Johns Hopkins University. Carey Business School. The Edward St. John Department of Real Estate

Transcription

1 Johns Hopkins University Carey Business School The Edward St. John Department of Real Estate Practicum Fall 2008 Submitted by: Ryan Brown Faculty Advisor: Jay Gouline December 10, 2008

2 TABLE OF CONTENTS 1. EXECUTIVE SUMMARY IDEA INCEPTION LOCATION / SITE SELECTION LAND USE AND PUBLIC POLICY MARKET ANALYSIS AND PROPOSED PROGRAM DEVELOPMENT PLAN CONSTRUCTION BUDGET DEVELOPMENT TIMELINE FINANCIAL ANALYSIS ASSUMPTIONS PRESENT VALUE OF CASH FLOWS (OFFICE BUILDING) PRESENT VALUE OF PROPERTY RESALE (OFFICE BUILDING) PRESENT VALUE SUMMARY (OFFICE BUILDING) VALUATION OF RESIDENTIAL DEVELOPMENT RIGHTS LAND VALUATION (RESIDUALVALUE) COMPETITIVE ADVANTAGE CONCLUSION BIBLIOGRAPHY APPENDIX EXHIBIT SCHEDULE

3 1. EXECUTIVE SUMMARY There are numerous administrative departments within Johns Hopkins Medicine that have been relocated off the main medical campus in East Baltimore to accommodate expanding clinical and research programs. Given these relocated administrative departments provide core services to the medical campus, there is much inefficiency when the functions they perform occur remotely. A parcel of land adjacent to the medical campus is currently available for sale. The purpose of this analysis is to: 1) propose a development plan that provides infrastructure for off campus administrative departments to return to the medical campus; and 2) arrive at a residual value for the land. The proposed development plan includes the following: a) A 3 level underground parking garage, providing 975 parking spaces b) A 12 story, 290,000 SF building, with 240,000 SF allocated for office and 50,000 SF allocated for retail c) Sell the development rights to 342 residential units on the balance of the parcel The present value of the land to Johns Hopkins Medicine is $9,651,001. The value of each development component is summarized in the table below: Land Value Summary Present Value Cash Flows From Office Building $ 61,916,080 Present Value Property Resale From Office Building $ 13,731,486 Present Value Residential Development Rights $ 9,056,617 Total Property Value $ 84,704,183 Total Construction Costs $ 75,053,182 Land Value (Residual) $ 9,651,001 Although Johns Hopkins Medicine can pay up to $9,651,001 for the land and achieve an 8.78% cost of capital, the organization has a competitive advantage over private developers due to its not for profit status. Property tax abatement and a lower cost of capital create an internal value of $7,002,345, which should be recognized entirely by Johns Hopkins Medicine. As such, the internal value should be subtracted from the $9,651,001 land value to arrive at the purchase price for the subject property. In closing, Johns Hopkins Medicine should pay no more than $2,648,565 for the parcel of land. 3

4 2. IDEA INCEPTION 2.1. Situational Overview Johns Hopkins Medicine unites the faculty physicians and scientists of Johns Hopkins University School of Medicine with the health professionals and facilities of the Johns Hopkins Health System. Over recent years many core administrative departments within Johns Hopkins Medicine have been relocated off the main medical campus in East Baltimore to provide room for expanding research and clinical programs. There are several departments that were relocated; a few select examples include: 1) the legal department relocated to Mt. Washington; 2) the department of marketing and communications relocated to Fell s Point; and 3) the centralized scheduling function relocated to Power Plant. Advances in technology as well as an extensive shuttle system allow off campus departments to stay connected with the medical campus. However, a school of thought believes the relocation of Johns Hopkins Medicine administrative departments off the medical campus impedes intellectual synergy and creates immense inefficiencies Thesis Statement Project Goal A viable option exists to create office space on the East Baltimore campus for relocated administrative departments. A parcel of land adjacent to the medical campus zoned for office is currently available for sale. The parcel of land is referred to as the subject property. The following paper outlines a viable development program for the subject property and determines the maximum price Johns Hopkins Medicine should pay for the land. 3. LOCATION / SITE SELECTION 3.1. Subject Property Location The subject property is located directly adjacent to the Johns Hopkins parking garage on Orleans St. It is bordered on the north by Orleans St., on the south by Fayette St., on the west by N. Wolfe St., and on the east by Washington St. A map of the Johns Hopkins medical campus is provided as Exhibit 1. As highlighted in the map, the subject property (lower right corner) is ideally situated at the new main entrance of the medical campus. 4

5 EXHIBIT 1: Johns Hopkins East Baltimore Medical Campus New Cardiovascular & Critical Care Tower New Main Entrance to Medical Campus New Children s & Maternal Tower Subject Property Johns Hopkins Orleans St. Parking Garage 3.2. Johns Hopkins Campus Development A tremendous redevelopment is currently underway on the Johns Hopkins campus with the construction of two new patient towers. The towers will each reach 12 stories and encompass over 1.6 million square feet. The project is slated to open in the spring of 2011 and cost over $1 billion. A critical point of the Johns Hopkins redevelopment is the relocation the main entrance from 600 N. Wolfe St. to Orleans Street. A pedestrian bridge will connect the recently completed Orleans St. parking garage to the new hospital towers. As such, the nucleus of the campus will be centered at the intersection of Orleans and North Wolfe Streets, directly across from the subject parcel Access to Subject Property The subject property has excellent access from major highways. The entrance and exit ramps to Interstate 83 are located five blocks west on Fayette St. Interstate 83 connects 5

6 northwestern portions of Baltimore City and County, as well as southern Pennsylvania, to the downtown area. In addition, the entrance and exit ramps to Interstates 95 and 895 are located 2 miles east of the subject property on Orleans St. Interstate 95 north connects northeastern portions of Baltimore and Harford Counties. Anne Arundel and Howard Counties can be reached via Interstates 95 and 895 south through the McHenry and Harbor tunnels. The Baltimore Metro rail line originates at the Johns Hopkins medical campus, two blocks north of the subject property. The Metro rail travels through the central business district ending in Owings Mills. The entire rail line is nearly 16 miles Subject Property Tax Parcels and Ownership The subject property is comprised of two tax parcels. The first parcel (tax parcel 1) is located at 1950 E. Fayette St. and is 101,683 SF or 2.33 acres. The current owner of tax parcel 1, according to Maryland State Department of Assessment and Taxation, is Capital Development, LLC. The second parcel within the subject property (tax parcel 2) is located at Orleans St. and is 10,500 SF. or 0.24 acres. The current owner of tax parcel 2 is Dell House, LLC. Capital Development, LLC and Dell House, LLC have the same ownership partners, according to the listing broker, John Sheridan, from CB Richard Ellis The assemblage of both tax parcels yields 112,183 SF or 2.57 acres. Exhibit 2 is a map that provides an overview of both tax parcels within the subject property. 6

7 EXHIBIT 2: Subject Property Tax Parcels Tax Parcel 2 10,500 SF Tax Parcel 1 101,683 SF N Both Tax Parcels 112,183 SF 2.57 Acres Please Note: The subject property highlighted in blue has completed razed and no structures currently reside on the parcel. 7

8 4. LAND USE AND PUBLIC POLICY 4.1. Planned Unit Development The subject property is located within a larger planned unit development (PUD) that was approved by the Baltimore City Council in December 2004 (Council Bill ) 1. Exhibit 3 provides an aerial illustration of the PUD from the south. The subject property, encompassing both tax parcels, is identified as Parcel C. The balance of the PUD is comprised of Parcels A and B, which represent a single tax parcel with the address of 1951 East Fayette St. Parcels A and B are under contract and expected to close in July These parcels are collectively referred to as contract property. The contract property is 243,492 SF or 5.58 acres. EXHIBIT 3: Planned Unit Development from South 1 A copy of the approved Planned Unit Development can be found in the appendix as Exhibit 27. 8

9 To provide an alternative vantage point the Exhibit 4 represents an aerial picture of the PUD from the north. Again, Parcel C represents the subject property and Parcels A and B represents the contract property. The Johns Hopkins Orleans St. parking garage is located directly west of the subject property. EXHIBIT 4: Planned Unit Development from North 9

10 The size of the entire PUD, both the subject property and contract property, is 355,675 SF or 8.16 acres. To summarize the components of the PUD, Table 1 provides a detailed overview of the individual parcels. Table 1: Planned Unit Development Overview PUD Property Development Parcel Address SF Acres Subject Property Contract Property Parcel C Parcel B Parcel A 1950 E. Fayette 101, Orleans 10, Subtotal 112, E. Fayette 243, Subtotal 243, GRAND TOTAL 355, Approved Zoning The entire PUD is approved for over 1.2 million SF of development. The contract property is comprised of residential and a small, 10,000 SF, allocation for retail. The subject property has the greatest density within the PUD. The approved zoning for the subject property is 240,000 SF office; 50,000 SF of retail; and 342 residential units. Table 2 provides an overview of the zoning for the entire PUD. 10

11 Table 2: Planned Unit Development Approved Zoning Use QTY Size Parcel A (Contract Property) Residential 60 Townhouses 168,000 SF Parcel A Subtotal 168,000 SF Parcel B (Contract Property) Retail 10,000 SF Residential Multi-Family 372 Units 396,070 SF Townhouses 12 Units 33,600 SF Parcel B Subtotal 439,670 SF Parcel C (Subject Property) Office Retail 240,000 SF 50,000 SF Residential 342 Units 364,230 SF Parcel C Subtotal 654,230 SF GRAND TOTAL 1,261,900 SF Parking Spaces Size Parcel A (Contract Property) 0 0 SF Parcel B (Contract Property) ,250 SF Parcel C (Subject Property) ,250 SF TOTAL 1, ,500 SF 11

12 Exhibit 5 illustrates the original concept plan for the entire PUD. The illustration is provided only to convey the initial massing plan for the various mixed uses (i.e. office, retail, residential). Given that the contract property is being sold separate from the subject property, there is autonomy in developing alternative design plans that are more suitable to the respective owners. EXHIBIT 5: Planned Unit Development Concept New Main Entrance to Medical Campus Subject Property Contract Property Johns Hopkins Orleans St. Parking Garage 5. MARKET ANALYSIS AND PROPOSED PROGRAM 5.1. Office Market Demand The goal of the proposed development is to relocate Johns Hopkins Medicine administrative departments back to the East Baltimore medical campus. To that end, the market demand is known since these departments currently operate within the organization from off campus locations. Several interviews were conducted with the Senior Director of Leasing for Johns Hopkins Real Estate to review all off campus leases and determine those departments 12

13 most feasible to return to the medical campus. Although the premise is that administrative departments should be located on the medical campus because of intellectual synergies, there are certain departments that are better suited in their current off campus locations. A prime example is the department of Information Technology which recently underwent a capital intensive build out on the Johns Hopkins Mt. Washington campus for a data management center. Table 3 provides an overview of the departments that have been identified as ideal candidates to return to the medical campus. 13

14 Table 3: Administrative Departments that are Candidates to Relocate Johns Hopkins Medicine Off Campus Tenants Current Size SF Projected Size SF 1. Fund for Johns Hopkins Medicine (Development Fund) 43,458 47, Planning & Marketing, Public Affairs 24,661 27, Access Services (Centralized Scheduling) 19,946 21, Emergency Medicine (Administration/Training) 16,009 17, Office of Technology and Licensing 14,486 15, Government Affairs 13,166 14, Cancer Registry 12,215 13, Research Administration Office of Billing & Quality Assurance 12,173 13, Johns Hopkins International 10,119 11, Finance / Regulatory Compliance 10,000 11, Pathology 7,785 8, Psychiatry (Dr. Pulver) 7,280 8, Neurology (Dr. Gordon) 6,796 7, Johns Hopkins Health System Legal 5,525 6, Medical Services Administration 5,300 5, Critical Care Research (Dr. Pronovost) 3,400 3, JHHS Central Verification Office 2,038 2, Infectious Disease (Dr. Bartlett) 1,500 1, Tenant to be Identified 0 2,554 Subtotal Off Campus Space 215, ,000 GRAND TOTAL SPACE 237, ,000 Approved Office within Residential PUD 240, ,000 Variance 2,557 0 *Sorted by size. Current size represents off campus lease in rentable square feet. Projected size represents space program if returned to east Baltimore medical campus with a 10% increase in space. 14

15 As illustrated in the table above there are 18 Johns Hopkins Medicine administrative departments identified as being ideal candidates to return to the medical campus. These 18 departments currently lease 215,857 rentable SF of space in buildings scattered throughout the Baltimore City metro area. Richard Peiser in the book Professional Real Estate Development states that most firms that wish to move are looking for 10 20% more space than they currently occupy (Peiser 2004]. Mr Peiser s conclusion is very applicable to the off campus administrative departments. During department interviews, most managers indicated they would expand their office space if the opportunity was available. For this reason, 10%, or 21,856 SF was added to total program on a pro rata basis to arrive at a total projected office program of 237,443 SF. The total office density approved for the subject property is 240,000 SF, which leaves 2,554 SF vacant. As many on campus administrative departments work out of sub standard office space, the 2,554 SF of vacant space can easily be filled with internal office tenants Office Market Supply The East Baltimore Biotech Park, which resides at the northern border of the medical campus, is the only competition for office space in the market. Exhibit 6 is a map which dentifies the location of the Biotech Park vis à vis the Johns Hopkins medical campus. 15

16 EXHIBIT 6: East Baltimore Biotech Park from South The East Baltimore Biotech Park project is facilitated by East Baltimore Development Inc. Forrest City Development was selected as the master developer and phase one is currently underway. Phase one will include: 1.1 million SF of office space, 50,000 SF of retail and 850 residential units. There are four office buildings planned for phase one, each totaling approximately 275,000 SF. There will be a small retail component in each of the office buildings. The first office building, which carries the name Rangos, was completed in April Johns Hopkins University signed a lease for 100,000 SF of space in the Rangos building to house a basic science laboratory. The second, third and fourth buildings are expected to be delivered in April 2009, April 2010 and April 2012, respectively. Exhibit 7 provides a map of the Biotech Park phase one development. 16

17 EXHIBIT 7: East Baltimore Biotech Park, Phase One Office Bldg. Office Bldg. Apr Apr Office Bldg. Apr Rangos Office Bldg. Open Any of the four office buildings in the East Baltimore Bio tech Park provide an option for relocation of off campus administrative departments. However, there are four main advantages to Johns Hopkins Medicine developing an office building on the subject property, versus leasing space in the Biotech Park. First, the subject property can be developed for office space at a lower cost than the Biotech Park. The four proposed office buildings are being developed as biotech space with laboratories as the target market. Such space requires mechanical and structural enhancements to the building to ensure laboratory conditions. The enhancements will increase rent cost. Since administrative offices have no use for the structural and mechanical enhancements they will overpay for the space. Second, an office building on the subject property is proximal to the main entrance of the medical campus. The office buildings in the Biotech Park are adjacent to the north end of the campus and represent a minute walk to the main hospital buildings. 17

18 Third, in developing a building on the subject property, Johns Hopkins Medicine tenants would be pay rent to the organization thereby creating equity. Fourth, an office building on the subject property would not be subject to lease restrictions currently present at the Biotech Park. East Baltimore Development Inc. has incorporated restrictions in the master development plan which prohibits Johns Hopkins from leasing more than 50% of the available office space. The purpose of the restrictions are to ensure a careful balance of public and private tenants. Since the amount of space Johns Hopkins can lease is limited, a strategy of consuming bio tech space for strictly administrative functions is counter productive to life science efforts within the organization. As such, Johns Hopkins is best served by directing administrative tenants to the subject property Residual Office Demand and Proposed Program The 18 office tenants identified to return to the medical campus 98% of the 240,000 SF of office zoned for the subject property. There is over 1million SF of office space planned just north of the medical campus in the Biotech Park. However, as previously mentioned it is more advantageous for Johns Hopkins Medicine to direct administrative departments to the subject property. In conclusion, the demand for 240,000 square feet of office space can easily be met through internal administrative departments. The 18 departments identified in Table3 will comprise the office program for the development Retail Market Demand The PUD allows the development of 50,000 SF of retail on the subject property. By andlarge all of the demand for retail will be generated by the workforce occupying the office building and medical campus. As such, retail tenants on the subject property will be relatively small in size and provide goods and services that directly benefit the medical campus Retail Market Supply The community in and around the medical campus has limited retail. There are few national chains and the majority of retail outlets are locally owned. The East Baltimore Biotech Park plans to develop retail within phase one, which will increase the supply of retailers in the market. The Biotech retailers will be located minutes (walking distance) from the main entrance of the medical campus. Given the distance from the Biotech Park and the absence of much retail in the community, there is little competition for retailers in the subject property. 18

19 5.6. Residual Retail Demand and Proposed Program Seven tenants have been identified for the retail component of the building. The total rentable square feet planned for these tenants is 50,000. The proposed retail program is complimentary to the habits and needs of workforce and represents a mixture of tenants internal and external to Johns Hopkins. Table 4 provides an overview of the proposed development program. 19

20 Table 4: Retail Program Tenant Projected Size SF JHM Tenant 1. Johns Hopkins Credit Union 12,000 Yes 2. Patient First / Urgent Care Center 6,000 Yes 3. Johns Hopkins Pharmacy 3,000 Yes 4. Deli 2,500 No 5. Daily Grind / Coffee Shop 1,000 No 6. Child Care Center 24,500 No 7. Kinko's - Fed Ex Store 1,000 No Total Retail Program 50,000 Approved Retail within Residential PUD 50,000 Johns Hopkins Medicine Retail Tenants 21,000 42% External Tenants 29,000 58% Total 50, % Johns Hopkins Credit Union There is one Johns Hopkins Credit Union branch serving the medical campus which is located at 2027 Monument St. The location is satisfactory; however, with the focus of the entire campus shifting to Orleans St. it will no longer be proximal for the majority of campus workforce. In addition, the current location is not owned by Johns Hopkins; therefore rent is paid to an external landlord. The current location is approximately 11,000 SF and undersized for the demand. A 12,000 SF space has been programmed into the office building to house the Credit Union Patient First / Urgent Care Center Johns Hopkins operates an employee health center which provides walk in services to staff members for non acute illnesses. Although, the health center provides quality service it is staffed by two nurses and only open from 8:30am 4:30pm. The minimal staff and operating hours limit the scope of services that can be provided to 20

21 a workforce of over 15,000 employees. There is a need to develop an expanded walk in service that employees can utilize on campus. Johns Hopkins Medicine has a development agreement with Patient First, an urgent care provider in Maryland and Virginia. The details of the relationship are beyond the scope of this paper. However, the one component most relevant to the project is that Johns Hopkins can collaborate with Patient First to develop an urgent care center on the east Baltimore medical campus. A Patient First opened on the Johns Hopkins Bayview Medical Center in November 2007, and it has been extremely successful in providing care to employees and generating specialty referrals to the hospital. The same results are expected if a Patient First is developed on the East Baltimore medical campus. A 6,000 SF space has been programmed into the office building, which represent the size of a typically Patient First Center Pharmacy Johns Hopkins operates an outpatient pharmacy at three locations on the medical campus.. Two of the locations, the Weinberg building and the Johns Hopkins Outpatient Center, are focused on specific patient populations. The third location at 1810 E. Monument St. has a more general focus towards the Johns Hopkins workforce. Similar to the Johns Hopkins Credit Union, the pharmacy s Monument St. location is at the northern end of the medical campus. This location represents a minute walk from the new main entrance where the majority of the employment base will reside. For this reason, the employee centric pharmacy will locate to the first floor of the subject property taking advantage of the adjacency to the largest concentration of employees and Patient First Deli A rough estimate of 250 SF per worker in the 240,000 SF office building results in approximately 1,000 employees. Although there are numerous lunch options around the medical campus all of them require employees to leave the building. Due to tight work schedules and weather conditions, many employees do not have time to leave the building for lunch and would choose a deli within the building out of convenience. The captive workforce and limited lunch options in close proximity, create enough demand to support a deli. As such, a deli is planned for 2,500 SF on the first floor. 21

22 Daily Grind / Coffee Shop For the same reason that the estimated workforce approximately 1,000 employees in the office building would provide enough demand for a deli, the workforce would also support the demand for a coffee shop. At the moment there are three Daily Grind franchises on medical campus. Each of the franchises serves a localized (building specific) demand for morning and afternoon coffee. The locations of the existing Daily Grind shops are: 1) Johns Hopkins School of Public Health, Hampton House; 2) Johns Hopkins School of Public Health, Bloomberg Building; and 3) Broadway Research Building. Each of these three sites are located at the northern end of the medical campus and do not represent an efficient option for individuals who will be working in the proposed office building. The walk to the closest site would take approximately minutes and is too long for workers in the proposed office building. For this reason a coffee shop is planned for 1,000 SF on the first floor Child Care Center Johns Hopkins has a partnership with Bright Horizons to provide a child care and early learning center for dependents of employees. The Bright Horizons Center is located at 98 N. Broadway, which is two city blocks south of the medical campus on Orleans St. The current space is approximately 22,000 SF. Although, employees praise the service provided by Bright Horizons, demand for child care services greatly exceeds capacity, with only a fraction of the eligible employees being served. Currently, there is a 16 month waiting list for admission. In most cases, employees find alternative child care options while on the wait list. A 24,500 SF child care center has been planned for the the building. An outdoor play area for the center will be incorporated into final design plans. The intent is not to relocate the existing center from 98 N. Broadway, but provide a second center to meet the need for child care services. The child care center planned in the subject property will have a great advantage over the current location because it is located on the medical campus. This will allow parents the ability to easily visit children during the day and, most important, eliminate driving to 98 N. Broadway for drop off and pick up FedEx Kinko s Currently, there is a FedEx Kinko s satellite office on the first floor of the Nelson building of the Johns Hopkins Hospital. The satellite office handles printing requests from the medical campus. The development of an office building on the subject parcel will bring approximately 1,000 administrative professionals to the campus which will ultimately increase the demand for printing services. Since the proposed office building will represent the largest concentration of administrative jobs on 22

23 campus, it is extremely logical to relocate the FedEx Kinko s to the first floor of the new office building. Hence, a 1,000 square foot satellite office has been planned for the third floor. 6. DEVELOPMENT PLAN 6.1. Parking To maximize the density on the subject property, underground parking will be incorporated into the development plan. The underground parking garage will span the entire site and will encompass 112,000 SF per level. Parking spaces have been designed at 345 SF each, which includes circulation, and each parking level will be able to accommodate 325 spaces. The subject property is zoned for 710 parking spaces, which translates into 2.2 levels of underground parking. The 710 parking spaces appear low given the amount of density zoned on the subject property. Johns Hopkins Medicine will request a variance within the PUD to develop 3 full underground levels that will increase the number of spaces from 710 to 975. Since all of the parking will be provided underground there is a high degree of confidence that the variance will be granted. The parking garage will be accessed from Orleans and Fayette Streets, which are much more capable of accommodating traffic volumes than Wolfe and Washington Streets. Having access on both Orleans and Fayette will permit right hand turn entrance and exit. Four gates will be planned for each entrance. Exhibit 8 on the following page provides a schematic drawing, including dimensions, of the planned parking garage. 23

24 EXHIBIT 8: Underground Parking Garage Washington Street Orleans St. Under Ground Parking: 374ft. 0.00in. X 300ft. 0.00in. Subject Property 112,074 SF 374ft. 6.00in. X 300ft. 0.00in. 3 Levels 975 Spaces Fayette Street 0 ft. 19 ft. 2.4 in. 32 ft. 64 ft. Wolfe St Office / Retail Building The office and retail components of the development will be incorporated into a single building. As was previously mentioned, when the Johns Hopkins campus redevelopment plan is completed in the spring of 2011, the main entrance of the campus will be positioned at the corner of Wolfe and Orleans Street. For this reason the development plan concentrates the office and retail building towards the northwest corner of the subject property. The location will create proximal synergies and the possibility of an above street pedestrian bridge linking the subject property to the medical campus. The PUD zoning limits development height to 170 feet for a maximum width of 140 feet. To comply with zoning requirements, the footprint of the building is designed to the measurements of 175 feet by 140 feet, for a total foot print of 24,500 SF. Ceiling heights in the building are designed at 10ft with 3.5ft allocated for mechanical, translating into 13.5ft per story. Given the height restriction, 12 floors will be constructed for a total building size of 290,000 SF. Please note that 12 floors at 24,500 SF per floor results in 294,000 SF. Zoning restricts the office and retail components to 290,000 SF in aggregate. The additional 4,000 SF will be removed in the final architectural design. 24

25 Under the PUD Baltimore City may take up to 11 feet on the northern border of the parcel to create a turning lane on Orleans St. To account for the potential loss of land, a 15 ft. setback from Orleans St. has been incorporated in the plan. A 9.8 ft. setback from Wolfe St. was incorporated into the design to allow an adequate buffer from the street. Exhibit 9 provides a schematic depiction, including measurements, of the above ground development plan. EXHIBIT 9: Above Ground Development Plan Orleans St. Fayette Street 6.3. Residential The PUD allows for the development of 342 residential units with a maximum density of 364,230 SF. The residential component of the subject property falls outside the intended scope, and therefore, Johns Hopkins Medicine plans to sell the development rights to the 342 residential units. In Exhibit 9, two parcels have been identified with cross hatching. These parcels have been allocated for residential development and total 83,620 square feet of land. Johns Hopkins Medicine will create a condominium with the underground parking garage, which will allow for separate ownership of the above ground development rights. A detailed valuation of the residential units is addressed in Section 13 of the paper. 25

26 7. CONSTRUCTION BUDGET 7.1. Parking Michael Moraz, Project Manager, Whiting Turner Contracting Company is an expert in the construction of underground parking garages and served as a consultant in the development of the construction budget for the subject property. The construction design and budget was modeled after a recently completed underground parking garage of similar size and character in Baltimore City. A cast in place underground garage will be constructed on the subject property. Assuming 975 parking spaces on 3 underground levels, results in a total construction cost of $25,734,522, or $26,406 per parking space. A detailed project budget is provided in the appendix as Exhibit Office / Retail Building R.S. Means Company, Inc. publishes an annual Square Foot Costs manual for 72 model buildings. Each model has a detailed project budget which can be customized to account for any variations in size, design and location factors. The 2009 Square Foot Cost manual was used to develop a project budget for the office / retail building. The construction cost for a 12 story, 290,000 SF building, with steel frame construction and double glazed heat absorbing tinted plate glass panels is $47,177,200. A breakout of hard and soft costs is provided in Table 5. A detailed project budget can be found in Exhibit 11 of the appendix. Table 5: Office / Building Construction Costs Office / Retail Building Construction Costs Cost / SF Total Costs Hard Costs $ $ 35,339,400 Soft Costs $ $ 11,837,800 Total $ $ 47,177, Carrying Costs During the development period additional costs associated with a construction loan will be incurred. The average construction loan is tied to the monthly LIBOR rate. As of 26

27 December 3, 2008, the 1 month LIBOR rate was 1.9%. Johns Hopkins Medicine s high credit rating will allow them to borrow at a 3% premium over LIBOR. Assuming an average outstanding balance of 60% total construction costs, the project will incur $2,143,543 in carrying costs. These carrying costs will be included in the construction budget. Exhibit 12 provides a detailed overview of the carrying cost calculation Total Construction Budget In summary, the total construction budget for the underground parking garage and office/retail building is $72,909,638. When the carrying costs of $2,143,543 are included, the total construction budget increases to $75,053,182. Table 6 provides an overview of the total construction costs. Table 6: Total Construction Costs Total Construction Costs Parking Garage Construction Cost $ 25,734,522 Office / Retail Building Construction Cost $ 47,175,116 Subtotal $ 72,909,639 Carrying Cost $ 2,143,543 Total Construction Cost $ 75,053, DEVELOPMENT TIMELINE The development timeline is estimated at 33 months. The development plan will be submitted to the Johns Hopkins Medicine Board on December 15, If the Board approves the plan, a letter of intent will be executed with the land owner and a 90 day feasibility study will be conducted. The feasibility study will be completed by April 1, Provided no monumental discoveries are made during the feasibility study, a purchase agreement will be executed for the parcel by April 15, Development approval and permits for the underground parking garage and office / retail building will be submitted to Baltimore City simultaneously on April 16, The approval process for the garage is projected to take 90 days, with a completion date of July 27

28 15, Once approval is received on July 15, 2009 construction on the garage will begin and take 12 months to complete. The approval process for the building will take 180 days total and is estimated to be completed on October 12, Since the office building will be built on top of the parking garage, there will be substantial time savings on the construction because no excavation is required. The estimated duration for constructing the building, including interior finishes, is 18 months. Construction can begin on the building while the parking garage is still being built, which presents another time saving measure. The estimated start date for building construction is March 9, 2010 with completion on August 30, In summary the development process will begin on December 15, 2008 with Board approval and the building will open for business on September 1, A detailed development timeline has been included as Exhibit FINANCIAL ANALYSIS ASSUMPTIONS 9.1. Analysis Timing A discounted cash flow model was developed to value the office / retail building as well as the underground parking garage. Based upon the construction timeline the building is expected to be delivered in September 2011, which serves as the analysis start date. The development strategy is to hold the property for the long term. To ensure that the reversion of the building does not comprise a large portion of the value a 20 year model was developed Lease Up The subject property is scheduled to open in September All of the leases for the off campus office tenants do not coincide with opening date. Therefore, a lease up strategy has been developed that allows off campus tenants fulfill their lease obligations prior to relocating to the subject property. Based upon the lease schedule, the average months that office space will be vacant is 11 and the office component of the building will not reach full occupancy until year 3. Table 7 provides a summary of the lease up schedule. A detailed schedule can be found in the appendix as Exhibit

29 Table 7: Lease Up Schedule / Office Tenants Lease Office Tenants Commencement Subject Property Vacancy Months 1. Fund for Johns Hopkins Medicine (Development Fund) Jul Months 2. Planning & Marketing, Public Affairs Dec Months 3. Access Services(Centralized Scheduling) Sep Months 4. Emergency Medicine (Administration/Training) 1 Sep Months 5. Office of Technology and Licensing Jul Months 6. Government Affairs Dec Months 7. Cancer Registry Dec Months 8. Research Administration Office of Billing & Quality Assurance Sep Months 9. Johns Hopkins International 1 Sep Months 10. Finance / Regulatory Compliance 1 Sep Months 11. Pathology Jul Months 12. Psychiatry (Dr. Pulver) 2 Sep Months 13. Neurology (Dr. Gordon) Nov Months 14. Johns Hopkins Health System Legal 1 Sep Months 15. Medical Services Administration Apr Months 16. Critical Care Research (Dr. Pronovost) 2 Sep Months 17. JHHS Central Verification Office (Credentialing Office) 2 Sep Months 18. Infectious Disease (Dr. Bartlett) 2 Sep Months 19. Tenant to be Identified Sep Months AVERAGE VACANCY 11 Months Retail tenants are not relocating from existing off campus locations. Therefore it is assumed that leases for retail tenants will commence with the opening the subject property in September,

30 Although the lease up strategy results in vacancies during the first three years of operations, it is more cost effective for off campus office tenants to fulfill their lease commitments rather than prematurely terminate lease and incur termination fees Rent Rate The average rent that Johns Hopkins off campus administrative departments are paying in 2008 is $22.96 triple net. According to CoStar the average 2008 rent that retail tenants, occupying less than 25,000 SF, in Baltimore City was $22.11 triple net. To arrive at a rental rate when the building will open in 2011, the 2008 average rental rates for office and retail were inflated using an annual increase of 3.42%. The annual increase represents the average annual increase in CPI for all consumer goods from Applying the annual increase of 3.42% to the office rental rate of $22.96 yields a rental rate of $25.39 in The triple net rate of $22.11 in 2008 for office tenants increase to $24.45 in Across the 20 year analysis period the subject property will begin to lose its competitive advantage because newer buildings will be introduced to the market. A building losing its competitive advantage can also be described as functional obsolescence and will reduce the rents commanded in the market place. To account for functional obsolescence, the annual increase in the rental rate for the subject property was decreased from 3.41% to 2.41%. Exhibit 15 and 16 provide a detailed overview of the rent schedules for office and retail tenants, including a graph illustrating the impact of functional obsolescence Market Leasing Assumptions Market leasing assumptions have been segmented into three categories to capture the uniqueness of each tenant group. The categories are 1) office tenants; 2) internal retail tenants; and 3) external retail tenants. Exhibit 17 in the appendix provides a detailed overview of the market leasing assumptions. Lease Renewals The renewal rate for office and internal retail tenants is projected at 85%. The projected renewal rate may be considered high in comparison to other office buildings 30

31 in the market. However, these tenants represent departments within Johns Hopkins Medicine. The decision to renew leases will be made by central leadership which is the same group that is responsible for the fiscal management of the building. As such, there is a direct control over lease renewals and explains the high retention rate. The renewal for internal and external retail tenants is projected at 72.5%. The renewal rate was obtained using the following steps: Step 1. Total Market Size / Average Lease Term = Space Up for Renewal per Year Step 2. New Leases / Space Up for Renewal per Year = Rollover % Step 3. Rollover % 100% = Retention Rate All of the information required for the retention rate calculation was obtained from CoStar. The total market for retail space was restricted to buildings in Baltimore City with spaces less than 25,000 square feet, and constructed after There are 62 buildings in the defined market with a total market size of 5,842,997 SF (rentable). The average lease term for space in the market is 4.69 years, or 56.2 months. Dividing the total market size by the average lease term results in 1,247,122 SF of space coming up for renewal per year. There was 343,130 SF of new leases as defined by CoStar. Dividing new leases by the space up for renewal per year results in a 27.5% rollover. The final step in the calculation subtracts the percent rollover from 100%, yielding a retention rate of 72.5%. Downtime: The projected downtime for office tenants is three months. If an internal office tenant were to turnover, there is a high probability that another Johns Hopkins administrative department would be available to backfill the space. Therefore, the time space is on the market will be very limited. Three months of downtime has been incorporated because it represents a reasonable period of time for space to be renovated for a new tenant. Under such a scenario Johns Hopkins Medicine would not charge a department rent while the space is being renovated. The downtime for internal and external retail tenants is projected 16 months. The downtime for retail tenants was obtained using CoStar and represents the average 31

32 number of months retail space, 25,000 SF or less, in building constructed after 1985, was on the market. Term The lease term for office tenants is 10 years which represent the average term of a Johns Hopkins Medicine off campus lease. The term for retail tenants is dependent upon the size and the capital investment required to fit out the space. Johns Hopkins Credit Union The current Johns Hopkins Credit Union lease at 2027 Monument St. is 10 years. It is therefore reasonable to assume a 10 year lease term for the subject property. Patient First Patient First urgent care centers currently reside on the Johns Hopkins Bayview, Green Spring Station and White Marsh locations. The lease term for each of these centers is 10 years. The reason for the 10 year term is largely reflective of the significant capital expense associated with the build out of the centers. As such, the lease term for Patient First in the subject property is 10 years. Johns Hopkins Pharmacy The Johns Hopkins Pharmacy is leasing 3,000 SF which represents a fairly small lease within the subject property. Due to the size of the space being leased, a 5 year term has been assumed. Deli Build out of the deli space will be capital intensive and the tenant will seek to lengthen the lease term to amortize the build out expense over a longer period of time. For this reason a 10 year lease term is assumed for the deli tenant. Daily Grind / Coffee Shop A lease term of five years was assumed for The Daily Grind coffee shop because the lease represents less than 1% of the total building and the cost to build out the space is relatively inexpensive. 32

33 Bright Horizons Child Care Center The Bright Horizons Child Care Center at the Johns Hopkins 98 North Broadway St. Building has a lease term of 10 years. Although, the a new child care center will be sought for the subject property, a 10 year lease term seems to be an industry standard and was assumed. FedEx Kinko s The FedEx Kinko s store is very similar to The Daily Grind in that the leased space is small and requires little capital investment. That said, a 5 year lease term was assumed. Rent Abatement Office tenants are not given rent abatement in the subject property because they are internal to the organization. Internal and external retail tenants are given 2 months rent abatement. External tenants are provided the abatement to provide a competitive lease offer. Internal retail tenants are provided the abatement to improve the financial performance of the business while volume is ramping up. Tenant Improvement Allowances Office space will be delivered completely finished with the fit out costs incorporated into the construction budget. If a new tenant signs a lease after the office space has been vacated they will be given $15 per SF. An office tenant renewing a lease in 10 years will be given $5 per SF to update finishes. Retail space will be delivered as a vanilla shell with HVAC, utilities and lighting. Internal and external retail tenants will be given $10 per SF for a new lease and $7 per SF for a lease renewal. The SF improvement allowances were provided by Gene Parker, Chief Operating Officer, Continental Realty Corporation. The tenant improvement allowances for office and retail have been escalated at 3.42% annually. The annual increase represents the Producer Price Index for Blue Collar Workers and was chosen because labor represents the largest portion of construction costs. 33

34 Leasing Commissions Office tenants are internal to the organization and will not be represented by a leasing agent. Therefore, no leasing commissions have been factored into the discounted cash flow model for new or renewed leases. External retail tenants will have leasing agents represent them and as a result leasing commissions have been included for new leases and renewals. Gene Parker, Chief Operating Office for Continental Realty Corporation provided a market rate commission schedule. The commissions for new leases are calculated on annual base rent in the following schedule: 6% in year 1; 4% in year 2; 4% in year 3; 3% in year 4; 3% in year 5; and 2% years 6 and beyond. For external retail lease renewals, 1.5% of base rent was assumed. Lease renewals for internal retail tenants will not have leasing commissions. Conversely, leasing commissions have been factored into the analysis for new internal retail tenants. As was mentioned in the rent abatement section, if internal retail tenants turnover, there is a high probability that an external retail tenant will fill the space. For this reason, leasing commissions for new internal retail leases follow the schedule for external retail leases outlined above Expense Assumptions Building Owners and Managers Association (BOMA) publishes the annual Experience Exchange Report which provides the average operating expenses for office buildings by submarket throughout the United States. The 2007 report focusing on buildings between 100, ,999 SF in Downtown Baltimore, MD was used as a benchmark to project the following operating expenses: Housekeeping Common Area Maintenance Utilities Security Building Insurance 34

35 The 2007 report is available in the appendix as Exhibit 28. The 2007 report represents a survey of actual expenses from Provided that the subject building will not be operational until 2011, the 2006 expenses were inflated to 2011 dollars. Each expense used an individual inflation figure that was representative of the particular industry (housekeeping, insurance, etc). The list of assumptions is too comprehensive to be included in the narrative section, but have been properly organized in the appendix as Exhibit 18. Real Estate Taxes Real estate taxes on the subject property were calculated based upon the assessed value of the land and total construction costs. The Baltimore City tax rate is $2.26 per $100 value and Maryland State tax rate is $0.112 per $100 value. Based upon the stated rate, the total real estate taxes are $1,871,763 in year one (i.e. 2011) on an assessed value of $78,909,639. The taxes represent an expense of $2.99 per SF of the office building (290,000 SF) and parking garage (336,223 SF). In discussions with Johns Hopkins Legal Counsel, the office component of the building, as well as the pro rata portion of the parking garage to support the office space, full fill the charitable mission of the organization. Therefore, these components of the development are not subject to real estate taxes from Baltimore City or the State of Maryland. On the contrary, the retail and residential components, along with the pro rata share of the parking garage to support these functions, fall outside of the charitable mission and are subjected to real estate taxes. The tax abatement calculation associated with the non profit status of Johns Hopkins Medicine is broken out into two components: 1) office / retail building; and 2) parking garage. Office / Retail Building The total property taxes allocated to the office / retail building are $866,789 or 2.99 per SF in year one. The office component of the building represents 83% of the total SF and is not subject to property taxes. As such, only 17%, or $149,445, of the office / retail building s allocated property taxes is owed. The tax savings in year 1 on the office / retail building is $717,343. Parking Garage The total property taxes allocated to the parking garage are $1,004,947 or 2.99 per SF in year one. The property tax abatement will only be given to the portion of the garage that supports the office tenant s charitable mission. 35

36 The retail component of the building will require 4 parking spaces per 1,000 SF of space. The requirement results in 200 parking spaces being allocated for the retail component of the building. The garage will provide parking for the entire site, including the residential development which Johns Hopkins Medicine plans to sell. Therefore a portion of the garage must be allocated to the residential component of the subject property. The residential development will require 1.5 spaces per unit. At 342 units, 513 parking spaces will be required. In total, 713 parking spaces, or 73%, of the parking garage will not support the charitable mission of Johns Hopkins Medicine and be subject to tax. Property taxes on 73% of the parking garage will reduce the expense from $1,004,947, or $2.99 per SF, to $733,611, or 2.18 per SF. Table 8 provides a breakout of the parking garage tax allocation. Table 8: Parking Garage Tax Allocation Parking Garage Tax Allocation Taxed Components Spaces % Total Retail Parking: 4 spaces per 1, % Residential Parking: 1.5 Spaces per Unit % Subtotal % Total Garage Spaces 975 The reduction in real estate taxes allows Johns Hopkins to achieve a better return over competitors that do not have a non profit status. The total tax savings in year one, associated with the office/retail building and pro rata share of parking garage, is $988,679. The year one savings reduces the real estate taxes from $1,871,737 to $833,059. Table 9 provides a summary of the tax savings calculation. Table 9: Year One Real Estate Tax Savings Real Estate Tax Savings Total Real Estate Taxes (Entire Parcel) $ 1,871,737 Tax Abatement (Office & Pro Rata Parking) $ (988,678) Total Real Estate Taxes Due (Year 1) $ 883,059 36

37 A small point worth mentioning is that there will be a slight reduction in the assessable tax base when the residential development rights are sold. The residential development rights will be sold in 2013, two years after the opening of the building. The total savings from transferring the residential development rights is approximately $2,900. The real estate tax calculations have been detailed in the appendix as Exhibit 19 Parking Garage Expenses The BOMA Experience Exchange report did not provide a benchmark operating expense for parking garages. The director of parking for the Johns Hopkins Medical campus was consulted with to develop a list of operating expenses for the underground garage. The expense per square foot is projected at $5.56 per square foot of parking garage, or $1,611,989. The parking expenses include staffing, maintenance and real estate taxes. The parking garage operating model is detailed in the appendix as Exhibit Capital Assumptions The building will be new construction in 2011 and the investment period is 20 years. There are several building components with a life expectancy that will expire during the investment period causing a capital event. The Marshall & Swift Valuation service was used to identify the life expectancy of building components. A copy of the Life Expectancy guidelines appears in the appendix as Exhibit 29. The following building components were identified as needing to be replaced during the investment period: 1) heat generating system; 2) cooling generating system; 3) roofing; 4) parking garage striping & sealing; 5) common area upgrades; and 6) parking garage structural repairs. Heat Generating System The building is heated through a boiler system. The average life expectancy of the heat exchangers and fans within the system is 20 years. The current cost for these items is $194,243. To adjust the expense to 2031 dollars, when the equipment will be replaced, an annual increase of 3.98% was applied. The annual increase represents the average annual increase in the Producer Price Index for Fabricated Heat Exchanges from 1980 to The inflated replacement cost in 2031 is $423,827 and has been incorporated into the discounted cash flow model. 37

38 Cooling Generating System The building is cooled through chilled water and fan coil units. The average life expectancy for the fan coil units is 13 years, which require replacement in The cost for the fan coil units at the time of construction is $623,500. The construction cost was provided by RS Means Square Foot Cost 30 th Edition. To adjust the current expense to 2024 dollars, an annual increase of 2.62% was used. The annual increase represents the average annual increase in the Producer Price Index for Air Conditioning and Refrigeration from 1978 to The total cost to replace the fan coil units in 2024 is $872,675 and has been incorporated in the discounted cash flow model. Roofing The roof covering on the building is a Duro Last single ply membrane which has an average life expectancy of 15 years. Based upon the life expectancy the roof covering will need replacement in The cost of the roof covering at the time of construction is $110,200. The current cost was provided by RS Means Square Foot Cost 30 th Edition. To adjust the cost to 2026 dollars an annual increase of 2.64% was used. The annual increase represents the average annual increase in the Producer Price Index for Asphalt Paving and Roofing Materials manufacturing from 1985 to Based upon the annual inflation rate, the cost to replace the single ply roof membrane is 2026 is $162,904. Parking Garage Striping & Sealing The parking garage will need to be striped and sealed every five years. The current cost to stripe and seal the garage is $40,000. An annual increase of 2.64% was applied to the current cost to account for inflation. The annual increase represents the average annual increase in the Producer Price Index for Asphalt Paving and Roofing Materials manufactured from 1985 to The schedule and cost to strip and seal the garage is as follows: Year Expense 2016 $45, $51, $59, $67,359 38

39 Common Area Renovations Renovations to common areas within the building will occur every eight years. An expense of $246,356 in 2019 and $303,456 in 2027 has been incorporated into the analysis. Parking Garage Structural Repairs Every 25 years the parking garage will require structural repairs as well as the replacement of the traffic membrane. The cost for the said repairs is estimated at $2.50 per SF of parking garage space. The size of the parking garage is 245,667 SF; therefore the estimated expense in 2009 is $614,168. Since the structural repairs will occur in 25 years, they are beyond the scope of the 20 year discounted cash flow model. The expense was nonetheless identified in the event the investment time horizon changes Cost of Capital (Discount Rate) The Capital Asset Pricing Model (CAPM) was used to determine the cost of capital for investment in the subject property. The formula is: CAPM= RFR + β (RM RFR) +E. Each component of the formula is explained on the following page and further detail can be found in the appendix under Exhibit 22. Risk Free Rate (RF) The development strategy is to hold the subject property for 20 years. Construction on the building will not be complete for two years; therefore the yield on a 22 year Treasury Bill was used as the risk free rate. As of November 25, 2008 the yield on a 22 year Treasury Bill was 3.85%, as per the Wall St. Journal. Beta (β) Beta represents the risk or volatility of an investment as compared to the market. A Beta coefficient of 1 indicates the volatility of an investment is equal to the volatility of the overall market. A Beta coefficient greater than 1 indicates an investment is more volatile than the market, and less than 1 indicates that an investment will be less volatile than the market. The Beta for Health Care REIT, Inc (NYSE: HCN) was used in the cost of capital calculation. HCN was founded in 1970 in Toldeo, Ohio and invests exclusively in health care facilities. There are currently 648 health care properties within HCN s portfolio 39

40 spanning 39 states. Although the subject property is an office / retail building, the tenants provide health care administrative support services which is directly correlated with the volatility of the health care industry on aggregate. As of November 23, 2008 Health Care REIT, Inc s Beta was Return on Market (RM) Return on Market represents the historic return from U.S. equities and is included in the cost of capital calculation because it factors in the return that could be earned from an investment in equities. The average annual compound return for equities between 1900 and 2007, as reported by Cambridge Associates, LLC, was 9.8%. 3 Given that the Cambridge study represents over 100 years worth of data it provides an excellent representation of Return on Market. Error Factor (EF) While the Beta controls for the asset class (i.e. real estate) and the Return on Market controls for market portfolio, the E factor controls for the individual asset. In other words, if an investor is evaluating two similar office buildings in the same market, there is a need to quantify the difference because each is unique. There are three components to the E factor: 1) volatility; 2) leasing; and 3) operational. Volatility The subject property is unique in that it office tenants are internal to the organization and essentially a captive market. Retention rates will be very high compared with competing office buildings in the market because tenants will not have autonomy to make decisions on lease renewals. The decision to renew will be made by central leadership which is the same group that is responsible for the fiscal management of the building. As such, the subject property will experience fewer turnovers resulting in greater stability than competing properties in the market. Leasing The majority of the building (240,000 SF) will be used for office and occupied by internal tenants. The Johns Hopkins Credit Union, Pharmacy and Patient First are three 2 source: Capital IQ 3 Cambridge Associates, LLC U.S. HISTORIC CAPITAL MARKET RETURNS, Reidel, Anderson & Morales,

41 internal tenants that will occupy 21,000 SF of retail space. The remaining 29,000 SF represents 10% of the building and will be filled with tenants external to Johns Hopkins. Since the office tenants and internal retail tenants are within Johns Hopkins Medicine, there is no need for leasing agents to represent the tenant or owner. Removing leasing agents eliminates commissions on 90% of the building representing a tremendous savings over competing buildings. Operational Property management can have a significant impact on the financial performance of a building. The subject property will be considered an annex to the existing medical campus and managed by the Johns Hopkins Medicine internal facilities department. Providing property management services within the organization provides efficiencies over competing buildings that outsource management to third parties for two main reasons. First, property management services will be provided at cost, unlike thirdparty management companies that incorporate a profit into the pricing of services. Second, there is an existing infrastructure providing property management services to the medical campus. The existing infrastructure will be able to provide services at a lower cost due to economies of scale. Given the high retention rate, elimination of leasing commissions and internal property management services, there is much less risk associated with the subject property than a similar office building in the market. As such, an E factor of negative 0.25% has been incorporated into the cost of capital calculation to reflect the reduced risk of the subject property. Applying the above mentioned components into the capital asset pricing model results in a cost of capital for Johns Hopkins Medicine of 8.78%. In evaluating the proposed development plan, Johns Hopkins Medicine must achieve a minimum return of 8.78%. 10.PRESENT VALUE OF CASH FLOWS (OFFICE BUILDING) Exhibit 23 in the appendix provides a statement of cash flows for the office building and parking garage. The unlevered present value of the cash flows at a discount rate of 8.78% is $61,916,

42 11.PRESENT VALUE OF PROPERTY RESALE (OFFICE BUILDING) The investment time horizon for the subject property is 20 years and the property is projected to be sold at the end of year 20. The resale value was determined by capitalizing the cash flow cash flow after tenant improvements, leasing commissions, and capital expenses in year 21. Using cash flow after tenant improvements, leasing commissions, and capital expenses is preferred over net operating income because it is inclusive of all expenses and provides a more realistic valuation. Two components are required to calculate the resale value: 1) terminal cap rate; and 2) selling costs. Terminal Cap Rate The subject property will be new in 2011 and is projected to be sold in Although regular maintenance and capital improvements are planned for the building, there will be loss in value due to functional obsolescence. For this reason, the terminal capitalization rate will equal the cost of capital, which is 8.78%. Selling Costs Upon resale of the subject property, Johns Hopkins Medicine will be responsible for: 1) 50% of the State and Baltimore City transfer taxes; 2) 50% of the Baltimore City recordation fees; and 3) broker fess. The total selling costs represent 4.5% of the resale value, or $3,482,634. The resale value is calculated at $77,391,856. When the selling costs of $3,348,634 are subtracted, the net cash flow from the property sale in year 20 is $73,909,223. The present value of the net cash flow from resale is $13,731,486. A summary of the property resale calculation is reflected in Table 10. A detailed calculation can be found in the appendix under Exhibit

43 Table 10: Property Resale Present Value of Cash Flow from Resale Year 21 Cash Flow After TI's, LC's & Capital Expenses $ 6,795,005 Terminal Capitalization Rate 8.78% Resale Value $ 77,391,856 Selling Costs $ 3,482,634 Net Cash Flow from Sale (Year 20 Dollars) Present Value Cash Flow from Resale $ 73,909,223 $ 13,731, PRESENT VALUE SUMMARY (OFFICE BUILDING) The unlevered present value of the office, including cash flow from operations and resale, is $75,647,566. A detailed present value scheduled has been included in the appendix as Exhibit 25. At Johns Hopkins Medicine s cost of capital of 8.78%, the distribution of the property s value is: 22.65% assured income, 59.50% prospective, and 18.15% prospective property resale. The largest component of the property s value is derived from prospective income which represents rent revenue from leases that have not been executed. For a typical office building having half of the value tied to future leases represents risk. The uniqueness of the subject property is that the majority of tenants are internal to the organization. Although 59.50% of the property s value is tied to future leases, there is much less risk when compared to competing properties because organizational leadership has direct control of lease renewals. Table 11 provides an overview of the present value property value summary. 43

44 Table 11: Present Value Summary Office Building Present Value Summary Present Value Cash Flow $ 61,916,080 Present Value Property Resale $ 13,731,486 Total Property Present Value $ 75,647,566 Value Per Square Foot $ 261 Percentage Value Distribution Assured Income 22.65% Prospective Income 59.50% Prospective Property Resale 18.15% 13.VALUATION OF RESIDENTIAL DEVELOPMENT RIGHTS The present value summary for the office building and parking garage has been detailed in the previous section. The final component of the subject property s value is the residential development rights that Johns Hopkins Medicine plans to sell. As a brief overview, the subject property s zoning allows for the development of 342 residential units with a maximum density of 364,230 SF. There is currently 83,620 SF of land allocated for residential development on the subject property. In order to achieve 342 units, a multi family complex will have to be constructed Model Complex Dulaney Crescent Apartments in Towson, Maryland totals 361,448 SF and represents a model complex for the subject property from a design perspective. The floor plate for Dulaney Crescent is 72,289 SF, placing the structure at 5 stories. A picture of the apartment complex has been provided on the following page. 44

45 Dulaney Crescent Building Value The construction cost for a medium rise residential complex similar to Dulaney Crescent is $120 per SF. The average size of a residential unit on the subject property is 1,065 SF, which equates to a cost $127,800 per residential unit. The per unit cost multiplied times 342 zoned units results in a total construction cost of $43,707, Land Value The assessed value of the Dulaney Crescent Apartments is $41,927,400, or $158,816 per unit. The land value comprises 27% of the total value, or $42,446 per unit. The building (i.e. improvements) represents 73% of the total value, or $116,370 per unit. The value distribution per apartment unit is provided in Table 11 below. Table 11: Dulaney Crescent Value Distribution Dulaney Crescent Value Distribution Total Value % Total Land Value per Unit 42,446 27% Building Value per Unit 116,370 73% Total 158, % 45

46 Although Dulaney Crescent represents a model complex, it is located in Towson, Maryland and commands higher rent than a comparable property on the east side of Baltimore City. The difference in rent is a factor of land value. Since rent in East Baltimore will be less than Towson, the land value for the subject property must be adjusted. Waterloo Place is a 196 unit garden style apartment complex in the Mt. Vernon neighborhood of Baltimore City. The complex was constructed in 1991 and has an assessed value of $20,578,000, or $104,990 per unit. The land value of the property is 10% of the total value, or $10,517 per unit. The building value (i.e. improvements) of the property represents 90% of the total value, or $94,473 per unit. The value distribution per apartment unit is provided in Table 12. Table 12: Waterloo Place Value Distribution Waterloo Place Value Distribution Total Value % Total Land Value per Unit $ 10,517 10% Building Value per Unit $ 94,473 90% Total $ 104, % When compared to Dulaney Crescent, the land value of Waterloo Place comprises much less of the total property value. While the residential land value of the subject property is less than Towson, the location is more marketable than the Waterloo Place. As such, the land value for the subject property is believed to be somewhere between the two complexes. To that end, a blended per unit land value (i.e. average) of Dulaney Crescent and Waterloo Place was used to determine the land value for the subject property. The blended per unit value is $26,481. The per unit value multiplied by 342 units, results in a total land value of $9,056,671 for the residential development rights on the subject property Value of Residential Development The total construction cost for a residential apartment complex on the subject property is projected at $43,707,600. Based upon the blended per unit land methodology, the total land value of the residential development rights are $9,056, 617. In total, the residential development is valued at $52,764,217 or $154,281 per unit. Table 13 provides an overview of the residential value distribution. 46

47 Table 13: Value of Residential Development Total Per Unit % of Total Building Value $43,707,600 $127,800 83% Land Value $9,056,617 $26,481 17% Total Value $52,764,217 $154, % Johns Hopkins Medicine s strategy is to sell the residential land development rights. Although the sale of the residential development rights is not expected to occur until 2013, the only carrying costs associated with the land are the pro rata property taxes. The taxes on the residential portion of the land have been absorbed into the operating budget of the office building and parking garage until the sale occurs in In summary, based the methodology outlined above, it is projected that Johns Hopkins Medicine can sell the land rights to the residential development for $26,481 per zoned unit, or $9,056,617 in total Projected Return for Residential Developer To validate the projected land value, two profitability metrics were calculated for a residential developer based upon the land purchase price of $9,056,617. The first profitably metric is Return on Assets, which divides the cash flow from operations by the purchase price. The Return on Assets will provide the yield from operating the property. The second metric is Return on Equity, which divides the cash flow after financing by cash invested. Return on Equity represents the cash on cash return for the investment. In order to arrive at the metrics, the following inputs are required. Rents The current rental rate for a two bedroom / two bathroom unit in the Waterloo Place complex is $1,670. Since Waterloo Place is 15 years old, an inflation factor of 10% was applied to the rent to account for the residential complex on the subject property being new and commanding a higher rent. Based on the following assumption the monthly rental rate is projected at $1,837 per unit, per month. 47

48 Other Income, Vacancy and Operating Expenses The Institute of Real Estate Management produces an annual Metropolitan Area Report for residential properties. The 2007 report was used to project other income, vacancy and operating expenses. Table 14 provides an overview of the benchmarks used in the analysis. The entire Metropolitan Area Report can be found in the supporting documentation section of the appendix as Exhibit 30. Table 14: Residential Benchmarks The Institute of Real Estate Management 2007 Benchmark Report Other Income (excl. parking) $ 437 Per Unit / Per Year Vacancy $ 885 Per Unit / Per Year Operating Expenses $ 4,138 Per Unit / Per Year Financing Cost Based on the total construction cost of $43,707,600 and a land acquisition of $9,056,617, the residential developer will require $52,764,217 in capital for the entire project. It is assumed that the residential developer will be required to contribute 20% equity to the project. Therefore, the financed amount is $42,211,373. The interest rate at which the developer can borrow is projected at 8%, and a 30 year amortization schedule is assumed. Provided the inputs above, the annual mortgage payment is $3,716,785 and the financing costs represent 8.8% of total borrowed amount. Profitability Metrics With a land acquisition cost of $9,056,671 a private residential developer can expect a Return on Assets of 11.0% and a Return on Equity of 19.9%. The profitability metrics project a more than generous return to a residential developer. As such, there is high degree of confidence that Johns Hopkins Medicine can receive $26,481 per residential unit, or $9,056,617 in total, for the residential development rights. Exhibit 26 in the appendix provides detail on the residential valuation and private developer profitability metrics. 48

49 14.LAND VALUATION (RESIDUALVALUE) The total property value including the cash flow from operations, property resale, and sale of residential development rights is $84,704,183. The total construction costs for the underground parking garage and office building are $75,053,182. When the present value is subtracted from the construction costs, there is a residual value of $9,651,001. The residual value represents the maximum price that Johns Hopkins Medicine can pay for the subject property (i.e. land) and still achieve return of 8.78%. Table 15 provides a summary of the residual land value calculation. Table 15: Residual Land Value Calculation Total Property Value Summary Present Value Cash Flow from Office Building $ 61,916,080 Present Value Property Resale from Office Building $ 13,731,486 Present Value Residential Development Rights $ 9,056,617 Total Property Value $ 84,704,183 Total Construction Costs (Office Building & Parking) $ 75,053,182 Land Value $ 9,651, COMPETITIVE ADVANTAGE Johns Hopkins Medicine has a competitive advantage in the market over private developers interested in the subject property. The competitive advantage is a product of property tax abatements, associated with the organization s non profit status, as well as a lower cost of capital. These factors create value for Johns Hopkins Medicine that impact the price that should be paid for the subject property Tax Benefits The tax benefits associated with Johns Hopkins Medicine s non profit status were detailed in the Section 9.5 of the paper. To quantify the tax savings over the entire investment period, a discounted cash flow model analyzed the present value of the property with the full tax expense. The return based on the full tax expense represents the yield a for profit developer would achieve. The difference between the two returns represents the value Johns Hopkins Medicine creates. The full property tax expense for the office building and underground parking garage in year one is calculated at $1,871,737. Johns Hopkins Medicine is only responsible for 49

50 $883,057, which is the pro rata share of the retail component in the building and parking allocated for retail and residential. The year one tax savings sum to $988,678. A for profit developer will no doubt pass taxes through in rents to recuperate the full expense. However, during lease up and downtime the increased real estate taxes have a significant impact on the net operating income of the property. The impact of the increased real estate tax expense has been summarized in Table 16. The present value of cash flows from the office building is $57,941,722 and the present value of the resale is $12,507,855. The value of the residential development rights is not impacted with the increased real estate tax. When the total construction costs of $75,053,182 for the office building and parking garage are subtracted from the total present value of the property, the residual land value is $4,453,012. The residual land value represents the maximum price a for profit developer can pay for the land to achieve an 8.78% return. Table 16: Impact of Full Tax Rate on Residual Land Value: Total Property Value Summary Full Tax Rate Present Value Cash Flow from Office Building $ 57,941,722 Present Value Property Resale from Office Building $ 12,507,855 Present Value Residential Development Rights $ 9,056,617 Total Property Value $ 79,506,194 Total Construction Costs (Office Building & Parking) $ 75,053,182 Land Value $ 4,453, E Factor Lower Cost of Capital The second means in which Johns Hopkins Medicine creates value over competing developers is through a lower cost of capital. In section 9.7, Johns Hopkins Medicine s cost of capital was calculated using the capital asset pricing model. The E (error) factor decreased the cost of capital by 25 basis points to reflect the reduced risk associated with the subject property. Johns Hopkins Medicine s cost of capital is 8.78%. To quantify the value the 25 basis points has on the present value of the property, a separate discounted cash flow model was run with a discount rate and terminal capitalization rate of 9.03%. The discounted cash flow model also assumed the full property tax expense because it represents ownership by a for profit developer. 50

51 The present value of the total property at a cost of capital of 9.03%, and the full property taxes, is $77,701,838. When the construction costs of $75,053,182 are subtracted from the present value, the residual land value is $2,648,656. Table 17 provides an overview of the present value calculation. Table 17: Impact of 9.03% Cost of Capital & Full Tax Rate on Residual Land Value Total Property Value Summary 9.03% Cost of Capital & Full Tax Rate Present Value Cash Flow $56,698,638 Present Value Property Resale $11,946,583 Present Value Residential Development Rights $ 9,056,617 Total Property Value $77,701,838 Total Construction Costs $75,053,182 Land Value $ 2,648, Competitive Advantage Summary Johns Hopkins Medicine creates $7,002,345 in value on the subject property over a competing for profit developer. The value is a direct factor of property tax abatements and a reduced cost of capital. Table 16: Summary of Johns Hopkins Medicine Value Creation Total Property Summary A. Land Value to Johns Hopkins Medicine $ 9,651,001 B. Land Value with Full Property Taxes $ 4,453,012 C. Land Value with Full Property Taxes and 25 Basis Points $ 2,648,656 Johns Hopkins Medicine Value Creation ( A - C ) $ 7,002,345 51

52 16.CONCLUSION The objective of this analysis was to: 1) propose a development plan that provides Johns Hopkins Medicine Administrative departments the necessary infrastructure to return to the East Baltimore medical campus; and 2) arrive at a land value for the subject property. Development Plan The market analysis identified approximately 240,000 SF of office tenants that are ideal candidates to return to the medical campus. Zoning on the subject property can accommodate the demand, as well as sufficient parking. There are clear advantages to Johns Hopkins Medicine developing an office building on the subject property versus leasing space for administrative departments in the East Baltimore Biotech Park. For the following reasons, the subject property can accommodate a development plan that allows administrative departments to return to the medical campus. Subject Property Land Value Johns Hopkins Medicine can afford to pay $9,651,001 for the subject property and achieve an 8.78% cost of capital. Property tax abatements and a lower than market cost of capital provide the organization a competitive advantage over private developers. The competitive advantage creates an internal value of $7,002,345. The internal value created should be recognized entirely by Johns Hopkins Medicine and therefore subtracted from purchase price of $9,651,001. To that end, Johns Hopkins Medicine should pay no more than $2,648,656 for the subject property because it represents the maximum price a competing for profit developer would pay for the parcel. 52

53 17.BIBLIOGRAPHY Professional Real Estate Development. Richard B. Peiser. The ULI Guide to Business Series. (Washington, DC: ULI the Urban Land Institute, Second Edition 2004). Professional Property Development. Johns McMahan. (The McGraw Hill Companies, 2007). THE OFFICE BUILDING From Concept to Investment Reality. Johns R. White. (A Joint Publication of the Counselors of Real Estate, Appraisal Insitute, Society of Industrial and Office REALTORS Educational Fund 1993). Office Development Handbook. The ULI Development Handbook Series. (Washington, DC: ULI the Urban Land Institute, Second Edition 1998). Square Foot Costs. R.S. Means Company, Inc. 30 th Annual Edition, Marshall Valuation Service. Life Expectancy Guidelines Marshall & Swift/Boeckh, LLC BOMA Experience Exchange Report Building Owners and Managers Association, International 2007 Metropolitan Area Reports, Baltimore, Maryland. Institute of Real Estate Management. CoStar Group, Property and Market Search via Internet Interview on October 6, 2008 with James Callahan, Sr. Director of Leasing, Johns Hopkins Real Estate E mail consultation on November 4, 2008 with Lisa Decker, Project Manager, The Whiting Turner Contracting Company. Interview on November 14, 2008 with Michael Moraz, Project Manager, The Whiting Turner Contracting Company. E mail consultation on November 24, with Sam Clark, Legal Counsel, The Johns Hopkins Health System. E mail Consultation on November 26, 2008 with Gene Parker, Chief Operating Office, Continental Realty Corporation. 53

54 18.APPENDIX EXHIBIT SCHEDULE FINANCIAL SCHEDULES EXHIBIT 10: EXHIBIT 11: EXHIBIT 12: EXHIBIT 13: EXHIBIT 14: EXHIBIT 15: EXHIBIT 16: EXHIBIT 17: EXHIBIT 18: EXHIBIT 19: EXHIBIT 20: EXHIBIT 21 EXHIBIT 22: EXHIBIT 23: EXHIBIT 24: EXHIBIT 25: EXHIBIT 26: Parking Garage Construction Budget Office and Retail Construction Budget Construction Carrying Costs Development Timeline Lease Up Schedule Office Rental Rates Retail Rental Rates Market Leasing Assumptions Expense Assumptions Real Estate Tax Calculation Parking Garage Operating Model Capital Assumptions Cost of Capital Statement of Cash Flows Net Proceeds from Sale Detailed Present Value Calculation Residential Development Rights Valuation SUPPORTING DOCUMENTS EXHIBIT 27: Baltimore City Coucil Bill EXHIBIT 28: BOMA Experience Exchange report 2007 EXHIBIT 29: EXHIBIT 30: Marshall and Swift Life Expectancy Guidelines Institute of Real Estate Management Metropolitan Area Report 54

55 EXHIBIT 10 Parking Garage Construction Budget Garage Type: Cast-in-Place Underground Garage Deminsions 374' X 300' (actual: X ) L.F. Perimeter 1,348.0 LF S.F. Floor Plate 112, SF Parking Levels 3.0 Garage Size (SF Area) 336,223 SF S.F. per Parking Space 345 SF Total Parking Spaces 975 Parking Spaces 1 per 297 SF of total building (290,000SF) AREA OF WORK ESTIMATED COST COST/GSF COMMENTS DIVISION 1 - General Requirements $ 978,409 $ 3 includes OCIP Costs DIVISION 2- Site work $ 4,686,951 $ 14 DIVISION 3 - Concrete $ 11,935,923 $ 36 DIVISION 4 - Masonry $ 443,815 $ 1 DIVISION 5 - Metals $ 702,706 $ 2 DIVISION 6 - Wood & Plastics $ - $ - DIVISION 7 - Thermal & Moisture Protection $ 208,458 $ 1 DIVISION 8 - Doors & Windows $ 3,362 $ 0 DIVISION 9 - Finishes $ 262,254 $ 1 DIVISION 10 - Specialties $ 13,449 $ 0 DIVISION 11 - Equipment $ - $ - DIVISION 12 - Furnishings $ 151,300 $ 0 DIVISION 13 - Special Construction $ - $ - DIVISION 14 - Conveyances $ 447,177 $ 1 DIVISION 15 - Mechanical $ 1,576,887 $ 5 DIVISION 16 - Electrical $ 1,654,218 $ 5 Subtotal Cost of Work $ 23,064,910 $ 69 General Conditions $ 1,442,397 $ 4 OCIP Supervision $ 70,607 $ 0 Permit Allowance $ 127,765 $ 0 P&P Bonds (1.5%) $ - $ - Included above Liability Insurance $ 70,607 $ 0 Contingency $ 336,223 $ 1 Contractor Management Fee (1.85%) $ 622,013 $ 2 Subtotal $ 2,669,612 $ 8 TOTAL COST IN TODAY'S DOLLARS $ 25,734,522 $ 77 COST SUMMARY Estimated Total GSF 336,223 SF Cost per GSF $ 77 SF Estimated Total Spaces 975 Cost per Space $ 26,406 NOTES: (1) Source: Michael Moraz, Project Manager, Whiting-Tuner Contracting Company. Estimated Provided: November 14,

56 EXHIBIT 11 Office & Retail Construction Budget Building Dimensions L.F. Perimeter 175' X 140' 630 S.F. Floor Plate Stories 24, S.F. Area 290,000 SF (4,000 SF excluded through design process to comply with zoning restrictions) Construction Type Steel Frame Exterior Wall Double Glazed Heat Absorbing Tinted Plate Glass Panels Interior Finishes 240,000 SF (interior finishes are only budgeted for office component - see note: 2) Description Unit Cost Cost Per S.F. % Of Sub-Total A. SUBSTRUCTURE 1010 Standard Foundations CIP Concrete pile caps $ 9.92 $ Special Foundations Steel H-piles, concrete grade beams $ $ Slab on Grade 4" reinforced concrete with vapor barrier (N/A - underground parking) $ - $ - 3.9% 2010 Basement Excavation Site preparation for slab, piles and grade beams (N/A - underground parking) $ - $ Basement Walls 4' foundation wall (N/A - underground parking) $ - $ - B. SHELL B10 Superstructure 1010 Floor Construction Concrete Slab, metal deck, beams $ $ Roof Construction Metal deck, open web steel joists, beams, columns $ 9.76 $ % B20 Exterior Enclosure 2010 Exterior Walls N/A $ - $ Exterior Windows Double glazed heat absorbing, tinted plate glass wall panels $ $ % 2030 Exterior Doors Double aluminum & glass doors $ 5,571 $ 0.66 B30 Roofing 3010 Roof Coverings Duro-Last Single ply membrane; perlite/eps composite insulations $ 5.60 $ Roof Openings N/A $ - $ - 0.3% C. INTERIORS 1010 Partitions Gypsum board on metal studs $ $ Interior Doors Single leaf hollow metal $ $ Fittings Toilet partitions $ 0.42 $ Stair Construction Concrete filled metal pan $ 18,950 $ % 3010 Wall Finishes 60% vinyl wall covering, 40% paint $ 1.33 $ Floor Finishes 60% carpet tile, 30% vinyl composition, 10% ceramic tile $ 4.81 $ Ceiling Finishes Mineral fiber tile on concealed zee bars $ 6.38 $ 6.97 D. SERVICES D10 Conveying 1010 Elevators & Lifts Four geared passenger elevators $ 479,050 $ Escalators & Moving Walks N/A $ - $ - 6.4% D20 Plumbing 2010 Plumbing Fixtures Toilet and service fixtures, supply and drainage $ 4,022 $ Domestic Water Distribution Oil fired water heater $ 0 $ % 2040 Rain Water Drainage Roof drains $ 2 $ 0.14 D30 HVAC 3010 Energy Supply N/A $ - $ Heating Generating Systems Boiler, heat exchanger and fans $ 388,485 $ Cooling Generating Systems Chilled water, fan coil units $ 14 $ % 3050 Terminal & Package Units N/A $ - $ Other HVAC Sys. & Equip. N/A $ - $0.00 D40 Fire Protection 4010 Sprinklers Sprinkler system, light hazard $ 2 $ Standpipes Standpipes and hose systems $ 1 $ % D50 Electrical 5010 Electrical Service/Distribution 2400 ampere services, panel board and feeders $ 1 $ Lighting & Branch Wiring High efficiency fluorescent fixtures, receptacles, switches $ 11 $ Communications & Security Alarm systems, internet and phone wiring, emergency lighting $ 6 $ % 5090 Other Electrical Systems Emergency generators, 200kW, uninterruptible power supply $ 1 $0.56 E. EQUIPMENT & FURNISHINGS 1010 Commercial Equipment N/A $ - $ Institutional Equipment N/A $ - $ Vehicular Equipment N/A $ - $ % 1090 Other Equipment N/A $ - $0.00 F. SPECIAL CONTRUCTION 1020 Integrated Construction N/A $ - $ Special Facilities N/A $ - $ % G. BUILDING SITEWORK NA Addressed in underground parking garage budget $ - $ % Subtotal $ % Credit (Interior Finishes) 3 ($3.73) Adjusted Subtotal $ Contractor Fees (General Requirements:10%, Overhead: 5%, Profit: 10%) 25% $ Architect Fees 6% $ 9.42 TOTAL BUILDING COST $ Per SF TOTAL BUILDING COST $ 47,175,116 NOTES: (1) Source: RSMeans; Square Foot Costs, 30th Annual Edition, 2009 (2) Tenants occupying the office component of building (240,000 SF) are internal to Johns Hopkins and therefore interior finishes were considered part of construction budget. Interior finishes for retail component (50,000 SF) were not included because tenants will be external to Johns Hopkins. A tenant improvement allowance has been provided for retail tenants. (3) The total cost for interior finishes in the retail component is $1,080,920 50,000 SF). To simply the construction budget, the credit for retail interior finishes is reflected as $3.73SF of total building area (290,000SF). Minor variance due to rounding is expected. 56

57 EXHIBIT 12 Carrying Costs of Construction Project 1 Month LIBOR Rate % Johns Hopkins Medicine Premium 3% Interest Rate 4.90% Parking Garage Construction Cost $ 25,734,522 Office Building Construction Cost $ 47,175,116 Total Construction Budget $ 72,909,639 Average Loan Outstanding 60% Carrying Cost $ 2,143,543 Adjusted Construction Budget $ 75,053,182 NOTES: (1) Rate obtained on 57

58 EXHIBIT 13 Development Timeline 58

59 EXHIBIT 14 Lease Up Schedule Subject Property Opening: September, 2011 Off-Campus Lease Commencement Subject Property Lease CY2011 CY 2012 CY 2013 CY 2014 CY 2015 CY 2016 Office Tenants Terminiation S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A M J J A S 1. Fund for Johns Hopkins Medicine (Development - Fund Raising) Jun Planning & Marketing, Public Affairs Nov Access Services Aug Emergency Medicine (Administration/Training) 1 NA 5. Office of Technology and Licensing Jun Government Affairs Nov Cancer Registry Nov Research Administration Office of Billing & Quality Assurance Aug Johns Hopkins International 1 NA 10. Finance / Regulatory Compliance 1 NA 11. Pathology Jun Psychiatry (Dr. Pulver) 2 Jan Neurology (Dr. Gordon) Oct Johns Hopkins Health System Legal 1 NA 15. Medical Services Administration Mar Critical Care Research (Dr. Pronovost) 2 Jul JHHS Central Verification Office (Credentialing Office) 2 Feb Infectious Disease (Dr. Bartlett) 2 Sep Tenant to be Identified NA Retail Tenants 3 1. Johns Hopkins Credit Union NA 2. Patient First / Urgent Care Center NA 3. Pharmacy NA 4. Deli NA 5. Daily Grind / Coffee Shop NA 6. Child Care Center NA 7. Kinko's - Fed Ex Store NA NOTES: (1) Tenant is leasing space in at the Johns Hopkins Mt. Washington Campus, therefore lease term is assumed to be flexible. (2) Tenant's off-campus lease expires prior to the opening of the subject property, therefore a space solution must be developed to fill the time gap. (3) Retail tenants are not currently located at an off-campus location, therefore leases will executed when building is open. (4) The subject property is scheduled to open in September 1, 2011 Office Tenants 1. Fund for Johns Hopkins Medicine (Development - Fund Raising) 2. Planning & Marketing, Public Affairs 3. Access Services(Centralized Scheduling) 4. Emergency Medicine (Administration/Training) 1 5. Office of Technology and Licensing 6. Government Affairs 7. Cancer Registry 8. Research Administration Office of Billing & Quality Assurance 9. Johns Hopkins International Finance / Regulatory Compliance Pathology 12. Psychiatry (Dr. Pulver) Neurology (Dr. Gordon) 14. Johns Hopkins Health System Legal Medical Services Administration 16. Critical Care Research (Dr. Pronovost) JHHS Central Verification Office (Credentialing Office) Infectious Disease (Dr. Bartlett) Tenant to be Identified TOTAL Lease Commencement Subject Property Jul 2013 Dec 2013 Sep 2013 Sep 2011 Jul 2013 Dec 2013 Dec 2013 Sep 2011 Sep 2011 Sep 2011 Jul 2013 Sep 2011 Nov 2013 Sep 2011 Apr 2012 Sep 2011 Sep 2011 Sep 2011 Sep 2011 Vacancy Months Leased Space RSF 22 Months 47,804 SF 27 Months 27,127 SF 24 Months 21,941 SF 0 Months 17,610 SF 22 Months 15,935 SF 27 Months 14,483 SF 27 Months 13,437 SF 0 Months 13,390 SF 0 Months 11,131 SF 0 Months 11,000 SF 22 Months 8,564 SF 0 Months 8,008 SF 26 Months 7,476 SF 0 Months 6,078 SF 7 Months 5,830 SF 0 Months 3,740 SF 0 Months 2,242 SF 0 Months 1,650 SF 0 Months 2,554 SF 240,000SF 59

60 EXHIBIT 15 Rental Rates Office Rent Schedule Construction Building Occupancy Market Rent $22.96 $23.74 $24.55 $25.39 $26.26 $27.15 $28.08 $29.03 $30.02 $31.05 $32.11 $33.20 $34.33 $35.50 $36.72 $37.97 $39.26 $40.60 $41.99 $43.42 $44.90 $46.43 $48.01 $49.65 Subject Property $22.96 $23.74 $24.55 $25.39 $26.00 $26.63 $27.27 $27.93 $28.60 $29.29 $30.00 $30.72 $31.46 $32.22 $32.99 $33.79 $34.60 $35.44 $36.29 $37.17 $38.06 $38.98 $39.92 $40.88 Variance $0.00 $0.00 $0.00 $0.00 $0.25 $0.52 $0.81 $1.11 $1.42 $1.76 $2.11 $2.48 $2.88 $3.29 $3.72 $4.18 $4.66 $5.16 $5.69 $6.25 $6.84 $7.45 $8.09 $8.77 Variance as % 0% 0% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 15% 16% 17% 18% 19% 20% 21% (Discount) Rent Rate / SF $54.00 $49.00 $44.00 $39.00 $34.00 $29.00 $24.00 $19.00 $14.00 $9.00 $4.00 Functional Obsolescence Market Rent Subject Property Notes: 1. Market Rent $22.96 Average rent per square foot (NNN)for Johns Hopkins Medicine off-campus leases in calendar year CPI Increase 3.41% 3. Depreciation 1% 4. Subject Property 2.41% (CPI - Depreciation) Average Annual Increase for all urban consumers on all items from 1913 to 2007 (94 years). Complete calendar years were used to calculate increase, therefore 2008 was not available at time of analysis. Market Rent is decreased by 1% annually (after construction is completed) to account for the functional obsolesces of the subject property. The subject property will be new construction in 2011, however, because the investment horizon is 20 years rent increases will be discounted by 1% to account for functional obsolescence. 60

61 EXHIBIT 16 Retail Rates Office Rent Schedule Construction Building Occupancy Market Rent $22.11 $22.86 $23.64 $24.45 $25.28 $26.15 $27.04 $27.96 $28.91 $29.90 $30.92 $31.97 $33.06 $34.19 $35.36 $36.56 $37.81 $39.10 $40.43 $41.81 $43.24 $44.71 $46.23 $47.81 Subject Property $22.11 $22.86 $23.64 $24.45 $25.04 $25.64 $26.26 $26.89 $27.54 $28.21 $28.89 $29.58 $30.29 $31.02 $31.77 $32.54 $33.32 $34.12 $34.95 $35.79 $36.65 $37.54 $38.44 $39.37 Variance $0.00 $0.00 $0.00 $0.00 $0.24 $0.50 $0.78 $1.07 $1.37 $1.69 $2.03 $2.39 $2.77 $3.17 $3.58 $4.02 $4.49 $4.97 $5.48 $6.02 $6.58 $7.17 $7.79 $8.44 Variance as % 0% 0% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 15% 16% 17% 18% 19% 20% 21% (Discount) Rent Rate / SF $54.00 $49.00 $44.00 $39.00 $34.00 $29.00 $24.00 $19.00 $14.00 $9.00 $4.00 Functional Obsolescence Market Rent Subject Property Notes: 1. Market Rent $22.11 Average rent per square foot (NNN) for retail tenants 25,000 SF or less in Baltimore City, as per CoStar. 2. CPI Increase 3.41% 3. Depreciation 1% 4. Subject Property 2.41% (CPI - Depreciation) Average Annual Increase for all urban consumers on all items from 1913 to 2007 (94 years). Complete calendar years were used to calculate increase, therefore 2008 was not available at time of analysis. Market Rent is decreased by 1% annually (after construction is completed) to account for the functional obsolesces of the subject property. The subject property will be new construction in 2011, however, because the investment horizon is 20 years rent increases will be discounted by 1% to account for functional obsolescence. 61

62 EXHIBIT 17 Market Leasing Assumptions Assumption Office Tenants Internal Retail Tenants External Retail Tenants Total Comments 1. Lease Renewals 85% 72.5% 72.5% Retail renewal percentage was obtained from CoStar. 2. Downtime 3Months 16Months 16Months Downtime for retail tenants was obtained from CoStar. 3. Term 10 Retail Tenant Breakdown: A. Johns Hopkins Credit Union 10 B. Patient First 20 C. Pharmacy 5 D. Deli 10 E. Daily Grind / Coffee Shop 5 F. Child Care Center 10 G. Kinko's - Fed Ex Store 5 4. Rent Abatement Current JHM off-campus office leases are for 10 years, therefore the term in the subject property is similar. Current Credit Union lease is 10 years, therefore term in subject property is similar Current Patient First leases at Johns Hopkins Bayview is 20 years. Pharmacy is leasing small space with little capital improvement Deli will require 10 year lease due to capital improvements to space. Daily Grind is leasing small space with little capital improvement Current Child Care Center lease is 10 years. Kinko's is leasing small space with little capital improvement Internal retail tenants are given 2 months rent abatement to allow them to remain competitive, from an operational perspective, with external tenants. 5. Tenant Improvement Allowances New Lease $ $ $ Relet $ 5.00 $ 7.00 $ 7.00 Retail space will be delivered as a vanilla shell with HVAC, utilities and lighting. New leases and relet will be given an allowance to remodel. Internal retail clients will be given same allowance as external tenants which allows them to remain competitive. Annual Escalator 3.42% 3.42% 3.42% Annual increase represents the PPI for Blue Collar worker. 6. Leasing Commissions New 0% See Below See Below Renew 0% 0% 1.50% Year 1 NA 6% 6% Year 2 NA 4% 4% Year 3 NA 4% 4% Year 4 NA 3% 3% Year 5 NA 3% 3% Years % 2% Internal office tenants will not have leasing agent and therefore no expense is represented. Internal retail tenants will not have a leasing agent, therefore no expense will be incurred with the original lease, or if the lease is renewed. However, if an internal retail tenant does not renew, there is a possibility that the space will be occupied by an external tenant. An external tenant will most likely have an leasing agent and is the reason that a leasing commission expense is included for "New Internal Retail Tenants." Gene Parker, Chief Operating Officer for Continental Realty Corp. provided the commission schedule for years 1-5 for external retail tenants. 62

63 EXHIBIT 18 Expense Assumptions Operating Expenses: 2006 SF 1 Expense 2011 SF 1 Expense Annual Increase Annual Increase Explanation 1. Housekeeping $ 1.09 $ % (BLS employment cost index for Blue Collar occupation code, Average Annual Increase: ) 2. Common Area Maintenance $ 2.26 $ % (BLS employment cost index for Blue Collar occupation code, Average Annual Increase: ) 3. Utilities $ 2.25 $ % (BLS; CPI for Electricity per KWH, Average Annual Increase: ) 4. Security $ 0.80 $ % (BLS employment cost index for Blue Collar occupation code, Average Annual Increase: ) 5. Bldg Insurance $ 0.31 $ % (BLS; Producer Price Index for Direct Property and Casualty Insurance, Average Annual Increase: ) 6. Parking Operations & Taxes 2 $ % (BLS employment cost index for Blue Collar occupation code, Average Annual Increase: ) (non-reimbursable) (expense was projected for 2011, therefore no escalation is required) 7. Administrative / Mgt as % of EGI 3.25% 3.25% 0% 8. Real Estate Tax (2010 Expense) 3 $ % (Increase represents CPI on all consumer expenditures) Retail (50,000SF of Building) 17.24% (Johns Hopkins will pay property taxes on pro rata share of retail space because it doesn't support charitable mission.) Real Estate Tax Gross Up to 290,000SF $ 0.52 (Represents SF expense for entire 290,000 based upon the actual taxes for retail component) 9. RE Tax Adjusted for Sale of Residential Units Year 2013 $ 3.07 Retail (50,000SF of Building) 17.24% Real Estate Tax Gross Up to 290,000 SF $ 0.53 (Beginning 2013 real estate taxes will decrease because 75% of ground-level land will be sold with residential development rights. The associated property taxes will follow the sale. See Exhibit IX for details. NOTES: (1) SF expenses were reported in the 2007 BOMA Experience Exchange Report and represent the average expense for a downtown Baltimore office building between 100, ,000 SF in These expense were inflated to 2011 dollars to reflect the actual operating expense for the subject property. (2) The real estate expense represents 2011 and therefore not inflated. A portion of real estate taxes will be eliminated when the residential development rights are sold. See schedule IX for detail. SF expense for Parking Garage Operations and Taxes is detailed in EXHIBIT IX. 63

64 Real Estate Calculation Prior to Sale of Residential Development Rights Assessed Value Total FY 2010 Purchase Price 1 $ 6,000,000 Construction Improvements $ 72,909,639 Assessed Value $ 78,909,639 EXHIBIT 19 Real Estate Taxes Real Estate Taxes Baltimore City Maryland Total (based on FY 2010 assessed value) Tax Rates $ 2.26 $ 0.11 $ 2.37 Total Taxes $ 1,783,358 $ 88,379 $ 1,871,737 Tax Abatement Calculation Pro Rata Share Building Parking Garage Total A. Building Size 290,000SF 336,223SF 626,223SF Office 17% Full Tax Pro Rata Taxes Due $ 866,789 $ 1,004,947 $ 1,871,737 Retail 83% No Tax Real Estate Taxes per SF $ 2.99 $ 2.99 $ % Tax Abatement Building Parking Garage Total B. Parking Taxed Spaces Taxes Due as % of Structure 17% 73% NA Retail: 4 spaces per 1, Real Estate Taxes Due $ 149, $ 733, $ 883, Residential: 1.5 spaces per 1, Real Estate Taxes per SF $ 0.52 $ 2.18 Total 713 Tax Savings (Year 1) $ 717, $ 271, $ 988, Percent of Total Garage Taxed 73% Real Estate Calculation After Sale of Residential Development Rights Pro Rata Land (Ground Level) Size % Total Office Building Footprint 28,454SF 25% (includes set backs from Orleans and Wolfe St. ) Residential Development Rights 83,620SF 75% (residential development rights will be sold in September Year 3) Total Parcel Footprint 112,074SF 100% Residential Building Open Units Sold 2 Johns Hopkins Assessed Value Land $ 6,000,000 6,204,600 1,628, ,677 Construction Improvements $ 72,909,639 75,395,857 77,966,856 80,625,526 Total $ 78,909,639 $ 81,600,457 $ 79,595,832 $ 81,053,203 Pro Rata Share Building $ 866,789 $ 896,347 $ 874,327 $ 890,336 Parking Garage $ 1,004,947 $ 1,039,216 $ 1,013,686 $ 1,032,246 Total Taxes $ 1,871,737 $ 1,935,563 $ 1,888,013 $ 1,922,582 Taxes per SF $ 2.99 $ 3.09 $ 3.01 $ 3.07 Retail Component 17% 17% 17% 17% Adjusted Taxes per SF $ 0.52 $ 0.53 $ 0.52 $ 0.53 Annual Increase 3.41% NOTES: (1) Baltimore City and Maryland will calculate real estate taxes on the purchase price of land and construction costs. A estimate of $6,000,000 was assumed for the land to arrive at the assessable) (2) Upon sale of the residential units 75% of the assessable base of land will transfer to new owner and reduce the tax per SF from $3.20 to $3.12. Taxes will increase at 3.41% from 2013 through end of investment time period. 64

65 Revenue Monthly Parkers Total Parking Spaces 975 Percent Monthly Parkers 80% (monthly membership) Monthly Parkers 780 Monthly Rate $ (cost for monthly parkers at other on-campus garages) Subtotal Monthly Revenue $ 1,169,472 Hourly Parkers Total Parking Spaces 975 Percent Available for Hourly 20% Hourly Spaces Available 195 EXHIBIT 20 Parking Garage Operating Model Turnover Rate 2 (Weinberg garage parking spaces turnover) Hourly Parkers Per Day 390 (Monday-Friday) Percent Utilization 50% (to factor that all available hourly parking spaces will not be used) Adj. Hourly Parkers Per Day 195 Hourly Parking Translated Into % Monthly Parkers 1 Average Hours Per Parker Monthly Rate Annualized $ 1,500 Annual Hours of Parking 101, Hourly Parking Annualized $ 202,708 Monthly Parkers to Achieve Hourly Revenue 135 Charge per Hour $ 2.00 Subtotal Hourly Parkers $ 202,708 80% Monthly Parkers 780 Monthly Parkers to Achieve Hourly Revenue 135 GRAND TOTAL REVENUE $ 1,372,180 Subtotal 915 *Parking garage expenses are detailed on the next page Subtotal as % of available spaces 94% 65

66 EXHIBIT 20 Parking Garage Operating Model Expenses Staffing Employees per 8 hour shift 2 Number of Shifts per day 2 (garage will have attendants from 7:00am - 11:00pm and be closed to only monthly parkers after hours and on weekends) Staffing Hours per day 32 Days per Week 5 Staffing Hours per Week 160 Staffing Hours per Year 8,320 Unproductive factor 50% (coverage for employee sick and vacation time - can use float pool from other campus garages) Adj. Staffing Hours per Year 12,480 Staff Hourly Wage $ Staffing Cost $ 149,760 Fringe Benefit 31% (Staff with be hired for Johns Hopkins Medicine and provided benefits) Total Staffing Cost $ 196,186 General Maintenance 2 Expense Per Space $ 700 (Quote provided by George Economas, Director of Parking - Johns Hopkins Medical Campus) Parking Spaces 975 Total Maintenance $ 682,192 Real Estate Taxes Tax Abatement Full Tax Taxes per SF of Parking $ 2.18 $ 2.99 (real estate tax abatement on 28% of garage due to Johns Hopkins non-profit status) Parking Garage Size SF 336, ,223 Total Taxes $ 733,611 $ 1,004,947 GRAND TOTAL EXPENSES $ 1,611,989 $ 1,883,325 Total Cost Per SF Building $ 5.56 $ 6.49 (total cost per SF of building - 290,000SF) NOTES: (1) ARGUS will not permit the inclusion of hourly parking revenue. As such, revenue from an additional 135 monthly parkers was assumed to account for hourly revenue. (2) A few examples of General Maintenance include: cleaning, civil fire protection maintenance, parking equipment maintenance, clean and repair signs, elevator maintenance, air-handling 66

67 EXHIBIT 21 Capital Assumptions Avg Replacement Cost at Time of Annual Replacement Capital Improvement Expenses: Useful Life 1 Year Construction 2 Increase Cost 1. Heat Generating System (Boiler) , % 423,827 See note (3) Comments 2. Cooling Generating System (Chilled H20) , % 872,675 See note (4) 3. Roofing (Single Ply Duro-Last) , % 162,904 See note (5) 4. Parking Garage Striping & Sealing , , , , % 67,359 See note (6) , Common Area Rennovations , % 303, Parking Garage: Structural Repairs & Replace Traffic Membrane , % 1,612,441 See note (8); Replacement will occur 5 years after sale. Notes: (1) Average useful life was determined using the 2006 Marshal Valuation Service - Marshall & Swift, The Building Cost People. (2) The cost at time of construction was determined using the 2009 RSMeans; Square Foot Costs, 30th Annual Edition. (3) Annual increase represents the average increase in PPI for Fabricated Heat Exchangers and Steam Condensers from (4) Annual increase represents the average annual increase in PPI for AC, Refrigeration from (5) Annual increase represents the average annual increase in PPI for Asphalt Paving and Roofing Materials Mfg from (6) Annual increase represents the average annual increase in PPI for Asphalt Paving and Roofing Materials Mfg from (7) 20,000 SF of common area within the building. Assume an update to floor and wall coverings at $10 per SF. (8) Annual increase represents the average annual increase in PPI for Asphalt Paving and Roofing Materials Mfg from

68 EXHIBIT 22 Cost of Captial Calculation Capital Asset Pricing Model Capital Asset Pricing Model Cost of Capital = RFR + B (RM - RFR) + E Inputs Rate Time Premium 3.85% Return on Market 9.80% Comments Yeild on 20 Year T-Bill as of November 25, Source: Wall St. Journal. Because the subject property will not be completed untill 2011, the Yield on a 22 Year T-Bill was used: 3.847% Cambridge Associates, LLC - U.S. Market Historic Returns, Riedel, Anderson & Morales. Represents the average annual growth rate for equities between 1900 and Beta 0.87 Health Care REIT, Inc. as of November 23, Source: E -0.25% Function of: Leasing, Operational Risk, Volatility of Specific Asset. Calculation Johns Hopkins Medicine Cost of Capital = RFR + Beta (RM - RFR) + E 3.85% % 3.85% -0.25% 8.78% 68

69 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 For the Years Ending Aug 2012 Aug 2013 Aug 2014 Aug 2015 Aug 2016 Aug 2017 Aug 2018 Aug 2019 Aug 2020 Aug 2021 Potential Gross Revenue EXHIBIT 23 Statement of Cash Flows Base Rental Revenue $3,249,439 $3,729,513 $7,273,350 $7,857,906 $8,047,278 $8,241,219 $8,436,514 $8,636,514 $8,841,338 $9,051,092 Absorption & Turnover Vacancy 45,904 Base Rent Abatements 22,951 Scheduled Base Rental Revenue 3,249,439 3,729,513 7,273,350 7,857,906 8,047,278 8,172,364 8,436,514 8,636,514 8,841,338 9,051,092 Expense Reimbursement Revenue Housekeeping 167, , , , , , , , , ,449 Common Area Maintenance 346, , , , , , , ,051 1,013,571 1,048,239 Utilities 344, , , , , , , ,763 1,001,312 1,034,954 Security 123, , , , , , , , , ,968 Administrative / MGT 72, , , , , , , , , ,749 Real Estate Taxes 67,542 77, , , , , , , , ,272 Building Insurance 45,453 52, , , , , , , , ,998 Total Reimbursement Revenue 1,167,248 1,376,039 2,808,190 3,098,544 3,198,509 3,285,240 3,413,311 3,525,532 3,641,206 3,743,629 Parking Revenue Assigned Parking Unassigned Parking 616, ,176 1,392,916 1,520,232 1,572,072 1,614,840 1,681,116 1,738,440 1,797,720 1,859,028 Total 616, ,176 1,392,916 1,520,232 1,572,072 1,614,840 1,681,116 1,738,440 1,797,720 1,859,028 Total Potential Gross Revenue 5,033,033 5,818,736 11,474,466 12,476,687 12,817,864 13,072,451 13,530,946 13,900,493 14,280,272 14,653,752 Effective Gross Revenue 5,033,033 5,818,736 11,474,466 12,476,687 12,817,864 13,072,451 13,530,946 13,900,493 14,280,272 14,653,752 69

70 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 For the Years Ending Aug 2012 Aug 2013 Aug 2014 Aug 2015 Aug 2016 Aug 2017 Aug 2018 Aug 2019 Aug 2020 Aug 2021 Operating Expenses EXHIBIT 23 Statement of Cash Flows Housekeeping 374, , , , , , , , , ,324 Common Area Maintenance 774, , , , , , , ,808 1,013,317 1,047,973 Utilities 768, , , , , , , ,526 1,001,069 1,034,705 Security 275, , , , , , , , , ,874 Administrative / MGT 163, , , , , , , , , ,247 Real Estate Taxes 150, , , , , , , , , ,226 Building Insurance 101, , , , , , , , , ,983 Parking Operations 1,612,400 1,667,544 1,724,574 1,783,555 1,844,552 1,907,636 1,972,877 2,040,349 2,110,129 2,182,296 Total Operating Expenses 4,220,674 4,383,480 4,702,341 4,881,417 5,043,977 5,208,860 5,385,679 5,565,099 5,750,530 5,941,628 Net Operating Income 812,359 1,435,256 6,772,125 7,595,270 7,773,887 7,863,591 8,145,267 8,335,394 8,529,742 8,712,124 Leasing & Capital Costs Tenant Improvements 46,289 Leasing Commissions 7,195 Heat Generating System (Boiler Cooling Generating System (Chi Roofing (Single Ply Duro Last) Parking Garage: Power Wash, St 45,566 51,907 Common Area Renovations 246,356 Parking Garage: Structural Rep Total Leasing & Capital Costs 45,566 53, ,356 51,907 Cash Flow Before Debt Service $812,359 $1,435,256 $6,772,125 $7,595,270 $7,728,321 $7,810,107 $8,145,267 $8,089,038 $8,529,742 $8,660,217 & Taxes =========== =========== =========== =========== =========== =========== =========== =========== =========== =========== 70

71 For the Years Ending Potential Gross Revenue Base Rental Revenue Absorption & Turnover Vacancy Base Rent Abatements Scheduled Base Rental Revenue EXHIBIT 23 Statement of Cash Flows Year 11 Year 12 Year 13 Year 14 Year 15 Year 16 Year 17 Year 18 Year 19 Year 20 Year 21 Aug 2022 Aug 2023 Aug 2024 Aug 2025 Aug 2026 Aug 2027 Aug 2028 Aug 2029 Aug 2030 Aug 2031 Aug 2032 $9,277,511 $9,405,037 $9,472,197 $9,472,197 $9,472,197 $9,478,736 $9,496,025 $9,496,025 $9,496,025 $9,496,025 $10,437, ,071 58, ,497 89,842 29,825 81,194 8,670,598 9,405,037 9,472,197 9,472,197 9,472,197 9,420,491 9,466,200 9,496,025 9,496,025 9,496,025 9,766,171 Expense Reimbursement Revenue Housekeeping Common Area Maintenance Utilities Security Administrative / MGT Real Estate Taxes Building Insurance Total Reimbursement Revenue 494, , , , , , , , , , ,798 1,022,963 1,121,162 1,159,505 1,199,159 1,240,171 1,275,132 1,326,451 1,371,812 1,418,731 1,467,250 1,438,069 1,009,395 1,105,675 1,142,823 1,181,224 1,220,912 1,254,603 1,304,334 1,348,163 1,393,457 1,440,281 1,410, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,531 3,653,550 4,006,633 4,135,013 4,263,939 4,396,703 4,505,077 4,675,070 4,823,281 4,974,898 5,136,631 5,017,124 Parking Revenue Assigned Parking Unassigned Parking Total Total Potential Gross Revenue Effective Gross Revenue 1,807,068 1,987,968 2,055,768 2,125,860 2,198,352 2,258,160 2,350,836 2,431,008 2,513,904 2,599,632 2,544,900 1,807,068 1,987,968 2,055,768 2,125,860 2,198,352 2,258,160 2,350,836 2,431,008 2,513,904 2,599,632 2,544,900 14,131,226 15,399,648 15,662,978 15,862,006 16,067,262 16,183,739 16,492,117 16,750,317 16,984,831 17,232,288 17,328,200 14,131,226 15,399,648 15,662,978 15,862,006 16,067,262 16,183,739 16,492,117 16,750,317 16,984,831 17,232,288 17,328,200 71

72 For the Years Ending Operating Expenses Housekeeping Common Area Maintenance Utilities Security Administrative / MGT Real Estate Taxes Building Insurance Parking Operations Total Operating Expenses Net Operating Income Leasing & Capital Costs Tenant Improvements Leasing Commissions Heat Generating System (Boiler Cooling Generating System (Chi Roofing (Single Ply Duro Last) Parking Garage: Power Wash, St Common Area Renovations Parking Garage: Structural Rep Total Leasing & Capital Costs Cash Flow Before Debt Service & Taxes EXHIBIT 23 Statement of Cash Flows Year 11 Year 12 Year 13 Year 14 Year 15 Year 16 Year 17 Year 18 Year 19 Year 20 Year 21 Aug 2022 Aug 2023 Aug 2024 Aug 2025 Aug 2026 Aug 2027 Aug 2028 Aug 2029 Aug 2030 Aug 2031 Aug , , , , , , , , , , ,957 1,083,814 1,120,880 1,159,214 1,198,859 1,239,860 1,282,263 1,326,117 1,371,470 1,418,374 1,466,883 1,517,050 1,069,471 1,105,405 1,142,546 1,180,936 1,220,616 1,261,628 1,304,019 1,347,834 1,393,121 1,439,930 1,488, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,063 2,256,930 2,334,117 2,413,944 2,496,501 2,581,881 2,670,182 2,761,502 2,855,945 2,953,618 3,054,632 3,159,101 6,109,674 6,342,202 6,548,553 6,759,525 6,977,638 7,200,039 7,436,092 7,678,183 7,927,435 8,185,308 8,446,733 8,021,552 9,057,446 9,114,425 9,102,481 9,089,624 8,983,700 9,056,025 9,072,134 9,057,396 9,046,980 8,881,467 1,304, , ,939 67,009 1,749, ,357 9, , , , , ,904 59,130 67, ,456 1,578, ,329 1,694, , ,456 76, , ,012 2,086,462 $6,443,274 $8,377,117 $7,419,811 $9,102,481 $8,867,590 $8,680,244 $8,979,666 $8,909,230 $9,057,396 $8,131,968 $6,795,005 =========== =========== =========== =========== =========== =========== =========== =========== =========== =========== =========== 72

73 EXHIBIT 24 Net Proceeds from Sale Resale Calculation - Based on 20 Year Proforma Capitalize Cash Flow After TI s & LCs - Year 21 Terminal Cap Rate 8.78% Cash Flow After TI s & LCs - Year 21 (sale to occur at the end of year 20) 6,795,005 Resale Value 77,391,856 Selling Cost Total Cost Seller Obligation 1 Seller Cost 1. Maryland State Transfer Taxes 0.50% of purchase price 0.25% 193, Baltimore City Transfer Taxes 1.5% of purchase price 0.75% 580, Baltimore City Recordation Fees $ 5.00 per 500 Value 1.00% 773, Broker Fees 5% of purchase price 2.50% 1,934, % 3,482,634 Seller's Costs as Percent of Resale Value 4.50% Net Proceeds from Sale (Discounted 1 Year from Year 21 to 20) 73,909,223 Notes: 1. Seller is only responsible for 50% of Transfer taxes, recordation fees, and broker fees. 73

74 EXHIBIT 25 Detailed Present Value P.V. of P.V. of P.V. of P.V. of P.V. of P.V. of P.V. of P.V. of P.V. of P.V. of P.V. of Analysis Year Annual Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow Period Ending Cash % Year 1 Aug 2012 $812,359 $755,472 $753,720 $751,975 $750,239 $748,511 $746,791 $745,078 $743,374 $741,677 $739,988 $738,307 Year 2 Aug ,435,256 1,241,281 1,235,529 1,229,818 1,224,145 1,218,512 1,212,917 1,207,362 1,201,844 1,196,364 1,190,921 1,185,515 Year 3 Aug ,772,125 5,446,732 5,408,918 5,371,453 5,334,334 5,297,556 5,261,115 5,225,008 5,189,229 5,153,778 5,118,648 5,083,837 Year 4 Aug ,595,270 5,680,998 5,628,472 5,576,552 5,525,229 5,474,494 5,424,342 5,374,761 5,325,747 5,277,289 5,229,382 5,182,016 Year 5 Aug ,728,321 5,375,724 5,313,666 5,252,466 5,192,110 5,132,585 5,073,876 5,015,972 4,958,858 4,902,523 4,846,955 4,792,141 Year 6 Aug ,810,107 5,052,183 4,982,278 4,913,498 4,845,823 4,779,233 4,713,708 4,649,228 4,585,777 4,523,332 4,461,877 4,401,395 Year 7 Aug ,145,267 4,900,019 4,821,010 4,743,454 4,667,320 4,592,579 4,519,204 4,447,165 4,376,435 4,306,989 4,238,799 4,171,839 Year 8 Aug ,089,038 4,525,429 4,442,132 4,360,555 4,280,661 4,202,411 4,125,764 4,050,688 3,977,145 3,905,100 3,834,520 3,765,373 Year 9 Aug ,529,742 4,437,814 4,346,025 4,256,342 4,168,710 4,083,078 3,999,396 3,917,615 3,837,688 3,759,569 3,683,213 3,608,576 Year 10 Aug ,660,217 4,190,176 4,093,992 4,000,231 3,908,826 3,819,713 3,732,830 3,648,117 3,565,512 3,484,961 3,406,407 3,329,796 Year 11 Aug ,443,274 2,899,216 2,826,094 2,754,980 2,685,814 2,618,537 2,553,096 2,489,433 2,427,499 2,367,242 2,308,613 2,251,564 Year 12 Aug ,377,117 3,505,410 3,409,075 3,315,600 3,224,895 3,136,873 3,051,447 2,968,537 2,888,061 2,809,943 2,734,109 2,660,488 Year 13 Aug ,419,811 2,887,403 2,801,537 2,718,416 2,637,944 2,560,032 2,484,592 2,411,541 2,340,798 2,272,285 2,205,926 2,141,649 Year 14 Aug ,102,481 3,294,161 3,188,786 3,087,013 2,988,714 2,893,760 2,802,032 2,713,411 2,627,787 2,545,051 2,465,100 2,387,835 Year 15 Aug ,867,590 2,984,426 2,882,258 2,783,813 2,688,945 2,597,518 2,509,399 2,424,462 2,342,585 2,263,650 2,187,546 2,114,165 Year 16 Aug ,680,244 2,716,800 2,617,707 2,522,446 2,430,860 2,342,800 2,258,121 2,176,686 2,098,364 2,023,031 1,950,565 1,880,850 Year 17 Aug ,979,666 2,613,703 2,512,530 2,415,493 2,322,416 2,233,127 2,147,465 2,065,275 1,986,409 1,910,723 1,838,084 1,768,362 Year 18 Aug ,909,230 2,411,607 2,312,879 2,218,408 2,128,000 2,041,473 1,958,652 1,879,369 1,803,465 1,730,791 1,661,200 1,594,557 Year 19 Aug ,057,396 2,280,027 2,181,614 2,087,662 1,997,960 1,912,305 1,830,507 1,752,383 1,677,762 1,606,477 1,538,375 1,473,304 Year 20 Aug ,131,968 1,903,719 1,817,323 1,735,034 1,656,650 1,581,975 1,510,826 1,443,030 1,378,421 1,316,843 1,258,146 1,202,191 Total Cash Flow 149,546,479 69,102,300 67,575,545 66,095,209 64,659,595 63,267,072 61,916,080 60,605,121 59,332,760 58,097,618 56,898,374 55,733,760 Property 8.78% Cap 73,909,222 17,302,375 16,517,147 15,769,253 15,056,835 14,378,135 13,731,486 13,115,305 12,528,091 11,968,422 11,434,946 10,926,382 Total Property Present Value $86,404,675 $84,092,692 $81,864,462 $79,716,430 $77,645,207 $75,647,566 $73,720,426 $71,860,851 $70,066,040 $68,333,320 $66,660,142 =========== =========== =========== =========== =========== =========== =========== =========== =========== =========== =========== Rounded to Thousands $86,405,000 $84,093,000 $81,864,000 $79,716,000 $77,645,000 $75,648,000 $73,720,000 $71,861,000 $70,066,000 $68,333,000 $66,660,000 =========== =========== =========== =========== =========== =========== =========== =========== =========== =========== =========== Per SqFt Percentage Value Distribution Assured Income 21.02% 21.34% 21.67% 22.00% 22.33% 22.65% 22.98% 23.31% 23.64% 23.97% 24.30% Prospective Income 58.96% 59.02% 59.07% 59.11% 59.15% 59.20% 59.23% 59.26% 59.28% 59.30% 59.31% Prospective Property Resale 20.02% 19.64% 19.26% 18.89% 18.52% 18.15% 17.79% 17.43% 17.08% 16.73% 16.39% =========== =========== =========== =========== =========== =========== =========== =========== =========== =========== =========== % % % % % % % % % % % 74

75 EXHIBIT 26 Residential Development Rights Valuation Dulaney Cresent Value Distribution - Comparable A Waterloo Place Value Distribution - Comparable B Property Value 1 Total Value % Total Property Value 1 Total Value % Total Total Building Value $ 30,721,700 73% Total Building Value $ 18,516,700 90% Total Land Value $ 11,205,700 27% Total Land Value $ 2,061,300 10% Total Property Value $ 41,927, % Total Property Value $ 20,578, % Total Size 361,448 SF Total Size 190,000 SF Value per SF $ Value per SF $ Number of Units Number of Units Total Value per Unit $ 158,816 Total Value per Unit $ 104,990 Building Value per Unit $ 116,370 73% Building Value per Unit $ 94,473 90% Land Value per Unit $ 42,446 27% Land Value per Unit $ 10,517 10% Total Value per Unit $ 158, % Total Value per Unit $ 104, % Subject Property - Residential Value Calculation Residential Construction Costs Residential Construction Costs Per Unit 3 $ 127,800 Value of Residential Development Rights Residential Units Approved within Parcel 342 Land Value Per Unit $ 26,481 Total Residential Construction Costs $ 43,707,600 Approved Residential Units 342 Total Value $ 9,056,617 Residential Land Value Dulaney Cresent Land Value Per Unit $ 42,446 Waterloo Land Value Per Unit $ 10,517 Blended Land Value Per Unit 4 $ 26,481 Residential Units Approved 342 Total Blended Land Value $ 9,056,617 Subject Property Residential Value Building $ 43,707,600 83% Land Value $ 9,056,617 17% Total Subject Property Residential Value $ 52,764, % 75

76 EXHIBIT 26 Residential Development Rights Valuation Projected Return for Residential Developer Based on Land Value Per Unit Total Gross Potential Rents $1,837 22,044 7,539,048 Vacancies per Unit 6 (885) (302,670) Return on Assets Total Rents per Unit 21,159 7,236,378 (CFO / Purchase Price) 11.0% Other Income (excluding parking) ,454 Total Collections 21,596 7,385,832 Return on Equity (CFAF/Cash Invested) 19.9% Total Operating Expenses 6 4,138 1,415,196 Cash Flow from Operations 17,021 5,821,182 Return Calculations Financing Cost Property Cost 52,764,217 LTV 80% Financed Amount 42,211,373 Interest Rate 8% Term (Years) 30 Annual Mortgage Payment 3,716,785 Financing Cost 8.8% NOTES: (1) Property value represents 2008 and was obtain from the Maryland State Department of Assessments and Taxation. (2) Dulaney Cresent has allocated more common areas amenities which reduces the number of total units. The complex charges higher rents that average to off-set the below average number of units. (3) Lisa Decker, Project Manager, Whiting-Turner provided residential construction cost estimate of $120/SF based on a comparable project in Towson, Maryland. (4) The location of Dulaney Cresent (Towson, Maryland) allows it to command higher rents than a similar property in East Baltimore City and therefore lowers the land value. To account for the lower land value a blended land value between Dulaney Cresent and Waterloo, a comparable residential complex in Baltimore City was used. (5) In 2008, rent for a two bed room / two bathroom apartment in the Waterloo Place was $1,670. Since the Waterloo Place is nearly 10 years old, an inflation of 10% was applied to the rent figure to account for the subject residential building being new and commanding a higher rent. Based on the following assumption, rent is projected at $1,837. (6) Vacancy, other income, and total operating expenses were obtained from the 2007 Institute of Real Estate Management, Metropolitan Area Report for 76

77 EXHIBIT 27 77

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84 EXHIBIT 29 84

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