Appendix Q Analysis of Market Conditions by Real Estate Economics

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1 Appendix Q Analysis of Market Conditions by Real Estate Economics

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3 Wednesday, January 11, Calle Amanecer, Suite 200 San Clemente, CA Charles Mallon Euland Capital Laguna Niguel, CA (949) RE: Housing Product Feasibility SunPointe, Laguna Niguel Dear Mr. Mallon: I apologize for the delay in sending you this letter of opinion. You had asked my opinion regarding the viability of three separate land plans and product types associated with the SunPointe parcel above the Mercedes Benz dealership in the city of Laguna Niguel. I have inspected the site and surrounding areas. This site is adjacent to the Gateway Specific Plan in Laguna Niguel, with planned and recently introduced industrial/office/commercial/apartment developments. Directly north of the site are existing single-family neighborhood, followed by Paseo De Colinas, then by attached housing. Directly west and below the site is a Mercedes Benz dealership, with a lighted lot which has an obvious negative impact on views from the site. The view and traffic noise encumbrances are also severe from the adjacent 73 Toll Road and I-5 Freeway. Directly west of the site are slopes leading to existing Laguna Niguel neighborhoods. South of the site is the Saddleback Church Rancho Capistrano retreat. Below is an aerial overview of the site and surrounding area: 1

4 Sun Pointe Though the site offers an excellent location in terms of access to jobs, shopping and services, the surrounding encumbrances greatly restrict the viability of lower density, executive move-up or upscale housing product on the site. Metrostudy s Neustar Element One Group Distribution of the surrounding population, groups the this population into the following categories: Current Selections Code Name # of Households % Comp G1 O Entry Level % G2 Feature Location % G3 Simple Life % G4 Family Life % G5 Elite % G6 Active Adult Entry Level % G7 Active Adult Feature % G8 Active Adult Elite % G9 Renters % Total 4, % Source: Neustar; Real Estate Economics 2

5 Not surprisingly, the most potent groups (Renters, Entry Level, Simple Life and Family Life) tend to be price-sensitive buyers either moving up from rental product or from entry level attached housing product. To these potential buyers, price is a much more important consideration than avoidance of encumbrances. Conversely, avoidance of encumbrances are one of the main considerations for the Elite and Active Adult categories. Given these considerations, below are insights with regard to the land plans and product concepts being proposed for SunPointe: A 35-lot concept was shared that produces 5,000 square foot lots on the subject property. There are currently 11 new home programs in Orange County ranging in minimum lot sizes from 4,800 to 5,500 square feet. A summary of these product concepts is shown below: Sales Information PRICING INFORMATION Min Map Total Units Units Monthly Sales List Price/ Size Lot Size No. Development Builder City Units Off'd Avail. Quarter Overall Base Sq. Ft. (Sq. Ft.) (Sq. Ft.) 1 Oakmont CAL Atlantic Irvine $1,160,131 $ ,748 4,800 2 Torrey CAL Atlantic Irvine $1,538,222 $ ,623 5,500 3 Larkspur Lennar Irvine $1,264,639 $ ,710 5,500 4 La Vita Brookfield Irvine $2,061,832 $ ,604 5,500 5 Messina TRI Pointe Irvine $1,643,948 $ ,690 5,000 6 Stafford CAL Atlantic Tustin $1,280,689 $ ,804 5,000 7 Skyridge CAL Atlantic MV $1,025,233 $ ,989 5,100 8 Briosa William Lyon Rancho MV $993,750 $ ,284 5,225 9 Cirrus Meritage Rancho MV $947,836 $ ,978 5, Aubergine TRI Pointe Rancho MV $1,098,094 $ ,402 5, Sapphire Taylor Morrison San Clemente $1,679,917 $ ,650 5,000 OVERALL AVERAGES: $1,335,845 $ ,316 5,214 GRAND TOTALS: The above stems from our 4 th quarter 2016 field audit of new homes. As shown, the average price of new homes in this density range is $1.335mm for 3,316 square feet. Unfortunately, the encumbrances associated with the SunPointe site (glaring lights from the dealership, Toll Road pollution, noise and visibility) will not allow for this type of executive move-up product. At these prices, buyers would be drawn to much stronger alternatives. Obviously, if prices were sufficiently discounted at SunPointe, product would sell, but the required discount would position the SunPointe community such that development costs would exceed revenues. This larger lot, lower density option is considered unfeasible. Likewise, the 2 nd alternative you presented, which produced 53 lots at a 3,600 square foot lot minimum generates similar issues. Below is a summary of new home product in Orange County on lot sizes ranging from 3,450 to 3,960 square feet: 3

6 Sales Information PRICING INFORMATION Min Map Total Units Units Monthly Sales List Price/ Size Lot Size No. Development Builder City Units Off'd Avail. Quarter Overall Base Sq. Ft. (Sq. Ft.) (Sq. Ft.) 1 Welton Taylor Morrison Irvine $1,032,473 $ ,445 3,800 2 Belvedere Irvine Pacific Irvine $1,237,485 $ ,713 3,450 3 Piedmont Irvine Pacific Irvine $1,047,807 $ ,390 3,700 4 Calistoga William Lyon Irvine $1,350,285 $ ,856 3,450 5 Capella Taylor Morrison Irvine $1,310,759 $ ,064 3,760 6 Sage II KB MV Irvine $790,470 $ ,885 3,800 7 Cressa The New MV Irvine $1,041,680 $ ,614 3,800 8 Palo Alto KB MV Irvine $1,250,263 $ ,157 3,960 9 Aqua Taylor Morrison San Clemente $1,014,322 $ ,375 3,600 OVERALL AVERAGES: $1,119,505 $ ,611 3,702 GRAND TOTALS: WEIGHTED AVERAGES: $1,120,774 $ ,590 Though increasing the density tends to reduce the anticipated buyer profile s aversion to the aforementioned negative elements, this density still generates product with a market average of $1.121mm for 2,590 square feet. This product still draws a buyer profile of executive move-up families that are not likely to choose an encumbered location. This executive move-up buyer profile will opt for a less encumbered location at Rancho Mission Viejo, Baker Ranch or another south County location offering product above $1.0mm. In order to offer reasonably valued product that will draw a buyer profile that is more price-sensitive than location-sensitive, product below $1.0mm will need to be offered. The 3 rd alternative land plan alternative you presented me appears to accomplish the needed result of offering product at prices points below $1.0mm. It is <$1.0mm product that will draw the anticipated buyer profile of price-sensitive couples and families. This 3 rd alternative land plan produced 71 lots with a clustered detached concept patterned after the Cornerstone product profile in San Joaquin Hills. Below is a summary of recent transactions at Cornerstone: SALE TYPE PROPERTY TYPE ADDRESS CITY PRICE SQFT YEAR BUILT STATUS PAST SALE Condo/Co op 10 Newton Ct Laguna Niguel $750,000 2,141sf 2007 Sold PAST SALE Condo/Co op 7 Lancaste Ct Laguna Niguel $755,000 1,864sf 2008 Sold PAST SALE Condo/Co op 7 Cheshire Ct Laguna Niguel $775,000 1,864sf 2010 Sold PAST SALE Condo/Co op 7 Bradford Ct Laguna Niguel $795,000 1,864sf 2010 Sold PAST SALE Condo/Co op 5 Lancaste Ct Laguna Niguel $795,000 1,862sf 2008 Sold PAST SALE Condo/Co op 2 Newton Ct Laguna Niguel $882,500 2,500sf 2008 Sold PAST SALE Condo/Co op 11 Bradford Ct Laguna Niguel $882,500 2,486sf 2010 Sold PAST SALE Condo/Co op 2 Plymouth Ct Laguna Niguel $885,000 2,486sf 2007 Sold PAST SALE Condo/Co op 12 Somerset Ct Laguna Niguel $885,000 2,486sf 2007 Sold PAST SALE Condo/Co op 1 Rutland Ct Laguna Niguel $887,500 2,486sf 2007 Sold Averages: $829, Like the subject community, these Cornerstone transactions are encumbered by close proximity to the Toll Road. Though still expensive, the home sizes and prices are well below the $1.0mm threshold, drawing a buyer profile who will be sufficiently sensitive to price and commutability (the strengths of SunPointe) to overcome objections to the identified encumbrances (car dealership, lights, Toll Road and Freeway noise) that impact 4

7 the SunPointe site. This 3 rd alternative land plan may be the only one that generates sufficient economies of scale to produce a revenue that exceeds development and sales costs. Based on an examination of these land plans, the highest density land plan that generates 71 clustered homes at prices conducive to the anticipated buyer profile is probably the only viable option for the envisioned SunPointe community. Mr. Mallon, please call me with any questions or concerns regarding this opinion, and thank you for the opportunity to serve Euland Communities. Sincerely, REAL ESTATE ECONOMICS Mark R. Boud Sr. Vice President Metrostudy Hanley Wood LLC MRB:ka x:\econ\econ2017\lagunaniguel117-euland\ltr - mallon jan 2017 v3.doc 5

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