newport hills commercial area analysis

H E A R T L A N D

December 2010

Newport HillsCommercial Area AnalysisPHASE II: Economic & Redevelopment Strategy

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December 2010

Table of Contents

Summary of Key Findings ...................................................................................................... 1

Task A Summary of Findings ......................................................................................................................... 1

Task A-1 Phase I Review ................................................................................................................................................. 1 Task A-2 Market Assessment ........................................................................................................................................ 1

Task B Summary of Findings: Feasibility Evaluation ........................................................................... 3

Phase II Overview ..................................................................................................................... 6

Scope of Work .................................................................................................................................................... 6

Task A-1: Phase I Summary Review .................................................................................. 8

Challenges .............................................................................................................................................................................. 8 Opportunities ....................................................................................................................................................................... 9

Task A-2: Market Assessment .......................................................................................... 10

Regional Context ............................................................................................................................................ 10

Subject Property Description and Surrounding Uses ........................................................................ 10

Current Zoning ................................................................................................................................................ 11 Residential Uses ................................................................................................................................................................ 11 Building Height .................................................................................................................................................................. 11 Lot Coverage ....................................................................................................................................................................... 12 Residential Unit Density ................................................................................................................................................ 12 Parking Requirements .................................................................................................................................................... 12

Demographics ................................................................................................................................................. 12 Household Composition ................................................................................................................................................ 13 Senior Demographic ........................................................................................................................................................ 16 Employment Estimates .................................................................................................................................................. 17

Multi-Family Market ..................................................................................................................................... 19 Existing Supply .................................................................................................................................................................. 19 Trade Area Multi-Family Trends ............................................................................................................................... 20 Comparable Project Survey .......................................................................................................................................... 21

For-Sale Market – Single Family Residential......................................................................................... 23 Sales Volume ....................................................................................................................................................................... 23 Pricing .................................................................................................................................................................................... 24

For-Sale Market – Attached Condos ......................................................................................................... 25 Existing Supply .................................................................................................................................................................. 25 Sales Activity ....................................................................................................................................................................... 26 Sales Volume ....................................................................................................................................................................... 26 Pricing Trends .................................................................................................................................................................... 27 Similar Condominium Project Survey ..................................................................................................................... 29

Senior Housing Market ................................................................................................................................ 31 Types of Senior Housing ................................................................................................................................................ 31 Existing Supply .................................................................................................................................................................. 32 Comparable Project Survey .......................................................................................................................................... 32

Office Market ................................................................................................................................................... 35 Supply & Demand Reconciliation ............................................................................................................. 38

Multi-Family ........................................................................................................................................................................ 38 Condominium ..................................................................................................................................................................... 41

December 2010

Senior Housing ................................................................................................................................................................... 42 Office....................................................................................................................................................................................... 43

Similar Redevelopment Projects .............................................................................................................. 45 Juanita Village, Kirkland ................................................................................................................................................ 46 Lake Hills Village, Bellevue ........................................................................................................................................... 46 Kelsey Creek Center ......................................................................................................................................................... 47 Town Center and Downtown Revitalization, Kenmore ................................................................................... 48 Totem Lake Mall, Kirkland ........................................................................................................................................... 48

Task B: Feasibility Analysis ............................................................................................... 49

Feasibility Methodology .............................................................................................................................. 49 Program Scenarios and Key Assumptions ............................................................................................. 50

Program Scenarios ........................................................................................................................................................... 50 Program Assumptions .................................................................................................................................................... 51

Economic Feasibility of Alternatives and Findings ............................................................................. 54 Stod’s Site ............................................................................................................................................................................. 54 Newport Hills Shopping Center Site ......................................................................................................................... 59

Recommendations and Next Steps .................................................................................. 66

OBSERVATIONS AND RECOMMENDATIONS .......................................................................................... 66 Task A Summary of Findings ...................................................................................................................... 66

Task A-1 Phase I Review ............................................................................................................................................... 66 Task A-2 Market Assessment ...................................................................................................................................... 66

Task B Summary of Findings: Feasibility Evaluation ......................................................................... 67 Recommendations ......................................................................................................................................... 69

Best Performing Alternatives ...................................................................................................................................... 69 Potential Code Changes .................................................................................................................................................. 69

Next Steps ......................................................................................................................................................... 70 Refined Feasibility Analysis ......................................................................................................................................... 70 Implementation Plan ....................................................................................................................................................... 70

EXHIBITS ................................................................................................................................... 72

Exhibit 1: Newport Hills Commercial Area Context Map .................................................................. 73

Exhibit 2: Newport Hills Area Land Use Map ........................................................................................ 74 Exhibit 3: Newport Hills Commercial Market Area Map ................................................................... 75

Exhibit 4: Market Rate Multi-Family Complex Location Map .......................................................... 76

Exhibit 5: Multi-Family Rent Comp Survey ........................................................................................... 77

Exhibit 6: Condominium Complex Location Map ................................................................................ 79 Exhibit 7: Senior Housing Complex Location Map .............................................................................. 80

Exhibit 8: Senior Housing Rent Comp Survey ...................................................................................... 81

Exhibit 9: Summaries of Comparable Redevelopment Projects .................................................... 84

Exhibit 10: Redevelopment Alternatives, Scenario 3a ..................................................................... 89 Exhibit 11: Redevelopment Alternatives, Scenario 3b1 ................................................................... 90

Exhibit 12: Redevelopment Alternatives, Scenario 3b2 ................................................................... 91

Exhibit 13: Redevelopment Alternatives, Scenario 3c ...................................................................... 92

SUMMARY OF KEY FINDINGS

Newport Hills Commercial Area Analysis Phase II: Economic And Redevelopment Strategy December 2010 Page 1

Summary of Key Findings

Based on our review of the Phase I Retail Report and our analysis of the residential, senior housing, and office market it is our contention that the Newport Hills Commercial Area, and specifically the Newport Hills Shopping Center Site (the ―NHSC Site‖) and Stod’s Site (collectively referred to as the ―Subject Property‖) has mixed-use redevelopment potential. The Newport Hills Subarea, identified in Exhibit 1, is primarily comprised of residential homes. The Newport Hills Commercial Area where Subject Property is located is removed from major arterial roads and its primary uses include the Newport Hills Swim and Tennis Club, professional office space for neighborhood businesses, a gas station, church, and apartments and condominiums. Because of the somewhat isolated nature of the Subarea, the Subject Property has historically provided a commercial hub for nearby residents. While the Subject Property should continue to serve as the local commercial center for the Subarea, the current utilization of the Subject Property as single-purpose retail is not sustainable over the long term. As indicated in the Phase I Retail Report and as Heartland has concluded through its market and financial analysis any redevelopment of the Subject Property should include a mix of commercial and residential uses.

TASK A SUMMARY OF FINDINGS

Task A-1 Phase I Review The findings from Phase I indicate that continued use of the Subject Property for single purpose retail is not supported by the market. Further, the Phase I report concludes that the Subject Property will not likely attract a major national retailer or another anchor grocer due its tertiary retail location and low traffic counts. Successful retail on the Subject Property will need to create a unique draw and establish the Subject Property as a destination. These uses could include a fitness center, restaurants/cafes, a hardware store, small specialty grocers, childcare, and instruction-oriented uses. The Phase I report indicates that the Subject Property can support between 20,000 and 25,000 square feet of retail in the near term. The majority of the future leasable space would be located on the NHSC Site with 1,500 – 4,000 square feet of supporting retail to be located on the Stod’s Site. This range of near-term supportable square footage is slightly less than the 30,000 square feet of retail space that is currently under lease at this NHSC Site. Additional residential units on the Subject Property could be accretive to the supportable retail on the site.

Task A-2 Market Assessment The Market Assessment analyzes current and projected conditions supporting the attached multi-family market, (for-rent and ownership), the senior housing market, and office market. Based on this analysis Heartland concludes that:

After reconciling projected demand with the current development pipeline and historical development patterns, there is sufficient evidence to support development of for-rent multi-family residential product on the Subject Property. Heartland estimates that there is demand for an additional 800 units over those currently in the pipeline within the Primary Market Area through 2018 and that the Subject Property is well positioned to capture a share of that total. Development of between 300 and 350 units begins to push



the capture rate of the Primary Market Area’s capacity to over 30 percent, and would be at the high end of the range that should be considered for the Subject Property. A reasonable target for new units on the Subject Property in the next development cycle (through 2018) is between 200 and 250 units.

The multi-family rental market fundamentals are trending up with rents improving after a difficult two-year decline and vacancies are decreasing which collectively indicates a growing demand. Based on our review of comparable apartment complexes in the area we conclude that the rent would be $1.85 per square foot per month for an average unit size of 750 square feet for an average monthly rent of $1,390. This is on the higher end of the spectrum and far exceeds the rental rate achieved at the only stacked flat apartment project near the Subject Property, but is justified based on the overall strong location of the Subject Property with easy access to job centers but in a quiet setting, with the convenience of commercial services on site, and the anticipated quality of the complex over that of comparable projects.

Based on current and projected market conditions, the inclusion of attached multi-family ownership (condominium) units is not recommended as a redevelopment alternative on the Subject Property. The anemic demand, oversupply, and non-existent capital market for new construction all indicate that this would not be a prudent product to include at this time.

Office as a primary use on the Subject Property is not supported. Due to the Subject Property’s tertiary office location removed from major arterials, with inferior access to freeways, and distance from a critical mass of related services needed to attract office tenants; office on the Subject Property will likely take the form of professional service firms (insurance, real estate, dentistry, travel agency etc.) in ground floor commercial space. Further, there is no significant difference between office rents and retail rents in this market area.

Based on our review of the supply pipeline and demand estimates, Heartland estimates that there is demand for roughly 775 senior housing units in the Primary Market Area through 2018. The neighborhood surrounding the Subject Property is quiet and services (e.g. personal care, health care, and conveniences, etc.) are nearby making Subject Property a strong candidate for a senior housing project.

In Task A-2, Heartland also reviewed several examples of Eastside neighborhood retail centers that have transitioned from single purpose retail to a mix of uses. The purpose of this review was to understand what has made them successful to date, or in some cases, not successful, and what learnings can be applied to the Subject Property. Four of the five properties that were reviewed involved redevelopment into a new mixed-use project and one involved the renovation of the retail center. The properties that were analyzed included:

Juanita Village, Kirkland;

Lake Hills Village, Bellevue;

Kelsey Creek Center, Bellevue;



Town Center and Downtown Revitalization, Kenmore; and

Totem Lake Mall, Kirkland.

While there is not one model for this type of redevelopment, in general, the following apply to all of the comparable developments that were reviewed and these should be considered in looking at redevelopment of the Subject Property. Common Project Elements

These projects have long timelines with multiple phases and require flexibility in order to adapt to changing market demands.

Key anchor uses—either public facilities or national retailers—help to both catalyze and anchor the developments.

The addition of residential uses benefits the retail, but the surrounding retail trade area must also be strong.

The feasibility of implementing ―urban‖ density projects in suburban environments is challenging because:

o Suburban parking ratios are costly to maintain in structures or underground.

o Suburban rents are substantially lower than urban rents in the Puget Sound while mid-rise construction costs remain the same.

Common Design Elements

Movement of small retail shops from behind large surface parking lots or within enclosed malls to areas closer to the street.

Reconfiguration of parking to accommodate parallel and angled parking.

Some amount of shared parking between the retail and housing uses.

Addition of social gathering spaces.

Significant focus on pedestrian-oriented landscaping and hardscaping to create inviting and welcoming environments that draw both residents and retail customers.

TASK B SUMMARY OF FINDINGS: FEASIBILITY EVALUATION As described in more detail in the Task B: Feasibility Analysis section of this report, Heartland analyzed multiple rehabilitation and redevelopment scenarios on both the Stod’s site and the NHSC site. This analysis found that:



The current Neighborhood Business zoning designation on the Subject Property, does not provide the flexibility to develop economically viable mixed-use projects and will instead propagate more commercial space than this market area can support.

Marginal economic feasibility will not likely encourage significant redevelopment efforts in the near future as presently zoned.

Conservative construction and permanent loan financing terms currently available (and likely to be in place for the foreseeable future) do not provide for the use of significant leverage.

In the meantime, the Subject Property ownership entities will need to continue to operate struggling retails centers.

To make future redevelopment more attractive moderate land use code changes for the Subject Property are recommended to be adopted. A set of potential code modifications are discussed further in this report.

The following two tables summarize the key financial performance metrics of the scenarios that were analyzed. The scenario that modeled redevelopment under the current zoning regulations, Scenario 3a, for both Subject Property sites are not financially feasible based on their negative rate of return. The programs, key assumptions of each scenario, and financial performance are discussed further in the Task B: Feasibility Analysis section of this report. Summary of Key Financial Performance Metrics - Stod’s Site

Indicates best performing alternative

Discount

Rate Value

Value/

SF

Rate of

Return

Total Equity

Needed

Stabilized

Year

Stabilized

Cash on Cash

Stabilized

Value

Total

Development

Cost

Margin

on Cost

Exit Cap

Rate

Scenario 1 10% $1,095,591 $15 n/a $0 2011 n/a $1,111,454 $0 n/a 8.75%

Scenario 2 17% $1,336,115 $18 n/a $1,609,726 2011 n/a $4,898,779 $1,563,730 n/a 8.75%

Scenario 3a: Current Zoning -7.0% $10,191,778 2014 2.5% $4,325,708 $12,704,910 -193.7% 6.20%

Return on Cash Equity -4.3% $8,318,698 3.1%

Scenario 3b: Moderate Code Modification 9.4% $17,399,051 2015 12.0% $34,939,349 $37,697,967 -7.9% 6.20%

Return on Cash Equity 11.4% $15,525,971 13.5%

Scenario 3c: Maximum Capacity 9.1% $26,853,705 2016 13.5% $60,204,633 $61,831,140 -2.7% 6.20%


Scenario



Summary of Key Financial Performance Metrics - NHSC Site


Discount

Rate Value

Value/

SF

Rate of

Return

Total Equity

Needed

Stabilized

Year

Stabilized

Cash on Cash

Stabilized

Value

Total

Development

Cost

Margin

on Cost

Exit Cap

Rate

BAU (As Is) n/a $2,170,332 $8 n/a $0 n/a n/a n/a n/a n/a 8.75%

Scenario 1 8% $6,416,221 $25 n/a $1,383,546 2015 28% $9,212,739 $0 n/a 8.75%

Scenario 2 8% $7,164,624 $28 n/a $1,605,666 2015 27% $10,780,514 $1,143,922 n/a 8.75%



Scenario 3b-1: Moderate Code Modification 15.2% $12,275,616 2015 7.0% $25,156,331 $26,094,397 -3.7% 6.20%




Scenario 3c: Maximum Capacity 9.5% $67,549,748 2016 4.1% $149,066,670 $144,798,062 2.9% 6.20%


Scenario


Phase II Overview

The Newport Hills Commercial Area (―Subject Property‖) is located in the City of Bellevue (―City‖), Washington within the Newport Hills neighborhood, which is generally bound by Interstate 90 to the north, Interstate 405 to the west, Southeast 69th Street to the south and Coal Creek Parkway to the east. Context maps of the Subject Property are located in Exhibit 1 and Exhibit 2. The Newport Hills neighborhood can generally be characterized as a single family residential neighborhood with limited multi-family housing or commercial property. This land use pattern is a function of the zoning in this area. The Subject Property is in the only commercially zoned area of the Newport Hills neighborhood and totals 7.63 acres between the two sites that compose it. The 5.91 acre Newport Hills Shopping Center Site (―NHSC Site‖) is located on the east side of 119th Avenue Southeast and comprises approximately 60,000 square feet of leasable commercial space. The NHSC Site includes two stand-alone retail spaces; a 6,080 square foot bank building and a 2,150 square foot fast food restaurant building, as well as nearly 51,300 square feet of in-line retail. The 1.72-acre Stod’s Baseball Site (―Stod’s Site‖) is east of 119th Avenue Southeast and comprises a 27,000 square foot retail building. In 2009, the NHSC Site lost two anchor tenants, Red Apple Grocery and the Hallmark Store/ Pharmacy that together totaled nearly 30,000 square feet. Loss of this tenant leaves the NHSC Site 50 percent vacant. Stod’s Site is improved with a building that was formerly occupied by an Albertson’s grocery store and dry cleaner. Today the building is used by Stod’s Baseball School and a pizza establishment. The buildings at both Subject Property sites are 40 to 50 years old and are generally in need of substantial upgrade or replacement. The current situation with these two sites presents challenges and opportunities for both the property owners, neighborhood residents and the City of Bellevue. The property owners, community members, and the City are aligned in their desire to see the Subject Properties revitalized.

SCOPE OF WORK Heartland was contracted by the City to complete this Phase II of the Newport Hills Market and Planning Study. The Phase II scope of work is divided into two tasks. Task A is a Market and Site Analysis of the Subject Property and Task B is a Feasibility Analysis of the Subject Property under several scenarios. For Task A, Heartland reviewed and commented on the report material resulting from Phase I in which Real Retail LLC assessed the Subject Property’s position in the retail market. Heartland also conducted non-retail market research, which included:

Analysis of the for-sale and for-rent residential market;

Analysis of the senior housing market;

Analysis of the office market; and

An evaluation of comparable neighborhood center redevelopment efforts.

PHASE II OVERVIEW


In Task B, Heartland evaluated the feasibility of the Subject Property in its current, as-is, condition compared to several redevelopment alternatives. This task included the following elements:

Identification of programmatic placement and intensity of uses of the NHSC Site based on the findings from Phase I and Phase II Task A;

Assessment of the economic feasibility of specific redevelopment scenarios for the Subject Property; and

Identification of the types of Land Use Code, design guidelines, or other City regulatory changes that may need to be addressed in Phase III in order to achieve the optimal redevelopment scenario(s).

The following report addresses each of the above scope elements described for Task A and Task B of Phase II of the Newport Hills Commercial Area Analysis.


Task A-1: Phase I Summary Review

To help inform the scenarios developed for feasibility analysis in Task B, Heartland reviewed the Phase I ―Newport Hills Retail Analysis‖ report prepared by Real Retail, dated September 2010 (―Retail Report‖). The Retail Report provided market overviews of the Puget Sound, Seattle, Eastside, and the Newport Hills Trade Area. It also evaluated grocery store supply and demand factors and provided an overview of the competitive retail properties in the area. The report concluded with recommendations regarding an adaptive re-use of the existing Subject Property buildings, a permanent adaptive re-use of the Subject Property, and specific retail uses that could be targeted for the Subject Property.

Challenges The Retail Report found the following key challenges with the Subject Property:

Average daily traffic counts of less than 5,000 near the Subject Property do not support national retailers.

The Subject Property has no direct connection to major arterials, which limits its drive-by accessibility and visibility.

The Subject Property faces considerable competition from nearby Coal Creek Village, Coal Creek Marketplace, Factoria Village, and Factoria Marketplace.

Newport Hills’ demographics do not support a standard grocery store.

No additional retail space on the Subject Property can be supported.

Near-term demand will likely only support 20,000 to 25,000 square feet of small shop retail, over 70% less than the existing 88,150 square feet of retail space located on the Subject Property.

Current zoning does not allow for flexibility with retail uses and sizes. Recommended zoning code modifications included:

Allow for apparel and accessory stores.

Increase health/fitness club to 20,000 square feet.

Increase hardware to 15,000 square feet.

Increase childcare maximum to 10,000 square feet.

TASK A-1: PHASE I SUMMARY REVIEW


Opportunities

The Retail Report highlighted a few areas of opportunity, including:

The demographics in the Subject Property trade area, defined by major arterials and natural barriers are strong; household income is over $95,000 per year and the population is highly educated.

Successful retail on the Subject Property will need to create a unique draw to the area and establish the Subject Property as a local destination. These uses could include a fitness center, restaurants/cafes, a hardware store, small specialty grocers, childcare, and instruction-oriented uses.

There are some key existing neighborhood amenities including the Newport Hills Swim and Tennis Club, YMCA Lake Heights Child Care, Newport Hills Park and Playfields, Newport Hills Elementary School, and Tyee Middle School that could drive traffic to the Subject Property and could have synergy with the redevelopment of the site.

Addition of higher density housing will be accretive to the retail space.

The findings from the Retail Report informed Heartland’s scenarios for feasibility analysis conducted in Task B. Based on information from the Real Retail report, all of the redevelopment alternatives included less retail space than exists today, higher-density mixed-use buildings, and a reconfiguration of new retail to be more pedestrian-friendly. In addition, Heartland analyzed both a moderate and substantial renovation of the existing retail space to attract new tenants. While it can be shown that some of these alternatives may prove to be economically and physically feasible, it is important to understand that in order for them to actually be realized, the property owners or future developer must make a concerted targeted marketing effort. This is particularly true because the retail success is dependent on finding niche tenants. On sites like the Subject Property that has low traffic counts, accessibility challenges, and significant nearby competition, simply building or renovating the retail space does not guarantee that it will be occupied. The alternatives that Heartland analyzed are described in more detail in the Task B section below.


Task A-2: Market Assessment

REGIONAL CONTEXT The Subject Property is located in the Newport Hills Subarea (―Subarea‖) that is bordered on the west by Interstate 405, on the south by Southeast 69th Street and on the north and east by Coal Creek Parkway. Its proximity to Interstate 405 and Interstate 90 makes downtown Seattle, Bellevue and the Cascade Mountains easily accessible. The Subarea is centrally located in King County (―County‖) with major regional employment centers nearby. Downtown Bellevue is roughly five miles to the north of the Subject Property, or about a 10-minute drive, and downtown Seattle roughly 11 miles west of the Subject Property, or about an 18-minute drive. The Subarea is comprised primarily of single-family homes and the Subject Property has historically served as the neighborhood center for convenience shopping for goods such as food, drugs, hardware, and personal services. The Subject Property had been anchored by supermarket(s); however, grocery stores and some of the other retail businesses have relocated to the Coal Creek Parkway Southeast shopping center area located southeast of the Subarea at Newcastle Way/Southeast 69th Way and Coal Creek Parkway Southeast. The graphic in Exhibit 1 provides context for the Subject Property’s location within the region and Subarea.

SUBJECT PROPERTY DESCRIPTION AND SURROUNDING USES The Subject Property is at the intersection of 119th Avenue Southeast and Southeast 56th Street and is currently owned by two entities, which are separated by 119th Avenue Southeast. The Stod’s Site, which is located west of 119th Avenue Southeast, is a 1.72 acre parcel owned by BGN Properties, Inc. This site is improved with a 27,000 gross square foot1 former grocery store that was built in 1969. The NHSC Site is located east of 119th Avenue Southeast and is owned by Rainier Northwest University LLC. This site is comprised of three parcels totaling 5.91 acres and currently contains a neighborhood shopping center totaling 51,290 gross square feet of retail space, a 6,080 square foot bank building, and a 2,150 square foot fast food restaurant2. Table 1 summarizes the current conditions at the two sites. Table 1: Current Subject Property Conditions

Property Lot Acres Building

Square Feet Vacant

Square Feet Vacancy

Rate Year Built

NHSC Site 5.91 61,150 30,010 50%

In Line Retail 51,920 30,000 1963

Former Grocery 20,100 20,100 100%

East Retail Line 25,190 9,900 37%

South Retail Line 6,000 0 0%

Fast Food Restaurant 2,150 0 0% 1963

Bank Building 6,080 0 0% 1977

Stod’s Site 1.72 27,000 0 0% 1969 Source: Property owner files

The property uses immediately adjoining the Subject Property are depicted in Exhibit 2, but can generally be described as residential in nature with the exception of the Newport Hills Swim and

1 Square footage estimate has been provided by the property owner. 2 Ibid

TASK A-2: MARKET ASSESSMENT


Tennis Club, the Chevron gas station, the Newport Hills Professional Center the Newport Hills Community Church. The Swim and Tennis Club is located north of the NHSC Site and on the north side of Southeast 56th Street. The Newport Hills Professional Center is located on the southwest corner of Southeast 56th Street and 119th Avenue Southeast and directly adjoins the Stod’s Site to the north. The Chevron gas station is on the east side of 119th Avenue Southeast and adjoins the NHSC Site to the south and west. South of the Stod’s Site and south of Southeast 58th Street is a King County Park and Ride parking lot and the Newport Hills Community Church. Other notable land uses near the Subject Property include the Newport Heights elementary school, which was recently constructed in 2008 and the Tyee Middle School temporary location in the Bellevue School District facility on Southeast 60th Street. The 4.5 acre Newport Hills Community Park is located on the southwest corner of Southeast 60th Street and 120th Avenue Southeast. Additionally, the lighted sports fields at this park have recently been retrofitted with synthetic turf. This improvement will help draw traffic to the area in the evenings with sports teams and community members able to use the park for longer hours.

CURRENT ZONING The Subject Property is currently zoned Neighborhood Business (NB). According to the Bellevue Land Use Code, development in the NB zone is intended to encourage small scale, mixed-use commercial that provide housing opportunities and retail and service businesses for the surrounding residential community. A limited amount of administrative office space may be developed in this zone. The following narrative summarizes Bellevue Land Use Code requirements that dictate building use and form in NB Districts.3 It should be noted that entire Stod’s Site and a significant portion of the NHSC Site are within a Transition Area Design District overlay (a ―Transition District‖).4 The Transition District is intended to provide a buffer between residential property and property that permits development of higher intensity, such as the NB district. All development within a Transition District must be reviewed by the Director of the Department of Planning and Community Development using the Design Review Process. The implications of the Transition District on the Subject Property are incorporated in the discussion below.

Residential Uses Residential uses are permitted in NB Districts only if the units are located on the second floor and above the permitted ground floor nonresidential uses. Residential common area cannot be on the ground floor.

Building Height The base building height for new development is 20 feet with increases permitted up to 15 feet for a total allowable height of 35 feet if basement parking occupies a minimum of 75 percent of the building footprint. Conversely, buildings may achieve an additional 10 feet over the base height of 20 feet for a total allowable height of 30 feet if office or residential use occupies the second floor. While the maximum building height can reach up to 35 feet, buildings cannot exceed two stories. The Transition District permits buildings up to 35 feet if certain conditions

3 Bellevue City Code. 20.10.340, ―Neighborhood Business District (NB).‖

Bellevue City Code. 20.20.010. ―Uses in land use districts dimensional requirements.‖ 4 Bellevue City Code. 20.25B. ―Transition Area Design District‖



are met; however, the impact of this overlay is not significant because the limitation to two stories ultimately governs the redevelopment capacity.

Lot Coverage The base building to lot coverage ratio is 35 percent. The code allows for up to a 50 percent coverage ratio if the development is a mixed-use building containing residential area equal to at least 50 percent of the building footprint, or if congregate care senior housing is constructed. In order to achieve this higher lot coverage the non-residential uses of the project cannot exceed 35 percent building to lot coverage. Property in a Transition Overlay must setback primary structures a minimum of 30 feet from the property line.

Residential Unit Density Where the lot coverage is increased to 50 percent through the construction of senior housing (all types mentioned above) the total density cannot exceed 15 dwelling units per acre.

Parking Requirements Table 2 summarizes the minimum and maximum parking requirements for land uses permitted in the NB zone. Table 2: Minimum/Maximum Parking Requirement by Use

Land Use Parking Requirement

Multi-family

1 BR or Studio 1.2 stalls/unit

2 BR Unit 1.6 stalls/unit

3 BR Unit 1.8 stalls/unit

Senior Housing

Nursing Home 0.33 stalls/bed

Congregate Care 0.5 stall/unit

Senior Citizen Dwelling 0.8 stalls/unit

Commercial

Retail in shopping center less than 15,000 square feet

5.0 stalls/1,000 net square feet (min) 5.5 stalls/1,000 net square feet (max)

Retail in shopping center between 15,000 and 400,000 square feet

4.0 stalls/1,000 net square feet (min) 4.5 stalls/1,000 net square feet (max)

Restaurants

Sit down restaurant 14 stalls/1,000 net square feet

Take out restaurant 16 stalls/ 1,000 net square feet Source: Bellevue City Code. 20.20.590, ―Parking, circulation and walkway requirements.‖

DEMOGRAPHICS This market analysis evaluates both residential product (apartment, condominium, and senior housing) as well as office product. For each of these product types, Heartland assessed the overall demographic trends for those persons and households located in the County and within a 10-minute and 15-minute drive time area from the Subject Property. The 10-minute drive time area represents the primary market area (PMA) or the geographic area from which the Subject Property is expected to draw the majority of its demand for ownership, rental, senior, and professional office. This area generally stretches four miles to the west into the Mercer Island commercial core, four miles to the east near the south end of Lake Sammamish,



almost five miles to the south into portions of Newcastle, and five miles to the north to SR-520. For purposes of this report, downtown Bellevue is excluded from this area as rental and ownership households projected for growth in this area are unlikely to consider a more suburban setting such as Newport Hills. The area between the 10-minute and 15-minute drive time area represents the secondary market area (SMA) and encompasses portions of Kirkland, Bellevue, Redmond, Mercer Island, Issaquah, Newcastle, and Renton. The SMA supplies additional support to demand beyond the PMA. The theory is that a portion of the owners, renters, or business owners looking to locate in the general area that are considering a site in the SMA may be captured by the PMA. A map found in Exhibit 3 illustrates these two market areas.

Household Composition The current household estimates through 2010 are based on data provided by the Washington Office of Financial Management’s (―OFM‖) April 1 official population estimates and DemographicsNow, a market research data provider. It is important to note that the future projections are based primarily on growth trends specific to the area of focus (PMA or SMA) for several reasons. First, these projections generally rely on past growth trends – or are backward looking which are shaped by past and current regulatory conditions. As it relates to this analysis, the PMA and SMA, are primarily (+/-70 percent) zoned for lower density reidential uses.5 When developable land supply is constrained as it is in both the PMS and SMA, the growth rate of household formation would be expected to maintain its past rate or trend downward. An example where these two factors influence growth estimates that become reality is if a portion of a market area that is currently zoned largely for low density residential was to be rezoned by the city in the coming years to permit high-rise residential then household growth for that PMA may exceed current estimates. What would likely occur in this situation is a portion of new households anticipated to locate to the SMA may instead move to the PMA due to the new development permitted by this hypothetical example. This is why the SMA is important. Between 2000 and 2010 County wide households grew at an average annual rate of 1.3 percent yielding the County roughly 9,595 new households per year. In comparison, the PMA grew at an annual rate of 1.0 percent and the SMA grew at a rate of 1.1 percent. This annual growth between 2000 and 2010 translates to roughly 235 new households per year in the PMA and 611 new households per year in the SMA. The average people per household in 2000 compared to 2010 for these areas are detailed in Table 3. These household sizes are slightly below the US average of 2.67, but significantly above downtown Bellevue households, which was 1.66 in 2000 declined to 1.50 in 2010. Table 3: People Per Household Comparison

Area 2000 2010 Change

King County 2.44 2.40 (-0.05)

PMA 2.42 2.36 (-0.06)

SMA 2.48 2.44 (-0.04) Source: OFM, DemographicsNow

5 Based on a survey of King County Assessor parcel data for the PMA and SMA. Zones with a ―R‖ (residential) or ―SF‖ (single family) designation were counted. The PMA has roughly 74 percent of its land zoned R or SF with low to moderate densities less than 40 units per acre while the SMA has 70 percent of its land zoned R or SF. The Newport Subarea has 96 percent of its land zoned low to moderate density residential.



The 2015 projection offered by DemographicsNow suggests that household size in the County and SMA will decline slightly by 0.03 people per household, while the PMA is expected to see its household size increase slightly by 0.03 people per household. This projection also suggests that more families will be moving to the PMA. Another key data point for evaluating demand is the propensity to own versus rent. The information in Table 4 reveals that home ownership is more common in the PMA compared to the County and the SMA. Home ownership rates are in the low 60 percent range for the County and the SMA for 2000 and 2010 while the ownership rate has remained at 74 percent for the PMA. The fact that the PMA’s ownership rate is over 10 percent greater than the two other areas is likely due to the zoning conditions and the resulting available supply of rental product. Table 4: Ownership/Rental Propensity

Ownership Rental

2000 2010 2000 2010

King County 60% 62% 40% 38%

PMA 74% 74% 26% 26%

SMA 63% 63% 37% 37% Source: OFM, DemographicsNow

Heartland generally contends that the ownership rate will decline slightly during the next development cycle as a result of the ―Great Recession‖, which was caused by an over-exuberant housing market, and the positive market fundamentals that are creating a more attractive apartment investment and development environment. The outfall from the recession is both an adjustment to housing prices that became inflated during the housing bubble and possible bank underwriting or federal policy changes such as modifications in how mortgage interest is treated in tax filers’ gross income adjustments. On the market side, investors and multi-family developers are seeing the effects of the recession on the for-sale housing market, making condominium projects difficult to pencil and near impossible to finance. However, the multi-family rental market is beginning to attract development capital with a positive shift in renter-oriented demographic, improving employment growth, and low vacancy rates that are driving increased demand for new units. Using the data sources noted above, Heartland estimated overall household growth and ownership/rental splits for the PMA and SMA through 2018, which is historically the period in a decade when the development cycle has peaked. It is important to keep in mind the caveat noted in the introduction of this section; these estimates are based on past trends and housing unit development patterns, among other factors. Changes in regulatory conditions or a shift in market dynamics could alter the course of these estimates. Table 5 and Chart 1 help summarize these projections and the following bullet points highlight the key findings from this analysis.

Overall household growth in the PMA is not currently projected to be very robust through 2018; the total number of new households is estimated to be approximately 140 households per year for an average annual growth rate of 0.5 percent. This is roughly two times less than the average annual growth of 235 households formed between 2000 and 2010 in the PMA. The SMA is anticipated to grow by roughly 860 households per year through 2018. This annual growth is expected to increase at an average rate of 1.1 percent, which is similar to the growth rate anticipated for the County.

Ownership growth in the PMA is anticipated to be essentially flat through 2018 with an average of approximately only 60 new ownership households entering this market area.



Ownership growth in the SMA appears to be stronger than the PMA through the next development cycle with an average of roughly 570 new ownership households entering this area per year. This equates to an average annual growth rate of 1.4 percent compared to the PMA’s average annual growth rate of 0.3 percent. Countywide, ownership households are projected to increase at a rate of 1.4 percent per year through 2018.

Households seeking rental housing are estimated to outnumber those seeking to own in the PMA through 2018. The estimated average annual increase for the PMA is 80 households, which equals an average annual rate of 1.3 percent. The SMA is estimated to welcome an average of 290 rental households per year, which equals a growth rate of 1.3 percent per year. The Countywide rental household growth rate is estimated to be approximately 1.4 percent. This Countywide rate suggests the current estimates indicate rental growth will be accommodated in other areas of the County more so than in the PMA or SMA.

Table 5: Household Growth Projections

2010 to 2018

2000 2010 2014 2018 Total

Annual Growth

Annual Growth Rate

Population

King County 1,737,046 1,933,400 2,026,763 2,124,878 191,478 23,935 1.2%

PMA 59,623 64,493 66,375 67,915 3,422 428 0.7%

SMA 133,711 144,804 151,835 158,962 14,158 1,770 1.2%

Households

King County 710,920 806,865 854,728 898,727 91,863 11,483 1.4%

PMA 24,031 26,382 26,931 27,492 1,110 139 0.5%

SMA 55,225 61,338 64,971 68,214 6,875 859 1.4%

Ownership Households

King County 425,438 501,436 531,255 558,625 57,189 7,149 1.4%

PMA 17,855 20,110 20,237 20,571 461 58 0.3%

SMA 34,546 39,532 41,961 44,081 4,549 569 1.4%

Rental Households

King County 285,481 305,429 323,473 340,103 34,674 4,334 1.4%

PMA 6,176 6,272 6,695 6,921 649 81 1.3%

SMA 20,679 21,806 23,010 24,132 2,326 291 1.3% Source: OFM, DemographicsNow



Chart 1: Household Growth Projections

Source: OFM, DemographicsNow, Heartland

Senior Demographic As one of the fastest growing age cohorts in the country, seniors are a potential target demographic for the Subject Property. . This demographic age cohort begins at 55, with the majority source of demand for ―aging in place‖ residential projects oriented towards those over 65. The 55 to 64 year old cohort is included here because this is the age cohort that feeds the future aging population and is a factor in estimating demand for the later years of the development cycle. Countywide, the 55 and over estimated population accounts for approximately 39 percent of the total population in 2010 (1,933,400 people). The 55 and over population in the PMA accounts for 29 percent of the area’s total population (64,493 people), which is 10 percent below the County’s share. On the other hand, the SMA’s 55 and over population share is approximately 43 percent of the total population for that area (144,804 people). Table 6 illustrates these observations. Table 6: 55+ Age Cohort Population Share by Area – 2010 Estimate

PMA SMA King County

Age 55 - 64 16% 22% 16%

Age 65 - 74 8% 12% 13%

Age 75 + 5% 9% 10%

Total 29% 43% 39%

Source: DemograhicsNow, Heartland

In general, senior housing developers focus their demographic analysis on a five-mile radius area. Because of the natural constraints created by Lake Washington, the 10-minute drive time area as defined by the PMA is a close proxy with the north/south radius length approximating five miles and the east/west radius length between three and four miles. The age cohort with the greatest growth potential in the PMA is the 65 to 74 age group. This group is expected to grow by an average of 431 people per year between 2010 and 2018. This



equals an average annual growth rate of 6.1 percent. The 55 to 64 year old age cohort, or the ―feeder cohort‖, is estimated to grow by an average of 395 people per year through 2018 equaling a rate of 3.0 percent. Table 7 shows Heartland’s population estimates by age cohort for the PMA. Table 7: Population Growth Projections Ages 55+ 2010 to 2018

2000 2010 2014 2018 Total

Per Year

Annual Growth

AGE COHORT - 10 Minutes Drive Time (PMA)

Age 55 - 64 6,357 10,350 11,324 13,831 3,481 435 4.2%

Age 65 - 74 4,097 5,416 6,801 8,591 3,175 397 7.3%

Age 75 + 3,195 2,974 2,885 3,404 430 54 1.8%

Total 13,649 18,739 21,010 25,826 7,087 886 4.7%

Source: DemograhicsNow, Heartland

Employment Estimates Employment trends are evaluated in this report in order to assess the potential demand for office users at the Subject Property. The Subject Property is located outside of the Subarea’s primary office area, which is located around Interstate 90 in Factoria. Office users in Factoria tend to be concentrated in dedicated office buildings rather than single story buildings that may be leased by office or retail tenants. The Subject Property lends itself to the latter: tenants that provide services catering to the local community, such as financial, insurance, real estate, or legal offices and medical related users to name a few. Employment estimates for target office users were generated by using employment estimates from the US Bureau of Labor Statistics, the Washington State Employment Security Department and DemographicsNow at the County level and PMA. The target employment sectors assessed for this analysis are the following:

Insurance carriers and related activities;

Real estate;

Rental and leasing services;

Professional and technical services;

Management of companies and enterprises; and

Administrative and support services.

These sectors are collectively referred to as the professional employment sector. Additionally, the ambulatory health care services employment sector was evaluated. This sector is comprised of clinics, dental offices, and other medical related offices located outside of hospital campuses. Countywide, the professional employment sector accounts for 19 percent of the 2010 total estimate and the ambulatory health care service sector accounts for roughly 4 percent of the total.



Further, employment estimates indicate the PMA accounts for roughly 3 percent of the County’s total employment or roughly 34,000 of the 1.1 million. Utilizing similar ratios, the estimated 2010 professional and ambulatory health care employment for the PMA is estimated to be 8,400 jobs. Table 8 summarizes this 2010 estimate. Table 8: 2010 Employment Estimates

2010 Estimate

Share of County Total

King County Total 1,129,000

Target Sector Total 261,000

Professional Employment 214,000 19%

Ambulatory Health Services 47,000 4%

PMA Employment 34,000 3%

Target Sector Total 8,400

Professional Employment 7,000

Ambulatory Health Services 1,400 Source: US Bureau of Labor Statistics, Washington State Employment Security Division, Heartland

Based on the 2010 estimates and projected employment growth based on Washington State Employment Security Division estimates, Heartland estimates that roughly 370,000 square feet of new office space and 50,000 square feet of medical related space could be supported in the PMA through 2018. Table 9 summarizes this finding. Table 9: 2010 to 2018 Employment and Demand Estimates

2011-14 2015-18 Total Office Space Demand*

PMA 2,021 1,546 3,567 447,650

Professional Employment 906 1,070 1,976 395,234

Ambulatory Health Services 47 103 150 52,417 * Space demand estimate based on 250 square feet per employee estimate for professional employment and 350 square feet per employee for ambulatory health services employment Source: US Bureau of Labor Statistics, Washington State Employment Security Division, Heartland



MULTI-FAMILY MARKET For-rent multi-family is a potential use for the Subject Property in the redevelopment scenarios. The following analysis evaluates the current supply and market fundamentals of the multi-family market in the PMA and SMA.

Existing Supply The existing supply of market rate multi-family units in close proximity6 to the Subject Property can generally be described as suburban style complexes with an average of 2 to 3 stories and multiple buildings in the complex.5 The complexes in this close-in area are surfaced parked and consume more land per square foot than multi-family projects located beyond this area. Table 10 illustrates this observation. A map showing the location of the market rate multi-family complexes is located in Exhibit 4 of this report. Table 10: Multi-Family Complex Summary Comparison by Area

Area Total Complexes

Total Units

Units/ Complex

Avg Year Built

Avg Unit Size

Avg Floors

Avg Buildings

Land SF/Units

5 Minutes 15 853 57 1983 944 2.5 6.3 2,319

PMA 125 6,149 49 1975 893 2.4 3.9 1,888

SMA 410 15,827 39 1972 867 2.2 3.6 2,025

Overall 535 21,976 41 1973 873 2.2 3.7 1,987

Downtown Bellevue 22 3,393 154 1998 823 7.1 1.9 326 Note: All areas exclude downtown Bellevue from the totals and averages. Source: King County Assessor, Heartland

Further, Table 11 shows that the number of market rate multi-family complexes near the Subject Property represents only 14 percent of the total units in the PMA (853 out of 6,149). The projects in this area also take up at least 300 more square feet per unit of land, average more total buildings, and have units at least 50 square feet per unit more than complexes in other parts of the PMA and SMA. These observation are largely indicative of the zoning in this area; where multi-family complexes are permitted, the zoning encourages low density suburban style apartments. There are only 21 complexes in the PMA and SMA that can be described as ―urban‖ style complexes. This style is generally defined as complexes with at least 3 stories of residential, at least 25 units, may include some structured parking or retail, and have less than 1,000 land square feet per unit with an average land square feet per unit near 500. The average year built for these complexes is 1993. Six of these complexes are in the PMA and the remaining 15 are in the SMA with the majority located in Renton (13) and the remainder in Mercer Island, Kirkland, or Issaquah. The comparable projects described in a subsequent section generally fit this style of development.

6 Close proximity is defined here as with a five minute drive from the Subject Property. This area generally extends towards Interstate 90 to the north, Coal Creek Parkway Southeast to the west, Newcastle to the south, and Interstate 405 to the west.



Trade Area Multi-Family Trends Market fundamentals for multi-family product began to decline around the time the recession began in late 2007 early 2008. Since then rents have declined and vacancy has increased throughout the Puget Sound resulting in few new developments and existing apartment properties resorting to offering concessions such as months of free rent, free or reduced parking, and adjusting vacancy rates down. These trends however, are beginning to turn as vacancy is beginning to tighten and rents are stabilizing. Table 11 and Chart 2 show that through the Fall 2010 rents are still declining year-over-year with the Factoria subarea being the only exception. However, rents in all of these areas have actually increased slightly since the Spring 2010. This recent rental rate improvement is being driven by an increasing demand evidenced by the improving vacancy rate, which is lower year-over-year in all areas. Table 11: Multi-family Year-over-Year Trends by Area

Rental Rate per Square

Foot per Month Rental Rate Vacancy Rate

Fall 2010

Fall 2009

Year over Year

Trend Fall 2010

Fall 2009

Year over Year

Trend Fall 2010

Fall 2009

Year over Year

Trend

Puget Sound $1.11 $1.13 $926 $941 5.0% 7.1%

King County $1.21 $1.23 $989 $1,007 4.9% 6.7%

New Eastside Product*

$1.68 $1.74 $1,452 $1,489 3.3% 4.1%

Factoria $1.21 $1.20 $1,136 $1,127 5.3% 6.3%

Note: The Newer Eastside Product data set is comprised of complexes built in the Bellevue East, Bellevue West, and Mercer Island submarkets. The buildings are constructed after 2000 in Bellevue and range in height from 2 to 5 stories. Source: Dupre & Scott

Chart 2: Multi-family Trends by Area

Source: Dupre & Scott



Comparable Project Survey In order to inform the multi-family feasibility analysis, comparable multi-family properties were surveyed. Determining the appropriate market area from which to draw comparable data was challenging in that there are very few multi-family properties within the Newport Hills neighborhood and none of them are new. Furthermore, most new multi-family development on the Eastside has occurred in downtown Bellevue, which is a different market profile, product type, and price point than what could be expected to be achieved in Newport Hills. Ultimately, we looked at five properties: two newly built properties in Renton; a 45 year-old multi-family property in Newport Hills; a 20 year-old property in the Factoria area that is undergoing substantial unit rehabs; and a new building on Mercer Island. While none of these properties are perfect comparables for future development on the Subject Property, they do help to define what the potential range for rents and unit sizes could be.

Rents: Weighted average monthly rents range from $0.90 to $1.91, with the average of the comparable set at approximately $1.50. The Newport Hills property rents are almost 50 percent of the Mercer Island property. This discrepancy is due to the age of the Newport Hills property and the location.

Vacancy: Vacancy rates are between 6 and 7 percent for the older properties in the comparable set. However, the two new buildings in Renton are at 66 and 82 percent vacant and are offering concessions, including anywhere from a 3 to 20 percent reduction off market rents. Both properties opened in mid-2010 and have yet to stabilize, but have noted strong velocity in lease up and both claim to be ahead of schedule in their lease-up timeline. As the multi-family market continues to stabilize and the properties go through their initial lease up, these vacancies should decline.

Unit Size: Weighted average unit size ranges from 728 to 1,040 square feet with most properties comprising a mix of studio, one-, and two-bedroom apartments. Newport Manor is the only property containing three-bedroom units.

Parking: Parking ratios range from 1.00 spaces per unit to almost 1.50 spaces per unit. At all of the properties, except for Mercer Place, at least one parking space is included as part of the monthly rent.

Table 12 and Table 13 summarize the key statistics of the comparable properties and more detailed information on the comparable set can be found in Exhibit 5.



Table 12: Multi-family Comparable Property Summary

Table 13: Multi-family Comparable Average Monthly Rents by Unit Type

Property

Neighborhood /

City

Average Unit

Size (sf)

Weighted Avg

Rent

($/sf/mo) Occupancy

Year

Opened

Parking

Ratio

1 Newport Manor Newport Hills 788 $0.90 93% 1965 1.00

2 The Mercer Place Mercer Island 1021 $1.91 94% 2006 1.33

3Park West at

Somerset

Bellevue--Factoria

Area 1040 $1.21 94% 1989 1.38

4Harrington

Square Renton Highlands 728 $1.84 34%

2010

(2011)* 1.45

5The Reserve

Apartments

Renton--near The

Landing 839 $1.58 18% 2010** 1.48

Average 883 $1.49 67% 1.33

* Harrington Square is two phases, Phase 2 will be complete in 2011. The first phase is not yet stabilized.

** The Reserve is not yet stabilized.

Property Total Units Studio 1 BD/1 BA 2 BD/2 BA 3BR

1 Newport Manor 27 - $750 $1,048 $1,200

2 The Mercer Place 150 $1,044 $1,846 $2,959 -

3 Park West at Somerset 145 - - $1,263 -

4 Harrington Square 110 $1,116 $1,550 $1,689 -

5 The Reserve Apartments 440 $965 $1,384 $1,469 -

Average 174 $1,042 $1,382 $1,685 $1,200



FOR-SALE MARKET – SINGLE FAMILY RESIDENTIAL The single-family market is assessed in this report for two reasons. First, it is to provide a marker for the general economic health of the PMA and SMA, and second to evaluate the resale market for the senior housing market. A stable single family home market gauged by pricing and sales volume trends and months of available supply is indicative of how an area is performing relative to the larger market. For this analysis, the PMA and SMA are compared to King County. Regarding the single family home market relative to the senior housing market, the sale of a single family home is a common source of funds for entry into a senior housing property. The more stable a market is, the more likely seniors living in the area will be able to move into one of these projects. Using sales data from the Northwest Multiple Listing Service (NWMLS), Heartland assessed monthly activity dating back to January 2007. This timeframe captures the months leading up to the median price peak, which occurred in mid-to-late 2007, the recessionary period, and the ongoing recovery. Overall, the single family market in the PMA, SMA, and King County are showing signs of recovery with sales volume and median price trends improving and the months of available supply in balance. Tables 14 through 16 and Charts 3 through 5 below, illustrate that while activity and pricing is not where it was at the peak, the single family market has appeared to stabilize in the PMA, SMA and to a lesser degree at the county level.

Sales Volume Sales activity was off nearly 40 percent from October 2010 and October 2009 in the PMA with only 38 transactions in 2010 compared to 63 in 2009. The SMA and King County also had October year-over-year declines, but to a lesser degree than the PMA. A sign of stabilization is the average sales activity for the previous 12 months, which has improved for all three market areas. In the 12 months between November 2009 and October 2010, the monthly average number of sales was 52 compared to 46 between November 2008 and October 2009, representing a 14 percent improvement in the PMA. Similar trends are found for the SMA and county. Table 14 and Chart 3 illustrate the sales volume trends. Table 14: Sales Volume Comparison Table

Oct-10 Oct-09

Year-over-Year Change

Nov 09-Oct 10 12 Mo Avg



PMA 38 63 -40% 52 46 14%

SMA 99 112 -12% 108 90 20%

King County 1,309 1,758 -26% 1,427 1,232 16% Source: NWMLS

Chart 3: Sales Volume Trends

Source: NWMLS



Pricing The median price was off by roughly 4 percent from October 2010 to October 2009 in the PMA, representing a decline in price from $514,000 to $493,500. King County also had October year-over-year declines, but to a slightly lesser degree than the PMA, while the SMA showed a strong year-over-year improvement between October 2010 and October 2009. This year-over-year snapshot indicates median prices either relatively stable or improving in these market areas. Another sign of stabilization is the 12-month weighted average of the year-over-year median sales price percent change, which has improved for all three market areas. During the 12 months between November 2009 and October 2010, the weighted average of the year-over-year median price change was roughly three percent for the PMA and SMA, compared to negative 16 and negative seven percent between November 2008 and October 2009. Table 165and Chart 4 illustrate the median sales price trends. Table 15: Median Sales Price Comparison Table

Oct-10 Oct-09 Year over Year Change



PMA $493,500 $514,000 -4% 3% -16%

SMA $575,000 $482,475 19% 3% -7%

King County $375,000 $377,500 -1% -1% -11%

Source: NWMLS

Chart 4: Median Sales Price Trends

Source: NWMLS

Chart 5 shows that the spread between the median list price and median closing price for both the PMA and SMA is closing relative to the nearly 10 percent difference in price observed between the buyer and seller in 2009 and early 2010. This is an indicator that the single family market is beginning to shift from a buyer’s market to a more balanced market. Chart 5: List Price/Close Price Spread Trends

Source: NWMLS



The months-supply-of-inventory indicator is also providing a positive sign for the single family residential market. Based on the monthly absorption over the past 12 months and the number of active listings in each market area, the months supply of inventory is between roughly five and seven months for the PMA, SMA, and county. This range is important because a market is generally in balance when its months supply of inventory is between five and seven months. When the supply is greater than seven months the market is a buyer’s market and it is a seller’s market when the months supply of inventory is under five months. Table 16: Months Supply of Inventory Table

Active Listings

Average Sales per Month

Months Supply of Inventory

PMA 292 52 5.6

SMA 685 108 6.4

King County 9,674 1,427 6.8

Source: NWMLS

FOR-SALE MARKET – ATTACHED CONDOS

Existing Supply The existing supply of condominium units in close proximity to the Subject Property can generally be described as suburban style complexes with an average of 2 to 3 stories and multiple buildings in the complex.7 The complexes in this close-in area are surfaced parked and consume more land per square foot than condominium projects located beyond this area. Table 17 illustrates this observation. A map showing the location of the condominium complexes in the PMA and SMA is located in Exhibit 6 of this report. Table 17: Condominium Complex Summary Comparison by Area

Area Total Complexes

Total Units

Units/ Complex

Avg Year Built

Avg Unit Size

Avg Stories

Avg Buildings

Land SF/Units

5 Minutes 26 1,628 63 1987 1,141 2.6 6.7 2,348

PMA 130 5,965 46 1986 1,201 2.6 6.0 2,989

SMA 317 11,352 36 1986 1,325 2.5 5.3 2,920

Overall 447 17,317 39 1986 1,289 2.5 5.5 2,944

Downtown Bellevue

19 1,649 87 1993 1,038 8.7 1.9 588

Note: All areas exclude downtown Bellevue from the totals and averages. Source: King County Assessor, Heartland

Table 17 shows that the quantity of condominium complexes close to the Subject Property represent only 27 percent of the total units in the PMA (1,628 out of 5,965). The complexes in this area, as well as in the remainder of the PMA and the SMA include over 2,000 square feet of land per unit. This observation is largely indicative of the zoning in this area, which where condominium complexes are permitted, encourages low density style complexes.

7 Close proximity is defined here as with a five minute drive from the Subject Property. This area generally extends towards Interstate 90 to the north, Coal Creek Parkway Southeast to the west, Newcastle to the south, and Interstate 405 to the west.



Sales Activity Using sales data from the Northwest Multiple Listing Service (NWMLS), Heartland assessed monthly condominium activity dating back to January 2007. This timeframe captures the months leading up to the median price peak, which occurred in mid to late 2007, the recessionary period, and the ongoing recovery. Overall, the condominium market in the PMA, SMA, and King County appears to have reached the trough. However, there are no significant signs of recovery with sales volume and median price trends generally flat and the months of available supply tilted towards the buyer’s market. Tables 18 through 20 and Charts 6 through 8 below illustrate that activity and pricing is not improving in the PMA or the County.

Sales Volume Sales activity is off nearly 60 percent from October 2010 and October 2009 in the PMA with only 7 transactions in 2010 compared to 17 in 2009. The SMA and King County also had October year-over-year declines over 40 percent. Evidenced by improving average sales activity in all three market areas in the previous twelve months, the condominium market seems to have reached the bottom. During the 12 months between November 2009 and October 2010 and between November 2008 and October 2009 the monthly average number of sales in the PMA was near ten. The SMA was similarly flat, while the county sales activity during these periods improved more substantially. Table 18 and Chart 6 illustrate the sales volume trends. Table 18: Sales Volume Comparison Table

Oct-10 Oct-09 Year over Year Change



Year over Year Change

PMA 7 17 -59% 10 10 2%

SMA 15 27 -44% 22 21 4%

King County

280 476 -41% 362 326 11%

Source: NWMLS

Chart 6: Sales Volume Trends

Source: NWMLS

The months supply of inventory indicator shown in Table 19 continues to indicate that the condominium market is still a buyer’s market. Based on the monthly absorption over the past 12 months and the number of active listings in each market area, the months supply of inventory is



between roughly eight and 11 months for the PMA, SMA, and county. As noted previously, when the months supply of inventory is over seven months it is a buyer’s market. Table 19: Months Supply of Inventory Table Active

Listings Average Sales

per Month Months Supply of

Inventory

PMA 110 10 11.0

SMA 169 22 7.8

King County 3,461 362 9.6 Source: NWMLS

Pricing Trends The median price is off by roughly seven percent from October 2010 and October 2009 in the PMA representing a decline in price from $235,500 to $218,750. The SMA and King County also had October year-over-year declines similar to the PMA. This year-over-year snapshot indicates median prices did not improve in these market areas. Another sign that the condominium market is not in recovery mode in the PMA and county is the 12-month weighted average of the year-over-year median sales price percent change. This metric declined for the PMA and County but improved in the SMA. During the 12 months between November 2009 and October 2010 the weighted average of the year-over-year median price change was roughly negative 19 percent for the PMA and negative five percent for the county, but a positive 10 percent for the SMA Conditions in the PMA have worsened compared to the period between November 2008 and October 2009. Table 20 and Chart 7 illustrate the median sales price trends. Table 20: Median Sales Price Comparison Table

Oct-10 Oct-09


Nov 09-Oct 10 12 Mo Weighted Avg

Nov 08-Oct 09 12 Mo Weighted Avg

PMA $218,750 $235,500 -7% -19% -4%

SMA $215,000 $240,000 -10% 10% -9%

King County

$231,750 $251,000 -8% -5% -8%

Source: NWMLS

The October 2010 median price per square foot for condominium units in the PMA is roughly $180 per square foot compared to $190 per square foot in the SMA. The year-over-year change for these two areas is negative 18 percent in the PMA ($218 per square foot in October 2009) and negative 14 percent in the SMA ($222 per square foot in October 2009). Chart 7: Median Sales Price Trends

Source: NWMLS



Chart 8 shows that the spread between the median list price and median closing price for both the PMA and SMA is not closing. The PMA and SMA spread remains at or near 10 percent. This is an indicator that the condominium market is still firmly a buyer’s market. Chart 8: List Price/Close Price Spread Trends

Source: NWMLS



Similar Condominium Project Survey In order to inform the feasibility of condominium units on the Subject Property, condominium properties that have similar characteristics to those that would be included in potential projects on the Subject Property (e.g. building height, unit count, ground floor retail, etc) were surveyed. As in the multi-family for-rent market, determining the appropriate set of complexes to draw comparable data from was challenging in that there are very few condominium properties within the Newport Hills neighborhood and none of them are new. Furthermore, most newer condominium development on the Eastside has occurred in downtown Bellevue, which is a different market profile, product type, and price point than what could be expected to be achieved in Newport Hills. Ultimately, Heartland evaluated nine properties: one older complex in Newport Hills, a three-story complex in Factoria, one Renton complex, one Mercer Island complex, and three in or near downtown Bellevue. Four of the projects are converted apartments and two of the downtown Bellevue projects have ground floor retail. While none of these properties are true comparable projects for future development on the Subject Property, they do help to define what the potential range for sales prices and unit sizes could be.

Unit Size: Weighted average unit size ranges from 651 to 1,200 square feet with most properties comprising a mix of studio, one-, and two-bedroom units. The complexes that were built and sold as condominiums average 1,050 square feet, while projects originally built as apartments average 760 square feet.

Sales Price: Weighted average sales price per square foot between 2005 and October 2010 range from $245 per square foot at the Newport Crest complex in Newport Hills to $458 per square foot at the Belle Arts complex in downtown Bellevue. The Newport Hills property sales price per square foot is on average 65 percent less than the other projects, excluding Newport Court in Factoria which is 18 percent higher than Newport Crest.

The weighted average absolute sales price of these properties ranges from roughly $220,000 at the Newport Crest and Newport Court complexes to $535,000 at 150 Meydenbauer Bay, located just south of downtown Bellevue. The downtown Bellevue properties (excluding 150 Meydenbauer) and the Mercer Island property sold at a 60 percent premium over the Newport Crest property between 2005 and 2010 while the Renton and Factoria projects weighted average prices was very similar. The similarity is due to the smaller unit sizes. This pricing discrepancy is due primarily to the location and age of the Newport Hills property. Tables 21 and 22 summarize the key statistics of the comparable properties.



Table 21: Condominium Complex Sample Summary

Source: King County Assessor Table 22: Condominium Complex Pricing Trends

Source: King County Assessor

Property

Neighborhood/

City

Year

Built Units

Average

Unit Size (sf) Buildings Stories

Construction

Type

Apartment

Conversion

Mixed

Use

Newport CrestBellevue -

Newport Hills1984 24 1,005 2 3 Wood Frame

Newport CourtBellevue -

Factoria1995 30 835 1 3 Wood Frame

Revo 225 Renton 1999 110 651 1 3 Wood Frame Y

Carlton of Mercer

IslandMercer Island

1989 (Eff

Yr 2001)60 953 1 7 Wood Frame Y

150 Meydenbauer

Bay

Bellevue - South

of Downtown2006 47 1,212 1 4

Reinforced

Concrete

Library SquareBellevue-

Downtown2003 51 1,046 1 6

Reinforced

ConcreteY

Belle ArtsBellevue-

Downtown2000 128 713 2 5 Wood Frame Y

AbellaBellevue-

Downtown2001 83 978 1 6 Wood Frame Y Y

Complex 2005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 2010

Weighted

Average

Newport Crest 1 2 1 0 1 0 $208 $237 $345 $0 $196 $0 $245

Newport Court 3 3 3 2 0 1 $242 $314 $321 $312 $0 $199 $288

Revo 225 0 0 47 2 0 1 $0 $0 $378 $358 $0 $232 $375

150 Meydenbauer Bay 0 47 2 2 2 5 $0 $443 $511 $491 $413 $400 $443

Library Square 14 6 6 1 1 2 $341 $393 $456 $427 $389 $366 $380

Belle Arts 0 0 125 2 1 6 $0 $0 $463 $510 $441 $343 $458

Abella 17 12 11 0 1 3 $311 $383 $427 $0 $430 $347 $365

Carlton of Mercer Island 1 53 11 1 3 3 $317 $400 $420 $450 $315 $303 $395

Sales Activity Average Sales Price Per Square Foot(Units)



SENIOR HOUSING MARKET As discussed above in the demographics section, there is both existing and growing demand for senior housing in the PMA and SMA. To better understand the senior housing supply-side landscape in the PMA and SMA, Heartland surveyed four comparable senior properties, and compiled data on the existing senior properties.

Types of Senior Housing The senior housing market can be segmented by the level of care available at the property. In many cases senior housing developments include a combination of different care levels. The main categories of care include:

Independent: Often referred to as ―retirement communities‖ or ―independent living facilities‖, these provide housing ―exclusively for adults (normally 55 or older). The person is generally healthy and any medical or personal care can be provided by visiting nurses or a home health aide. Staff at the retirement community does not take on the general responsibility for the safety and well-being of the adult.‖ 8

Assisted Living: These communities ―provide 24-hour assistance based on individual needs, including daily activities such as bathing, dressing, housekeeping, meals and medication.‖ 9

Memory Care: “Alzheimer’s/Memory Care facilities offer specialized care and programs for individuals suffering from Alzheimer’s disease or other memory loss. They provide a safe and physically secured environment and may operate as a stand-alone facility or part of an Assisted Living community.‖ 10

Adult Family Home: This segment is composed of ―regular neighborhood homes where staff assumes responsibility for the safety and well-being of the adult. A room, meals, laundry, supervision and varying levels of assistance with care are provided. Some provide occasional nursing care. Some offer specialized care for people with mental health issues, developmental disabilities or dementia. The home can have two to six residents and is licensed by the state.‖ 11

Nursing Home: “Nursing homes provide 24-hour supervised nursing care, personal care, therapy, nutrition management, organized activities, social services, room, board and laundry.‖ 12

Continuing Care: “A Continuing Care Retirement Community (CCRC) is a residential community for adults that offers a range of housing options (normally independent living through nursing home care) and varying levels of medical and personal care

8 Washington State Department of Social and Health Services, Aging and Disability Services Administration, http://www.aasa.dshs.wa.gov/pubinfo/housing/other/ 9 Holiday Retirement Homes, http://www.holidaytouch.com/Retirement-101/senior-living-options.aspx 10 Ibid. 11 Washington State Department of Social and Health Services, Aging and Disability Services Administration, http://www.aasa.dshs.wa.gov/pubinfo/housing/other/ 12 Ibid.

http://www.aasa.dshs.wa.gov/pubinfo/housing/other/

http://www.holidaytouch.com/Retirement-101/senior-living-options.aspx

http://www.aasa.dshs.wa.gov/pubinfo/housing/other/



services. A CCRC is designed to meet a resident’s needs in a familiar setting as he/she grows older.‖ 13

Existing Supply Based on conversations with large senior housing developers active in the Puget Sound area, a senior housing development’s trade area is within a 10-minute drive time or within approximately five miles. This area is roughly equivalent to the PMA. They noted that the majority of their residents typically come from within a five-mile radius of where the senior was previously living or within a five-mile radius of where an adult child is living. To better frame the existing supply, the following analysis focuses on both the PMA and the SMA. According to parcel data from the King County Assessor’s Office and additional market research there are approximately 3,200 units of senior housing in 32 buildings within the PMA and SMA. The average age of the existing building stock is 19 years, with 25 percent (eight buildings) at ten years or less and 16 percent (five buildings) at five years or less. The most common level of care is a combination of independent and assisted living with full continuum and assisted living with memory care as the next largest categories. Table 23 provides a summary of the existing supply and more detailed information can be found in Exhibit 7. Table 23: Existing Senior Properties in the PMA and SMA, by Level of Care

Property by Level of Care Type

Drive-time Area

Total # of Units

Total # of Senior Properties

Average Age of Property I

I + AL

I + AL + MC

AL + MC

AFH + AL NH FC

5-Minute 0 0 0 0 0 0 0 0 0 0

PMA 1,132 11 16 1 4 0 2 2 0 2

SMA 2,196 21 20 1 8 2 3 1 3 3

Total 3,328 32 18 2 12 2 5 3 3 5

KEY I = Independent AFH = Adult Family Home AL = Assisted Living NH = Nursing Home / Skilled Nursing MC = Memory Care CC = Continuing Care

Source: King County Assessor and Heartland research

Comparable Project Survey Heartland surveyed five comparable senior housing developments within PMA and SMA. There were no existing senior housing properties identified in the Newport Hills neighborhood and the locations of the comparable properties include Newcastle, Bellevue, Renton, Issaquah, and Kirkland. The survey focused on newer buildings (built from 2000 on) with at least 50 units and only targeted those properties that had a month-to-month rent arrangement.14

Rents: Weighted average monthly per-square-foot rents range from $4.22 to $8.61, with the average of the comparable set at approximately $5.77. The Aegis of Kirkland has

13 Ibid. 14 Some developments have an upfront fee model, where residents pay a large ―deposit,‖ which can be as large as $300,000 to $500,000 and then pay a reduced monthly rent. This deposit is returned once a resident leaves the property.



over 75 percent studios, which results in a higher weighted average per-square-foot rent of $8.61. Similarly, the Regency Newcastle at $6.60 weighted average rents, has over 55 percent studios and the overall average unit size at 549 square feet is smaller than the other properties in the comp set. Average total monthly rent for a studio unit is $2,585; $3,711 for a one-bedroom unit; and $5,250 for a two-bedroom unit.

Operating Expenses: While we were not able to obtain information about operating expenses from our comparable project survey, based on conversations with local area senior housing developers, typical operating expenses can run from $30,000 to $45,000 per unit per year, with labor being the majority of the costs. This expense range considers basic independent / assisted living care and varies depending on the operator’s model and cost structure. Per resident expenses can actually be higher than this range if they require higher levels of services, but these are typically charged on an ―ala carte‖ or ―fee for service‖ basis. As would be expected, this is significantly higher than multi-family buildings, which typically run in the $5,000 - $6,500 per unit per year range.

Vacancy: Vacancy rates are highly variable across the properties and range from two percent at the Merrill Gardens Renton property to 50 percent at the Bellettini. The Bellettini, according to management is facing a temporarily high vacancy, but was previously running at 85 to 90 percent in their first stabilized year (2009).

Unit Size and Mix: Weighted average unit size ranges from 549 to 1,385 square feet with properties comprising a mix of studio, one-, and two-bedroom apartments. The percent breakdown of the unit mix of each property varies significantly, with the Bellettini at 56 percent one-bedroom units and 44 percent two-bedroom units; Merrill Gardens at 45 percent studio and one-bedroom units and 55 percent two-bedroom units; University House at 62 percent studio and one-bedroom units and 38 percent two-bedroom units; Aegis of Kirkland at 96 percent studio and one-bedroom units and 4 percent two-bedroom companion suite units; and the Regency Newcastle at an estimated 90 percent studio and one-bedroom units and 10 percent two-bedroom units.

Parking: Parking is included in the rent in three of the four properties, but most properties noted that a low percentage of their residents use their parking space. For the three properties that provided parking count information, ratios ranged from 0.40 spaces per unit to 1.52 spaces per unit.

Amenities: Typical building amenities include on-site wellness centers, fitness areas, game/activity rooms, dining room, and salon. Some higher-end properties like the Belletttini have two on-site restaurants. The monthly rent typically includes weekly housekeeping services and one to three meals per day, but additional care-related services are provided for additional fees.

Tables 24 and 25 summarize the key statistics of the comparable properties and more detailed information on the comparable set can be found in Exhibit 8.



Table 24: Senior Comparable Property Summary

Source: Heartland phone interviews with onsite staff

Table 25: Senior Comparable Property Average Monthly Rents by Unit Type

Source: Heartland phone interviews with onsite staff

Property Neighborhood / City

Year

Opened

Average Unit

Size ( sf )

Weighted Avg

Rent ($/sf/mo ) Occupancy Level of Care

1 The Bellettini Downtown Bellevue 2008 1385 $4.51 50% I + AL

2 Merrill Gardens-Renton Renton Centre Downtown 2005 617 $4.22 98% I + AL

3 University House Sammamish Plateau 2004 677 $4.91 82% CC

4 Aegis of Kirkland Totem Lake 2000 683 $8.61 80-90% I + AL + MC

5 Regency Newcastle Newcastle 2008 549 $6.60 80% I + AL

Average 782 $5.77 78%

I = Independent

AL = Assisted Living

CC = Continuum Care

Property Total Units Studio 1 BD/1 BA 2 BD/2 BA

1 The Bellettini 145 $2,850 $5,200 $7,900

2 Merrill Gardens-Renton 155 $1,850 $2,450 $3,400

3 University House 185 $2,400 $3,050 $3,865

4 Aegis of Kirkland 50 $3,300 $4,500 $6,990

5 Regency Newcastle 99 $2,525 $3,355 $4,095

Average 127 $2,585 $3,711 $5,250



OFFICE MARKET The Subject Property has historically been leased by retail tenants; however, professional office or medical office users are a potential tenant group that could be targeted in a releasing or redevelopment strategy. Beyond the area immediate around the Subject Property and the Coal Creek Parkway commercial center in Newcastle, the majority of commercial space in the PMA that is oriented for office users and is in buildings with less than 50,000 square feet is concentrated around Interstate 90. This is primarily because office properties are generally located where either access to the freeway is strong or where there is already a critical mass of office properties and related services (e.g. nearby shopping and dining options). The Subject Property’s location is considered tertiary largely because it is not on a major arterial, does not have direct access to freeways, and is not in close proximity to a critical mass of related services. Office user types that may locate here are in the FIRE (finance, real estate, and insurance) category, legal services, or medical providers that service the neighborhood. The following analysis frames the office market influencing the Subject Property. Due to the location of the Subject Property outside of an office core and away from a commercial anchor such as a hospital, this analysis concentrates on commercial properties with no more than 50,000 square feet of total space and it excludes office space located in business parks. The properties within this data set have been identified as either office properties, medical oriented office properties, or retail properties offering space to office users. Within this data set, there are 565 Eastside properties roughly totaling 8.8 million rentable square feet and averaging two stories and 15,600 square feet. The typical available space in these properties is roughly 6,250 square feet. In the Interstate 90 Corridor there are 112 properties totaling just under 1.9 million rentable square feet and averaging two stories and almost 17,000 square feet with the average available space totaling nearly 6,000 square feet. The Interstate 90 Corridor accounts for 21 percent of the total Eastside commercial space that is 50,000 square feet or less. There is limited office product around the Subject Property. Professional space at the corners that is near the Subject Property is largely occupied. Just to the southeast in Newcastle there is the Valley Medical Center and the Newport Hills Professional Center located on Southeast 69th Way west of Coal Creek Parkway Southeast. This three-story, 17,000 square foot building was constructed in 2007. The major tenant at the Newport Hills Professional Center is the Newcastle Clinic, but there is currently 2,600 square feet available on the second floor. The asking rate is $24 per square foot gross. The implied adjusted triple net rent is roughly $20 per square foot. Table 26 provides a snapshot of office space availability and rent for the Interstate 90 Corridor area and the total Eastside.



Table 26: Office Space Summary

Count Total Space Available Vacancy

NNN Rent per square foot per year

Interstate 90 Corridor

Office 88 1,605,151 236,969 14.8% $21.62

Office/Medical 2 44,793 2,546 5.7% $25.00

Office/Retail 22 222,281 34,993 15.7% $21.62

Overall 112 1,872,225 274,508 14.7% $22.09

Total Eastside

Office 431 7,043,563 1,196,279 17.0% $19.86

Office/Medical 33 501,136 43,863 8.8% $21.35

Office/Retail 101 1,278,403 161,766 12.7% $21.31

Overall 565 8,823,102 1,401,908 15.9% $21.10 Source: OfficeSpace.com Chart 9 illustrates the office vacancy and rent trends for office space under 50,000 square feet. Historically, rental rates began to climb as the vacancy rate leveled out at or slightly below 10 percent. Currently the vacancy rate is currently near 15 percent and average rents have adjusted downward to 2007 levels. While still high, vacancy levels are down from the almost 20 pcernt level observed in 2009. Chart 9: Interstate 90 Corridor Office Space Rent and Vacancy Trends

Source: OfficeSpace.com

A key observation is related to the typical rents for retail space versus office space in this data set. Rental rates for retail space of buildings under 50,000 square feet is currently near $23.18 per square foot per year in the Interstate 90 Corridor. This rate is slightly greater than the rates quoted for commercial office space and retail space marketed as office, which are shown in Table 26 at $21.62 per square foot. This suggests that potential office tenants at the Subject Property would likely be able to pay rates similar, but not necessarily more than retail rates for office space. Additionally, as depicted in Table 26 there is no notable rental rate premium for medical office space users.



Chart 10 illustrates the annual office space absorption trends for the Interstate 90 Corridor dataset. Year to date, the market has absorbed over 70,000 square feet, which counters the two years of negative absorption experienced in 2008 and 2009. Chart 10: Interstate 90 Corridor Office Space Absorption Trends

Source: OfficeSpace.com



SUPPLY & DEMAND RECONCILIATION

Multi-Family Based on the findings from this market analysis and the following supply and demand reconciliation analysis, multi-family product is a possible redevelopment alternative land use for Subject Property. Planned and Proposed Projects Within the PMA and SMA, there are 1,495 total multi-family units in 12 projects in the development pipeline that are anticipated to come online within the next five years.15 Of the total pipeline, 521 units (35 percent) are in the PMA and 974 units are located in the SMA. Further, 650 of the total units in the pipeline (43 percent) are currently under construction. Of the 650 units that are under construction, 60 percent of them are follow-on phases to The Reserve and Harrington Square developments in Renton that completed the first phase in 2010. The majority of the pipeline units are scheduled to come online in 2011 and 2013; however, not all developments track according to the planned schedule. It is likely that a portion of this list may not be developed on time pushing some of the completion dates into later in the cycle. Table 27 and Chart 11 illustrates this analysis. Table 27: Multi-family Pipeline Summary

* *Previous phases completed in 2010 Source: Dupre and Scott Apartment Advisors, ―The Apartment Development Report‖ (September 2010), Heartland permit search

15 Dupre and Scott Apartment Advisors, ―The Apartment Development Report‖ (September 2010), Heartland permit search

Property Units

Construction

End Date (est.) Status Street Number City

Market

Area

1 Woodland Commons II 66 2011 Planned 13906 NE 9th Place Bellevue SMA

2 Lake Hills Village 74 2013 Planned 15590 Lake Hills Blvd Bellevue SMA

3 Newport Vista Apts- Phase II 10 2013 Planned 12428 SE 31st St C Bellevue PMA

4 Discovery Heights 253 2011 Under

construction

NE Discovery Dr & Highlands

Drive NE

Issaquah SMA

5 Mercer II 90 2012 Planned 2460 76th Avenue SE Mercer Island SMA

6 Arterra 166 2013 Planned 2441 76th Avenue SE Mercer Island SMA

7 Quendall Terminals 200 2014 Planned 4350 Lake Washington Blvd N Renton PMA

8 Reserve II * 290 2011 Under

construction

1202 N 10th Place Renton PMA

9 Harrington Square II * 107 2011 Under

construction

950 Harrington Avenue NE Renton SMA

10 Sunset Highlands Mixed Use 21 2013 Planned 4409 NE Sunset Boulevard Renton PMA

11 2nd & Main Apartments 101 2013 Planned 207 Main Ave S Renton SMA

12 Eagle Ridge 117 2013 Planned 1600 Benson Road S Renton SMA

Total 1,495



Chart 11: Multi-family Pipeline Summary by City and Year

Source: Dupre and Scott Apartment Advisors, ―The Apartment Development Report‖ (September 2010), Heartland permit search Table 28 helps put this development pipeline into context. Heartland counted the number of multi-family units developed over the previous four eight-year periods and found that on average, 950 units, or around 120 per year, were developed in the PMA. The most significant growth period (1986 to 1993) yielded 1,420 total units. This period was preceded by a low growth period in which only 620 units were built. Based on this pattern, there is the potential for development to recover at a similar pace as the 1986 to 1993 period and produce well over 1,000 units through 2018. Table 28: Historical Multi-family Development Patterns Development Period

PMA SMA Total Units Annual Average Total Units Annual Average

1978-85 620 78 4,401 550 1986-93 1,421 178 3,049 381 1994-01 1,074 134 1,253 157 2002-09 698 87 1,063 133

8-yr Average 953 119 2,442 305 Source: King County Assessor, Heartland

Supply/Demand Balance Overall demand for multi-family apartment units can be derived from the both structural demand and turnover demand. Structural demand is defined demand generated by rental households new to the PMA. Turnover demand is generated from existing rental households either relocating or up/downsizing from previously occupied rental units. Additionally, a share of the SMA structural demand may be captured by the PMA as rental households projected to locate in the SMA may ultimately choose to live in the PMA as a widening range of housing alternatives are developed. Table 29 illustrates Heartland’s methodology for estimating demand for new multi-family units in the PMA. Table 30 summarizes the estimated demand for this product and balances the estimated demand with the current pipeline supply and projects the number of new units that could be supported in the PMA through 2018.



Table 29: PMA Multi-Family Demand Estimates 2011 2012 2013 2014 2015 2016 2017 2018 Total

PMA Pipeline Supply 290 0 31 200 0 0 0 0 521

Existing Supply Plus Pipeline

6,440 6,440 6,471 6,671 6,671 6,671 6,671 6,671

Structural Rental Demand 92 109 110 111 128 40 33 27 649

Multi-Family Renters1 83 98 99 99 115 36 30 24 584

Cumulative Multi-Family Structural Demand

83 181 280 379 494 530 560 584

PMA Turnover Demand2 3,220 3,220 3,236 3,336 3,336 3,336 3,336 3,336

Share of Turnover Demand to New Projects3

81 81 81 83 83 83 83 83 659

SMA Multi-Family Rental Structural Demand4

187 219 219 218 251 189 179 166 1,628

PMA Capture of SMA Structural Demand5

9 11 11 11 13 9 9 8 81

1. Based on our analysis of existing multi-family units in the PMA, roughly 90 percent of renters are living in multi-family complexes.16

2. Historical market data suggests the turnover rate ranges from 50 percent to 60 percent. 3. The share of turnover demand for new product is assumed to be 2.5 percent of the total turnover demand. 4. Based on our analysis of existing multi-family units in the PMA, roughly 70 percent of renters are living in multi-

family complexes. 5. The PMA’s capture rate of SMA structural demand is estimated to be five percent.

Table 30: PMA Demand and Supply Reconciliation Units

PMA Structural Multi-family Rental Demand 584

PMA Turnover Multi-family Rental Demand + 659

PMA Capture of SMA Structural Multi-family Rental Demand + 81

Total Demand for New Supply = 1,324

Demand for New Supply 1,324

Current Pipeline Supply - 521

Estimated Development Capacity = 803

Based on this analysis, Heartland estimates that the PMA could anticipate between 1,300 and 1,400 new residential units through 2018. With roughly 520 units currently in the pipeline (of which 290 are currently under construction) there is capacity for an additional 800 units assuming the planned projects are completed. To contextualize this estimated PMA capacity, if 100 units of multi-family product were developed on the Subject Property it would capture roughly 10 percent of the total capacity (less the 290 units currently under construction which would not be competitive with the Subject Property) estimated through 2018. A total of 200 units would represent 19 percent and 350 units would represent a capture rate 34 percent of the total.

16 There are approximately 6,150 units in the PMA. After accounting for a frictional vacancy rate of five percent, it can be ascertained that the PMA has approximately 5,860 occupied multi-family units. Comparing this estimate with the estimated number of rental households in the PMA (approximately 6,275), it can be assumed that the remaining rental population is found in rental homes.



Condominium Based on the findings from this market analysis and the following supply and demand reconciliation analysis and discussion, condominium product is not a likely redevelopment alternative land use for the Subject Property. Planned and Proposed Projects There is currently only one planned condominium project identified in both the PMA and SMA. This project is the Whitworth Condominiums. Located at 407-409 Whitworth Avenue South near downtown Renton the proposed development has an approved permit for 33 units. The reason for such a limited condominium pipeline is a direct result of the housing market crash and subsequent devaluation of housing prices. As illustrated in the For-Sale Market – Attached Condos section of this report, this impacted condominium projects in particular. The PMA currently has 11 months of inventory, sales volumes off 85 percent from the peak, and sales prices off 18 percent. The condominium sales volume and price impacts are observed to be even greater in the five-minute drive time area with volumes off 90 percent and sales prices off 34 percent. Because sales prices and volumes are down, lenders are not financing the construction of condominium projects. Condominium construction loans are repaid by proceeds from the sale of units and under the market conditions such loans are too risky to underwrite. Heartland does not anticipate the condominium market to recover for several years making multi-family apartment projects the better performing alternative. Supply/Demand Balance In addition to the challenges noted above with developing condominium projects, the estimated demand for attached product through 2018 in the PMA is low. Demand for condominium units in the PMA is estimated to be fewer than 50 units for the PMA and roughly 200 for the SMA through 2018. Table 31 illustrates this demand analysis based on the household growth projections in the Demographics section. Table 31: PMA Condominium Product Demand through 2018

Ownership

Household Growth Attached Product1 Condo Product2

PMA 460 >> 69 >> 17

SMA 4,550 >> 683 >> 205 1. Assumed split of attached and detached product is 15 percent attached. 2. Estimate that 25 percent of PMA and 35 percent of the SMA is stacked flat condo.

Table 32 shows that the PMA on its own does not currently project to support new condominium development and even if a it could capture a share of the SMA demand the likelihood that the Subject Property would capture that demand is relatively low.



Senior Housing Based on the findings from this market analysis and the following supply and demand reconciliation analysis and discussion, senior housing product is a potential redevelopment alternative land use for Subject Property. Planned and Proposed Projects There are currently 1,143 senior housing units in the development pipeline through 2014.17 None of these identified projects are located in the PMA or SMA. Supply/Demand Balance As noted in the Senior Housing Market section, senior housing developers primarily focus on the demographics within a five mile radius. In our analysis, this approximates the ten minute drive time area of the PMA. Table 32 illustrates the estimated demand for senior housing through 2018 in the PMA. This approach is based on applying a capture rate to each of the age cohorts with the likelihood of a person moving into a senior housing unit increasing with age.

Table 32: PMA Senior Housing Unit Demand through 2018

Age Cohort Growth Estimated Capture

Potential Demand Note

Age 55 - 64 3,480 5% 174 Demand from this cohort may be realized towards the end of the projection period.

Age 65 - 74 3,180 15% 477 These cohorts are the primary source for demand during the projection period. Age 75 + 430 35% 151

Total 7,090 772

While there is strong growth among these cohorts, there are several reasons for the relatively low capture rate for each of these age groups. First, as the retirement age continues to move up the ―feeder cohort‖ will likely remain in their homes longer. Further, the housing crisis has had a significant impact on people’s ability to move from their house and the perception that the majority of seniors have paid off their home is not necessarily true. For example, in California 25 percent of seniors have a mortgage on their home.18 To that end, the for sale market of single family product in the PMA, as discussed in the For-Sale Single Family Market section of this report, are relatively stable and showing signs of improvement. Based on our review of the supply pipeline and demand estimates, Heartland estimates that there is demand for roughly 775 senior housing units in the PMA through 2018. The neighborhood surrounding the Subject Property is quiet and services (e.g. personal care, health care, and conveniences, etc.) are nearby making Subject Property a strong candidate for a senior housing project.

17 Dupre and Scott. ―The Apartment Development Report.‖ September 2010 and a Heartland jurisdictional permit search. 18 Adler, Jane. Demographers Dispel Misconceptions About Aging Adults. National Real Estate Investor, November 29, 2010.



Office Office users are a potential tenant for commercial space in the redevelopment alternatives; however, based on the Subject Property’s location this use is not a redevelopment driver. Planned and Proposed Projects There is over 140,000 square feet of office space currently in the office development pipeline within the PMA. Of this space, just over 45,000 square feet are in mixed use projects located in the City of Renton. The permits for these mixed used projects have office space included ranging from 2,300 square feet in the Whitworth condominium project to 17,800 at the Springbrook Ridge PUD. In Newcastle near the Subject Property, there is a 17,000 square foot professional building proposed that is aiming to leverage off its proximity to the shopping center and medical services nearby. Table 34 provides a list of this pipeline. Table 34: PMA Office Product Pipeline

Use City Project Name Address Status Rentable Square Feet

Commercial Bellevue Keybank 3240 156th Ave SE Issued 6,000

Office Bellevue Crossroads II 15420 NE 8th St Open 15,000

Office Bellevue Factoria North Building 12400 SE 38th St Issued 9,500

MOB Bellevue 116th Medical Development

1835 116th Avenue NE

Open 35,000

Office Issaquah 675 NW Locust Street Development

675 NW Locust Street

Open 15,540

Office Newcastle Pathways at Newcastle 12833 Newcastle Way

Approved 17,552

Mixed Use Renton Springbrook Ridge PUD

SE 172nd St & Benson Rd S

Open 17,800

Mixed Use Renton Whitworth Condo 407-409 Whitworth Ave S

Approved 2,300

Mixed Use Renton Sunset Highlands Mixed Use

4409 NE Sunset Blvd

Approved 9,343

Mixed Use Renton 2nd & Main Apartments

207 Main Ave S Approved 13,084

Mixed Use Renton Eagle Ridge Apartments & Office

1620 Benson Rd S Open 4,000

Total: 145,119

Supply/Demand Balance Based on the office employment growth projections in the PMA, Heartland estimates there to be demand for an additional 445,000 office square feet through 2018 as depicted in Table 25. Much of this demand will likely be met by office space totaling over 50,000 square feet and it will likely be concentrated around Interstate 90 or other areas of concentrated commercial activity.



Table 35: PMA Office Product Pipeline

Estimated Employment Growth Estimated Square

2010-2018 Feet Demanded

PMA 3,567 447,650

Professional Services 1,976 395,234

Medical Services 150 52,417

Because the Subject Property is not in a primary location (based on access to the freeway and location to services) it is not likely to draw any major office tenants. Further, because the office lease rates for space in buildings totaling less than 50,000 square feet average around $22 per square foot per month, a similar rate to retail, there is no distinct advantage to specifically targeting office users.



SIMILAR REDEVELOPMENT PROJECTS As evidenced by the current condition and vacancy levels of the Subject Property, general trends away from the traditional mall and strip center development patterns coupled with the recent recession have led to the death of many suburban retail centers. Like Newport Hills, many communities across the country are looking at ways to retrofit, rehabilitate, and redevelop these no longer successful and often rundown retail centers. Heartland looked at several examples in the Eastside to understand what has made them successful to date, or in some cases, not successful, and what learnings can be applied to the Subject Property. Four of the five properties that were reviewed involved redevelopment into a new mixed-use project and one involved the renovation of retail center. The properties that were analyzed included:

Juanita Village, Kirkland;

Lake Hills Village, Bellevue;

Kelsey Creek Center, Bellevue;

Town Center and Downtown Revitalization, Kenmore; and

Totem Lake Mall, Kirkland.

While there is not one model for this type of redevelopment, in general, the following apply to all of the comparable developments that were reviewed and these should be considered in looking at any redevelopment of the Subject Property. Common Project Elements

These projects have long timelines with multiple phases and require flexibility in order to adapt to changing market demands.

Key uses—either public facilities or national retailers—help to both catalyze and anchor the developments.

The addition of residential uses benefits the retail, but the surrounding retail trade area must also be strong.

The feasibility of implementing ―urban‖ density projects in suburban environments is challenging because:

Suburban parking ratios are costly to maintain in structures or underground.

Suburban rents lag urban rents in the Puget Sound (because the suburban markets are inferior ―urban‖ markets) while mid-rise construction costs remain the same.



Common Design Elements

Movement of small retail shops from behind large surface parking lots or within enclosed malls to areas closer to the street.

Reconfiguration of parking to accommodate parallel and angled parking.

Some amount of shared parking between the retail and housing uses.

Addition of social gathering spaces.

Significant focus on pedestrian-oriented landscaping and hardscaping to create inviting and welcoming environments that draw both residents and retail customers.

The following section provides a brief description of each of the redevelopment projects and summarizes the key takeaways. Additional details on each of the projects can be found in Exhibit 9.

Juanita Village, Kirkland The new mixed-use, pedestrian-friendly development replaced an abandoned grocery store and a rundown strip mall that formerly occupied the site. When completed, it will include approximately 580 residential units and over 55,000 square feet of retail space. It is located in close proximity to two key site amenities – Juanita Beach Park and Lake Washington and sits at the heavily trafficked intersection of Juanita Drive Northeast and 98th Avenue Northeast. To enable high-density housing and accommodate the parking, much of the open space is situated above the garage structure. The two major residential projects include the Avalon Juanita Village (211 units) and the Chelsea at Juanita Village (196 units), both of which are apartment developments and were completed in 2005 and 2002 respectively. The building permit for the final phase (179 residential units and 18,000 square feet of retail) was issued in 2008, but construction has not yet begun on this phase. Key Takeaways

Significant on-site housing density and a strong retail market in the surrounding trade area were necessary to attract national tenants.

Two of the site's borders are defined by high-traffic arterials, which provide excellent drive-by visibility and accessibility and help the retail thrive.

Location is both a strong retail and strong housing location.

Lake Hills Village, Bellevue The Lake Hills Village project is a three-phase redevelopment of a 27,000 square-foot 1950s-era neighborhood retail center. When completed, it will include 75 to 90 residential units, 75,000 square feet of retail space, 45,000 square feet of professional service and medical service office



space and a 10,000 square foot branch of the King County Library. A QFC grocery moved out of the center several years ago and relocated several blocks west. Subsequently, the neighborhood hardware store, Red Apple Market, Hallmark, and a pharmacy also moved out. The developer first conceived of the project over ten years ago. Planning and implementation of the project required substantial community outreach as well as negotiations with the county to secure the library. Phase 1 was completed in mid-2010 and includes the library and some retail and office space. Phase 2 is anticipated to begin in 2011 or 2012 and will include the underground parking garage, at-grade parking, a pedestrian plaza, housing units, and approximately 20,000 square feet of small shop space. Phase 3 requires the exit of an existing Bank of America and negotiations are ongoing. Key Takeaways

Securing a key community anchor, like the King County Library, was critical to the success of the project.

Major public-private redevelopment projects take a long time and the developer must have a long-term vision and patient capital.

Existing tenants lease options must be carefully integrated into the development phasing.

A phased development plan enables flexibility as market conditions change.

Kelsey Creek Center The Kelsey Creek Center redevelopment calls for the renovation of an existing 106,000 square-foot Kmart building and an existing 76,000 square-foot two-story office and retail building and new construction of at least two new retail buildings totaling11,500 square feet. The Kmart building has been vacant since the early 2000s when Kmart filed for bankruptcy. Since that time, redevelopment of the site has been considered and explored by other retailers, including Costco, but under the previous zoning, constructing a new building and providing enough parking was not possible because of a requirement to daylight an existing stream onsite. In mid-2010, City of Bellevue City Council approved a zoning agreement that allows for the property owner to pay for off-site mitigation in lieu of daylighting the stream onsite. The project is currently in the design review phase, and pending approval by the City, the owner is anticipating beginning construction by May 2011 with completion by late 2011. Key Takeaways

Identifying and implementing key zoning changes can enable redevelopment of sites that could otherwise continue to sit vacant.

Renovation of retail space on a site that is in a good retail location is a viable alternative to full redevelopment.



Town Center and Downtown Revitalization, Kenmore The Kenmore Town Center revitalization plan calls for the redevelopment of a 9.6-acre city-owned property that currently houses a park and ride lot and a struggling retail center. When completed, the Kenmore Town Center revitalization will include 300 to 500 residential apartments, 77,000 to 100,000 square feet of retail space and over 20,000 square feet of public plaza and gathering space. The development will be adjacent to a newly completed City Hall (May 2010) and a new branch of the King County library (anticipated completion in 2011). With the goal of creating a catalytic redevelopment project in the downtown core, the city purchased the site and in 2007 the city entered into a Disposition and Development Agreement (DDA) with Urban Partners, a private developer, to implement the redevelopment plan. In the context of the depressed market conditions, the DDA was amended in 2010 to allow the developer more time to close on the property, in exchange for the developer providing additional earnest money and assumption of interim control of the existing retail center through a ground lease agreement. A current start date for the redevelopment effort has not yet been announced. Key Takeaways

Developing public realm investment projects (e.g. City Hall and library branch) prior to or in conjunction can help ―set the stage‖ and incent private development.

In a redevelopment motivated by the local jurisdiction, it is critical to balance ensuring an outcome that reflects the desires of the public stakeholders, while also responding to the needs of the developer for a marketable and commercially viable project.

Maintaining interim occupancy levels in an already struggling center is challenging because of the need to keep leases short-term and flexible to enable redevelopment when market conditions turn around.

Totem Lake Mall, Kirkland Since 2009, plans by the developer/owner to redevelop the existing mall into a high-density mixed-use community have been on hold because of the recent economic conditions. The conceptual plan calls for the redevelopment of the existing 230,000 square-foot mall and strip center into almost one million square feet of a mix of office, retail, cinema, and residential space. Currently, vacancy is over 60 percent with five large tenants occupying over 88,000 square feet. The mall was built in 1973 and consists of a traditional enclosed mall and a strip center. In 2004, Developer's Diversified Realty and Coventry Real Estate Advisors purchased this historically underperforming mall. Prior to and since that time, major tenants have continued to exit the mall. The city and community have been very supportive of the redevelopment of the mall because of the opportunity to revitalize a major asset in the City and the potential increased tax base. In 2006, the city council approved a development agreement with the developer and committed $15 million towards the purchase of right-of-way for a new plaza, street improvements, and a portion of the parking structure. Key Takeaway

Local jurisdiction support and possibly funding is important, but it is no guarantee that a project will move forward; market conditions drive redevelopment.


Task B: Feasibility Analysis

FEASIBILITY METHODOLOGY Heartland evaluated the rehabilitation and redevelopment alternatives using a discounted cash flow approach. The income and operational inputs to the model are sourced from the market analysis findings from Task A and the cost assumptions are based on our estimates of current rates in the market place. The results from this modeling provide perspective on the performance of each scenario. In evaluating the feasibility of the rehabilitation and redevelopment scenarios, Heartland’s methodology integrated three areas of analysis:

Market and Demographic Analysis: The potential land uses were analyzed within the context of the current and forecasted market and demographic conditions discussed in Task A-2 above and the Retail Report. Additionally, the market and demographic analysis informed the inputs to the financial model, including absorption, unit sizes, rent levels, and retail space square footage.

Physical Site Planning: The initial site planning performed for this Phase II scope took into consideration both the existing physical and regulatory constraints on the site and the market-driven capacity of the site. This analysis informed the building size, height, and parking assumptions that were utilized in the financial model. The analysis considered both what was feasible under the existing zoning envelope and what could be feasible from a market perspective, if the zoning were to be modified.

Financial Feasibility: While there are many perspectives from which to evaluate financial feasibility, in general, for this Phase II scope, the feasibility was considered mainly from the point of view of the property owner, who could ultimately either be joint-venturing with a future development partner, or ground leasing or selling land to a developer. The analysis evaluated key project-level financial performance metrics for each scenario, including:

Internal Rate of Return (“IRR”): this is the discount rate required to achieve an NPV of zero for all project cash flows. The IRR should be higher than the developer or landowner’s minimum required rate of return.

Stabilized Cash on Cash Return: this is the return on equity from the cash flow earned in the first year that the property is stabilized (typically, about one year after construction is complete and occupancy is at least 95% and operating expenditures are normalized).

Margin On Cost: this is the gross profit from the development as a percentage of the total development costs ―TDC‖. It is calculated by looking at the net ―stabilized value‖ (the stabilized net operating income at an appropriate capitalization rate) as a percentage of the TDC. Generally a lender and developer would require that this margin be eight to ten percent.

Total Equity Required: this is the total amount of the TDC that cannot be covered by debt. Depending on the developer’s equity position or ability to raise equity, the total amount of equity required could be a hurdle. Additionally, the timing of the equity investments affects the investor’s return. The analysis considered any land contributions and cash investments to be equity contributions.

RECOMMENDATIONS AND NEXT STEPS


Additionally, the analysis evaluated these metrics on a levered and unlevered basis. This phase of the analysis did not focus on the deal structure as this would be evaluated in a future phase after the property owners decide which renovation or redevelopment approach to pursue.

PROGRAM SCENARIOS AND KEY ASSUMPTIONS

Program Scenarios The program scenarios described and summarized below were determined based on the findings from Phase I and Phase II-Task A. Table 38 provides the program description and for Scenarios 1 through 3c and Table 39 and Table 40 detail the redevelopment programs tested in Scenario 3a through 3c for the Stod’s Site and the NHSC Site. Table 38: Summary of Programs by Site

Site Program Description

Stod’s Site

Scenario 1: ―As-Is‖: Maintain property in current state with existing tenants.

Scenario 2: ―Major Rehabilitation‖: Rehabilitate existing building and release to new tenants

Scenario 3: Site Redevelopment

3a: ―Current zoning‖: Develop new mixed-use residential under current zoning requirements.

3b: ―Moderate Code Modification‖: Develop new mixed-use residential with potential zoning updated code including that may allow taller buildings (up to 45-feet), adjust the lot coverage ratio, parking requirements, etc.

3c: ―Maximum Capacity‖: Develop new mixed-use residential with modified zoning requirements similar to 3b, but with buildings up to 65-feet.

NHSC Site

Scenario 1: ―As-Is with TI‖: improve existing space with increased tenant improvement allowances and extend longer leases to increase occupancy.

Scenario 2: ―Aesthetic Rehab with TI‖: improve existing center with aesthetic exterior upgrades to attract tenants at higher rents and extend longer leases and increased tenant improvement allowances to increase occupancy.

Scenario 3: Site Redevelopment

3a: ―Current zoning‖: Develop new mixed-use residential under current zoning requirements.

3b-1: ―Moderate Code Modification‖: Develop new stacked flat residential building on a portion of the site using potential zoning updated code including that may allow taller buildings (up to 45-feet), adjust the lot coverage ratio, parking requirements, etc. and maintain remaining retail under Scenario 2.

3b-2: ―Moderate Code Modification‖: Develop new mixed-use residential with potential zoning updated code including that may allow taller buildings (up to 45-feet), adjust the lot coverage ratio, parking requirements, etc.

3c: ―Maximum Capacity‖: Develop new mixed-use residential with modified zoning requirements similar to 3b, but with buildings up to 65-feet.



Based on the findings from the Task A-2, each scenario either models the performance of the existing asset or the redevelopment of the site as for-rent multi-family, stand-alone retail, or mixed use with for-rent multi-family over ground floor commercial space.

Program Assumptions Scenario 1 and Scenario 2 for both sites assume no significant physical changes to the structures on the site. The redevelopment scenario programs are highlighted below. The graphics in Exhibit 10 through Exhibit 13 illustrate the rough configuration for these scenarios. It is important to note that these programs and scenarios are not development plans, but rather bookends to help the City and property owners understand the impact of renovating and re-tenanting or redeveloping each site under current and hypothetical conditions. Table 39: Stod’s Site Scenario 3a, 3b, 3c: Mix of uses and Summary Capacity

Parce

l SF

Acr

es

Buildin

g Type

Total S

torie

s

Buildin

g Footp

rint

Retail

NSF

Residen

tial U

nits

Surface

Par

king

Struct

ured P

arkin

g

Below

Gra

de Par

king

Total P

arkin

g

Stod's Site

3a: Current Zoning74,923 1.3 Apartment 2 17,023 14,000 19 60 28 36 124

Lot Coverage: 23% Res Parking Ratio: 1.40 per unit

FAR: 0.39 Commercail Parking Ratio: 5.00 per 1,000 NSF

Share on Surface Lot: 4.3

Share Below Grade: 0.7

3b: Moderate Up Zone

74,923 1.3 Apartment 4 44,200 1,500 150 0 125 70 195





3c: Maximum Capacity

74,923 1.3 Apartment 6 44,200 1,500 250 0 125 195 320







Table 40: NHSC Site Redevelopment Scenarios: Mix of uses and Summary Capacity

Parcel N

ame

Parcel S

quare F

eet

Acr

es

Buildin

g Type

Floors

Buildin

g Footp

rint

Ret

ail Square

Feet

Units

Surface

Par

king

Struct

ured P

arkin

g

Below

Gra

de Par

king

Total P

arkin

g

Newport Hills Shopping Center

3a: Current Zoning

1 Former Red Apple 58,550 1.3 Apartment 2 19,600 15,800 22 68 0 42 109.8

2 In Line Retail 89,590 2.1 Apartment 2 39,200 28,800 44 40 26 42 108

3 Herfy's 24,000 0.6 Retail Stand Alone 1 9,600 9,600 0 21 0 0 21

4 Bank of America 20,000 0.5 Retail Renov 1 6,080 6,080 0 47 0 0 47

5 Surface Parking Area 65,525 1.5 No Change 1 0 0 0 108 0 0 108

Total 257,665 5.9 74,480 60,280 66 284 26 84 394





3b-1: Moderate Code Modification

1 Former Red Apple 58,550 1.3 Apartment 4 42,100 0 108 0 111 24 135

2 In Line Retail 89,590 2.1 Retail Renov 1 31,193 31,193 0 33 0 0 33

3 Herfy's 24,000 0.6 Retail Renov 1 2,150 2,150 0 29 0 0 29

4 Bank of America 20,000 0.5 Retail Renov 1 6,080 6,080 0 47 0 0 47


Total 257,665 5.9 81,523 39,423 108 217 111 24 352





3b-2: Moderate Code Modification


2 In Line Retail 89,590 2.1 Apartment 4 39,200 0 163 40 20 93 153

3 Herfy's 24,000 0.6 Apartment 4 13,200 12,200 43 21 0 94 115

4 Bank of America 20,000 0.5 Apartment 4 16,000 8,000 52 16 20 65 101


Total 257,665 5.9 110,500 20,200 366 132 151 276 559





3c: Maximum Capacity


2 In Line Retail 89,590 2.1 Apartment 6 83,000 0 276 0 496 65 561

3 Herfy's 24,000 0.6 Apartment 6 13,200 12,200 73 21 0 0 21

4 Bank of America 20,000 0.5 Apartment 6 16,000 8,000 88 16 20 29 65

5 Surface Parking Area 65,525 1.5 Part of Parcel 2 1 0 0 0 0 0 0 0

Total 257,665 5.9 154,300 20,200 619 37 627 211 875







Redevelopment Scenario Key Assumptions The following list outlines the key inputs for the redevelopment scenarios on the Stod’s and NHSC sites. The assumptions for Scenario 1 and Scenario 2 for each site (the As-Is and As-Is with Aesthetic Rehab scenarios) are imbedded with each of those scenario narratives due to the more nuanced nature of these alternatives.

Key Program Assumptions The scenarios programmed under the current land use code honor the lot coverage, building height, parking ratio requirements for residential and commercial uses, and below grade parking requirement for additional building height. In the redevelopment scenarios we modeled the effect of:

Increasing the allowable building heights to either 45-feet or 65-feet and permit more than two stories;

Decreasing the residential parking ratio from an average of 1.4 stalls per unit to 1.25 stalls per unit;

Allowing a lot coverage over 50 percent and;

Removing the requirement that below grade parking must be beneath at least 75 percent of the structure allowing the potential for more cost effective ground level structured parking beneath structure the upper residential floors.

Key Market Inputs for Redevelopment Scenarios

Land Value: The value of commercial land is $25 per square foot. This acts as both a cost to the project and as equity for the property owner if they want to contribute it to the project.

Apartment Base Rent: $1.85 per square foot per month escalating at three percent per year

Apartment Expenses: $5,000 per unit per year escalating at 2 percent per year

Apartment Construction Costs (Hard): $130 per gross square foot – includes fixtures and equipment, but does not include builder profit, taxes, soft costs or contingencies.

At-Grade Structured Parking: $17,000 per stall

Below Grade Structured Paring: $30,000 per stall

Soft Costs: Approximately 28 percent of hard costs

Permanent Loan Sizing Terms: 80 percent loan to costs, 75 percent loan to value, 1.25 debt service cover ratio (note: the debt service cover ratio is the key driver for sizing the permanent loan)



Apartment Capitalization Rate: Entrance rate of 6.00 percent and exit rate in 2021 of 6.20 percent.

Retail Capitalization Rate: Entrance rate of 8.25 percent and exit rate in 2021 of 8.50 percent.

The hold period for every scenario is 10 years or through the end of 2021.

ECONOMIC FEASIBILITY OF ALTERNATIVES AND FINDINGS

Stod’s Site Two scenarios and three sub-redevelopment scenarios were analyzed for the Stod’s Site. The goal of modeling the redevelopment scenarios is to understand how a new, market rate building would perform when compared to the As-Is scenario. This model is based on current and project market conditions to estimate whether or not these scenarios are financially feasible. The modeled scenarios include:

Scenario 1: As-Is

Scenario 2: Major Rehabilitation

Scenario 3: Redevelopment

o 3a: Current Zoning Redevelopment

o 3b: Moderate Code Modification

o 3b: Maximum Capacity

Scenario 1: As-Is

The ―As-is‖ scenario assumes that the property will remain in its current physical condition with its existing tenants—Stod’s Baseball, Sahara Pizza (owned by Stod’s Baseball owner), and the cell tower, until it is ultimately redeveloped. Timeline / Phasing Under Scenario 1, Stod’s Baseball could remain a tenant throughout the environmental remediation and entitlements process, which could likely take 12 to 24 months. Under this Senario 1, the existing leases are assumed to be renewed on a short-term basis with no negative impact to redevelopment. The existing cell tower lease is on a month-to-month basis, which provides for ultimate flexibility in transitioning the property from its current use to a redevelopment site. Financial Performance This scenario illustrates that the property could provide an interim source of cash to a developer as they are pursuing entitlements and completing environmental remediation for a redevelopment of the property. The current leases provide approximately $100,000 per year in



cash flow, which on a static basis, using the income approach, is equivalent to a value of approximately $1.1 million ($14 per square foot), assuming an 8.75 percent cap rate. Assuming that the property does not get redeveloped and remains occupied, the net present value is in the range of $1.03 million to $1.1 million ($14 to $15 per square foot) based on a reasonable exit cap rate range assumption of 8.75 percent to 9.25 percent, a 10 percent discount rate, and a sale in ten years. This outcome assumes no improvements are made to the existing structure and expenses remain at the current low level. Key Assumptions:

No improvements are made to the existing structure and expenses remain at the current level.

All existing tenants continue to renew their leases.

Rents grow at 2 percent per year.

The exit cap rate range upon sale in year 10 is 8.75 percent to 9.25 percent.

Discount rate of 10 percent.

Risks and Constraints Scenario 1 is a relatively low-risk scenario as it continues business as-usual operations with a tenant that has leased this space for over fifteen years and who has expressed a desire to remain in the space. However, if Stod’s Baseball were to vacate the property, because of the unique nature of his business and the long-term tenancy it is unlikely that a new replacement tenant could be found without substantial exterior building work and interior tenant improvements, which would require significant capital investment by the current property owner or a future owner. Additionally, given the relatively weak retail market and the competition from the Newport Hills Shopping Center, even with additional capital investment, achievable rents may not be at a level high enough to achieve a return on that investment and it may be difficult, if not impossible, to find a replacement tenant. Scenario 2: Major Rehabilitation

The Major Rehabilitation scenario assumes that the existing building and property will be renovated. The renovations will include façade and structural renovation, roof repair, minor system improvements (as necessary) and restriping in the parking lot. The goal of this scenario is to renovate the property as a long-term retail asset and attract tenants at higher rents than what the property can currently attract. Timeline / Phasing: This scenario assumes that the property will be sold in 2011 and that the renovation will begin in 2012 and will take place in a single five-to seven-month phase. The existing tenants will remain in place until the renovation work requires them to vacate. A sale of the property as an ongoing retail asset is assumed in year 10 (2021).



Financial Performance: This scenario illustrates that there is very minimal value created by rehabilitating the existing building for retail use. Assuming that the property is renovated (not redeveloped) and is sold as an ongoing retail center in ten years, the net present value is approximately $1.4 million ($18 per square foot), assuming a 17 percent discount rate for the developer. This is only slightly higher than the $1.03 to $1.1 million value achieved in Scenario 1. The major renovation will cost $1.6 million (2010 dollars) and approximately $1.3 million over ten years, is required for tenant improvements. In total, these expenditures will require $1.6 million in equity, with the remainder financeable by a small rehab/construction loan. This equity investment results in a 20 percent cash on cash return on a $4.9 million stabilized value (2013). Key Assumptions:

Existing tenants will remain in place at current lease rates through the beginning of renovation work.

New tenant rents will be $17 per square foot (2010 dollars) significantly higher than the current average levels of approximately $3 per square foot and will grow at two percent per year. It is assumed that higher rent levels are achievable because of the building rehabilitation and the fact that the current rent is below market.

In 2010 dollars, tenant improvements for new tenants are $30 per square foot and grow at two percent per year.

Minimum lease terms are five years.

Current vacancy rates are zero percent, but this scenario assumes 50 percent vacancy in 2012 after construction completion, with stabilization occurring at 90 percent occupancy in with 10 percent vacancy thereafter.

The exit cap rate range upon sale in year 10 is 8.75 percent.

The discount rate is 17 percent.

Risks and Constraints: While Scenario 2 has the potential for achieving higher rents than the below market rate rents that currently exist, there is a significant amount of risk in a new owner’s ability to attract new retail tenants. As described in Scenario 1, the submarket area is relatively weak and there could be competition from the Newport Hills Shopping Center. A potential buyer of the site that would be looking to rehabilitate the building and re-lease it, would likely look to have a significant portion of the building pre-leased before beginning any renovation work. Scenario 3: Redevelopment Table 39 details the program for each of the three redevelopment scenarios modeled for the Stod’s Site. The following subsections summarize the program assumptions, timing, and financial performance for Scenario 3a, 3b and 3c for the Stod’s Site.



Program Assumptions The program for Scenario 3a is based on the current land use code. To maximize development on the Stod’s Site under the code, we modeled a two-story 19-unit apartment complex with 14,000 square feet of retail situated along 119th Avenue Southeast. The building footprint is roughly 17,000 square feet or 23 percent of the total parcel area. In order to accommodate a second level for a mixed use building 75 percent of the building footprint must have below-grade parking beneath it. This scenario has 36 below-grade stalls and 60 surface stalls. The residential units are parked at 1.4 stalls per unit19 and the commercial space is parked at 5.0 stalls per 1,000 net square feet of space. Scenario 3b and 3c assume modifications are made to the land use code that permit additional building height; lower parking ratios to better correspond with the unit mix; increase the lot coverage ratio to allow coverage greater than 50 percent; and remove the requirement that to achieve the maximum allowable height, parking must be beneath 75 percent of the building footprint. These scenarios utilized structured parking on the ground level to offset the parking needed for the development. This reduces the number of below-grade stalls, which are nearly two times the cost per stall than at-grade structured stalls and helps the performance of the scenario. The graphics in Exhibit 10 through Exhibit 13 illustrate the rough configuration for these scenarios. Timeline In scenario 3a, because zoning is already in place, the only hurdle to redeveloping is the remediation of known contamination related to a former dry cleaner with regards to Scenario 3a. Clean up investigations are reportedly ongoing and the anticipated timeline for the site’s remediation is 16 months on the outside. The modeled time line for Scenario 3a to commence construction is in the third quarter 2011. Due to time necessary to modify the land use code, Scenarios 3b and 3c would not begin predevelopment work until the first quarter 2012 and would not commence construction until 2013. Chart 11 illustrates the modeled time frame for Scenario 3a through Scenario 3c. Chart 11: Stod’s Site Timing Summary by Scenario -- Scenario 3a --

19 The assumed unit mix for all apartment buildings in the redevelopment scenarios for the Stod’s Site and the NHSC Site is 35 percent two bedroom units, 35 percent one bedroom units, and 30 percent studios. This unit mix impacts the average square feet per unit and the parking ratio.

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

TIMING

Pre Development Aug 2011 x

Construction Start Aug 2012 x

Construction End Aug 2013 x

Stabilization 2014 x

Disposition 2021 x



-- Scenario 3b --

-- Scenario 3c --

Financial Performance: This scenario illustrates that even with additional height and relaxed parking requirements, the building performance only marginally exceeds the performance of current zoning scenario. Chart 12 reveals that the internal rate of return on the total net cash flow for the project (excluding land as equity since the property owner would not likely redevelop the site). This chart shows that the yields range from a negative seven percent if redeveloped under the current code conditions, but a redevelopment similar to that modeled in Scenario 3b or 3c could yield a return of just over nine percent. To achieve this return increase, an additional $6.5 million in equity would be required. Chart 12: Rate of Return / Equity Requirement Comparison – Stod’s Site

The relatively low returns for the modified code scenarios can be explained by (1) relatively low pro-forma rents compared to the cost to construct; (2) the quantity of underground parking needed to support the units for each scenario; and (3) loan sizing terms, influenced primarily by the debt service coverage ratio, that reduces the amount of debt that may be used for development to just over half the total development costs. Nonetheless, the higher rate of return over the current zoning scenario suggests that land use code relief, coupled with the improving apartment market and loosening capital markets, could potentially lead to interest by the property owner or an outside party to redevelop the Stod’s site.

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

TIMING

Pre Development Mar 2012 x

Construction Start Mar 2013 x

Construction End Mar 2014 x


Disposition 2021 x

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

TIMING





Disposition 2021 x



Newport Hills Shopping Center Site Three scenarios were analyzed for the NHSC Site. The third scenario—full redevelopment of the site— is comprised of three sub-scenarios:

Scenario 1: As-Is with Tenant Improvements

Scenario 2: Aesthetic Modifications

Scenario 3: Redevelopment

3a: Mixed Use Redevelopment as Currently Zoned

3b-1: Mixed Use Redevelopment with Modified Zoning and 45-Feet Max Height. Redevelopment on only the Former Red Apple portion of the site with the remaining assets re-leased as in Scenario 2 assumptions

3b-2: Mixed Use Redevelopment with Modified Zoning and 45-Feet Max Height

3c: Mixed Use Redevelopment with Modified Zoning and 65-Feet Max Height

Scenario 1: As-Is with Tenant Improvements The ―As-is‖ scenario assumes that the exterior of the property will remain in its current physical condition with its existing tenants, but that increased Tenant Improvement (―TI‖) packages will be available to both renewing existing tenants and new tenants. Timeline / Phasing This scenario assumes an immediate start date commencing with communicating with the broker team that long-term (minimum five-year) leases are allowable and that increased TI packages are available for new tenants. For existing tenants, as their leases roll, the increased TI package would become available to them in conjunction with a long-term lease. A sale of the property as an ongoing retail asset is assumed in year 10.

Financial Performance: This scenario illustrates that there is potential to add value to the existing retail center through longer lease terms and a relatively modest investment in tenant improvements, which will drive increased occupancy. Assuming that the property is not redeveloped and is sold as an ongoing retail center in ten years, the NPV is approximately $6.4 million ($25 per square foot), assuming an 8 percent discount rate for the property owner. This is in contrast to an approximately $2.2 million ($8 per square foot) ―business-as-usual‖ static value, using the income approach, assuming current rents, 50% vacancy, and an 8.75 percent cap rate. Approximately $1.38 million in equity, over ten years, is required for the increased tenant improvements, but results in a 28 percent cash on cash return on a $9.2 million stabilized value (2015). Key Assumptions:

No exterior improvements are made to the exteriors, facilities, or common areas. All interior and signage improvements will be made on a tenant-by-tenant basis through TIs.



Existing tenants will renew leases at a rate of 75 percent and the remainder will be new tenants.

In 2010 dollars, average TIs for renewing tenants are $20 per square foot and $30 for new tenants and grow at 2 percent per year.


Current vacancy rates are 50 percent, and this scenario assumes a downward trend to 40% by 2012, 35% by 2013, 25% by 2014 and stabilized at 20 percent thereafter. Because of the oversupply of retail space in the Subject Property area and the lack of any additional improvements to the center it is assumed that full occupancy is likely not achievable.

Rents will remain at the current average levels of approximately $15 per square foot, modified gross and will grow at 2 percent per year. It is assumed that higher rent levels are likely not achievable because of the marginal location and lack of exterior improvements.

Operating expenses grow at 2 percent per year.


The discount rate is 8 percent, which is assumed to be the property owner’s cost of capital.

Risks and Constraints: A major underlying risk with this scenario is that this property will not be able to attract new tenants. The potential tenant pool is significantly narrowed by the fact that the site, as described in the Retail Report, will not attract national tenants, therefore, it is completely reliant on local and independent retailers. Furthermore, given the oversupply of retail space in the Subject Property, even with the favorable TI packages and longer lease terms, there may not be enough demand from retail tenants to fill all of the spaces. If a large or key retail space remains dark, this would adversely affect all of the stores in the center and bodes poorly for the long-term financial performance of the center. Additionally, locking in longer leases and spending more on TI, which requires longer leases over which to amortize the cost, also makes it more difficult to reconsider a redevelopment scenario in the future. Any reconsideration would have to take into account the timing of the lease rolls and would either have to wait out the lease expirations and / or buy out some of the leases. When the market recovers and developable land sites become scarcer, developers may be willing to deal with these encumbrances, but in the meantime, they would limit the competitiveness of the site. Scenario 2: Aesthetic Modifications

The Aesthetic Modification scenario assumes that the exterior of the property will be renovated and as in Scenario 1, increased TI packages will be available to both renewing existing tenants and new tenants. The renovations will include façade renovation, some minor system improvements (as necessary) and restriping in the parking lot. The goal of this scenario is to increase occupancy and achieve higher rents.



Timeline / Phasing: This scenario assumes an immediate availability of new lease terms and new TI packages for new tenants. The exterior renovation will begin in early 2011 and will take place in a single four- to five-month phase. A sale of the property as an ongoing retail asset is assumed in year 10. Financial Performance: This scenario illustrates that there is potential to add value to the existing retail center through longer lease terms and a relatively modest investment in tenant improvements, which will drive increased occupancy. Assuming that the property is not redeveloped and is sold as an ongoing retail center in ten years, the NPV is approximately $6.4 million ($25 per square foot), assuming an 8 percent discount rate for the property owner. This is in contrast to an approximately $2.2 million ($8 per square foot) ―business-as-usual‖ static value, using the income approach, assuming current rents, 50% vacancy, and an 8.75 percent cap rate. The exterior renovation will cost $1.1 million (2010 dollars) and approximately $1.38 million over ten years, is required for the increased tenant improvements. In total, these expenditures will require $1.6 million in equity, with the remainder financeable by a small rehab/construction loan. This equity investment results in a 27 percent cash on cash return on a $10.8 million stabilized value (2015) Key Assumptions:

Existing tenants will renew leases at a rate of 75 percent and the remainder will be new tenants.

In 2010 dollars, average TIs for renewing tenants are $20 per square foot and $30 for new tenants and grow at 2 percent per year.


Current vacancy rates are 50 percent, and this scenario assumes a downward trend to 40% by 2012, 25% by 2013, 15% by 2014 and stabilized at 15 percent thereafter. As in Scenario 1, full occupancy is likely not achievable, however, because of the exterior improvement, a slightly lower stabilized vacancy is assumed.

For new and renewing tenants, rents will be approximately $3 per square foot higher than the current average levels of approximately $15 per square foot, modified gross and will grow at 2 percent per year. It is assumed that higher rent levels are achievable because of the combination of aesthetic improvements, longer leases, and more favorable TI packages.

Operating expenses grow at 2 percent per year.


The discount rate is 8 percent, which is assumed to be the property owner’s cost of capital.

Risks and Constraints: While Scenario 2 has the potential for achieving higher rents, this scenario has a higher risk profile than Scenario 1 because it requires more capital outlay and is still reliant on the same factors described in the risks and constraints of Scenario 1. Furthermore, in this scenario, which



assumes higher average rents for both renewal and vacant space, upon renewal, existing tenants must be convinced that the increased costs associated with the higher rent rates can be recovered by an increase in revenue generated by the increased traffic resulting from the aesthetic improvements of the center. In addition, because the renovation work will occur on the exterior of the building and in the common areas (e.g. the parking lot), the potential for this work to negatively affect existing tenants’ business is greater. If their business is affected at a significant enough level to make it extremely difficult or even impossible to recover from the lost rent, then during or after the renovation, the center could face more dark space and potentially lease defaults. The dark space could counteract any of the positive lift the renovation work was intended to create and at the very least could push absorption of the renovated space out on a longer timeline. Scenario 3: Redevelopment Table 40 details the program for each of the four redevelopment scenarios modeled for the NHSC Site. The following subsections summarize the program assumptions, timing, and financial performance for Scenario 3a, 3b-1, 3b-2, and 3c. Program Assumptions The program for Scenario 3a is based on the current land use code. To maximize development on the NHSC’s Site under the code, we modeled a two-story 22-unit apartment complex with 15,800 square feet of ground floor retail fronting Southeast 56th Street on Parcel 1, the Former Red Apple Site. On Parcel 2, the remaining In-Line Retail portion of the Site, we tested the development of 28,800 square feet of commercial space with 44 units of residential on a single story above the ground floor. Under this scenario, the Herfy’s portion of the site would be improved with a 9,600 square foot stand-alone commercial building that could be divided into three or four street-oriented retail spaces. The Bank of America building is assumed to be renovated with the bank operating out of a portion of the building and a portion leased out to another commercial tenant after renovations are complete. Scenario 3b-1 assumes that only Parcel 1 on the site is redeveloped, but to 45 feet and with a partial level of at-grade parking beneath the upper floors. The remainder of the property is assumed to be renovated under Scenario 2. Redevelopment Scenarios 3b-2 and 3c are variations on the above program with stacked flat multi-family product and ground floor commercial space in buildings up to heights of either 45-feet or 65-feet. Scenario 3b maintains a similar layout as the prior redevelopment scenarios, but with the added height of 45 feet benefiting Parcel 1 (Former Red Apple), Parcel 2 (Remaining In-Line Retail), Parcel 3 (Herfy’s), and Parcel 4 (Bank of America). Parcel 5, maintains 108 stalls to serve the adjoining commercial space. Scenario 3c has Parcel 1, 3, and 4 increasing to 65 feet and Parcel 2 and Parcel 5 are combined to accommodate a two-level above-grade parking garage with four levels of residential above it. This central structure would provide parking for the units as well as surrounding commercial space. These four scenarios are summarized in Table 40 and illustrated in Exhibit 10 through Exhibit 13. Timeline Because zoning is in place and there is no known environmental contamination on site, this scenario assumes predevelopment work… This scenario assumes predevelopment work will



begin in the third quarter 2011 and construction will commence the following year. The schedules in Chart 13 illustrate the modeled timeline for Scenario 2a. Chart 13: NHSC Site Timing Summary by Scenario -- Scenario 3a --

-- Scenario 3b-1 --

-- Scenario 3b-2 --

PHASE 1 (Parcels 1,3,4)





Disposition 2021 x

PHASE 2 (Parcels 2,)

Pre Development Jun 2015 x

Construction Start Jun 2016 x

Construction End Jun 2017 x


Disposition 2021 x

PHASE 1 (Parcels 1,2,3,4)





Disposition 2021 x

No Phase 2; A Single Phase Scenario

Pre Development None

Construction Start None

Construction End None

Stabilization None

Disposition None

PHASE 1 (Parcels 1,3,4)





Disposition 2021 x

PHASE 2 (Parcels 2,)

Pre Development Jun 2015 x

Construction Start Jun 2016 x

Construction End Jun 2017 x


Disposition 2021 x



-- Scenario 3c --

Financial Performance The disparate financial performance of the NHSC site redevelopment under current zoning versus the modified zoning scenarios illustrates that additional building height and lower parking requirements are necessary to achieve a financially viable project. These findings strongly support the need for thoughtful land use code modifications to facilitate redevelopment. Chart 14 illustrates the rate of return on cash and required equity for each redevelopment scenario. Assuming the property owner invests his land into the redevelopment project, the internal rate of return on cash equity is approximately negative 4.6 percent under the current zoning, compared to a positive internal rate of return on cash equity of 15.2 percent for Moderate Code Modifications. Due to the quantity of underground parking that would be required under modified code conditions to support a full build out of the site, coupled with rents that do support this type of investment, Scenario 3b-2 does not perform well as 3b-1. Scenario 3c does approach a 10 percent return on equity, but at a significant cost. The returns for this scenario are stronger because the majority of parking is provided in two levels of above-grade structured parking reducing the number of below-grade stalls. Chart 14: Rate of Return on Cash / Cash Equity Requirement Comparison – NHSC Site

It is important to note that Scenarios 3a and 3b-1 are not direct comparisons because Scenario 3a models redevelopment of Parcels 2 and 3 with Parcel 4 undergoing renovation while Scenario 3b-

PHASE 1 (Parcels 1,2,3,4)

Pre Development Sep 2012 x

Construction Start Sep 2013 x

Construction End Sep 2014 x


Disposition 2021 x

No Phase 2; A Single Phase Scenario

Pre Development None

Construction Start None

Construction End None

Stabilization None

Disposition None



1 assumes that the NHSC Site is redeveloped with a 45-foot apartment building and that the remaining retail space is renovated. If Parcel 1 in Scenario 3b-1 were redeveloped with an apartment building under current zoning conditions and the remaining retail were renovated as is assumed for Scenario 3b-1 we can see an equal comparison. While redevelopment under current zoning would produce a return of roughly 8.0 percent on the cash equity it underperforms Scenario 3b-1 by over seven percent while requiring only $1 million less in equity. Additionally, the retail required in this modified Scenario 3a is not likely to be supportable.



Recommendations and Next Steps

OBSERVATIONS AND RECOMMENDATIONS Based on our review of the Phase I Retail Report and our analysis of the residential, senior housing, and office markets it is our contention that the Subject Property has mixed-use redevelopment potential. The Newport Hills Subarea has a residential core that is removed from major arterial roads and surrounded by neighborhood parks. Because of the somewhat isolated nature of the Subarea, the Subject Property, has historically provided a commercial hub for nearby residents. While the site should continue to serve as the local commercial center for the Subarea, the current utilization of the Subject Property as single-purpose retail is not sustainable in the long term. As indicated in the Phase I Retail Report and as Heartland has concluded through its market and financial analysis any redevelopment of the Subject Property should include a mix of commercial and residential uses

TASK A SUMMARY OF FINDINGS

Task A-1 Phase I Review The findings from Phase I suggest that the use of the Subject Property for single purpose retail is not supported by the market. Further, the Subject Property will not likely attract a major national retailer or another anchor grocer due its tertiary retail location that does not benefit from strong traffic counts. Successful retail on the Subject Property will be retail that creates a unique draw to the area and establishes the Subject Property as a destination. These uses could include a fitness center, restaurants/cafes, a hardware store, small specialty grocers, childcare, and instruction-oriented uses. As such, the Phase I report indicates that the Subject Property can support between 20,000 and 25,000 square feet of retail in the near term. The majority of the future leasable space would be located on the NHSC Site and limit retail could be located on the Stod’s Site. This range of near-term supportable square footage is slightly less than the 30,000 square feet of retail space that is currently under lease at this NHSC Site. Additional residential units on the Subject Property could be accretive to the supportable retail on the site.

Task A-2 Market Assessment The Market Assessment analyzed current and projected conditions supporting the attached multi-family market, (for-rent and ownership), the senior housing market, and office market. Based on this analysis Heartland concluded:

After reconciling projected demand with the current development pipeline and historical development patterns, there is sufficient justification for development of for-rent multi-family residential product on the Subject Property.

Heartland estimates that there is development capacity to develop an additional 800 units in the Primary Market Area and that the Subject Property is well positioned to capture a share of that total. Development of between 300 and 350 units begins to push the capture rate of the Primary Market Capacity over 30 percent, but is not overly



aggressive. A reasonable range of units that could be supported on the Subject Property through this development cycle is between approximately 200 and 250 units.

The multi-family rental market fundamentals are trending upward; rents are improving after a difficult two-year rate decline and vacancies are decreasing, indicating a growing demand.

Based on our review of apartment complexes in the area that may be similar to a complex on the Subject Property, we concluded that the base rent could be $1.85 per square foot per month for a 750 square-foot average-size unit. This is on the higher end of the spectrum and far exceeds the rental rate achieved at the only stacked flat apartment project near the Subject Property, but is justified based on the overall strong rental location of the Subject Property with easy access to job centers but in a quiet setting, the convenience of commercial services on site; and the anticipated quality of the complex over that of comparable projects.

Based on current and projected market conditions, the inclusion of attached multi-family ownership units (condominium) is not recommended and is not included as a redevelopment alternative on the Subject Property. The projected demand for this type of product, the oversupply of existing product, and the current lending conditions for new construction all indicate that this would not be a prudent investment on this site.

Office as a primary use on the Subject Property is not supported. Due to the Subject Property’s tertiary office location because location away from major arterial roads, inferior access to freeways, and distance from a critical mass of related services to support office use office on the Subject Property is relegated to an alternative simply as a tenant of ground related commercial space. Further, there is no significant difference between office rents and retail rents in this market area. Office user types that may locate here are in the FIRE (finance, real estate, and insurance) category, legal services, or medical providers that service the neighborhood.

Based on our review of the supply pipeline and demand estimates, Heartland estimates that there is demand for roughly 775 senior housing units in the Primary Market Area through 2018. The neighborhood surrounding the Subject Property is quiet and services (e.g. personal care, health care, and conveniences, etc.) are nearby making the Subject Property a strong candidate for a senior housing project.

TASK B SUMMARY OF FINDINGS: FEASIBILITY EVALUATION Heartland analyzed multiple rehabilitation and redevelopment scenarios on both the Stod’s site and the NHSC site. This analysis found that:

The current Neighborhood Business zoning designation on the Subject Property, does not provide the flexibility to develop economically viable mixed-use projects and will instead propagate more commercial space than this market area can support.

Marginal economic feasibility will not likely encourage significant redevelopment efforts in the near future as presently zoned.



Conservative construction and permanent loan financing terms currently available (and likely to be in place for the foreseeable future) do not provide for the use of significant leverage.

In the meantime, the Subject Property ownership entities will need to continue to operate struggling retails centers.

To make future redevelopment more attractive moderate land use code changes for the Subject Property are recommended to be adopted. A set of potential code modifications are discussed further in this report.

The Table 41 and Table 42 summarize the key financial performance metrics and best performing alternative of the scenarios that were analyzed. Table 41: Summary of Key Financial Performance Metrics - Stod’s Site


Table 42: Summary of Key Financial Performance Metrics - NHSC Site


Discount

Rate Value

Value/

SF

Rate of

Return

Total Equity

Needed

Stabilized

Year

Stabilized

Cash on Cash

Stabilized

Value

Total

Development

Cost

Margin

on Cost

Exit Cap

Rate

Scenario 1 10% $1,095,591 $15 n/a $0 2011 n/a $1,111,454 $0 n/a 8.75%

Scenario 2 17% $1,336,115 $18 n/a $1,609,726 2011 n/a $4,898,779 $1,563,730 n/a 8.75%



Scenario 3b: Moderate Code Modification 9.4% $17,399,051 2015 12.0% $34,939,349 $37,697,967 -7.9% 6.20%


Scenario 3c: Maximum Capacity 9.1% $26,853,705 2016 13.5% $60,204,633 $61,831,140 -2.7% 6.20%


Scenario

Discount

Rate Value

Value/

SF

Rate of

Return

Total Equity

Needed

Stabilized

Year

Stabilized

Cash on Cash

Stabilized

Value

Total

Development

Cost

Margin

on Cost

Exit Cap

Rate

BAU (As Is) n/a $2,170,332 $8 n/a $0 n/a n/a n/a n/a n/a 8.75%

Scenario 1 8% $6,416,221 $25 n/a $1,383,546 2015 28% $9,212,739 $0 n/a 8.75%

Scenario 2 8% $7,164,624 $28 n/a $1,605,666 2015 27% $10,780,514 $1,143,922 n/a 8.75%







Scenario 3c: Maximum Capacity 9.5% $67,549,748 2016 4.1% $149,066,670 $144,798,062 2.9% 6.20%


Scenario



RECOMMENDATIONS

Best Performing Alternatives The best performing scenario on the Stod’s Site is Scenario 3b, which provides a 9.4 percent project level return. The best performing scenario for the NHSC Site is Scenario 3b-1, which provides at 15.2 percent return at the project level and nearly 18 percent on cash equity invested. This scenario modeled the development of a four story multi-family for-rent complex on the Former Red Apple parcel and renovation re-lease and of the remaining existing retail square footage on the Site.

Potential Code Changes In order for redevelopment of either of the Subject Property sites to be financially feasible, changes to several components of the current zoning will be required. Many of these zoning changes will also enable and encourage the type and quality of development for these sites that the community has identified; that is, active destination uses with usable, engaging public space. Based on Heartland’s analysis, the following changes are recommended:

Building Height: allow building heights greater than the current maximum of 35 feet. Allow this height increase not only when 75 percent of the parking is below the foot print of the building, but also when 75 percent of the parking is covered within a structure that could be at, above or below grade. This would allow for greater flexibility in planning.

Lot Coverage: allow the maximum lot coverage to be increased from a maximum of 35 percent to 75 percent. Currently up to 50 percent lot coverage can be obtained under certain conditions (inclusion of senior housing or in a mixed-use project) but the increased coverage cannot cause the project to exceed 15 dwelling units per acre. For the NHSC Site, this would result in only 88 additional units over the entire site. As a point of reference, current allowable lot coverage in Neighborhood Commercial Zones (―NC Zones‖) in Seattle is 100 percent, below 13 feet. [note to MH: What does the below 13 feet mean?]

Parking: allow for the following parking reductions:

o Residential: require a blended average of 1.25 stalls per unit. The code currently requires parking ratios of 1.2 stalls per unit (studio and 1 bedroom units); 1.6 stalls per unit unit (2 bedroom units); and 1.8 stalls per unit ( 3 bedroom units). This results in a blended average of roughly 1.4 stalls per unit or more.

o Commercial: allow parking ratio reductions for restaurants. As a point of reference, in NC Zones in Seattle, the first 1,500 square feet or 2,500 square feet (depending on designation) of any drinking or eating establishment are exempt from parking. Similarly for any retail establishment, the first 4,000 square feet or 5,000 square feet are exempted.

Consider other reductions such as ―cooperative parking‖ allowances. For example, in comparable neighborhood commercial codes, if there are three or more business, it is assumed that a customers may go to more than one business once they park their car, therefore, parking requirements are reduced by 20 percent.



While not a code change, Heartland recommends that the City seek to implement the Multi-Family Tax Exemption program. This tax exemption provides a mechanism to increase the number of workforce housing units and enhances the feasibility for multi-family projects where area rents are relatively low or untested.

NEXT STEPS

Refined Feasibility Analysis The economic feasibility analysis completed in Task B provides initial observations and recommendations regarding the feasibility of redevelopment of the Subject Property. However, depending on the direction that the two Subject Property ownership entities are interested in pursuing, a more refined physical site planning and financial analysis should be conducted. This analysis will include conceptual architectural plans and more detailed financial and sensitivity analyses of the preferred scenarios identified in Task B above.

Implementation Plan In order for any renovation or redevelopment plans to move forward on the Subject Property, the two Subject Property ownership entities must choose a path to pursue. Depending on their decisions, several steps must be taken by both the City and the Property Owners. Stod’s Site The Stod’s Site ownership entity is motivated to sell20, therefore the implementation plan should focus on preparing the site for a sale. In addition to the refined feasibility analysis described above, key next steps should include:

Begin discussions with the City regarding zoning changes for the site: including defining a process and timeline for obtaining the necessary entitlements. This process should include a series of focused community design charrettes to inform the rezone process.

Position the property for sale, including clearly scoping the extent and cost of any necessary environmental remediation.

Conduct targeted marketing of the site to senior housing developers and market-rate housing developers to gauge interest.

NHSC Site The refined feasibility analysis will also continue to inform and refine the potential redevelopment opportunities on the NHSC Site. In addition, key next steps should include,

Begin discussions with the City regarding zoning changes for the site: including defining a process and timeline for obtaining the necessary entitlements. This process should include a series of focused community design charrettes to inform the rezone process.

20 The Stod’s Site has been listed for sale within the past year.



Begin informal discussions with Bank of America regarding the future of their existing ground lease renewal option and the existing improvements.

Meet with all current tenants and clearly communicate timelines and next steps, with the goal of maintaining their tenancy through the beginning of any redevelopment activities.

Continue to maintain the existing shopping center as a viable interim use for the site. Actively target tenants with minimal TI requirements, interest in short-term leases, and those that could potentially occupy new retail space in a redevelopment scenario. Depending on the phasing of the site, for example, if the Former Red Apple parcel was redeveloped first then the in-line retail could actually be re-leased at five-year terms and decent levels of TI.

Issue a request for proposals for potential fee developers or development partners for the site.

EXHIBITS

EXHIBIT 1: NEWPORT HILLS COMMERCIAL AREA CONTEXT MAP

EXHIBIT 2: NEWPORT HILLS AREA LAND USE MAP

EXHIBIT 3: NEWPORT HILLS COMMERCIAL MARKET AREA MAP

EXHIBIT 4: MARKET RATE MULTI-FAMILY COMPLEX LOCATION MAP

EXHIBIT 5: MULTI-FAMILY RENT COMP SURVEY

Newport HillsMulti-family Rent Comp Survey (as of November 2010)

1 Newport Manor 12235 Se 60th St, Bellevue (206) 612-9524

No. of Units: 27 Nbrhd: Newport Hills

Year Opened: 1965 Avg. Unit Size (SF): 788

Occupancy: 93% Weighted Avg. Rent / SF:$0.90

Concessions: Parking Ratio: 1.00

Parking Stalls: 27 Utilities: Tenant Pays All

Parking Cost: included in rent Storage Cost

# of Units Unit MixUnit Type SF Range SF Avg. Market Rent Range Rent/SF Range Rent/SF Avg.

0 0% 0 $0.00 $0.00 $0.00

21 78% 1BR 850 850 850 $650 $850 $0.76 $1.00 $0.88

4 15% 2BR / 1BA 1,100 1,100 1,100 $1,000 $1,095 $0.91 $1.00 $0.95

2 7% 3BR / 1BA 1,200 1,200 1,200 $1,200 $1,200 $1.00 $1.00 $1.00

2 The Mercer Place 7650 SE 27th Street 206-232-9355

No. of Units: 150 Nbrhd: Mercer Island




Parking Stalls: 200 Utilities: tenant pays all

Parking Cost: $75 - $100 Storage Cost$50-450


19 13% Studio 435 570 503 $895 $1,195 $2.06 $2.10 $2.08

49 33% 1BR 800 1,020 910 $1,450 $1,795 $1.81 $2.24 $2.03

82 55% 2BR / 2BA 1,100 2,200 1,650 $1,695 $4,500 $1.54 $2.05 $1.79

0% 0 $0.00 $0.00 $0.00

Amenities

W/D in unit

24-hour fitness Year round pool, spa

ground floor retail

concrete, steel constructionGranite, stainless steel

Amenities

controlled access garage central heat

3 Park West at Somerset 13180 SE Newport Way (425) 562-9267

No. of Units: 145 Nbrhd: Bellevue--Factoria Area




Parking Stalls: 200 est Utilities: tenant pays all

Parking Cost: 1 included in rent, $35 for addlStorage Cost$35


0 0% 0 $0.00 $0.00 $0.00

0 0% 0 $0.00 $0.00 $0.00

145 100% 2BR / 2BA 1,040 1,040 1,040 $1,150 $1,375 $1.11 $1.32 $1.21

0% 0 $0.00 $0.00 $0.00

4 Harrington Square 950 Harrington Avenue NE, Renton 425-207-8778

No. of Units: ** 110 Nbrhd: Renton Highlands

Year Opened: 2010 (2011) **217 total whenAvg. Unit Size (SF): 728

Occupancy: 34% 2nd phase is Weighted Avg. Rent / SF:$1.84

Concessions: 20% off mkt rentcompleted Parking Ratio: 1.45

Parking Stalls: ** 160 ** 316 total Utilities: Tenant Pays all

Parking Cost: $30 Storage Cost$30/mo


5 1% Studio 441 513 477 $1,080 $1,145 $2.45 $2.23 $2.34

57 52% 1BR 619 834 727 $1,210 $1,431 $1.95 $2.31 $2.13

45 41% 2BR 916 1,044 980 $1,595 $1,780 $1.74 $1.70 $1.72

0 0% 0 $0.00 $0.00 $0.00

* property is not yet stablilized

5 The Reserve Apartments 1202 North 10th Place, Renton (425) 430-1300

No. of Units: 440 Nbrhd: Renton--near The Landing


Occupancy: * 18% Weighted Avg. Rent / SF:$1.58

Concessions: 3-16% off mkt rent Parking Ratio: 1.48

Parking Stalls: 650 (estimate) Utilities:

Parking Cost: 1 included w. studio/1BR; 2 included w. 2 BR, add'l =$50Storage Cost


90 20% Studio 593 593 593 $865 $1,065 $1.46 $1.80 $1.63

215 49% 1BR / 1BA 708 877 793 $1,136 $1,336 $1.60 $1.89 $1.75

135 31% 2BR / 2BA 1,002 1,262 1,132 $1,361 $1,561 $1.36 $1.24 $1.30

0% 0 $0.00 $0.00 $0.00

* property is not yet stablilized

Club room

pool/hot tub community BBQ

24 hour Fitness Center W/D in unit

Wi-fi Café and Resident Lounge

Amenities

Secured, Underground Parking Cyber café

ftiness center Granite, stainless steel

BBQ and Courtyard views of mtns and city (some units)

Pool / Sauna Fireplace

Amenities

Secured u/g and a/g parking garages W/D in unit

Covered parking W/D in unit

Club House Dishwasher in unit

Amenities

Fitness Center Views in some units

EXHIBIT 6: CONDOMINIUM COMPLEX LOCATION MAP

EXHIBIT 7: SENIOR HOUSING COMPLEX LOCATION MAP

EXHIBIT 8: SENIOR HOUSING RENT COMP SURVEY

Newport HillsSenior Housing Rent Comp Survey (as of November 2010)

1 The Bellettini 1115 108th Ave NE, Bellevue

No. of Units: 145 Parking Cost: Included

Year Built: 2008 Weighted Avg. Unit Size (SF): 1,208

Occupancy: 50% Weighted Avg. Rent / SF: $4.51

Concessions: No Parking Ratio: 1.14

Parking Stalls: 165 Utilities: All included + basic cable

Neighborhood: Downtown Bellevue Storage Cost $1,000 one tine fee

Operator: Leisure Care Type of Care

Entrance Fee Model (Y/N): N X Independent Memory

except $3,000 community/residency fee X Assisted 62+ Other

Ala Carte or Full Service: $400 food credit Skilled Nursing

# of Units* Unit Mix* Unit Type Min Max SF Avg. Min Max Min Max Rent/SF Avg.

28% 1 BR/1 BA 709 715 712 $2,850 $2,850 $4.02 $3.99 $4.00

28% 1 BR/1.5BA+Den 1,049 1,049 1,049 $5,200 $5,200 $4.96 $4.96 $4.96

34% 2 BR/2BA 980 1,780 1,380 $5,900 $5,900 $6.02 $3.31 $4.67

10% 2 BR/2.5BA+Den 2,400 2,400 2,400 $9,900 $9,900 $4.13 $4.13 $4.13

Amenities Payment Options

Fitness w/ PrimeFit Platinum Level-units Private funds

Spa services Concierge Level-units Veterans Assistance Program

2 full-service restaurants Long Term Care Insurance

all Underground parking

*Breakdown between 1 and 1+ den and 2 and 2+ den is estimated because property only provided total #of 1BR and 2BR

SF Range Market Rent Range Rent/SF Range

2 Merrill Gardens-Renton 104 Burnett Avenue South, Renton

No. of Units: 155 Parking Cost: no info

Year Built: 2005 Weighted Avg. Unit Size (SF): 729


Concessions: none Parking Ratio: NA

Parking Stalls: no info Utilities: Included except telephone

Neighborhood: Renton Centre Downtown Storage Cost: NA

Operator: Merrill Gardens Type of Care

Entrance Fee Model (Y/N): N X Independent Memory

X Assisted Respite Care Other

Ala Carte or Full Service: 1 meal included Skilled Nursing

# of Units* Unit Mix* Unit Type Min Max SF Avg. Min Max Min Max Rent/SF Avg.

25% Studio 408 487 448 $1,850 $1,850 $4.53 $3.80 $4.17

20% 1BR 408 487 448 $2,450 $2,450 $6.00 $6.00 $6.00

55% 2 BR 860 1,050 955 $3,400 $3,400 $3.95 $3.24 $3.60

Payment Options

Cable in all apt. On-site wellness center Weekly housekeeping and linen Private Funds

Onsite laundry rooms Electronic key system Common rooms Long-term care ins.

Small pets welcome Salon and barbershop Low-income units available VA Assistance

Internet included Library

Market Rent Range Rent/SF RangeSF Range

Amenities

3 University House 22975 SE Black Nugget Road, Issaquah

No. of Units*: 185 Parking Cost: $85/mo



Concessions: 3rd month free Parking Ratio: 0.41

Parking Stalls: 75 Utilities: Included except telephone

Neighborhood: Sammamish Plateau Storage Cost: $25-$45 PUPM

Operator: ERA Living Type of Care

Entrance Fee Model (Y/N): N X Independent X Memory

X Assisted Other

Ala Carte or Full Service: 1 meal a day included X Skilled Nursing

# of Units* Unit Mix** Unit Type Min Max SF Avg. Min Max Min Max Rent/SF Avg.

5% Studio 458 458 458 $2,400 $2,400 $5.24 $5.24 $5.24

45% 1BR/1BA 535 535 535 $2,750 $2,750 $5.14 $5.14 $5.14

12% 1+BR/1BA(alcove) 664 664 664 $3,350 $3,350 $5.05 $5.05 $5.05

38% 2BR/2BA 850 1,251 1,051 $3,865 $3,865 $4.55 $4.55 $4.55


Weekly housekeeping and linen services Onsite salon NA

Cable television Game and billiards rooms

Access to our community Wellness Center Two courtyards and two solariums

Saltwater swimming pool and whirlpool Underground parking

*Info not provided at time of request. Estimated based on typical ERA property

*115 units to be added


4 Aegis of Kirkland 13000 Totem Lake Boulevard, Kirkland

No. of Units: 50 Parking Cost: None


Occupancy: 80-90% Weighted Avg. Rent / SF: $8.61

Concessions: No Parking Ratio: 0.40

Parking Stalls: 20 Utilities: Included except telephone and cable

Neighborhood: Totem Lake Storage Cost: No

Operator: Aegis Type of Care

Entrance Fee Model (Y/N): N X Independent X Memory

X Assisted Other

Ala Carte or Full Service: 3 ml/day incl Skilled Nursing

# of Units Unit Mix Unit Type Min Max SF Avg. Min Max Min Max Rent/SF Avg.

78% Studio 375 375 375 $3,300 $3,300 $8.80 $8.80 $8.80

18% 1BR 550 750 650 $4,200 $4,800 $7.64 $8.73 $8.18

4% 2BR--Comp. Suite 925 1,125 1,025 $6,480 $7,500 $7.01 $6.67 $6.84


Onsite exercise programs NA

Private movie theatre

Thorough annual unit cleaning

Weekly houskeeping services


5 Regency Newcastle 7454 Newcastle Golf Club Road, Newcastle

No. of Units: 99 Parking Cost: None

Year Built: 2008 Avg. Unit Size (SF): 468


Concessions: 2BR rents for 1BR rate for 1st yr Parking Ratio: 1.52

Parking Stalls: 150 Utilities: Included

Nbrhd: Newcastle Storage Cost n/a

Operator Regency Type of Care

Entrance Fee Model (Y/N) N X Independent Memory

X Assisted Other

Ala Carte or Full Service 3 ml/day incl Skilled Nursing

# of Units* Unit Mix Unit Type Min Max SF Avg. Min Max Min Max Rent/SF Avg.

56% Studio 343 343 343 $2,525 $2,525 $7.36 $7.36 $7.36

34% 1BR 601 601 601 $3,355 $3,355 $5.58 $5.58 $5.58

10% 2BR / 1BA 703 703 703 $4,095 $4,095 $5.83 $5.83 $5.83


Activity Rooms Van service included in rent NA

Weekly parties 2 laundry facilities per floor

Onsite physical, speech, and occupational therapy available Cable TV

Secure, underground parking lot


EXHIBIT 9: SUMMARIES OF COMPARABLE REDEVELOPMENT PROJECTS

KIRKLAND, WA

Address Juanita Drive NE & 98th Ave NE PROGRAM*

Date Completed Phase 1 and 2 (2002 - 2009) Use Units or GLA

Phase 3 TBD Residential 580 town homes,

apartments, lofts

Land Acreage 11 acres lake-view flats

Retail 56,000 sf

Team

Architect GGLO Parking 800+ (est.)

Contractor Mego Construction, Inc. Total Stories 5

Developer SECO Development, Inc. *when completed

Phases 3

Key Design Features

Pedestrian-friendly, tree-lined sidewalks

Streetlamps

Parallel and angle parking in front of stores

Pod parking for retail

Social gathering spaces

Project Picture (before) Project Picture (After) High-density housing

Mix of housing types

Key Retail Tenants

Starbucks Bank of America

Walgreens Local retailers

Project Description and Background

Key Takeaways

- Significant on-site housing density and a strong retail market in the surrounding trade area are necessary to attract national tenants.

- Two of the site's borders are defined by high-traffic arterials, which provide excellent drive-by visibility and accessibility and help the retail thrive.

- Location is both a strong retail and strong housing location.

Photo Source: http://www.gglo.com/project.aspx?projectId=171&catId=5

JUANITA VILLAGE

The new mixed-use, pedestrian-friendly development replaced an abandoned grocery store and a rundown strip mall that formerly occupied the site. When

completed, it will include approximately 580 residential units and over 55,000 square feet of retail space. It is located in close proximity to two key site amenities

– Juanita Beach Park and Lake Washington and sits at the heavily trafficked intersection of Juanita Drive Northeast and 98th Avenue Northeast. To enable high-

density housing and accommodate the parking, much of the open space is situated above the garage structure. The two major residential projects include the

Avalon Juanita Village (211 units) and the Chelsea at Juanita Village (196 units), both of which are apartment developments and were completed in 2005 and

2002 respectively. The building permit for the final phase (179 residential units and 18,000 square feet of retail) was issued in 2008, but construction has not yet

begun on this phase.

BELLEVUE, WA

Address 655 156th Ave SE PROGRAM*

Date Completed Phase 1 (2010) Use Units or GLA

Phase 2 (planned for 2011/2012) Residential 75-90 apartments

Retail 75,000 sf

Land Acreage 6.58 acres Office / 45,000 sf

Med Service

Team Library 10,000 sf

Architect Baylis Architects Parking 160 (at-grade) 400 (under-grnd)

Contractor E. Kent Halvorson Inc. Total Stories 3

Developer Cosmos Development *when completed

Phases 3 are anticipated

Key Design Features

Gathering places--plaza and library

Housing

King County Library

Mix of day and evening uses

Key Retail Tenants

Others TBD


Key Takeaways

- Securing a key community anchor, like the King County Library, was critical to the success of the project.

- Major public-private redevelopment projects take a long time and the developer must have a long-term vision and patient capital.

- Existing tenants options must be carefully integrated into the development phasing.

- A phased development plan enables flexibility as market conditions change.

Image Source: http://lakehillsvillage.com/

Edward Jones

The Lake Hills Village project is a three-phase redevelopment of a 1950s-era neighborhood retail center. A QFC grocery moved out of the center several years

ago and relocated several blocks west. Subsequently, the neighborhood hardware store, Red Apple Market, Hallmark, and a pharmacy also moved out. The

developer first conceived of the project over ten years ago. Planning and implementation of the project has required substantial community outreach as well as

negotiations with the county to secure the library. Phase 1 includes the library and some retail and office space. Phase 2 is anticipated to begin in 2011 or 2012

and will include the underground parking garage, at-grade parking, a pedestrian plaza, housing units, and approximately 20,000 square feet of small shop

space. Phase 3 requires the exit of an existing Bank of America.

LAKE HILLS VILLAGE

KENMORE TOWN CENTER AND DOWNTOWN REVITALIZATION KENMORE, WA

Address 6750 NE 181st St PROGRAM*

Date Completed TBD - in development Use Units or GLA

Residential 300 - 500 apartments

Retail 77,200 - 101,250 sf

Land Acreage 9.61 acres

Team

Architect GGLO Parking 550 - 833

Contractor Keller CMS Total Stories 6

Developer Urban Partners *when completed

Phases Up to 4

Key Design Features (Proposed)

23,000 SF of Plaza and Gathering Space

Green roofs

Adjacent to new City Hall and new KC Library

Key Retail Tenants

TBD


Key Takeaways

Image Source: Heartland

- Developing public realm investment projects (e.g. City Hall and library branch) prior to or in conjunction can help ―set the stage‖ and incent private

development.

- In a redevelopment motivated by the local jurisdiction, it is critical to balance ensuring an outcome that reflects the desires of the public stakeholders, while

also responding to the needs of the developer for a marketable and commercially viable project.

- Maintaining interim occupancy levels in an already struggling center is challenging because of the need to keep leases short-term and flexible to enable

redevelopment when market conditions turn around.

The Kenmore Town Center revitalization plan calls for the redevelopment of a 9.6-acre city-owned property that currently houses a park and ride lot and a

struggling retail center. When completed, the Kenmore Town Center revitalization will include 300 to 500 residential apartments, 77,000 to 100,000 square feet

of retail space and over 20,000 square feet of public plaza and gathering space. The development will be adjacent to a newly completed City Hall (May 2010)

and a new branch of the King County library (anticipated completion in 2011). With the goal of creating a catalytic redevelopment project in the downtown core,

the city purchased the site and in 2007 the city entered into a Disposition and Development Agreement (DDA) with Urban Partners, a private developer, to

implement the redevelopment plan. In the context of the depressed market conditions, the DDA was amended in 2010 to allow the developer more time to close

on the property, in exchange for the developer providing additional earnest money and assumption of interim control of the existing retail center through a

ground lease agreement. A current start date for the redevelopment effort has not yet been announced.

KIRKLAND, WA

Address 12650 Totem Lake Boulevard PROGRAM*

Date Completed Project is on hold (as of 12. 09) Use Units or GLA

Residential 216 luxury condos

Retail 562,300 sf

Land Acreage 26 acres Office 144,000 sf

Cinema 60,000 sf

Team

Architect Fuller/Sears (concept plan) Parking 3,093 (4-6 story structure)

Contractor TBD Total Stories 4 - 6

Developer Developer's Diversified Realty *approved Conceptual Master Plan (Nov. 2005)

Phases 2 - 3 (proposed)


Housing above retail space

Mix of uses

Pedestrian-oriented spaces

Significant landscape upgrades

Gathering spaces

Angled and parallel parking in front of stores

Key Retail Tenants

From left to right: (1) existing under-

performing strip mall; (2) entrance Others TBD

sign; (3) 2005 Conceptual Plan sketch


Key Takeaways

- Local jurisdiction support and possibly funding is important, but it is no guarantee that a project will move forward--market conditions drive redevelopment

Photo and Image Source: http://thesledgehammer.wordpress.com/2007/09/02/retail-wasteland-a-tour-of-the-totem-lake-mall/

http://www.ddr.com/listings/default.aspx?pn=A20999

Since 2009, plans by the developer/owner to redevelop the existing mall into a high-density mixed-use community have been on hold because of the recent

economic conditions. The conceptual plan calls for the redevelopment of the existing 230,000 square-foot mall and strip center into almost one million square

feet of a mix of office, retail, cinema, and residential space. Currently, vacancy is over 60 percent with five large tenants occupying over 88,000 square feet. The

mall was built in 1973 and consists of a traditional enclosed mall and a strip center. In 2004, Developer's Diversified Realty and Coventry Real Estate Advisors

purchased this historically underperforming mall in Kirkland. Prior to and since that time, major tenants have continued to exit the mall. The city and

community have been very supportive of the redevelopment of the mall because of the opportunity to revitalize a major asset in the City and the potential

increased tax base. In 2006, the city council approved a development agreement with the developer and committed $15 million towards the purchase of right-of-

way for a new plaza, street improvements, and a portion of the parking structure.

Maintain existing key tenant (Trader Joes)

TOTEM LAKE MALL

BELLEVUE, WA

Address 15015 Main St. (at 148th Ave SE) PROGRAM*

Date Completed Late 2011 (target date) Use Units or GLA

Residential 0 units

Retail

Land Acreage 16 acres New 11,500 sf

Renovated 182,000 sf

Team

Architect Group Mackenzie Parking

Contractor Total Stories 1 and 2

Developer Franklin West *when completed

Phases 1


New standalone retail buildings along

major arterials

Parking and landscaping improvements

Division of exsiting big-box space into

at least three different spaces

Key Retail Tenants


Key Takeaways

- Identifying and implementing key zoning changes can enable redevelopment of sites that could otherwise continue to sit vacant.

- Renovation of retail space on a site that is in a good retail location is a viable alternative to full redevelopment.

KELSEY CREEK CENTER

TBD

The Kelsey Creek Center redevelopment calls for the renovation of an existing 106,000 square-foot Kmart building and an existing 76,000 square-foot two-story

office and retail building and new construction of at least two new retail buildings totaling11,500 square feet. The Kmart building has been vacant since the

early 2000s when Kmart filed for bankruptcy. Since that time, redevelopment of the site has been considered and explored by other retailers, including Costco,

but under the previous zoning, constructing a new building and providing enough parking was not possible because of a requirement to daylight an existing

stream onsite. In mid-2010, City of Bellevue City Council approved a zoning agreement that allows for the property owner to pay for off-site mitigation in lieu of

daylighting the stream onsite. The project is currently in the design review phase, and pending approval by the City, the owner is anticipating beginning

construction by May 2011 with completion by late 2011.

EXHIBIT 10: REDEVELOPMENT ALTERNATIVES, SCENARIO 3A

EXHIBIT 11: REDEVELOPMENT ALTERNATIVES, SCENARIO 3B1

EXHIBIT 12: REDEVELOPMENT ALTERNATIVES, SCENARIO 3B2

EXHIBIT 13: REDEVELOPMENT ALTERNATIVES, SCENARIO 3C

newport hills commercial area analysis

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