTRS) 34 NUMBER PERIODS PER ANNUM 4 MASTER MANAGEMENT / OVERHEAD / ADMIN 1.50% Land Sale ProceedsTOTAL LOT SALES DEVELOPMENT PERIOD (QTRS) 27 ABSORPTION (MARKET RATE UNITS) UNLEVERAGED DISCOUNT RATE (NPV) 4.22% Per Quarter REAL ESTATE OVERALL TAX RATE 1.750% Land Basis
AVG (LOTS / ANNUM) - TOTAL PERIOD 340AVG (LOTS / ANNUM) - DEVELOPMENT PERIOD 428
PERIOD COMMENCING JULY 2007 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11PERIOD (QUARTERLY) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18ABSORPTION
LONG-TERM LEARNING DISTRICT 0 0 0 139 136 0 101 265 0 0 254 0 0 0 131 0 0 0PARK DISTRICT 0 0 0 281 12 137 24 24 19 18 185 46 52 43 12 11 6 34TRANSPORTATION DISTRICT 0 0 512 0 0 0 0 0 0 0 281 509 0 100 0 0 0 0TOTALS 0 0 512 420 148 137 125 289 19 18 720 555 52 143 143 11 6 34CUMULATIVE LOTS / UNITS SOLD 0 0 512 932 1,080 1,217 1,342 1,631 1,650 1,668 2,388 2,943 2,995 3,138 3,281 3,292 3,298 3,332LOTS / UNITS UNSOLD 3,625 3,625 3,113 2,693 2,545 2,408 2,283 1,994 1,975 1,957 1,237 682 630 487 344 333 327 293
LAND SALE PROCEEDSLONG-TERM LEARNING DISTRICT $637,546,593 $20,054,795 $0 $0 $78,326,240 $29,920,000 $0 $69,843,768 $32,000,000 $74,422,260 $14,026,230 $54,194,204 $0 $23,581,740 $0 $39,300,000 $2,504,700 $12,959,100 $70,027,056PARK DISTRICT $894,463,208 $0 $0 $0 $178,779,288 $13,722,198 $120,626,849 $27,444,396 $27,444,396 $21,360,811 $20,144,094 $107,518,530 $41,698,240 $40,197,278 $38,487,292 $13,722,198 $12,651,882 $7,300,302 $28,415,245TRANSPORTATION DISTRICT (RESID) $436,226,125 $0 $0 $155,181,648 $2,696,960 $0 $0 $0 $0 $1,062,500 $0 $159,309,724 $0 $0 $52,047,400 $0 $0 $0 $0TRANSPORTATION DISTRICT (NON-RESID) $233,151,746 $0 $9,460,796 $0 $28,784,448 $0 $0 $20,773,764 $0 $17,406,576 $0 $18,470,311 $0 $0 $0 $0 $0 $0 $0SUB-TOTAL (NON-TRENDED) $2,201,387,672 $20,054,795 $9,460,796 $155,181,648 $288,586,936 $43,642,198 $120,626,849 $118,061,928 $59,444,396 $114,252,147 $34,170,324 $339,492,769 $41,698,240 $63,779,018 $90,534,692 $53,022,198 $15,156,582 $20,259,402 $98,442,301TRENDING FACTOR 5.00% --- 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0125 1.0252 1.0380 1.0509 1.0641 1.0774 1.0909 1.1045 1.1183 1.1323 1.1464 1.1608SUB-TOTAL (TRENDED) $20,054,795 $9,460,796 $155,181,648 $288,586,936 $43,642,198 $120,626,849 $119,537,702 $60,939,794 $118,590,381 $35,911,143 $361,248,197 $44,924,982 $69,573,372 $99,994,309 $59,294,309 $17,161,356 $23,225,869 $114,267,346
OTHER REVENUESCFD REIMBURSEMENTS $215,000,000 $0 $0 $47,294,187 $30,565,648 $41,025,733 $15,317,295 $1,366,681 $680,384 $813,133 $4,267,997 $7,397,288 $5,241,070 $1,927,920 $64,170 $7,386,051 $11,068,381 $11,068,381 $11,068,381GOLF COURSE SALE (AT COMPLETION) $21,500,000 $0 $0 $0 $0 $21,500,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0INTERIM INCOME PROPERTIES $5,798,811 $586,034 $585,525 $585,525 $587,883 $324,139 $324,139 $324,139 $326,703 $327,894 $327,894 $327,894 $330,473 $331,762 $331,762 $132,784 $44,261 $0 $0SUB-TOTAL $242,298,811 $586,034 $585,525 $47,879,712 $31,153,531 $62,849,872 $15,641,434 $1,690,820 $1,007,087 $1,141,027 $4,595,891 $7,725,182 $5,571,543 $2,259,682 $395,932 $7,518,835 $11,112,642 $11,068,381 $11,068,381
TOTAL REVENUES $2,443,686,483 $20,640,829 $10,046,321 $203,061,360 $319,740,467 $106,492,070 $136,268,283 $121,228,522 $61,946,881 $119,731,408 $40,507,034 $368,973,379 $50,496,525 $71,833,054 $100,390,241 $66,813,144 $28,273,998 $34,294,250 $125,335,727
LAND DEVELOPMENT COSTS (REMAINING)ENGINEERING $31,988,733 $6,260,360 $3,486,886 $1,047,997 $2,290,842 $4,977,018 $3,731,765 $2,667,019 $2,305,508 $2,883,621 $1,655,612 $470,097 $120,611 $51,590 $36,745 $3,062 $0 $0 $0CFD ENGINEERING $7,772,963 $1,521,209 $847,281 $254,653 $556,653 $1,209,369 $906,784 $648,061 $560,217 $700,693 $402,298 $114,229 $29,307 $12,536 $8,929 $744 $0 $0 $0LLC BACKBONE INFRASTRUCTURE $202,581,280 $16,307,637 $15,259,383 $32,668,150 $24,517,121 $11,904,610 $4,756,341 $19,128,046 $19,216,600 $16,572,734 $10,634,824 $11,653,481 $12,346,909 $5,722,223 $1,038,008 $563,040 $160,429 $129,589 $2,155CFD BACKBONE INFRASTRUCTURE $141,580,122 $32,905,674 $30,565,648 $41,025,733 $15,317,295 $1,366,681 $680,384 $813,133 $4,267,997 $7,397,288 $5,241,070 $1,927,920 $64,170 $7,129 $0 $0 $0 $0 $0SUB-TOTAL (NON-TRENDED) $383,923,098 $56,994,880 $50,159,198 $74,996,533 $42,681,911 $19,457,678 $10,075,274 $23,256,259 $26,350,322 $27,554,336 $17,933,804 $14,165,727 $12,560,997 $5,793,478 $1,083,682 $566,846 $160,429 $129,589 $2,155TRENDING FACTOR 3.00% --- 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0075 1.0151 1.0227 1.0303 1.0381 1.0459 1.0537 1.0616 1.0696 1.0776 1.0857 1.0938SUB-TOTAL (TRENDED) $56,994,880 $50,159,198 $74,996,533 $42,681,911 $19,457,678 $10,075,274 $23,430,681 $26,747,059 $28,178,970 $18,477,901 $14,704,970 $13,136,947 $6,104,565 $1,150,436 $606,276 $172,875 $140,690 $2,357
OTHER COSTS & EXPENSES (REMAINING)REAL ESTATE TAXES 1.75% $60,179,282 $4,637,709 $4,595,868 $4,576,129 $4,252,367 $3,723,281 $3,584,654 $3,327,951 $3,076,707 $3,009,209 $2,761,210 $2,687,038 $1,950,124 $1,896,805 $1,755,595 $1,555,147 $1,437,754 $1,432,281 $1,386,528REDEMPTION PRICE $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0PRECLOSING / DUE DILIGENCE $500,000 $500,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0HOMELESS PROVIDER AGREEMENTS $29,530,000 $200,000 $536,000 $1,159,000 $2,359,833 $3,455,250 $3,455,250 $3,455,250 $3,455,250 $3,455,250 $7,998,917 $0 $0 $0 $0 $0 $0 $0 $0DEVELOPMENT AGREEMENT FEES $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0NITM FEE $85,239,600 $0 $0 $10,227,152 $70,451,064 $0 $0 $4,561,384 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0PLANNING $1,661,660 $415,415 $415,415 $415,415 $415,415 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0ENTITLEMENTS $1,826,000 $456,500 $456,500 $456,500 $456,500 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0GENERAL LEGAL $1,000,000 $500,000 $500,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0PUBLIC AFFAIRS $3,630,000 $105,000 $105,000 $60,000 $1,060,000 $60,000 $60,000 $60,000 $1,060,000 $60,000 $60,000 $50,000 $830,000 $30,000 $30,000 $0 $0 $0 $0INCOME PROP OTHER EXPENSES $2,453,342 $247,938 $247,722 $247,722 $248,720 $137,136 $137,136 $137,136 $138,220 $138,725 $138,725 $138,725 $138,815 $140,361 $140,361 $56,178 $19,722 $0 $0CARETAKING $12,702,415 $495,250 $495,250 $495,250 $495,250 $495,250 $495,250 $495,250 $495,250 $495,250 $495,250 $495,250 $495,250 $495,250 $474,833 $434,000 $434,000 $434,000 $434,000ENVIRONMENTAL INSURANCE $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0ENVIRONMENTAL CLEAN-UP $10,000,000 $666,667 $666,667 $666,667 $1,000,000 $4,000,000 $2,000,000 $1,000,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0CFD CITY OBLIGATION $33,561,229 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $5,593,538 $8,390,307 $8,390,307 $8,390,307 $2,796,770 $0GENERAL LIABILITY INSURANCE $20,152,018 $550,752 $550,752 $550,752 $550,752 $550,752 $550,752 $550,752 $550,752 $550,752 $550,752 $550,752 $550,752 $550,752 $550,752 $1,405,827 $580,827 $580,827 $580,827SALES / CLOSING COSTS 1.50% $33,020,815 $300,822 $141,912 $2,327,725 $4,328,804 $654,633 $1,809,403 $1,793,066 $914,097 $1,778,856 $538,667 $5,418,723 $673,875 $1,043,601 $1,499,915 $889,415 $257,420 $348,388 $1,714,010MARKETING/ADV (AFTER COOP) 0.50% $11,006,938 $550,347 $1,100,694 $1,651,041 $1,651,041 $1,651,041 $1,651,041 $1,100,694 $825,520 $550,347 $275,173 $0 $0 $0 $0 $0 $0 $0 $0MASTER CONTINGENCY 20.00% $40,516,256 $3,261,527 $3,051,877 $6,533,630 $4,903,424 $2,380,922 $951,268 $3,854,301 $3,901,186 $3,389,685 $2,191,495 $2,419,418 $2,582,608 $1,205,897 $220,390 $120,441 $34,575 $28,138 $471MASTER MANAGEMENT 1.50% $33,020,815 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659SUB-TOTAL $380,000,371 $13,933,586 $13,909,315 $30,412,642 $93,218,829 $18,153,924 $15,740,412 $21,381,443 $15,462,641 $14,473,733 $16,055,849 $12,805,566 $8,267,084 $12,001,863 $14,107,812 $13,896,974 $12,200,265 $6,666,063 $5,161,496
TOTAL EXPENSES (REMAINING) ($763,923,469) ($70,928,466) ($64,068,513) ($105,409,175) ($135,900,740) ($37,611,602) ($25,815,686) ($44,812,124) ($42,209,700) ($42,652,703) ($34,533,750) ($27,510,536) ($21,404,030) ($18,106,428) ($15,258,247) ($14,503,251) ($12,373,140) ($6,806,753) ($5,163,853)
RESIDUAL NET CASH FLOW ($50,287,637) ($54,022,192) $97,652,185 $183,839,727 $68,880,468 $110,452,597 $76,416,398 $19,737,181 $77,078,706 $5,973,284 $341,462,843 $29,092,495 $53,726,626 $85,131,994 $52,309,894 $15,900,858 $27,487,497 $120,171,874
PRESENT VALUE OF NET CASH FLOW 16.00% $1,119,973,713PRESENT VALUE OF NET CASH FLOW 17.00% $1,089,337,904PRESENT VALUE OF NET CASH FLOW 18.00% $1,060,047,797PRESENT VALUE OF NET CASH FLOW 19.00% $1,032,025,097PRESENT VALUE OF NET CASH FLOW 20.00% $1,005,197,021
HERITAGE FIELDS (EL TORO MCAS)SUBDIVISION DEVELOPMENT METHOD - AS-IS VALUE
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Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-1519 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 TOTAL
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,0260 31 26 6 32 18 18 18 18 18 11 0 0 0 0 0 1,100
97 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,49997 31 26 6 32 18 18 18 18 18 11 0 0 0 0 0 3,625
3,429 3,460 3,486 3,492 3,524 3,542 3,560 3,578 3,596 3,614 3,625 3,625 3,625 3,625 3,625 3,625 3,625196 165 139 133 101 83 65 47 29 11 0 0 0 0 0 0 0
$0 $0 $14,020,500 $30,492,000 $0 $0 $0 $24,480,720 $0 $0 $0 $24,742,080 $0 $0 $0 $22,651,200 $637,546,593$0 $24,765,094 $21,764,884 $6,421,896 $28,772,384 $20,144,094 $20,144,094 $20,144,094 $20,144,094 $20,144,094 $12,505,481 $0 $0 $0 $0 $0 $894,463,208
$65,927,893 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $436,226,125$0 $0 $0 $41,782,752 $0 $0 $21,758,220 $0 $0 $23,998,511 $0 $0 $0 $0 $0 $50,716,368 $233,151,746
$65,927,893 $24,765,094 $35,785,384 $78,696,648 $28,772,384 $20,144,094 $41,902,314 $44,624,814 $20,144,094 $44,142,605 $12,505,481 $24,742,080 $0 $0 $0 $73,367,568 $2,201,387,6721.1753 1.1900 1.2048 1.2199 1.2351 1.2506 1.2662 1.2820 1.2981 1.3143 1.3307 1.3474 1.3642 1.3812 1.3985 1.4160 ---
$77,482,676 $29,469,341 $43,115,275 $96,001,218 $35,537,870 $25,191,749 $53,057,113 $57,210,673 $26,148,297 $58,016,117 $16,641,257 $33,336,267 $0 $0 $0 $103,887,911 $2,417,317,747
$11,068,381 $7,378,919 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $215,000,000$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $21,500,000$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $5,798,811
$11,068,381 $7,378,919 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $242,298,811
$88,551,057 $36,848,260 $43,115,275 $96,001,218 $35,537,870 $25,191,749 $53,057,113 $57,210,673 $26,148,297 $58,016,117 $16,641,257 $33,336,267 $0 $0 $0 $103,887,911 $2,659,616,558
$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $31,988,733$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $7,772,963$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $202,581,280$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $141,580,122$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $383,923,098
1.1020 1.1103 1.1186 1.1270 1.1354 1.1440 1.1525 1.1612 1.1699 1.1787 1.1875 1.1964 1.2054 1.2144 1.2235 1.2327 ---$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $387,219,202
$1,164,213 $1,015,327 $978,587 $896,156 $714,878 $648,601 $614,244 $515,792 $410,943 $363,613 $265,095 $235,125 $175,829 $175,829 $179,346 $179,346 $60,179,282$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $500,000$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $29,530,000$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $85,239,600$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $1,661,660$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $1,826,000$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $1,000,000$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $3,630,000$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $2,453,342
$434,000 $434,000 $434,000 $381,500 $276,500 $276,500 $276,500 $276,500 $276,500 $276,500 $276,500 $184,332 $100,000 $75,000 $50,000 $25,000 $12,702,415$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $10,000,000$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $33,561,229
$580,827 $580,827 $580,827 $580,827 $580,827 $580,827 $580,827 $580,827 $580,827 $580,827 $580,827 $580,817 $580,817 $580,817 $580,817 $580,817 $20,152,018$1,162,240 $442,040 $646,729 $1,440,018 $533,068 $377,876 $795,857 $858,160 $392,224 $870,242 $249,619 $500,044 $0 $0 $0 $1,558,319 $36,259,766
$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $11,006,938$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $41,031,254
$1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $1,045,659 $660,416 $495,312 $330,208 $165,104 $33,020,815$4,386,940 $3,517,853 $3,685,802 $4,344,160 $3,150,933 $2,929,464 $3,313,087 $3,276,938 $2,706,153 $3,136,841 $2,417,700 $2,545,977 $1,517,063 $1,326,959 $1,140,371 $2,508,586 $383,754,320
($4,386,940) ($3,517,853) ($3,685,802) ($4,344,160) ($3,150,933) ($2,929,464) ($3,313,087) ($3,276,938) ($2,706,153) ($3,136,841) ($2,417,700) ($2,545,977) ($1,517,063) ($1,326,959) ($1,140,371) ($2,508,586) ($770,973,522)
$84,164,117 $33,330,407 $39,429,473 $91,657,058 $32,386,937 $22,262,285 $49,744,026 $53,933,735 $23,442,144 $54,879,276 $14,223,557 $30,790,290 ($1,517,063) ($1,326,959) ($1,140,371) $101,379,326 $1,888,643,036
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 4 3
DEVELOPMENT METHOD STATIC MODEL (LAND SALES MODEL)Heritage Fields (El Toro MCAS)
NonTrended Revenues & Costs / UnLeveraged Model
SubTotals Totals % SalesLAND SALES / OTHER REVENUES
LONG-TERM LEARNING DISTRICT $637,546,593 26.09%PARK DISTRICT $894,463,208 36.60%TRANSPORTATION DISTRICT (RESID) $436,226,125 17.85%TRANSPORTATION DISTRICT (NON-RESID) $233,151,746 9.54%CFD REIMBURSEMENTS $215,000,000 8.80%GOLF COURSE SALE (AT COMPLETION) $21,500,000 0.88%INTERIM INCOME PROPERTIES $5,798,811 0.24%TOTAL REVENUES $2,443,686,483 100.00%
LESS COSTS & EXPENSES:ENGINEERING $31,988,733 1.31%CFD ENGINEERING $7,772,963 0.32%LLC BACKBONE INFRASTRUCTURE $202,581,280 8.29%CFD BACKBONE INFRASTRUCTURE $141,580,122 5.79%REAL ESTATE TAXES $60,179,282 2.46%REDEMPTION PRICE $0 0.00%PRECLOSING / DUE DILIGENCE $500,000 0.02%HOMELESS PROVIDER AGREEMENTS $29,530,000 1.21%DEVELOPMENT AGREEMENT FEES $0 0.00%NITM FEE $85,239,600 3.49%PLANNING $1,661,660 0.07%ENTITLEMENTS $1,826,000 0.07%GENERAL LEGAL $1,000,000 0.04%PUBLIC AFFAIRS $3,630,000 0.15%INCOME PROP OTHER EXPENSES $2,453,342 0.10%CARETAKING $12,702,415 0.52%ENVIRONMENTAL INSURANCE $0 0.00%ENVIRONMENTAL CLEAN-UP $10,000,000 0.41%CFD CITY OBLIGATION $33,561,229 1.37%GENERAL LIABILITY INSURANCE $20,152,018 0.82%SALES / CLOSING COSTS $33,020,815 1.35%MARKETING/ADV (AFTER COOP) $11,006,938 0.45%MASTER CONTINGENCY $40,516,256 1.66%MASTER MANAGEMENT $33,020,815 1.35%TOTAL COSTS / EXPENSES ($763,923,469) -31.26%
LESS LAND (PER DISCOUNTED CASH FLOW): ($1,060,047,797) 43.38%
MASTER DEVELOPER'S PROFIT(1): $619,715,217
(1)Implied static profit± via iteration to results of yield (discounted cash flow) methodology.As Unleveraged Discount Rate: 18.00%As % All Costs Including Land (UnLeveraged) 33.98%As % Land Basis (Assuming 100% Development Financing) 58.46%As % Cash-On-Cash (Assuming 100% Development Financing / 50% Acq. Loan) 116.92%
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688
Heritage Fields Master-plan Prepared for Lehman Brothers Irvine, California C&W File ID. 07-31028-9175
V A L U A T I O N S E R V I C E S 3 4 4
CONCLUSION Incorporating the foregoing assumptions, the discounted cash flow indicated a total property “as is” value of $1,060,047,797. The indicated value range utilizing a range of discount rates from 16% to 20% is approximately $1.00 to $1.12 billion. Under the 18% discount rate assumption, the implied static profit was $619,715,217. Said profit would equate to 33.98% of the total costs including the indicated land basis. Note that this analysis was unleveraged. Thus, the actual return on equity, or cash-on-cash, would be higher if the investment was financed. Assuming all costs of development were financed and the land represents the equity contribution, the cash-on-cash return would be 58.46%. Assuming a developer could also secure a land acquisition loan of 50%, the cash-on-cash return would be 116.92%±. These rates of return were deemed adequate to attract capital to this type investment. It should also be recognized that a master developer might also recognize additional profit in the planning area/parcel build-outs. Based upon the comprehensive analyses presented, and subject to the limiting conditions and assumptions outlined in this report, the market value “as is” of the Heritage Fields property appraised was reconciled at $1,060,000,000 as of July 1, 2007. As a matter of reference, the only larger master-plan sale comparable warranting comparison is previously mentioned former Tustin Marine Corp Air Station (Legacy Park master-plan). The total price for the 423-acre project, in a 4-phase take-down, was $236,000,000. The project is proposed for 2,105± housing units and 6.87 million square feet of commercial space. The purchase price would correlate to $558,000 per acre and/or $112,000 per proposed housing unit. The appraised value for the subject property would correlate to $503,085 per acre and $292,414 per unit. The overall value per acre is substantiated by this land sale. Due to the great variances in intended land use, commercial, number of units, unit types, etc., the indicated value per unit is not applicable for direct comparison.
FOIA CONFIDENTIAL TREATMENT REQUESTED BY LEHMAN BROTHERS HOLDINGS INC.
LBEX-DOCID 2501688