Per EDCKC, the Project qualifies for the higher level of property tax abatement in Years 1-10 as it is located in a continuously distressed area.

Transcription

1 MEMO To: From: Bob Long, Economic Development Corporation of Kansas City, Missouri Lance Dorn, SB Friedman Development Advisors , Fran Lefor Rood, SB Friedman Development Advisors , Date: January 11, 2019 RE: Preliminary Financial Review 25 th and Troost SB Friedman Development Advisors (SB Friedman) was engaged by the Economic Development Corporation of Kansas City, Missouri (EDCKC) to conduct a preliminary financial review of the 25 th & Troost project, a proposed new construction mixed-use development in the Beacon Hill neighborhood of Kansas City, Missouri (the Project ). The proposed Project includes 248 apartments, 195 surface parking spaces and approximately 1,000 square feet (SF) of retail space, and is located on the southeast corner of Troost Avenue and East 25 th Street (the Site ). The Project will be developed by GSSW WR III, LLC (the Developer ). The Developer currently owns the Site, as well as four parcels located to the east. The Developer indicated that Project financial feasibility is challenged by the unproven market east of Troost Avenue and achievable rents that are unable to fully support new construction costs. Therefore, the Developer is requesting the following assistance through EDCKC: Sales tax exemption on construction materials (STECM); and 100% abatement of property taxes (above current predevelopment taxes) generated by the Project for 10 years under the Land Clearance for Redevelopment Authority (LCRA). Per EDCKC, the Project qualifies for the higher level of property tax abatement in Years 1-10 as it is located in a continuously distressed area. This memorandum includes a review of the following: Project characteristics Development budget Proposed sources of financing Proforma assumptions and 10-year cash flow Need for requested financial assistance Our analysis indicates that the full amount of requested financial assistance appears to be required for the Project to achieve viable rates of return. Our recommendations are provided in more detail in the Conclusions and Recommendations section of the memo. SB Friedman Development Advisors N LaSalle St Suite 820 Chicago IL sbfriedman.com

2 Project Characteristics The $43.9 million Project is located on the vacant block bound by Troost Avenue, 25 th Street, Forest Avenue, and 26 th Street in the Beacon Hill neighborhood of Kansas City. Troost Avenue has historically been a dividing line between areas to the west that have maintained investment over time and areas to the east that have been more economically challenged. While redevelopment activity is picking up in the area, including the Marcato development, which is being constructed immediately to the south of 26 th Street, the Project would be one of the first high-end developments located east of Troost Avenue. The Site is located approximately 0.75 miles southeast of Crown Center and approximately 0.5 miles south of the Hospital Hill Medical Center. The Developer indicated that they intend to market the Project primarily to this pool of workers and students. Figure 1. Project Site Plan 25 th Street Troost Avenue Forest Avenue 26 th Street Project Site Adjacent Parcels The Developer acquired the Site and four additional parcels located east of the Site through multiple acquisitions in 2017 and An aerial of the Site is presented in Figure 1. The development program includes: 248 rental apartments in 10 buildings, including: o 58 studio units, averaging 509 SF o 114 one-bedroom units, averaging 682 SF o 76 two-bed room units, averaging 1,056 SF Approximately 1,000 SF of retail 195 surface parking spaces. The Project will include one large, 5-story building with 124 units located on the southeast corner of Troost Avenue and 25 th Street and nine smaller, walk-up buildings with units each located along Troost Avenue, 26 th Street and Forest Avenue. The smaller buildings are intended to blend with the surrounding uses. Residential amenities will include a pool, pool deck, shared tenant kitchen, lounge, gas fire pit, and seating and dining areas on the rooftop of the larger building, as well as a fitness area, yoga room, package room, lounge, dog-wash station, additional grilling and dining areas, a dog park, on-site storage and valet trash. SB Friedman Development Advisors 2

3 Figure 2. Project Site Plan Drawing Source: GSSW, DRAW Architecture + Urban Design Figure 3. Project Rendering, 25 th Street & Troost Avenue Source: GSSW, DRAW Architecture + Urban Design Figure 4. Project Rendering, 26 th Street Source: GSSW, DRAW Architecture + Urban Design SB Friedman Development Advisors 3

4 The Developer is experienced in Kansas City and throughout the Southern United States. Previous projects in Kansas City include the Kirkwood Condominiums, located just south of Country Club Plaza, the Muehlebach Hotel Tower, located in downtown Kansas City, and the renovation of the IRS Center. Their most comparable project is a new construction, multi-family rental development in Dallas, Texas. PROJECT SCHEDULE The Developer anticipates beginning construction in April The Project will be completed in one phase and leasing is anticipated to begin in August 2020, after a 16-month construction period. The Developer is assuming the Project will stabilize in The Developer stated an intent to hold the Project over the long-term, as they have with previous rental investments. Developer Pro Forma Assumptions SB Friedman reviewed the EDCKC application and supplemental materials submitted by the Developer and engaged the Developer in subsequent conversations to obtain additional information to best understand underlying Project assumptions. EDCKC and the Developer provided the following documents for review: EDCKC Redevelopment Project Application; Project summary and preliminary development schedule, received October 24, 2018; 10-year pro forma dated October 16, 2018, received October 24, 2018, including: budget, cash flow (income and expenses), amortization schedule, return calculations, property tax projections, and other Project assumptions; Closing Settlement Statements and/or Purchase Contracts for Project parcels, received October 24, 2018; Preliminary design plans and drawings by Draw Architecture + Urban Design, dated November 5, 2018, received November 15, 2018; List of market comparables and associated rent data, received November 16, 2018; Preliminary construction cost estimates from Centric Construction, dated November 17, 2018, received November 27, 2018; A narrative outlining the development team and Developer s experience in Kansas City; and Other supporting documentation. PROJECT BUDGET Figure 5 presents total development costs (TDC) from the Developer s preliminary Project pro forma and the detailed construction costs estimated by Centric Construction. SB Friedman evaluated the Developer s budget line items on a per SF and per unit basis and as a percentage of total costs using benchmarks from comparable Kansas City projects, industry data, and SB Friedman s past experience. An explanation of key line items from the Developer s budget is provided on the following page. Detailed development costs are presented in Table 1B in Appendix B. Key findings from our review of the Project budget include the following: Land Acquisition. The Developer provided buyer s closing statements and purchase contracts for their purchase of Project Site parcels and four additional parcels located east of the Site. Eight Project parcels were purchased in September 2017 for approximately $1.2 million, including closing costs. Seven parcels, including SB Friedman Development Advisors 4

5 three Project parcels and the four parcels located adjacent to the Site, were purchased in March 2018 for approximately $529,000. The Developer prorated the March 2018 purchase price for the Project parcels based on SF, allocating approximately $307,000 in acquisition costs to the Project. The Developer indicated that the adjacent parcels would be developed later as a separate project. Four additional Project parcels were acquired from the City of Kansas City in November 2018 for $235,000. No as-is appraisals were provided by the Developer. On a per SF basis, the total $1.7 million purchase price is low relative to comparable projects recently reviewed by SB Friedman. However, acquisition costs as a percent of TDC for the Project (4.0%) appear reasonable relative to previously reviewed residential and mixed-use projects in Kansas City (typical range of % of TDC). Figure 5. Project Budget Summary and Benchmarks Developer Benchmark Key Line Uses/Development Costs [1] Budget % of TDC $/SF or Notes [2] Item Acquisition Costs $1,743, % $2 [3] [4] Site Preparation Costs $2,433, % $2 [3] [4] Hard Construction Costs $33,522, % $134 [4] Residential Hard Costs $29,260, % $117 Amenity Hard Costs $681, % $3 Soft Costs $2,905, % $12 Financing Costs $1,615, % $ % Developer Fees $1,250, % [5] $ % [5] Reserves and Other Costs $437, % $2 [4] TOTAL DEVELOPMENT COSTS $43,907, % $175 [1] Costs reflect budget provided by Developer on 10/24/2018 and detailed construction cost estimates provided by Developer on 11/27/2018 [2] Based on data from comparable Kansas City projects and SB Friedman project experience [3] Value/SF of land [4] Within benchmark range [5] % of TDC, net of acquisition Source: GSSW and SB Friedman Hard Construction and Site Preparation Costs. In their initial submittal, the Developer provided high-level parking and building construction cost estimates from Centric Construction. Upon request, the Developer subsequently provided more detailed site preparation and building cost estimates. The more detailed costs represented a decrease of approximately $132,000, which appears to be related to the method by which Centric Construction calculated the sales tax exemption on construction materials (STECM). SB Friedman incorporated the detailed costs into the pro forma for this analysis. o o Site Preparation Costs. The Developer s detailed cost estimates include approximately $2.4 million in site preparation costs, or $2/SF of land. Site preparation costs vary widely across projects, as site conditions and project-specific design and engineering drive site preparation costs. The Developer indicated the site has significant grading issues which have impacted the design and efficiency of the Project. Still, the site preparation costs appear reasonable relative to other projects reviewed by SB Friedman. Hard Construction Costs. The Developer s detailed cost estimates assume building costs of $134 per gross building SF. These estimates are on the low end of the typical range of recent new construction SB Friedman Development Advisors 5

6 mixed-use and residential development projects in Kansas City reviewed by SB Friedman. However, the Developer indicated that the grade change on the Site results in a lower efficiency ratio (rentable SF compared to gross SF), as they are unable to place rental units on the ground floor of the larger, 124-unit building. As a result, costs per gross SF may be disproportionally allocated between common space and rentable SF and therefore appear somewhat lower than costs for comparable projects. Given the lower efficiency ratio, SB Friedman also reviewed hard costs on a per unit basis. The Project hard costs of approximately $132,000/unit are within the range observed for mixed-use and residential projects recently reviewed by SB Friedman, and therefore appear reasonable. The Developer s hard costs include approximately $680,000 for rooftop amenities, including the rooftop pool. The detailed cost estimates provided by the Developer and Centric Construction did not include detail on this portion of the Project. The Developer indicated that the amenity costs are still preliminary and are based on Centric Construction s expertise from comparable projects. Given that estimates were provided by a third-party contractor, the amenity hard costs are considered reasonable. o Sales Tax Exemption on Construction Materials (STECM). In the detailed cost estimates, the Developer estimated proportions of various line items as materials and then applied an assumed 9.15% sales tax rate to derive an estimated value of the STECM. Using this methodology, the Developer appears to value the STECM benefit at approximately $1,070,000. SB Friedman adjusted the Developer s STECM calculation to reflect the standard methodology used by EDCKC to value the STECM benefit, which assumes 40% of hard costs are materials and are taxed at the prevailing Kansas City sales tax rate of 8.6%. This increased the STECM benefit to approximately $1,120,000. In total, the hard construction costs appear to be reasonable relative to comparable projects. Reserves and Other Costs. The Project budget includes an approximately $437,000 operating reserve to offset negative cash flow. SB Friedman paid the reserve out in Year 1 to analyze returns. FINANCING The Developer anticipates financing the Project with conventional debt and cash equity. Figure 6 presents preliminary anticipated financing sources included in the Project pro forma, as well as adjustments to reflect the detailed cost estimates subsequently provided by the Developer. Figure 6. Preliminary Financing Sources Sources/Development Financing [1] Developer Sources % of TDC Benchmark or Notes [2] Conventional Debt $28,539, % 65-75% Cash Equity $15,367, % 30-35% TOTAL SOURCES $43,907, % [1] Costs reflect budget provided by Developer on 10/24/2018 and detailed construction cost estimates provided by Developer on 11/27/2018 [2] Based on industry data, data from comparable Kansas City projects and SB Friedman project experience Source: GSSW and SB Friedman SB Friedman Development Advisors 6

7 Conventional Debt. The Developer is assuming 65% loan-to-cost (LTC) in permanent financing, with a 5.25% interest rate and 30-year amortization. The Developer has not yet secured financing and indicated their assumptions are based on preliminary discussions with local lenders. The LTC, interest rate and amortization assumptions are in line with comparable projects reviewed by SB Friedman and market data, and therefore appear reasonable. Cash Equity. It is anticipated that Project equity will be provided by a small investment group made up of the Developer s family and friends. The Developer indicated that they are considering structuring their equity contribution as a qualified Opportunity Zone investment. Equity accounts for 35% of TDC, which is in line with comparable projects reviewed by SB Friedman and market data, and therefore appears reasonable. CASH FLOW ASSUMPTIONS SB Friedman analyzed cash flow assumptions in the Developer s pro forma against comparable projects provided by the Developer, market data and recent mixed-use and residential projects reviewed by SB Friedman in Kansas City. Key assumptions from the Developer s pro forma are outlined below: Apartment Rents. The Developer is assuming an average monthly rent of $1.65/SF, or $1,247/unit, in 2019 and The Developer provided comparable rent data for developments in surrounding neighborhoods and the Crossroads. SB Friedman identified additional comparables in the area, as presented in Figure 7. On a per SF basis (in 2019 dollars), the Developer s revenue assumptions are in the middle of the range of both the Developer comparables (rents of $ /SF) and SB Friedman s comparables ($ /SF). Figure 7. SBF Market Comparables Building Name Year Built Units Avg Unit SF Avg. Asking Rent/Unit [1] Avg. Asking Rent/SF [1] 25th & Troost $1,247 $1.65 Platinum Apartments ,114 $1,863 $1.67 Gillham Park Row $1,414 $1.63 Interstate Flats $1,051 $1.67 Gallerie (under construction) $1,607 $1.72 Marcato (under construction) $1,141 [2] $1.61 [2] [1] Comparable rents inflated to 2019 dollars using Developer rent escalation assumption of 3.0% [2] Based on leasing information on the Marcato s website, accessed on 12/17/2018 Source: CoStar, Marcato and SB Friedman Rents around the Project Site appear to be highly sensitive to product class and the amenity package provided. The Developer indicated the Project will include a high-end amenity package and will consequently be distinct from other recently developed projects in the area. The Project includes more amenities than the Marcato project, which is located immediately south of the Site and is anticipated to open in February At the same time, the Gallerie project, which is located approximately 0.75 miles west of Troost and is anticipated to open in January 2019, has an even more extensive amenity package than the Project (including an amphitheater and game room) and appears to command rents at the high end of the range. Given the amenity level of the Project, it appears reasonable that it would fall in the middle of the range of market comparables. However, it would also be expected to have a more significant rent premium over projects which have more limited amenities, such as the Marcato, than the Developer is currently assuming. SB Friedman Development Advisors 7

8 Upon further discussion, the Developer indicated that the Project is located in an unproven market and that the Site is particularly challenged by the perceptions of the area east of Troost Avenue. The Developer stated that they believe the Marcato s rent assumption may already be pushing the market and that there is little room to push rents higher. The Developer also referred to the Project s larger units, and therefore higher average unit rents. Overall, on a per SF basis, Project rents reflects a 9.0% premium over average marketed rents at the Marcato. However, the rent premium appears to apply only to one- and two-bedroom units. Therefore, it is possible that the Project could achieve higher rents for studio units. (Rent sensitivities are further discussed in the Conclusions and Recommendations section of this memo). Given that the Beacon Hill neighborhood in particular is rapidly changing, with multiple large projects anticipated to come online in the near future, the Developer s rent assumptions were ultimately accepted as reasonable for the purposes of this analysis. The Developer is assuming a 3.0% rent escalation rate, which appears reasonable relative to comparable Kansas City projects. Parking Revenue and Other Income. The Developer is assuming a parking ratio of 0.63 spaces per unit. Parking is assumed to cost $30/month for tenants and is included in the Developer s pro forma as a component of Other Income, which also includes application fees, pet deposits, trash fees, utility administration fees and storage fees. Based on a review of projects in the area, the Developer s parking revenue assumption appears to be reasonable. Absorption and Vacancy. The Developer is assuming the Project will take 14 months to stabilize with an absorption rate of 20 units per month and fully stabilization in Based on a review of comparable projects reviewed by SB Friedman, this pace appears to be somewhat aggressive given that comparable projects in stronger submarkets within Kansas City typically absorb 9-12 units per month. Further, the large projects coming online in the surrounding area in 2019 are likely to impact the Project s achievable absorption. The Developer is assuming a stabilized vacancy of 6.0%, which appears to be somewhat conservative compared to the typical 5.0% vacancy assumption SB Friedman has observed for other projects in Kansas City. For the purposes of evaluating the Project s need for public assistance, SB Friedman adjusted the vacancy rate to 5.0% to bring the Project in line with other recent projects. Operating Expenses. SB Friedman reviewed annual operating expenses as a percentage of revenues. Expenses, net of real estate taxes, typically range from 20-25% of annual revenues at stabilization for new construction residential projects. The Developer is assuming annual operating expenses that are 28% of revenues, which exceeds the range from comparables. The relatively high expense ratio appears to be driven primarily by payroll expenses. The Developer provided detailed backup for their payroll assumptions and indicated that they typically invest significantly in the maintenance and care of the facilities since they tend to hold them for the long term. All other expense line items were within the typical range of industry data and projects recently reviewed by SB Friedman in the Kansas City market. Based on the additional detail provided by the Developer, the operating expense assumptions were considered reasonable. Real Estate Tax Payments and Base Value. The Developer estimated the future appraised value and assessed value (AV) of the Project using a hybrid cost and income approach to valuation, and assumed a tax rate of % to calculate real estate tax payments. The Developer first used the cost approach and a 1.51% millage rate in Years 1 and 2 of the Project to calculate an assessed value (AV) of $18,000/unit prior to stabilization. SB Friedman Development Advisors 8

9 After stabilization, the Developer used an income approach with a tax-loaded cap rate of 7.51%, resulting in stabilized AV of $27,200/unit. SB Friedman s engagement does not include estimating assessed value or property taxes; however, SB Friedman has observed a range from $18,000-23,000/unit for the initial AV of recently reviewed residential properties in Kansas City. Likewise, in EDCKC s experience, the initial AV for residential properties typically averages $20,000/unit. The Developer s assumptions therefore appear conservative. For the purposes of sizing public assistance, SB Friedman adjusted the stabilized AV to $20,000/unit, inflating annually at 3.0% (the Developer s inflation assumption). EDCKC also provided an updated tax rate of % (including the 2018 levy rate of % and a replacement tax of %). SB Friedman applied the new tax rate to the adjusted AV assumptions, which results in real estate tax payments of approximately $1,950/unit at stabilization. Furthermore, the Developer appears to have calculated the base value for the Project using the market value and assessed value of all 19 parcels purchased in 2017 and 2018, including the four parcels located east of the Site. SB Friedman adjusted this calculation to include only the Project parcels, which results in a base value of $101,525. Exit Capitalization Rate. The Developer s pro forma assumes a hypothetical sale in Year 10 by applying a 6.0% terminal cap rate to Year 10 net operating income (NOI). SB Friedman adjusted this calculation to show the reversion in Year 11 using the Year 10 NOI. The Developer s exit cap rate assumption appears to be on the low end of the range based on market data and comparable projects, and indicates that the Developer may believe the market is less risky than they have otherwise indicated. Need for Financial Assistance SB Friedman analyzed the Project s need for financial assistance from the EDCKC under three scenarios: 1. Without Assistance. This scenario assumes the Project will not receive any EDCKC assistance. 2. With Requested Assistance. This scenario assumes the requested STECM and LCRA abatement are provided. The benefit from the LCRA abatement is based on the Developer s projections of growth in property tax revenues above the current values, with a 100% abatement of incremental property taxes generated by the Project in Years With Adjusted Assistance. This scenario modifies the assistance request to an amount in which the Project is able to achieve market-acceptable rates of return, and to therefore be financially feasible. SB Friedman typically uses one or more of the following four return metrics to evaluate the need for gap financing: 1. Unleveraged Internal Rate of Return (IRR). This is the rate of return or discount rate for the Project, accounting for initial expenditures to construct the Project and ongoing cash inflows (annual net operating income [NOI] before debt service), as well as a hypothetical sale of the Project in Year 10. SB Friedman Development Advisors 9

10 2. Stabilized Yield on Cost. This metric is calculated by dividing NOI before debt service in the first year of stabilized operations by total project costs and is an indicator of the annual overall return on investment for the Project s financing structure. 3. Leveraged Internal Rate of Return. This is the annualized rate of return the Project s equity investors would be projected to realize over their full investment period, including an assumed hypothetical sale of the Project in Year Stabilized Cash on Cash Return. This metric indicates the annual cash return to equity investors once the Project reaches stabilization and is calculated by dividing net cash flow (after debt service) by the total initial equity investment. The Developer calculated each return metric in the Project pro forma and indicated a stabilized yield on cost return threshold of 7.0%. SB Friedman primarily evaluated the need for financial assistance based on stabilized yield on cost due to the preliminary nature of the Developer s financing assumptions and the Developer s indication that they plan to hold the Project for long-term. SB Friedman made the following adjustments to the Developer s original pro forma to analyze returns: Hard Construction Costs and STECM Calculation. In their original pro forma, the Developer provided highlevel hard cost estimates for the Project with and without STECM. Upon request, the Developer subsequently provided more detailed site preparation and hard construction cost estimates for the Project from Centric Construction. SB Friedman updated the Project site prep and hard costs to reflect the detailed costs estimates and recalculated the STECM benefit using the equation provided by EDCKC, which assumes 40.0% of hard construction costs are materials and applies the current Kansas City sales tax rate. This results in STECM benefit of approximately $1.1 million, which is the value used by SB Friedman to analyze returns. Vacancy Rate. The Developer is assuming a stabilized vacancy of 6.0%. SB Friedman adjusted the vacancy rate to 5.0% to bring the Project in line with other recent projects reviewed by SB Friedman in Kansas City. Assessed Value and Real Estate Tax Payments. The Developer is assuming a stabilized assessed value (AV) of $27,200/unit and a tax rate of %. Based on the assessed value range of comparable projects recently reviewed by SB Friedman, SB Friedman adjusted this assumption downward to $20,000/unit to analyze returns. SB Friedman also applied an updated tax rate provided by EDCKC (9.7326%). This results in real estate tax payments of approximately $1,950/unit at stabilization, which is in a decrease of approximately $220/unit. Real Estate Tax Base Value. The Developer appears to have included the four parcels located adjacent to the Site in their calculation of the base value for the Project. SB Friedman removed these parcels, resulting in adjusted base taxes of $1,535, which is the value used by SB Friedman to size public assistance. As presented in Figure 8 and in further detail in Appendix Figures 2B-3B, SB Friedman estimates that the Project would generate a stabilized yield on cost of 5.6% without any assistance. Typically, a project of this type would require a yield on cost of %, based on industry data and recent Kansas City projects that have moved forward with construction. Returns on the low end of the range are typical for projects in core markets, while returns on the high end of the range are typical for more challenging markets, such as the area east of Troost Avenue. With the full amount of requested assistance, SB Friedman estimates the Project as presented would generate a stabilized yield on cost of 6.9%, which is near the high end of market rates of return. SB Friedman Development Advisors 10

11 Figure 8. Projected Financial Returns No Full Benchmark Returns Metric Assistance Request Return [1] Stabilized Yield on Cost 5.6% 6.9% % Undiscounted Value of Total Assistance ($) $6,442,000 Discounted Value of Assistance [2] ($) $4,974,000 Discounted Value of Assistance [2] (% TDC) 11.3% Undiscounted Taxing District Property Tax Collections Over the 25-Year Period $11,730,000 [1] Based on industry data, data from comparable Kansas City projects and SB Friedman project experience [2] Discounted at 6.0% to 2019 dollars Source: GSSW and SB Friedman Conclusions and Recommendations The Project, as presented and described above, appears to require the full amount of requested assistance to achieve market-acceptable rates of return, and to therefore be financially feasible. As presented in Figure 8, the Project achieves returns in line with industry benchmarks and comparable projects that have moved forward with construction with the requested level of assistance that includes: Sales tax exemption on construction materials (STECM); 100% abatement of property taxes (above current predevelopment taxes) generated by the Project for 10 years under the Land Clearance for Redevelopment Authority (LCRA). The Project s need for assistance appears to be driven by achievable rents in the area east of Troost Avenue, which are unable to offset the costs of constructing the Project as currently presented. Given the amenity package provided in the Project and the rents being achieved or assumed by new and under construction residential projects in the areas surrounding the Project, the Developer s rent assumptions appear to be reasonable. There is a possibility that higher rents could be achieved given current asking rents at the Marcato development to the south. SB Friedman conducted a sensitivity analysis, adjusting the studio unit rents upward by 10% to reflect the patterns observed for new and under construction residential projects in the areas surrounding the Project. As a result, Project average rents increase to $1.69/SF and $1,267/unit. With the requested level of assistance, the stabilized yield on cost increases from 6.9% to 7.1%, which is just above the range of market rates of return. While it is possible this upside scenario is somewhat aggressive based on the Project s location, Beacon Hill and surrounding areas have seen significant investment in recent years and projects in the area are likely to benefit from their proximity to the Crossroads and Hospital Hill. However, rent assumptions are currently in line with the market and additional confirmation of supportable rents will only become available as projects such as the Marcato come online. SB Friedman therefore recommends the full requested level of assistance, which appears necessary for the project to achieve risk-adjusted, market-appropriate rates of return. SB Friedman Development Advisors 11

12 Appendix A LIMITATIONS OF OUR ENGAGEMENT Our report is based on estimates, assumptions and other information developed from research of the market, knowledge of the industry, and meetings/teleconferences with the Economic Development Corporation of Kansas City, Missouri and the Developer during which we obtained certain information. The sources of information and bases of the estimates and assumptions are stated in the report. Some assumptions inevitably will not materialize, and unanticipated events and circumstances may occur; therefore, actual results achieved during the period covered by our analysis will necessarily vary from those described in our report, and the variations may be material. The terms of this engagement are such that we have no obligation to revise analyses or the report to reflect events or conditions that occur subsequent to the date of the report. These events or conditions include, without limitation, economic growth trends, governmental actions, changes in state statute, additional competitive developments, interest rates, and other market factors. However, we will be available to discuss the necessity for revision in view of changes in the economic or market factors affecting the proposed project. Our report is intended solely for your information, for purposes of reviewing a request for financial assistance, and is not a recommendation to issue bonds or other securities. The report should not be relied upon by any other person, firm or corporation, or for any other purposes. Neither the report nor its contents, nor any reference to our Firm, may be included or quoted in any offering circular or registration statement, appraisal, sales brochure, prospectus, loan, or other agreement or document intended for use in obtaining funds from individual investors without our prior written consent. We acknowledge that upon submission to EDCKC, the report may become a public document within the meaning of the Missouri Sunshine Law. Nothing in these limitations is intended to block the disclosure of the documents under such Act. SB Friedman Development Advisors 12

13 Appendix B Figure 1B. Detailed Development Budget Uses/Development Costs Developer Budget % of TDC $/GSF $/Land SF Acquisition Costs Land Contract Amount $1,743,447 Total Acquisition Costs $1,743, % $2 Site Preparation Costs Parking $1,740, unit Building $449, unit Buildings $150, unit Buildings $93,415 Total Site Preparation Costs $2,433, % $2 Hard Construction Costs Parking $700, unit Building, 16-unit Buildings and 12-unit Buildings $29,260,440 Rooftop Amenity and Pool (pool, cabana and int. kitchen) $681,626 General Requirements $1,832,761 Overhead and Profit $1,046,571 Total Hard Construction Costs $33,522, % $134 Soft Costs Title Policy, Appraisal, Feasibility $72,900 Architect, MEP, Landscape, Interior Design $1,020,000 Cost Certification $70,000 Legal & Accounting $551,600 Pre-Development/other $22,400 Taxes During Construction $1,500 Construction Management $175,000 Impact Fees $112,320 FF&E $350,000 Utilities $20,000 Special Inspections $40,000 Builders Risk Insurance $100,000 Marketing Expenses $175,000 Soft Cost Contingency $195,000 Total Soft Costs $2,905, % $12 Financing Costs Bank Origination Fee $150,000 Draw Inspection Fee $25,000 Interim Interest Cost $1,440,216 Total Financing Costs $1,615, % $6 Developer Fees Development Fee $1,250,000 Total Developer Fees $1,250, % $5 Reserves and Other Costs Negative NOI $437,397 Total Reserves and Other Costs $437, % $2 TOTAL DEVELOPMENT COSTS $43,907, % $175 Source: GSSW and SB Friedman SB Friedman Development Advisors 13

14 Figure 2B. Returns with No Assistance STABILIZATION NO ASSISTANCE Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Development Sources Conventional Debt -$28,539,631 Cash Equity -$15,367,494 Net Operating Income $12,450 $2,361,417 $2,439,140 $2,511,097 $2,586,430 $2,664,023 $2,743,943 $2,826,262 $2,911,049 $2,998,381 $3,088,332 Payout of Capital Reserves $437,397 Reversion Proceeds (Year 10) $50,700,122 TOTAL $449,847 $2,361,417 $2,439,140 $2,511,097 $2,586,430 $2,664,023 $2,743,943 $2,826,262 $2,911,049 $53,698,503 Development Uses Debt Service $0 $1,418,372 $1,891,163 $1,891,163 $1,891,163 $1,891,163 $1,891,163 $1,891,163 $1,891,163 $1,891,163 Debt Repayment (Year 10) $24,188,556 Equity Distribution $449,847 $943,045 $547,977 $619,934 $695,267 $772,860 $852,780 $935,099 $1,019,887 $27,618,784 TOTAL $449,847 $2,361,417 $2,439,140 $2,511,097 $2,586,430 $2,664,023 $2,743,943 $2,826,262 $2,911,049 $53,698,503 Debt Coverage Ratio Unleveraged Cash Flow - No Assistance Total Project Costs -$43,907,125 Net Operating Income $12,450 $2,361,417 $2,439,140 $2,511,097 $2,586,430 $2,664,023 $2,743,943 $2,826,262 $2,911,049 $2,998,381 $3,088,332 Reversion Proceeds (Year 10) $50,700,122 TOTAL -$43,907,125 $12,450 $2,361,417 $2,439,140 $2,511,097 $2,586,430 $2,664,023 $2,743,943 $2,826,262 $2,911,049 $53,698,503 $3,088,332 Annual Yield on Cost 0.0% 5.4% 5.6% 5.7% 5.9% 6.1% 6.2% 6.4% 6.6% 6.8% 7.0% Unleveraged IRR 6.4% Leveraged Cash Flow - No Assistance Equity Contribution -$15,367,494 Equity Distribution $449,847 $943,045 $547,977 $619,934 $695,267 $772,860 $852,780 $935,099 $1,019,887 $27,618,784 TOTAL -$15,367,494 $449,847 $943,045 $547,977 $619,934 $695,267 $772,860 $852,780 $935,099 $1,019,887 $27,618,784 Annual Cash-on-Cash Return 2.9% 6.1% 3.6% 4.0% 4.5% 5.0% 5.5% 6.1% 6.6% 7.2% Leveraged IRR 9.6% Source: GSSW and SB Friedman SB Friedman Development Advisors 14

15 Figure 3B. Returns with Full Requested Assistance STABILIZATION FULL ASSISTANCE Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Development Sources Conventional Debt -$28,539,631 Cash Equity -$15,367,494 STECM $1,119,679 Net Operating Income $12,450 $2,361,417 $2,439,140 $2,511,097 $2,586,430 $2,664,023 $2,743,943 $2,826,262 $2,911,049 $2,998,381 $3,088,332 Payout of Capital Reserves $437,397 Savings from Property Tax Assistance $432,247 $481,201 $495,684 $510,600 $525,964 $541,789 $558,089 $574,878 $592,170 $609,981 $0 Reversion Proceeds (Year 10) $50,700,122 TOTAL $882,093 $2,842,618 $2,934,823 $3,021,697 $3,112,394 $3,205,812 $3,302,032 $3,401,139 $3,503,220 $54,308,484 Development Uses Debt Service $0 $1,418,372 $1,891,163 $1,891,163 $1,891,163 $1,891,163 $1,891,163 $1,891,163 $1,891,163 $1,891,163 Debt Repayment (Year 10) $24,188,556 Equity Distribution $882,093 $1,424,246 $1,043,660 $1,130,534 $1,221,231 $1,314,649 $1,410,869 $1,509,976 $1,612,057 $28,228,766 TOTAL $882,093 $2,842,618 $2,934,823 $3,021,697 $3,112,394 $3,205,812 $3,302,032 $3,401,139 $3,503,220 $54,308,484 Debt Coverage Ratio Unleveraged Cash Flow - Full Assistance Total Project Costs -$43,907,125 Less STECM $1,119,679 Net Operating Income $12,450 $2,361,417 $2,439,140 $2,511,097 $2,586,430 $2,664,023 $2,743,943 $2,826,262 $2,911,049 $2,998,381 $3,088,332 Savings from Property Tax Assistance $432,247 $481,201 $495,684 $510,600 $525,964 $541,789 $558,089 $574,878 $592,170 $609,981 $0 Reversion Proceeds (Year 10) $50,700,122 TOTAL -$42,787,446 $444,697 $2,842,618 $2,934,823 $3,021,697 $3,112,394 $3,205,812 $3,302,032 $3,401,139 $3,503,220 $54,308,484 $3,088,332 Annual Yield on Cost 1.0% 6.6% 6.9% 7.1% 7.3% 7.5% 7.7% 7.9% 8.2% 8.4% 7.2% Unleveraged IRR 7.8% Leveraged Cash Flow - Full Assistance Equity Contribution -$15,367,494 Less STECM $1,119,679 Equity Distribution $882,093 $1,424,246 $1,043,660 $1,130,534 $1,221,231 $1,314,649 $1,410,869 $1,509,976 $1,612,057 $28,228,766 TOTAL -$14,247,815 $882,093 $1,424,246 $1,043,660 $1,130,534 $1,221,231 $1,314,649 $1,410,869 $1,509,976 $1,612,057 $28,228,766 Annual Cash-on-Cash Return 6.2% 10.0% 7.3% 7.9% 8.6% 9.2% 9.9% 10.6% 11.3% 12.1% Leveraged IRR 13.4% Source: GSSW and SB Friedman SB Friedman Development Advisors 15

16 Appendix C Figure 1C: Assessed Value Schedule Abatement Year Calendar Year Projected Assessed Value [1][2] Property Taxes Before Abatement [3] Abatement % Property Taxes After Abatement [Paid to Taxing Jurisdictions] Estimated LCRA Benefit to Project $101,525 $1,535 [4] $4,457,002 $433, % $1,535 $432, $4,960,000 $482, % $1,535 $481, $5,108,800 $497, % $1,535 $495, $5,262,064 $512, % $1,535 $510, $5,419,926 $527, % $1,535 $525, $5,582,524 $543, % $1,535 $541, $5,749,999 $559, % $1,535 $558, $5,922,499 $576, % $1,535 $574, $6,100,174 $593, % $1,535 $592, $6,283,180 $611, % $1,535 $609, $6,471,675 $629, % $629,862 $ $6,665,825 $648, % $648,758 $ $6,865,800 $668, % $668,221 $ $7,071,774 $688, % $688,267 $ $7,283,927 $708, % $708,916 $ $7,502,445 $730, % $730,183 $ $7,727,518 $752, % $752,088 $ $7,959,344 $774, % $774,651 $ $8,198,124 $797, % $797,891 $ $8,444,068 $821, % $821,827 $ $8,697,390 $846, % $846,482 $ $8,958,312 $871, % $871,877 $ $9,227,061 $898, % $898,033 $ $9,503,873 $924, % $924,974 $ $9,788,989 $952, % $952,723 $0 TOTAL, Years 1-25 (Undiscounted) $17,052,712 $11,730,108 $5,322,604 Years 1-10 $5,337,958 $15,355 $5,322,604 Years $11,714,754 $11,714,754 $0 [1] Assessed value assumes $20,000/key upon completion [2] Developer assumed a 3% annual increase in assessed value following stabilization in Year 3 [3] Assumed 2018 tax rate, % as indicated by EDCKC [4] Base taxes, per 2017 assessed value and tax rates Source: EDCKC, SB Friedman SB Friedman Development Advisors 16