Frank D. Reeves Municipal Center

Transcription

1 SUMMARY APPRAISAL REPORT Frank D. Reeves Municipal Center th Street, N.W. Square 204, Lot 844 WASHINGTON, D.C. VALUE OPINION DATE: July 25, 2013 REPORT DATE: December 11, 2013 PREPARED FOR: Mr. Thomas D. Bridenbaugh Mr. Adam Gooch 1400 K Street, N.W. Akridge, VP, Director of Development Suite 1000 th Street, N.W., Suite 300 North Washington, D.C Washington, D.C PREPARED BY: LAND VALUE PANEL

2 LAND VALUE PANEL December 11, 2013 Mr. Thomas D. Bridenbaugh Mr. Adam Gooch 1400 K Street, N.W. Akridge, VP, Director of Development Suite 1000 th Street, N.W., Suite 300 North Washington, D.C Washington, D.C Re: Land Appraisal: Square 204, Lot 844 (Formerly Lot 209) Frank D. Reeves Municipal Center th Street, N.W. Proposed Land Exchange Between District of Columbia and Akridge Messrs. Bridenbaugh and Gooch: In accordance with our executed contract (and/or agreements), the Land Value Panel was engaged to prepare a Summary Appraisal Report of the above-referenced asset. The purpose of the appraisal is to estimate the retrospective market value of the fee simple estate in the subject land (84,536 square feet) as well as the leased fee interest in a small section of the total property (13,064 square feet) devoted to air rights for an apartment building. The asset is appraised in it as is condition, unoccupied and available for sale. Additionally, the Panel has been instructed to assume that future use or redevelopment of the property would be encumbered by labor premiums on the appraisal date. The appraisal date (July 25, 2013) was selected by the parties-in-interest to avoid any known influence of the stadium announcement on land prices in Southwest D.C. This letter of transmittal is an integral part of the attached Summary Appraisal Report and its addenda. The report is to be read, understood and used only in its entirety. The accompanying Summary Appraisal Report identifies the property and rights appraised; addresses pertinent facts regarding the area, subject property and comparable data; summarizes our investigation, analyses and opinions; and sets forth our assumptions and limiting conditions. This Summary Appraisal Report is in conformance with the requirements of Standards Rule 2-2(b) of the Uniform Standards of Professional Appraisal Practice, Edition (USPAP) as adopted by the Appraisal Standards Board of the Appraisal Foundation. The report also was prepared in conformance with the Code of Professional Ethics and Standards of Professional Practice of the Appraisal Institute, published by the Appraisal Institute in Our clients recognize that the signatories to the report and the Land Value Panel are unbiased third parties with no role in any past or present decisions regarding the acquisition, development, operation or disposition of the subject property. This report may not be relied on for any purpose whatsoever or by any person or firm other than our clients, without the express written consent of the appraisers. The Land Value Panel and the signatories to this report assume no responsibility or liability to any user of this document other than our clients.

3 Messrs. Bridenbaugh and Gooch Page 2. December 11, 2013 Based upon a consensus of the Land Value Panel Members, the estimated retrospective market value of the fee simple estate (subject to leased air rights) in the subject land (assumed vacant, cleared and approved for 524,000 FAR square feet of residential and first floor retail space), as of the effective appraisal date of July 25, 2013, was $60,260,000. Our clients requested that the Land Value Panel account for the impact of demolition expenses and labor premiums on the above retrospective market value opinion. Demolition Expense The Panel opined that demolition and rebuilding maximize the site s value. Akridge provided a building demolition and removal expense budget prepared by Clark Construction Group, LLC (Clark) of $5.3 million. The Panel applied a demolition cost of $5.0 million. The Panel determined that each of the residential comparators were encumbered by site preparation costs some of which were estimated and in other cases unknown. We moderately adjusted the demolition expense downward to account for comparability between the land sales and subject site. To avoid double counting for wage premiums, to be accounted for later, we reduced the amount by another $325,000 producing a net building demolition expense of $4.675 million. Accordingly, the retrospective market value as is, before adjusting for labor premiums, was $55,585,000. Labor Premium Adjustments All Panel Members made independent investigations as to the effect of labor premiums on building construction costs and the corresponding impact on land values. Conversations were opened with builders and contractors active in the District of Columbia. We determined that a range for the two combined requirements of Davis Bacon wage rates (affects City-owned assets only) and First Source labor was between 12.0% and 18.0%. The individual amounts vary and are influenced by construction type (residential versus office). We learned that these two requirements can also be project specific. The combined total, provided by Clark, is 16.5% and was allocated as follows: Davis Bacon at 7.8% and First Source at 8.7%. Given Akridge s development plan and the data provided by our clients, the Panel determined these additional costs fall inside the range found from our independent research. The rates are applied to the latest construction cost budget prepared by Clark (dated November 6, 2013) that totals $111,282,000. As of the appraisal date, it is the understanding of the Panel that Davis Bacon wage premiums are required by the Department of Labor. Depending upon the outcome of litigation between the District of Columbia and the Department of Labor, the expense of Davis Bacon wages could, in the future, be moot. Regardless, the impact of Davis Bacon is $8,679,996, rounded to $8,680,000 ($111,282,000 times 7.8%). The measured impact of Davis Bacon wages produces a land value of $46,905,000, rounded to $46,900,000.

4 Messrs. Bridenbaugh and Gooch Page 3. December 11, 2013 The impact of First Source is $9,681,534, rounded to $9,682,000 ($111,282,000 times 8.7%). The measured impact of First Source requirements reduces the land's retrospective value to $37,218,000, rounded to $37,200,000. Therefore, after accounting for a building demolition expense, it is the consensus of the Land Value Panel that the estimated retrospective market value of the fee simple estate (subject to leased air rights) in the subject property, in its as is condition and as encumbered by two labor premiums, as of the effective appraisal date of July 25, 2013, was: THIRTY-SEVEN MILLION TWO HUNDRED THOUSAND DOLLARS ($37,200,000). The Panel Members appreciate this opportunity to be of service in this important matter. Respectfully submitted, LAND VALUE PANEL CHAIRMAN Oakleigh J. Thorne, MAI, CRE District of Columbia Licensed General Appraiser GA #10140 Respectfully submitted, PANEL MEMBER Respectfully submitted, PANEL MEMBER Richard R. Harps, MAI, CRE District of Columbia Licensed Mark A. Chaney, MAI, MRICS District of Columbia Licensed General Appraiser GA #10003 General Appraiser GA #10107

5 TABLE OF CONTENTS I. INTRODUCTION Page Summary of Important Facts and Conclusions Purpose, Scope and Use of the Appraisal Definitions of Value and Property Rights Appraised Certification of Value Assumptions and Limiting Conditions II. FACTUAL DESCRIPTIONS Identification of the Property Ownership History Sub-Market Area Description Zoning Site Description Building Description III. ANALYSIS AND CONCLUSIONS Highest and Best Use Valuation Methodology Land Sale Comparison Approach Reconciliation and Final Value Estimate Requested Adjustments to Market Value Market Value As Is Market Value As Is Encumbered by Two Labor Premiums IV. ADDENDA Land Value Panel Instructions DC Surveyors s Office Plat Leased Land Area Schematic Akridge Estimate Summary of Construction Costs Apartment Land Sale Plats Subject Photographs A B C D E F

6 SUMMARY OF IMPORTANT FACTS AND CONCLUSIONS TYPE OF PROPERTY: ADDRESS: LAND OWNER: An existing concrete and steel eight-story (and partial six-story) office building containing 308,500 square feet of net rentable office and retail space with two levels of below-grade parking occupied by two agencies of the District of Columbia Government th Street, N.W. Washington, D.C. District of Columbia LEGAL DESCRIPTION: Square 204, Lot 844 (formerly Lot 209) LAND AREA: AIR RIGHTS LEASED AREA: LAND OWNED IN FEE: ZONING: 97,600 Square Feet (Source: D.C. Surveyor s Office) 13,064 Square Feet (identified by the Assessor s Office as Lot 7000) 84,536 Square Feet R-5-B and ARTS/CR R-5-B LAND AREA: 27,850 Square Feet (includes Air Rights of 13,064 square feet) ARTS/CR LAND AREA: 69,750 Square Feet BUILDING DELIVERY DATE: Circa PROPERTY RIGHTS APPRAISED : Fee Simple Estate (84,536 square feet) Leased Fee Interest (13,064 square feet) DATE OF REPORT: December 11, 2013 EFFECTIVE DATE OF VALUE OPINION: July 25, 2013 (selected by the parties-in-interest to avoid the potential of land price increases due to the announcement of a proposed soccer stadium in the District s Southwest quadrant) 1 Throughout the report, the Panel uses the term fee simple estate. The Panel recognizes that Lot 844's property rights are divided; however, future redevelopment of the lot will not interfere with any of the leaseholder s rights, and the existing apartment building s mass (FAR) occupying the air rights has been accounted for in the Panel s determination of FAR for the 84,536 square feet of land owned in fee. 1

7 HIGHEST AND BEST USE: LAND: PROPERTY: EXPOSURE TIME: Plan, design and build residential apartment units with first floor retail uses with a potential gross floor area of 524,000 square feet Raze the structure to provide a clear site for the construction of new residential units with first floor retail Given economic conditions prevailing on or about the appraisal date, the Panel estimate an exposure time of four to six months to place the land under contract, allow a prospective buyer to engage in due diligence and financing efforts, and close on the property VALUE ESTIMATES: ESTIMATED RETROSPECTIVE MARKET VALUE OF THE PROPERTY ASSUMED VACANT AND CLEARED $60,260,000 ($ Per FAR Square Foot) ESTIMATED RETROSPECTIVE MARKET VALUE OF THE PROPERTY AFTER ACCOUNTING FOR BUILDING DEMOLITION CREDIT $55,585,000 ESTIMATED RETROSPECTIVE MARKET VALUE OF THE PROPERTY AFTER ACCOUNTING FOR BUILDING DEMOLITION AND DAVIS BACON WAGE PREMIUMS $46,900,000 ESTIMATED RETROSPECTIVE MARKET VALUE OF THE PROPERTY AFTER ACCOUNTING FOR BUILDING DEMOLITION, DAVIS BACON WAGE PREMIUMS AND FIRST SOURCE LABOR PREMIUMS $37,200,000 PURPOSE PURPOSE, SCOPE AND USE OF THE APPRAISAL The purpose of this appraisal is to estimate the retrospective market value of the property under various scenarios as outlined in the Letter of Transmittal and within this report. At our clients request and to the best of our knowledge, this report conforms with the Uniform Standards of Professional Appraisal Practice, Edition (USPAP) as adopted by the Appraisal Standards Board of the Appraisal Foundation; the Code of Professional Ethics and Standards of Professional Practice of the Appraisal Institute; and the appraisal licensing laws of the District of Columbia. 2

8 SCOPE The scope of this appraisal includes a number of independent investigations and analyses. Some of the most important data sources are listed below. Market Area Description, Residential and Office Market Conditions: Numerous secondary data sources were examined, such as 2010 Census data, the Washington Business Journal, The Washington Post, and Costar Group, Inc.'s office database for the CBD and East End submarkets of the District. In addition, various reports published by government agencies were examined, including the Metropolitan Washington Council of Governments (MWCOG). Attention was paid to publications produced by local and national office leasing firms active in the District. In addition, the MATRIX (MRIS) web site and other related sources were accessed to determine condominium and rental housing market data, trends and conditions on or about the appraisal date. Site and Building Conditions: Inspections of the property s street block, lot and building exterior and interior were completed by two Panel Members (Messrs. Harps and Thorne) on October 18, The third Panel Member, Mr. Chaney, inspected the property on September 12, Cost Approach: The approach was not used as determining all forms of depreciation applicable to a 27-year-old structure would not produce a reliable retrospective market value conclusion. Sales Comparison Approach: Recent sales of land for office and residential uses in the District were obtained from CoStar s database and the District s assessment web site as well as the appraisers office files. The retrieval process typically included reviewing copies of deeds, BZA or Zoning Commission records, and financing and deed instruments on the District s web site, reviewing tax maps, verifying specifics of the sales transactions by contacting parties to the transfers, and inspecting the value-supporting analogues. This approach was used to provide an indication of the retrospective market value of the property. Income Capitalization Approach: Although the approach was considered to test highest and best use theories, we determined that the method was not applicable to the valuation effort. INTENDED USE AND USERS It is our understanding that the intended use of this report is to provide our clients, Messrs. Thomas D. Bridenbaugh, representing the District of Columbia, and Adam Gooch, representing Akridge, with a retrospective market value estimate of the property for a proposed exchange of parcels between the District of Columbia and Akridge. The intended users of this report are our clients. This report may not be relied on for any other purpose or by any other person or firm unrelated to matters concerning the parties who hold the subject asset. Further, the Land Value Panel members and the signatories to this report assume no responsibility or liability to any user of this document other than our clients and their legal counsel. Our clients recognize that the 3

9 signatories to this report (i.e, the Land Value Panel) have had no role in any past or present decisions regarding the acquisition, development, operation or disposition of this property nor the asset to be exchanged in Southwest located in Square 607. SPECIAL ASSUMPTIONS/HYPOTHETICAL CONDITIONS No hypothetical conditions or extraordinary assumptions are used in this report. WORK PERFORMED BY THE LAND VALUE PANEL The work performed for this assignment included the following: Inspect the property land, building, street circulation patterns, access points and micromarket area Consider all relevant market data by culling sales and listings and studying price and rental trends for both residential and office space users Study supply and demand conditions for residential and office space specifically in the 14th Street corridor and also generally in the southern portion of the Uptown sub-market Test various highest and best use scenarios for the continuation of the current use, the adaptive reuse and repositioning of the existing building, or the demolition of the existing structure, all within prevailing market conditions on the effective date of appraisal (i.e., July 25, 2013) Review relevant sections of the District of Columbia Zoning Regulations (DCMR Title 11) to understand development restrictions under the R-5-B and ARTS/CR zoning categories Review the following documents: Comprehensive Facilities Condition Assessment & Space Utilization Survey, produced by Faithful+Gould, Inc., dated October 5, 2009 Zoning Opinion Letter for Square 204, Lot 209, prepared by Goulston & Storrs, dated August 20, 2013 Phase I Environmental Site Assessment, prepared by Advantage Environmental Consultants, LLC, dated September 25, 2013 Lease Agreement for the Rental of Airspace between D.C. Department of Housing and Community Development (Landlord) and Parcel 13 Associates Limited Partnership (Tenant), dated October 8,

10 First Amendment to the Lease Agreement for the Rental of Airspace between the District of Columbia Department of Housing and Community Development (Landlord) and Parcel 13 Associates Limited Partnership (Tenant), dated November 11, 2009 A Title Report prepared by Commonwealth Land and Title Insurance Company, dated August 15, 2013 Various plats prepared by the DC Surveyor s Office Various District of Columbia publications relating to development activity in the vicinity of the property Plats, renderings and three optional land and building re-use studies prepared by R2L: Architects for Akridge, dated September 16, 2013 Several construction and demolition cost estimates prepared by Clark Construction Group, LLC for Akridge Verify land sale comparators through a review of tax records, conversations with individuals familiar with the transactions (when possible), inspections of all comparators, and a review of deeds on the District s web site Develop the single most relevant valuation approach to support our value opinions, i.e., the land sales comparison approach Memorialize the Land Value Panel s findings in this Summary Appraisal Report Excluded from the scope of this assignment are issues outside the range of the appraiser's expertise such as, but not limited to, environmental and subsoil conditions, zoning and easement compliance issues, and other considerations identified in our report. LAND VALUE PANEL S DELIBERATIONS The Panel s Chairman was engaged on October 8, The Panel Members tasks and activities are outlined below: 1) Review the following: the property s features; location within its sub-market; prior history of development activity in the vicinity; all documents provided by our clients (refer to the list above); recent real estate market observations, trends and projections published by various active brokerage firms; the DC Development Report, 2013/2014 edition and 14th and U Streets/MidCity report, published by DC Neighborhood Profiles, 2013 edition; and office files of each Panel Member 2) Panel Members, after considering the above, conversed on issues relative to future trends and feasible uses of the property as presently configured for adaptive re-use for office and residential users or its demolition 5

11 3) Offer analytical studies of three development options relating to those uses that produce the highest value for the asset 4) Compare and test these independent studies produced by each Panel Member within the context of prevailing sub-market conditions on or about the appraisal date 5) Discuss and test all highest and best use alternatives including, but not limited to, the three options proffered by Akridge 6) Develop a consensus as a Panel with regard to the property s highest and best and use 7) After completing the above activities, each Panel Member presented his respective valuesupporting analogues consistent with the best use of the property 8) All sales data were cross-checked and additionally vetted to determine the reliability of the terms and conditions of each sale to be applied in the valuation process 9) The best and most reliable comparators were selected from a larger land sale list 10) A second vetting process evolved targeting those specific land transactions to be used in the analysis 11) After several hours of conference calls relating to the above activities, a consensus was arrived at as to the property s retrospective market value 12) The Panel s Chairman drafted a Summary Appraisal Report that was reviewed and revised by all Panel Members 13) The narrative, supporting data and retrospective market value opinions follow in this Summary Appraisal Report DEFINITIONS OF VALUE AND PROPERTY RIGHTS APPRAISED This appraisal is based on the following definitions relating to market value: "MARKET VALUE" means "the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and acting in what they consider their own best interests; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale." 2 2 Government Printing Office, Federal Register, Vol. 55, No. 165, Rules and Regulations (Washington: Government Printing Office, 1990),

12 The market value estimate reflects the most probable price in terms of financial arrangements equivalent to cash (i.e., market rate, conventional financing). "HIGHEST AND BEST USE" is defined as "the reasonably probable and legal use of vacant land or an improved property that is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity. Alternatively, the probable use of land or improved property - specific with respect to the user and timing of the use - that is adequately supported and results in the highest present value." 3 "FEE SIMPLE ESTATE" is defined as "absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of 4 taxation, eminent domain, police power, and escheat." Fee simple estate is sometimes referred to as "fee simple interest" or "fee simple." "LEASED FEE INTEREST" is defined as "a freehold (ownership interest) where the possessory interest has been granted to another party by creation of a contractual landlord-tenant 5 relationship (i.e., a lease)." "RETROSPECTIVE VALUE OPINION" is "a value opinion effective as of a specified historical date. The term does not define a type of value. Instead, it identifies a value opinion as being effective at some specific prior date. Value as of a historical date is frequently sought in connection with property tax appeals, damage models, lease renegotiation, deficiency judgments, estate tax, and condemnation. Inclusion of the type of value with this term is appropriate, e.g., retrospective market value opinion. 6 "MARKET AREA" means "the area associated with a subject property that contains its direct competition." 7 "AIR RIGHTS" means "the right to undisturbed use and control of designated air space above a specific land area within stated elevations. 8 FLOOR AREA RATIO (FAR) means the relationship between the above-ground floor area of a building, as described by the building code, and the area of the plot on which it 3 th Appraisal Institute, The Dictionary of Real Estate Appraisal, 5 ed. (Chicago: Appraisal Institute, 2010), Ibid, 78. Ibid, 111. Ibid, 171. Ibid, 121. Ibid, 6. 7

13 stands; in planning and zoning, often expressed as a decimal, e.g., a ratio of 2.0 indicates that the permissible floor area of a building is twice the total land area. 9 "CLIENT" is "the party or parties who engage an appraiser (by employment or contract) in a specific assignment." 10 "INTENDED USE" is "the manner in which the intended users expect to employ the information contained in a report." 11 "INTENDED USER" is "the client and any other party as identified, by name or type, as user of the appraisal, appraisal review, or appraisal consulting report, by the appraiser on the basis of communication with the client at the time of the assignment; a party who the appraiser intends will employ the information contained in a report." 12 "EXPOSURE TIME" is "the time a property remains on the market; the estimated length of time the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at market value on the effective date of the appraisal; a retrospective estimate based on an analysis of past events assuming a competitive and open market. 13 "SUMMARY APPRAISAL REPORT" is a written report prepared under Standards Rule 2-2(b) or 8-2(b) of the Uniform Standards of Professional Appraisal Practice ( ed.) ; The essential difference between the Self-Contained Appraisal Report (full narrative report) and the Summary Appraisal Report is the level of detail of presentation. The Summary Appraisal Report should contain a summary of all information significant to the solution of the appraisal problem. "Summarize" is the distinguishing term related to the Summary Appraisal Report. Standards Rule 2-2(b) sets forth the reporting requirements for this type of report. The reader of the Summary Appraisal Report should expect to find all significant data reported in tabular or abbreviated narrative formats Ibid, 82. Ibid, 134; see also The Appraisal Foundation, Uniform Standards of Professional Appraisal Practice, Edition (Washington, D.C.: The Appraisal Foundation, 2011), U Ibid, 102; see also The Appraisal Foundation, Uniform Standards of Professional Appraisal Practice, Edition (Washington, D.C.: The Appraisal Foundation, 2011), U Ibid, ; see also The Appraisal Foundation, Uniform Standards of Professional Appraisal Practice, Edition (Washington, D.C.: The Appraisal Foundation, 2011), U Ibid, Ibid, 190; also The Appraisal Foundation, Uniform Standards of Professional Appraisal Practice, Edition (Washington, D.C.: The Appraisal Foundation, 2011), U-25 through U-27. 8

14 CERTIFICATION OF VALUE We certify that, to the best of our knowledge and belief,... - The statements of fact contained in this report are true and correct. - The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions and are our personal, impartial, and unbiased professional analyses, opinions, and conclusions. - Members of the Land Value Panel have no present or prospective interest in the property that is the subject of this report and no personal interest with respect to the parties involved. - Members of the Land Value Panel have performed no services, as appraisers or in any other capacity, regarding the property that is the subject of this report within the threeyear period immediately preceding acceptance of this assignment. - Members of the Land Value Panel We have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment. - Our engagement in this assignment was not contingent upon developing or reporting predetermined results. - Our compensation for completing this assignment is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal. - Our analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice. - Members of the Land Value Panel have made personal inspections of the property that is the subject of this report. - David M. Kopcynski, Senior Associate of Chaney & Associates, Inc. provided significant real property appraisal assistance to Mark A. Chaney, but not to other persons signing this Certification. - The reported analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the requirements of the Code of Professional Ethics and Standards of Professional Appraisal Practice of the Appraisal Institute. - The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. 9

15 - As of the date of this report, Oakleigh J. Thorne, MAI, CRE; Mark A. Chaney, MAI, MRICS; and Richard R. Harps, MAI, CRE have completed the continuing education program for designated members of the Appraisal Institute. - Disclosure of the contents of this appraisal report is governed by the By-laws and Regulations of the Appraisal Institute. Certified by the Chairman of, LAND VALUE PANEL Oakleigh J. Thorne, MAI, CRE District of Columbia Licensed General Appraiser GA #10140 Certified by, PANEL MEMBER Certified by, PANEL MEMBER Richard R. Harps, MAI, CRE Mark A. Chaney, MAI, MRICS District of Columbia Licensed District of Columbia Licensed General Appraiser GA #10003 General Appraiser GA #

16 ASSUMPTIONS AND LIMITING CONDITIONS This report has been made with the following general assumptions and limiting conditions: 1. This analysis is not to be used in connection with a Real Estate Syndicate(s) or Securities related activity. 2. No responsibility is assumed for the legal description or for matters including legal or title considerations. Title to the property is assumed to be good and marketable unless otherwise stated. We further assume that the subject is not encumbered by the existence of marked or unmarked cemeteries and/or historic resources which would hinder any development process. 3. The property is appraised free and clear of any or all liens or encumbrances unless otherwise stated. 4. The information furnished by others is believed to be reliable and was verified wherever possible. However, no warranty is given for its accuracy. It is assumed that all information known to the client and relative to the valuation has been accurately furnished and that there is no undisclosed information or documents affecting the use of the property or the valuation herein. 5. All engineering information is assumed to be correct. The plot plans and illustrative material in this report are included only to assist the reader in visualizing the property. The Land Value Panel has made no survey of the property and assumes that the existing boundaries are correct and that no encroachments exist. The appraisers assume no responsibility for any condition not readily observable from customary investigation and inspection of the premises which might affect the valuation. Unless specifically noted, it is assumed that any existing improvements on the appraised property are structurally sound, seismically safe and code conforming; that all building systems (mechanical/electrical, HVAC, elevator, plumbing, etc.) are, or will be upon completion, in good working order with no major deferred maintenance or repair required; that the roof and exterior are in good condition; and that the property has been engineered so that the improvements conform to all applicable local, state, and federal building codes and ordinances. The appraisers are not engineers, are not competent to judge matters of an engineering nature, and have not retained independent structural, mechanical, electrical, or civil engineers in connection with this appraisal. Unless stated, no problems were brought to our attention by ownership or management, and no engineering studies were furnished. If questions in these areas are critical to the decision process of the reader, competent engineering consultants should be relied upon. Structural defects and/or building system inadequacies may not be visually detectable, and negative findings reported by engineering consultants could have a substantial negative impact on the conclusions reported in this appraisal. 6. It is assumed that there are no hidden or unapparent conditions of the property or subsoil that render them more or less valuable, including subsurface oil, gas or mineral rights as well as air rights, unless otherwise stated in this report. Moreover, no opinion is expressed as to the value of any such items or whether the property is subject to surface entry for the exploration or removal of subsurface materials. No responsibility is assumed 11

17 for such conditions or for arranging engineering studies that may be required to discover them. The Panel Members are not experts on soil conditions or engineering issues, and our efforts are limited to visual inspection. We suggest our clients seek appropriate professional engineering counsel on all matters pertaining to soil structure and engineering. This report is not to be relied on as an opinion of the conditions of the property or soils, nor should any such representation be made. 7. Unless otherwise stated in this report, the existence of hazardous substances, including without limitation asbestos, polychlorinated biphenyls, petroleum leakage, or agricultural chemicals, which may or may not be present on the property, or other environmental conditions, was not called to our attention nor did we become aware of such during our inspection. We have no knowledge of the existence of such materials on or in the property unless otherwise stated. However, we are not qualified to test such substances or conditions. If the presence of such substances, such as asbestos, urea formaldehyde foam insulation, or other hazardous substances or environmental conditions, may affect the value of the property, the value estimated is predicated on the assumption that there are no conditions on or in the property or in such proximity thereto that they would cause a loss in value. No responsibility is assumed for any such conditions, nor for any expertise or engineering knowledge required to discover them. 8. It is assumed that all applicable zoning and use regulations and restrictions have been complied with, and all easements are enforceable and have been complied with, unless a nonconformity has been stated, defined, and considered in the report. Panel Members are not experts on zoning or easement issues, and our efforts are limited to reporting what we perceive as pertinent existing land use regulations and easements. We advise our clients to seek appropriate legal counsel on all matters pertaining to the status of easement agreements and the compliance of any existing or proposed uses of the subject property with applicable zoning codes. This report is not to be relied on as an opinion of compliance with zoning restrictions or as an opinion regarding the validity of easement agreements nor should any such representation be made. 9. It is assumed that all required licenses, certificates of occupancy, consents, or other legislative or administrative authority from any local, state, or national government or private entity or organization have been or can be obtained or renewed for any use on which the value estimate contained in this report is based. 10. The conclusions expressed in our appraisal report apply only as of the stated date of appraisal, and we assume no responsibility for economic or physical factors occurring at some later date which may affect the opinions stated herein. 11. By reason of the assignment, we are not required to give consultation or testimony, or attend court or any other hearing, with reference to the property unless written contractual arrangements have been previously made relative to such additional employment. 12. Disclosure of the contents of the report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. 13. Our report is prepared so that readers who consider our opinions can evaluate them in terms of the available data and its applications, the methodologies of analyses employed, and our judgments and conclusions. The reader is advised to reach an independent 12

18 conclusion regarding all facts, recognizing that the Panel Members do not possess expertise regarding certain issues. Appropriate experts should be consulted with respect to matters involving specialized knowledge and/or skills, including but not limited to, zoning, ADA and fire safety compliance, engineering and survey issues, and hazardous materials contamination. 14. It is assumed that there is full compliance with all applicable federal, state, and local environmental regulations and laws unless noncompliance is stated, defined and considered in the report. 15. It is assumed that the utilization of the land and improvements is within the boundaries or property lines of the property described and that there is no encroachment or trespass unless noted in the report. 16. The values reported here are valid estimates only under the valuation circumstances described, and the dollar amount of any value opinion rendered was based on the purchasing power of the U.S. dollar and normal financing rates, terms and charges as of the appraisal date. Further, the final estimate of the value is not guaranteed, and no warranty is implied or intended. If the subject property becomes distressed or is auctioned or market conditions change or the property cannot be held until the market for same returns, then the value estimates reported herein are invalid. 17. The distribution, if any, of the total valuation in this report between land and improvements applies only under the specified uses of the property as set forth. 18. The appraiser reserves the right, subject to agreement for time and fee, to make such adjustments to the analyses, opinions and conclusions set forth in this report as may be required by consideration of additional data or more reliable data that may become available. 19. The liability of the Land Value Panel and its Panel Members is limited to our clients only, not subsequent parties or users, and to the amount of the fees actually received by the Panel Members. Further, as previously stated, there is no accountability, obligation or liability to any other party. If this report is placed in the hands of anyone other than our clients, our clients shall make such party aware of all limiting conditions and assumptions of the report and the assignment. The appraisers are in no way to be responsible for any costs incurred to discover or correct any deficiencies of any type present in the property, physically, financially and/or legally. In the event the report is placed in the hands of a third party, it is required that such party be made cognizant of any and all limiting conditions resulting from the basis of the appraisers employment and discussions related thereto as well as those set forth in the report. Acceptance of and/or use of this report by the clients or any third party constitutes acceptance of the above conditions. 13

19 IDENTIFICATION OF THE PROPERTY The property is identified in the District s tax records as Lot 844 in Square 204 (formerly known as Lot 209) located at th Street, N.W., Washington, D.C. The property is found in the northwest corner of the intersection of U and 14th Streets, N.W. Included in Square 204 is an area of 13,064 square feet devoted to air rights and identified by the Assessor s Office as Lot The site is developed with an eight-story and mechanical penthouse office building with first floor retail space and two levels of underground parking constructed in about 1986 and known as Frank D. Reeves Municipal Center (known as the Reeves Center). OWNERSHIP HISTORY There have been no transfers of the subject property within the three years preceding the effective value date of this appraisal. The District of Columbia, has owned the site for over 30 years. In 1986, the District constructed a building of about 308,500 square feet of net rentable area. The Reeves Center office building was built on the eastern side of the site fronting on 14th, U and V Streets. In 1986 a 27,703-square-foot portion of the site was rezoned to R-5-B from C-M-2. Air rights over 13,064 square feet of the land zoned R-5-B (Lot 7000) was leased in October 1986 to Parcel 13 Associates Limited Partnership (Horning Brothers, Inc.) for construction of a 32-unit apartment building. The air rights lease payments are $1.00 per year, paid in advance; the lease expires in October 2085 (99-year lease). The leased area (71 feet along V Street by 184 feet deep) is located in the northwest corner of Lot 844 on the south side of V Street, N.W. There are two permanent surface-grade easements adjacent to this rectangular area which accommodate pedestrian access to the apartment units and offer modest open space. Refer to the addenda for a depiction of the air rights and related easements. In November 1989, the remaining C-M-2 portion of the site was rezoned to ARTS/CR. Reportedly, there have been no transfers of the subject property since 1985, and the property is not on the market at the present time. We are aware that this property may be exchanged for a parcel (Lot 13 in Square 607) owned by Akridge located in the southwest quadrant of the District of Columbia. 14

20 SUB-MARKET AREA DESCRIPTION The market area boundaries include Florida Avenue and the Columbia Heights area to the north, Rhode Island Avenue and Downtown to the south, Florida Avenue, 16th Street and the Dupont Circle area to the west, and Florida Avenue, 7th Street and Howard University to the east. The subject s more narrow geographic sub-area is defined by16th Street to the west, Florida Avenue to the north, 9th Street to the east, and Rhode Island Avenue to the south. The property is located in a new sub-area known as 14th and U Streets/MidCity. When the Reeves Center building was delivered (circa 1986), the market area was known as The Shaw School Urban Renewal Plan or Cardozo/Shaw Planning Area. The arrival of the 40,000-square-foot Whole Foods on the 1400 block of P Street in 2000 spurred the construction of several rental and condominium projects within a few blocks of the supermarket. With this development node firmly established, additional retail and restaurant activity began to spread north along 14th Street toward U Street. This was also a continuation east of the Dupont Circle renovation areas. Likewise, the 890,000-square-foot DC USA Mall (with Target, Bed Bath & Beyond, Best Buy, Staples and Marshalls) at 14th and Irving Streets serves as a development anchor on the far northern end of the 14th Street Corridor. Since 2001, over 3,200 residential units have been built or renovated in the vicinity of the mall, which opened in According to the Washington D.C. Economic Partnership (WDCEP), since 2001 over 4,300 new and renovated apartments have been built in MidCity. However, the recession of 2008 greatly reduced the momentum of redevelopment in MidCity as financing for projects in the pipeline became difficult to secure. In recent years, improvements in the national economy and the strength of the D.C. market revived many stalled plans and spurred a flood of new ones. In the last year, more than 1,200 new condos and rental apartments were completed or started on 14th Street. The table at the top of the following page lists the new projects in the market area depicted in the map to the right. 15

21 The U Street Corridor was the first to emerge in the mid- to late 1990s after Metro's Green Line was completed in After the end of the disruptive construction process, numerous apartment and retail projects were completed near the new Metro station at the intersection of 13th and U Streets. As the area's popularity increased during the 2000s, development began to spread south along 14th Street. Institutional investors have flocked to the District of Columbia for years, but have recently been drawn to the MidCity area. According to CoStar Group, $524.2 million worth of apartment building sales have occurred in the corridor since As an indication of this trend, one of the highest per-unit prices in the District of Columbia s history was paid in March 2013 by JPMorgan Chase. JBG Companies sold the 125-unit The District apartments at 14th and S Streets for $76 million, or $608,000 per unit. A JBG project, The Louis, under construction directly across U Street from the Reeves Building will be completed in early The 268-unit rental property features 43,641 square feet of retail space, including a 15,200-square-foot Trader Joe's, only the second to be located in the District of Columbia. Other retail highlights include 85,000 to 100,000 square feet of retail space planned for the next two years, the 36,000-square-foot Room & Board which opened in 2010, as well as 150 new retail businesses and restaurants that have opened since

22 The pace of apartment development in the District of Columbia has been growing steadily since its recent low point of 1,909 units in A total of 3,910 units were completed in As of August 2013, WDCEP estimated that 4,674 units would be completed in 2013 and that a record 6,347 units were in the pipeline for The most notable projects completed in MidCity in 2013 include the 231-unit Jefferson 14W at 1325 W Street and the 255-unit Capital View at th Street. Most of the near-term projects in the MidCity area are relatively small (fewer than 100 units). Several large properties are still in the planning stage with no determination of total units approved. According to the Bureau of Labor, the D.C. metropolitan economy added 50,600 jobs in the last 12 months (calendar year 2012), while the apartment vacancy rate has remained essentially unchanged. Access to third-party equity sources combined with the need for credit has been difficult for apartment builders, resulting in a drop in future building permit applications and proposed construction starts. Regardless, there are about 10,300 rental apartment units and condominiums presently under construction with deliveries expected in 2014 and Apartment construction, vacancy and net absorption are depicted in the bar graph below. Interest in the 14th Street corridor from investors and builders has surged since the recession s end. As stated, JBG recently built and sold a partially occupied luxury apartment building for $76 million. Recent condominium sales prices are at the high end of the market with average sale prices in the corridor at $538,483 per unit corresponding to about $610 per square foot. OFFICE MARKET CONDITIONS The subject property is located in the lower southeastern corner of the Uptown office market. The market area is generally defined by P and R Streets at the south and by the Potomac River and Western Avenue at the southwest and northwest The northern and eastern boundaries are defined by Eastern Avenue and North Capitol Street, respectively. 17

23

24 The office building inventory in this sub-area is comprised of 19 Class A and B buildings with net rentable areas above 15,000 square feet. Most buildings lie in a geographic concentration along the major corridors of Wisconsin and Connecticut Avenues, and there are no office buildings, other than a few chanceries, located along 16th Street north of P Street. Almost all building clusters are located to the northwest and west of the subject property. The table below depicts the list of buildings matching our criteria by delivery period. The Uptown market area is characterized by a high ratio of owner/user occupied buildings versus spec-built structures. Net space absorption was negative in the last two quarters of Although absorption turned positive in the first two quarters of 2013, the combined result remains negative. As the subject lies east of 15th Street and is about four blocks north of the northern boundary of the East End sub-market, we studied the performance of office building assets in this sub-area. The East End sub-market lies south of the subject between Massachusetts and Pennsylvania Avenues at the north and south, respectively. The western boundary is 15th Street, N.W., and the eastern boundary is formed by 6th Street, N.W. The southern boundary of the Uptown sub-market is co-terminus with the northern boundary of the East End sub-market. We set the building criteria to match a similar scale to an office building at the subject. None of these competing buildings are proximate to the subject, but rather are located about five to six blocks to the south. 18

25 Office product deliveries in the East End sub-area are found in the above table. Buildings delivered in the 20-year period from 1990 to 2010 are laboring under a combined vacancy rate of 13.7%. Almost 2.0 million square feet in the combined relevant sub-markets must be rented prior to building any new additions to the supply. Net office space absorption in the East End was negative in the first two quarters of Although space demand turned positive in the last two quarters of 2012, the pace was not adequate to offset the negative slide at the end of last year. The first quarter of 2013 offered positive results; however, the second quarter s positive absorption was relatively insignificant. We noted that two large law firms vacated space in older product, then downsized and relocated to lower cost sub-markets and buildings. Moreover, the GSA Footprint Freeze published by OMB in March 2013 will have a negative impact on new government leasing activity in all of the peripheral areas, including the subject s immediate area. The construction of a large employment center at U and 14th Streets by the District was a strategic measure to revive the neighborhood after the riots of In the last two decades, the area has experienced the creation of new businesses (stores and restaurants), gentrification of older existing row houses, and the development of new apartments. These positive demographics changed the U and 14th Street corridors into a nightlife destination and a thriving, desirable residential neighborhood. As a consequence of this growth, the Reeves Center is a land use anomaly. The building s appeal to the traditional private sector office market is severely limited. Though the building has successfully served the D.C. government for a long time, its design, age and condition suggest that it is not suitable for large-scale federal tenants. Capital costs needed to retro-fit the structure to GSA-compliant standards would be extensive. Moreover, it is unclear 19

26 that demand even exists for a federal tenant (or tenants) on a large scale (above 200,000 square feet) due to the push for austerity within GSA. OMB s 2013 Footprint Freeze limits expansion of federal agencies to their present footprint. Moreover, there are no private sector tenants to take down about 300,000 square feet of office and retail space at this location. In the absence of a requirement by a large tenant user, the vacant building would enter an oversupplied office market. The table at the right lists only Class A product where absorption has been exceptionally slow. The list ignores newly constructed buildings in both the Northeast and Southeast quadrants of the District. In addition to the list at the right, there are 642,000 square feet of available office space delivered in 2013 with building owners searching for first generation tenants. There are 18 office buildings planned for construction in the two western quadrants of the District between 2014 and These future deliveries total about 5.6 million square feet. According to CoStar, there are seven buildings presently under construction with targeted completion dates in 2014 totaling 2.15 million square feet. These seven buildings have 1.21 million square feet available for lease (56.3%). Ignoring product deliveries scheduled for 2015 through 2017, the current supply of existing and vacant office space is about 2.43 million square feet. Given the subject building s location, age and condition, the structure cannot successfully compete for office tenants even at discounted rents. Access to the transportation network is good with major collector bus routes operating along U and 14th Streets. The U Street-Cardozo Metro station is located one block from the subject at 13th and U Streets. The area s access to Metro and proximity to downtown, affording an easy walk to much of the downtown office core, has benefitted the new medium-density and high-density mixed-use projects being developed along U and 14th Streets, as well as the lower density residential developments along the east-west streets from 16th Street east to 9th Street. It is our opinion that mid- to high-rise residential structures (mostly with ground floor retail) will remain the predominant development activity in the subject s location. Barring any unforeseen changes in the current economic climate, we expect the sub-area s residential growth and demand for housing to continue. 20

27 ZONING The larger area of the subject site is zoned CR and is subject to the ARTS overlay. The northwest corner of the site is zoned R-5-B. The depiction at the right illustrates the square, zoning and leased area devoted to the air rights. The property is split-zoned with 69,743 square feet zoned ARTS/CR and 27,703 square feet zoned R-5-B. Air rights over 13,604 square feet of the R-5-B land are currently leased and improved with an apartment building with a gross floor area of 36,420 square feet (taken from the assessment card). The Comprehensive Plan Generalized Policy Map locates the subject property within the 14th Street mixed-used corridor, a traditional commercial business corridor with a concentration of retail storefronts along the street. Conservation and enhancement of these corridors is desired to foster economic and housing opportunities and to serve neighborhood needs. Any development or redevelopment that occurs should support transit use and enhance the pedestrian environment. The Future Land Use Map designates the subject site for medium-density commercial and residential mixed uses. Any residential development which includes more than 10 units would also be subject to Inclusionary Zoning requiring a certain percentage of affordable units to be built as part of the development. The Inclusionary Zoning also provides for a bonus FAR and increased height and occupancy above what is allowed as a matter of right. Set forth on the following page is a summary of the development potential for the property based on the mixed zoning on the site less the 13,604 square feet of air rights which are not available for development. 21

28 We noted that the above total FAR is moderately different from Akridge s FAR of 523,956 square feet. The difference lies in the amount of building mass attributed to the existing 32-unit apartment building on the air rights platform. Akridge assigns an FAR of 38,400 square feet to the platform. The Land Value Panel is using 36,420 square feet taken from the assessment card. The Panel used an FAR of 524,000 square feet as the potential gross building area for the redevelopment of the subject property. 22

29 SITE DESCRIPTION The subject is located on Lot 844 in Square 204. The site occupies the entire frontage of 14th Street between U and V Streets, N.W. The total land area is 97,600 square feet. The site is rectangular-shaped with about 305 feet of frontage on U and V Streets and 320 feet of frontage along the west side of 14th Street s right-of-way. All of the 14th Street frontage and a section of the V Street frontage are zoned ARTS/CR. The northwest corner of the tract is encumbered by an air rights lease containing 13,064 square feet. The addenda contains a plat illustrating the leased area. There is one curb cut along the north side of U Street for the entrance to the underground parking garage. The site and the Reeves Center building are at grade with the three adjacent public streets. The lot has a moderate southward-facing slope. The large corner site and the building s location in the eastern section of Square 204 enhance the air, light and view amenities. All public services are available and connected to the building, which occupies a high-profile corner location in the popular 14th Street corridor. BUILDING DESCRIPTION The Reeves Center building is an existing concrete and steel, eight-story (western section) and six-story (eastern section) office building containing about 308,500 square feet of net rentable office and retail space with two levels of below-grade parking. It is our understanding that two agencies of the District of Columbia Government occupy the building. First floor retail stores are aligned along the building s eastern elevation facing 14th Street. The structure was delivered for occupancy in circa The building s large six-story open atrium extends from the southern elevation on U Street to near V Street s frontage at the north. During the 1980s, atriums were a popular feature of trophy office buildings. Today, the feature is no longer in vogue as energy costs to heat the open space are found to be expensive, and the lost rental of the open space seriously reduces building efficiency (the ratio of rented space versus total building interior space). The Comprehensive Facilities Condition Assessment & Space Utilization Survey, produced by Faithful+Gould, Inc., noted the necessary capital costs to improve and upgrade all building systems. Significant expenses are required to prolong the building s physical life. Although the building s present configuration and systems are adequate for public occupancy, the structure is not suitable for private sector entities due to its age, location and inefficient design. Morever, we were instructed in performing this appraisal to assume that the District of Columbia would vacate the entire building at sale and that the District would not re-lease any space in the building thereafter. Akridge developed three options for the subject property (discussed in the highest and best use section that follow): Option 1 - By-Right Demolish and Rebuild Multi-family Option 2 - Adaptive Reuse - Residential Option 3 - Reuse Existing Structure - Office 23

30 HIGHEST AND BEST USE Our highest and best use conclusion considers the subject s features, access and zoning along with macro- and micro-market conditions prevailing in the District of Columbia s 14th Street corridor on or about the appraisal date of July 25, As an existing structure occupies the site, we directed our attention to a study of both the land as though vacant and as improved. AS THOUGH VACANT Physically Possible The at-grade street frontage along U, V and 14th Streets offers ample access and visibility. The site is exceptionally large with a surface area of 84,536 square feet (excludes the air rights) available for new construction outside the area devoted to the leased air rights. The site has access to all public services in the adjacent streets. The subject is of adequate size to support any number of uses that do not require a land use larger than about 84,500 square feet. There are no physical impediments to a legally permissible development. Legally Permissible A variety of residential, commercial and mixed uses are legally permitted. Specifically, the property can support a maximum by-right density of 525,936 FAR square feet (applying inclusionary zoning and the ARTS district overlay density bonuses). However, the subject is encumbered by a 72-year air rights lease (years remaining of a 99-year lease) on the northwest corner of the lot comprising 13,064 square feet. Legally, the balance of the subject site can be developed to a maximum of 523,956 square feet of building area (FAR) distributed between residential and commercial (office and retail) and other legally permissible uses. Due to the minor conflict in the FAR allocated to the air rights building, the Panel is using 524,000 FAR square feet to determine the subject s potential building mass. Financially Feasible The U Street Corridor sub-market has undergone significant new residential and retail development over the last four to six years. Development activity has been concentrated along U and 14th Streets. As such, immediate development of the subject lot with residential with ground floor retail appears financially feasible. The Land Value Panel reviewed the potential for an office building at the site. Although legally permissible, an office building is atypical to the sub-market and is isolated from the economic linkages with both the Uptown and East End sub-markets While market conditions are supportive of multi-family development, the delivery pipeline of new apartments scheduled in the District is significant. If construction began on the appraisal date, there is a risk that conditions could deteriorate (oversupply of units) by the time finished product is delivered. 24

31 Maximally Productive The Panel s comprehensive analysis of the subject s land and its market area activity led to the conclusion that development of a multi-family residential structure with a building mass of about 524,000 square feet is the highest and best use. AS IMPROVED Although Akridge s three options are the most plausible, the Panel studied alternative scenarios to retain a retro-fitted and upgraded structure for other mixed uses such as a hotel, call center and/or technical school(s). The Panel tested the financial aspects of Options 2 and 3 proposed by Akridge. Option 2 (adaptive reuse for residential occupancy) requires significant expenditures to upgrade and improve all mechanical, electrical and plumbing systems as well as the exterior facade for all building elevations. The results produce a structure of 287,050 square feet, well below the FAR permitted for a cleared site (524,000 square feet) described in the previous zoning section. Option 3 proposes a reuse of the existing structure for office and first floor retail uses. Several different financial and analytical iterations were tested for the retro-fitting costs to upgrade and improve all building systems. Significant re-configurations of the first floor lobby entrance and several upper floors would be required to satisfy private sector tenants. Due to the Footprint Freeze memorandum, GSA is not considered a likely leasing candidate. Further, the District of Columbia is specifically eliminated as a tenant pursuant to the instructions given to the appraisers herein. The Option s metrics produce an office building with a gross area of 308,500 square feet. Again, the building mass falls well below the site when cleared. The Panel concluded that much larger concerns are the office market overhang, the present high office space vacancy rate in both relevant sub-markets (East End and Uptown), and the building s relatively isolated location. The Panel concluded that private sector tenants are not apt to re-relocate to the Reeves Center due to its isolation from critical and active nodes of development well to the south, north and west of the subject s location. Moreover, the probability of an office tenant prospect requiring 300,000 square feet in the near term is extremely low. This leaves Option 1, i.e., demolish and re-build a multi-family project. The Option must be adaptable, reasonable and probable. The concept of a cleared site with a proposed residential use is: 1) adaptable, as the physical location and lot size are well defined and offer an economical project scale by industry standards; the corner location provides superior air, light and view amenities for residential housing. The adjacent road network and public transportation services are adequate, providing access to employment centers within and outside the District s boundaries. 25

32 2) reasonable, as there are at least 15 new residential development projects proximate to the subject in the 14th Street corridor as of the appraisal date; the Panel determined that a similar residential development at the subject is credible; the Panel noted that major residential builders are active in the market area. 3) probable, as there is a continuing and identifiable demand for residential housing in the 14th Street corridor. After meeting the above three tests for financial feasibility, the Panel opines that the financially feasible use is to clear the site and maximize the land s value by constructing a new building for housing units with the first floor devoted to retail stores to capture pedestrian traffic along 14th Street. The Land Value Panel has been instructed (Valuation Instructions 1(c.)) to assume that the District of Columbia and all retail tenants vacate the structure. As discussed herein, the subject's existing building is about 27 years old with a number of substandard mechanical and electrical systems which require significant upgrades to maintain efficient operations. There are also a number of incurable obsolete features such as the atrium, large hallway on the first floor, and inefficient upper floor space configurations. In conclusion, the Panel finds the structure to be an encumbrance to the feasible redevelopment of the land. Demolition of the structure is recommended. VALUATION METHODOLOGY The highest and best use of the property is to demolish the existing structure and redevelop the site with a residential project with first floor retail. The subject is valued as if vacant and cleared land consistent with the sales comparison approach. Said approach is the only method used in this analysis as it is judged to offer more reliable evidence than the other approaches to value and is more apt to be used by purchasers to determine a land price for new residential construction. We reviewed the possible use of a land residual method but deemed it a corroborative measure only. LAND SALE COMPARISON APPROACH Recent sales of land suitable for new residential construction were obtained from the District s tax records and CoStar s database. As a result of our investigation, we obtained information on four transactions summarized in the table on the following page. The selected land value supporting analogues occurred between July 2011and May A sale location map follows the adjustment table, and the land sale plats are found in the addenda. 26

33 27

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35 ANALYSIS OF COMPARABLE SALES The four comparators were selected from the Panel s database of land sales intended for new residential construction. The unadjusted prices range from about $55.00 to $ per FAR foot. Adjustments reflecting market reaction to those items of significant variance in the subject as compared to each analogue must be taken into consideration. In our analysis, a positive (or upward) adjustment was made for those elements of comparison noted for the analogues which we considered to be inferior to the subject, and a negative (or downward) adjustment was made for the opposite relationship. The Appraisal Institute s 14th Edition of The Appraisal of Real Estate suggests that when a quantitative approach may not be reliable, a qualitative and sale ranking method is recommended. We opined that numerical adjustment factors, especially related to the physical comparative adjustments, cannot be supported using paired sales. Accordingly, the adjustment chart illustrates a relative comparison and ranking analysis using a qualitative method with respect to the physical characteristics of the subject and the sales. Where possible, and when necessary, we applied a mathematical analysis to property rights, financing, conditions of sale and market condition adjustments. The factors considered of greatest impact upon value are property rights, financing, conditions of sale and market conditions (time). Three categories of site-specific adjustments were used in the comparison: # Location (sub-market appeal, corner or mid-block profile, and favorable economic linkages to employment centers) # Project Scale (issue of scale economics - larger projects have longer absorption rates and higher carrying costs when compared to smaller projects; generally, but not always, larger tracts tend to sell at lower unit prices when compared to unit prices paid for smaller tracts) # Features (e.g., shape, frontage, corner versus mid-block, access and development impediments, if any) Property Rights Conveyed Adjustments for interests conveyed are required in situations where the subject and sale properties have variable rights transferred. The property rights in the subject and the sales are identical for Sales One and Two; both are fee simple interests. Sale Three was considered moderately inferior to the subject as an easement for a Metro tunnel crosses the site along the Florida Avenue frontage, with the upper elevation of the easement only 15 to 20 feet below the grade surface. The presence of the easement and tunnel increases super-structure construction costs and reduces below-grade parking capacity. Moreover, WMATA has the right to review plans before any new construction is approved on the affected parcel. These encumbrances are contrary to the concept of fee simple rights. 28

36 Sale Four included a section of leased land whereby the buyer does not own fee simple rights to the total parcel acquired. A limited adjustment was applied to the sale. Financing Terms Adjustments for non-market financing arrangements, estimated by using cashequivalency calculations, are applied to any sale transactions with unusual or seller-provided financing to make them comparable to typical or market equivalent transactions. In this analysis, no adjustments were required as all of the sales involved cash transactions. Conditions of Sale An adjustment for conditions of sale is needed to reflect the motivations of buyers and sellers in sales that are not arms-length transactions. Various conditions may exist in these sales including a relationship between the parties, inadequate market exposure, financial and/or physical constraints, and location and/or legal considerations that influence the price or timing of the sale. The sales were reported to be arms-length transactions with no special conditions. However, Sale One was deemed inferior to the subject as the land transfer included an existing historic-designated structure. The retention of the building is considered a liability as planning, design and restoration expenses are higher than for a typical cleared site. Market Conditions The comparable sales transferred between July 2011 and May All four sales transferred after the economic trough of 2008 and The Panel found no successive transfers of vacant residential land of the same size to determine a data point to measure a land price increase. Accordingly, the Panel relied on a mid-point and conservative increase in land prices well below the performance of increases in condo pricing. GCAAR reports condo and co-op price increases from 2012 to year-to-date 2013 of over 23.0%. Finished product price increases impact, albeit not directly, the feasible price to be paid for land. The Panel s Chairman completed an independent study using MRIS s transactional database and determined that condo pricing has increased about 12.2% annually from 2010 to the appraisal date. An annual time adjustment of 7.0% was used by the Panel. The adjustment to the four sales ranges from 1.5% for the most recent sale to 14.5% for the oldest sale in July of PHYSICAL ADJUSTMENTS Location - The two sales located in the 14th Street corridor (Sales One and Four) were deemed about equal to the subject s prime location at 14th and U Streets. Sale Two s location at 200 K Street, N.E., was deemed to be significantly inferior to the subject s location. Sale Three also was deemed to have an inferior location when compared to the subject. Project Scale - We found only limited market evidence to support a scale adjustment for the differences in building mass between the subject and the sales. 29

37 Generally, larger scale buildings are more efficient in the distribution of fixed costs, and some variable expenses may be lower on a unit basis for larger assets. However, larger scale projects have longer construction and absorption periods. Both contribute to additional risk due to possible market condition changes during construction and absorption. Unsold or non-rented inventory adds to higher carrying costs. All sales except Sale Two were adjusted for this factor. Site Features - The subject parcel offers superior air, light and view amenities with frontage on three public streets when compared to most of the sales. The shape and size of the parcel offer efficient floor plates as well as design opportunities for entrance lobbies and public areas. Moreover, the size permits storage of delivered building materials on the parcel unlike all of the four smaller sales. As a result, all four sales were considered inferior to the subject. RANKING SALE PRICE INDICATIONS The Panel concluded that Sales Two and Three are inferior to the subject. Sales One and Four, both located in the same corridor as the subject, are ranked superior to the subject s possible value range. After reviewing the qualitative process, the Panel placed most emphasis for its value opinion on Sales One, Three and Four. Moderate weight was applied to the results obtained from Sale Two. Accordingly, the estimated value of the subject s fee simple estate and assumed vacant and unimproved, is $ per FAR foot or $60.26 million. ESTIMATED VALUE USING THE SALES COMPARISON APPROACH $60,260,000 RECONCILIATION AND FINAL VALUE ESTIMATE The sales comparison approach is the single most appropriate method to appraise the as if vacant cleared subject parcel. Land Sales Comparison Approach $60,260,000 Although other land valuation methods are available to support an indication of the site s market value, we opined that the sales comparison approach offers the best and most persuasive evidence. Moreover, three of the four analogues are largely comparable to the subject s assumed features and location on the appraisal date. Based upon a consensus of the Land Value Panel members, the estimated retrospective market value of the fee simple estate in the subject land (assumed vacant, cleared and approved for 524,000 FAR square feet of mostly residential space), as of the effective appraisal date of July 25, 2013, was $60,260,

38 Our clients requested that the Land Value Panel account for the impact of demolition expenses and labor premiums on the above value opinion. Demolition Expense The Panel opined that demolition and rebuilding maximize the site s value. Akridge provided a demolition and removal expense prepared by Clark of $5.3 million. The Panel applied a demolition cost of $5.0 million. The Panel determined that each of the residential comparators were encumbered by site preparation costs some of which were estimated and in other cases were unknown. The Panel moderately adjusted the demolition expense downward to account for comparability between the land sales and subject site. To avoid double counting for the wage premiums, to be accounted for later, we reduced the amount by another $325,000 producing a net demolition expense of $4.675 million. Therefore, after accounting for the building demolition credit, it is the consensus of the Land Value Panel that the estimated retrospective market value of the fee simple estate in the subject property, in its as is condition, as of the effective appraisal date of July 25, 2013, was: $55,585,000. REQUESTED ADJUSTMENTS TO MARKET VALUE The above market value estimate completes the valuation process. However, the partiesin-interest requested in their Valuation Instructions ( 5 b.) that the Panel take into account any additional obligations that the Exchange Agreement imposes upon the development of Reeves. The Instructions note that Davis-Bacon wage rates are to be considered. The Panel concluded that First Source premiums are an additional obligation. Labor Premium Adjustments We made independent investigations as to the effect of labor premiums on building construction costs and the corresponding impact on land values. Conversations were opened with builders and contractors active in the District. The Panel determined that a range for the two combined requirements of Davis Bacon wage rates (affects City-owned assets only) and First Source labor was between 12.0% and 18.0%. The individual amounts vary and are influenced by construction type (residential versus office). We learned that these two requirements can also be project specific. The combined total, provided by our clients, is 16.5%. This was allocated as follows: Davis Bacon at 7.8% and First Source at 8.7%. Given Akridge s development plan and the data provided by our clients, the Panel determined these additional costs fall inside the range found from our independent research. The rates are applied to the latest construction cost budget prepared by Clark (dated November 6, 2013) that totals $111,282,000. (Refer to the addenda for a recently prepared construction budget, dated November 6, 2013.) 31

39 As of the appraisal date, it is the understanding of the Panel that Davis Bacon wage premiums are required by the Department of Labor. Depending upon the outcome of litigation between the District of Columbia and the Department of Labor, the expense of Davis Bacon wages could, in the future, be moot. Regardless, the impact of Davis Bacon is $8,679,996, rounded to $8,680,000 ($111,282,000 times 7.8%). The measured impact of Davis Bacon wages produces a land value of $46,905,000, rounded to $46,900,000. The impact of First Source is $9,681,534, rounded to $9,682,000 ($111,282,000 times 8.7%). The measured impact of First Source requirements reduces the land s value to $37,218,000, rounded to $37,200,000. Therefore, after accounting for a building demolition credit prepared by Clark, it is the consensus of the Land Value Panel that the estimated retrospective market value of the fee simple estate in the subject property in its as is condition was $55,585,000. The estimated retrospective market value of the property encumbered by the two labor premiums, as of the effective appraisal date of July 25, 2013, was $37,200,000. MARKET VALUE AS IS FIFTY-FIVE MILLION FIVE HUNDRED EIGHTY-FIVE THOUSAND DOLLARS ($55,585,000) and MARKET VALUE AS IS ENCUMBERED BY TWO LABOR PREMIUMS THIRTY-SEVEN MILLION TWO HUNDRED THOUSAND DOLLARS ($37,200,000). EXPOSURE TIME Given current economic conditions prevailing in the District of Columbia on or about the appraisal date, we estimate an exposure time of four to six months to place the assets under contract, allow a prospective buyer to engage in due diligence and financing efforts, and close on the property. 32

40 ADDENDA

41 EXHIBIT A LAND VALUE PANEL INSTRUCTIONS

42 Valuation Instructions 1. General a. Each Appraiser will estimate the fair market value of both Reeves and SW Land in accordance with current USPAP standards, subject to the modifications and supplements set forth in these Valuation Instructions. b. The value of the SW Land will be as of the date immediately preceding the announcement of the soccer stadium deal on July 25, 2013, such that any increase in value associated with such announcement will not be included in the valuation. The value of Reeves will be as of the same date. c. Reeves will be valued both (i) assuming that the existing improvements remain in place but without any of the current tenants (i.e. as an empty building and assuming that the District of Columbia will not be a tenant in the building), and (ii) assuming that the Existing improvements will be demolished as part of the future development of the site (i.e., it is treated as raw land net of the estimated cost of demolition and any extraordinary development costs imposed by the District above by-right requirements, as more fully described below, as well as any other encumbrance, easements or impositions affecting the property). The higher of such valuations shall be the value of Reeves. d. Each Appraiser will make available to the other Appraisers all data referenced in his appraisal report or on which his appraisal is based. e. Each Appraiser will use a sales analysis, along with a grid and/or a detailed adjustment process. Each Appraiser will also use a land residual analysis. f. Any explanation/clarification provided by the District and/or Akridge to any Appraiser, and any response by the District and/or Akridge to any inquiry from any Appraiser, with respect to the SW Land and/or Reeves shall be provided to all Appraisers. 2. Physical Site Conditions Affecting Value a. The District and Akridge will jointly instruct the Appraisers as to the amount to be deducted from the value of each site to reflect the estimated cost of remediating adverse physical conditions ( Physical Conditions ). b. Physical Conditions will include, without limitation, the following: i. Known or suspected environmental contamination, including contaminated soils and asbestos, lead based paint and pcbs in improvements v2

43 ii. Extraordinary geotechnical conditions (e.g., rock, water or unsuitable soils). iii. Demolition of existing improvements (except as set forth in 1c above in the case of Reeves). In the case of Reeves, the scope of demolition will consist of demolition of all above and below grade improvements and offsite disposal of all debris. In the case of SW Land, the scope of demolition will consist of demolition and off-site disposal of all above grade structures and debris. iv. In the case of Reeves, the additional cost associated with providing structural support for, and developing around, ground leased improvements to remain (i.e. the building located at the north west corner).. 3. Development Potential and Constraints 4. Leases a. In the case of Reeves, the District and Akridge will provide the Appraisers with the preliminary density analysis of Reeves. The Appraisers, however, shall not be required to utilize the density calculations in their analysis and shall consider such information as they deem appropriate in their professional judgment. b. In the case of Reeves, the Appraisers will take into account (i) the requirements of the Greater U Street Historic District and the need for HPRB approval, and (ii) the arts use requirements imposed by the Uptown Arts Overlay District. c. The Appraisers will not assume the availability of any planned unit development, rezoning or other discretionary entitlements, other than HPRB approval of Reeves as described above. a. In the case of Reeves, the Appraisers will reflect the development, construction and operational impacts of the airspace lease agreement with an affiliate of Horning Brothers. b. In the case of SW Land, the Appraisers will adjust the value of SW Land to reflect the lease revenues under the NPS Lease. Since the NPS Lease is monthto-month, no other impact of the NPS Lease will be considered. 5. Title and Other Legal a. The Appraisers will take into account any title encumbrances that will survive closing on the Land Swap and that impact land value. The District and Akridge will provide to the Appraisers title information that indicates encumbrances that will survive closing v2

44 b. In the case of Reeves, the Appraisers will take into account the obligations that arise in connection with the development of property acquired from the District generally. In addition, in the case of Reeves, the Appraisers will take into account any additional obligations that the exchange agreement imposes upon the development of Reeves. In light of the CityCenter decision, assume that Davis- Bacon will apply to the development of Reeves. 6. Independent Appraiser and Value Conclusion a. The Appraiser appointed by the District and the Appraiser appointed by Akridge shall select a third Appraiser ( Independent Appraiser ), and the Independent Appraiser shall be approved by the District and Akridge. The engagement letter for the Independent Appraiser shall be subject to the approval of the District and Akridge. b. The Appraiser appointed by the District, the Appraiser appointed by Akridge, and the Independent Appraiser shall constitute the Land Value Panel, and the Independent Appraiser shall serve as the chairman of the Land Value Panel. c. Each of the three Appraisers will independently perform an estimate of the fair market value of both Reeves and SW Land in accordance with these instructions. Upon completion by each of the three Appraisers of their respective reports, the reports will be simultaneously exchanged electronically among the Appraisers. d. Within one week following the exchange of the appraisal reports, the three Appraisers shall meet (by phone or in person). The three Appraisers shall continue to meet (by phone or in person) as often as necessary until they have arrived at a tentative final decision as to the value of SW Land and Reeves. e. During the three business day period following the tentative final decision, the Appraisers appointed by Akridge and the District may confer with their respective clients. Thereafter, the three Appraisers will arrive at a final decision and issue a written report, executed by all three Appraisers, confirming their final decision. f. The three Appraisers shall endeavor to make decisions by consensus. However, if they are unable to achieve consensus, then the decision of a majority of the Appraisers shall constitute the decision of the Land Value Panel. g. It is contemplated that the appraisers may, from time to time, request data and information regarding Reeves and SW Land. The parties may respond to such requests but shall provide copies of such responses and information to the other party and all three appraisers. The third Appraiser may confer with Akridge and the District jointly, but not separately. h. The Land Value Panel shall submit its report of the estimate of value of each of the Properties to the District and Akridge under cover of a joint letter signed by all three Appraisers. The Land Value Panel shall use best efforts to issue its report no later than October 25, v2

45 EXHIBIT B DC SURVEYOR S OFFICE PLAT

46

47 EXHIBIT C LEASED LAND AREA SCHEMATIC

48

49 EXHIBIT D AKRIDGE ESTIMATE SUMMARY OF CONSTRUCTION COST

50 Akridge 14th & U Street (Reeve's Center) Option 1 - New Structure Washington, DC Page 1 Estimate Summary of Construction Cost November 6, 2013 Based on Current Pricing Existing Below Below Grade Grade Demolition Budget Sitework Parking Parking Retail Shell Residential Total Building Demolition $3,513,000 $176,000 $3,689,000 Sitework $250,000 $2,066,000 $2,316,000 Building Excavation $310,000 $251,000 $561,000 Support of Excavation $325,000 $1,211,000 $1,536,000 Structure $4,851,000 $810,000 $14,553,000 $20,214,000 Exterior Skin Envelope $1,423,000 $12,824,000 $14,247,000 Exterior Soffits $19,000 $19,000 Roofing & Waterproofing $601,000 $85,000 $28,000 $1,903,000 $2,617,000 General Building Finishes $1,089,000 $26,000 $200,000 $5,413,000 $6,728,000 Residential Unit Finishes $11,762,000 $11,762,000 Residential Unit Equipment $4,896,000 $4,896,000 Special Equipment $50,000 $209,000 $259,000 Vertical Transportation $335,000 $1,705,000 $2,040,000 Mechanical System $99,000 $895,000 $599,000 $16,819,000 $18,412,000 Electrical System $81,000 $689,000 $486,000 $9,344,000 $10,600,000 Builder's Risk Insurance $11,000 $5,000 $23,000 $8,000 $185,000 $232,000 General Liability Insurance $34,000 $17,000 $73,000 $26,000 $585,000 $735,000 General Condtions & Fees $511,000 $234,000 $1,037,000 $369,000 $8,268,000 $10,419,000 Construction Budget $5,134,000 $2,498,000 $11,105,000 $111,000 $3,949,000 $88,485,000 $111,282,000 Premium for First Source Allowance $150,000 $225,000 $999,000 $10,000 $355,000 $7,964,000 $9,703,000 Premium for 35% CBE $0 $0 $0 $0 $0 $0 $0 Premium for Davis Bacon $175,000 $200,000 $888,000 $9,000 $316,000 $7,079,000 $8,667,000 Premium Totals $325,000 $425,000 $1,887,000 $19,000 $671,000 $15,043,000 $18,370,000 Subtotal with Premium $5,459,000 $2,923,000 $12,992,000 $130,000 $4,620,000 $103,528,000 $129,652,000 Suggested Pricing Contingency $245,000 $88,000 $390,000 $4,000 $139,000 $3,106,000 $3,972,000 Total with Contingency $5,704,000 $3,011,000 $13,382,000 $134,000 $4,759,000 $106,634,000 $133,624,000 Cost per SF $18.76 /sf $28.43 /sf $77.71 /sf $4.56 /sf $ /sf $ /sf $ /sf Gross Area (SF) 304,000 sf 105,900 sf 172,200 sf 29,400 sf 32,400 sf 499,600 sf 733,600 sf Cost per Unit $196,018 /unit $245,632 /unit Number of Units 544 units 544 units Cost per Parking Space $38,234 /space $1,914 /space Number of Parking Spaces 350 spaces 70 spaces Alternates 1) Provide Mat Slab ILO Spread Footings add $5,328,000

51 Reeves Center Property Construction Wage Premium Summary for DC Land Dispositions Based on Estimate Summary of Construction Costs - Clark Construction: 10/30/13 Date: November 4, 2013 Development on Privately Acquired Land Development on City Disposed Land CONSTRUCTION BUDGET - CONTRACTOR COSTS ONLY $ 111,282,000 $ 111,282,000 Wage Related Premiums (source: Clark Construction) Premium for First Source Allowance 0.0% $ - 8.7% $ 9,703,000 Premium for CBE 0.0% - 0.0% - Premium for Davis Bacon 0.0% - 7.8% 8,667,000 Subtotal $ % $ 18,370,000 Subtotal with Premiums $ 111,282,000 $ 129,652,000 Suggested Price Contingency 3.49% of Hard Costs $ 3,883,000 $ 3,883,000 Total with Contingency $ 115,165, % $ 133,535,000 ADDITIONAL DEVELOPMENT COSTS IMPACTED BY INCREASED HARD COSTS Hard Cost Multipliers % of Hard Costs Cost % of Hard Costs Premium ($) G/C Bond 0.75% of Hard Costs 0.75% $ 834, % $ 137,775 Developer Change Order Contingency 5.00% of Hard Costs 5.00% 5,564, % 918,500 Soft Costs Multipliers 5.8% $ 6,398, % $ 1,056,275 Design Fees 2.50% of Hard Costs 2.50% $ 2,782, % $ 459,250 Builder's Risk Insurance 0.20% of Hard Costs 0.20% 222, % 36,740 Development Fee 4.00% of Hard Costs 4.00% 4,451, % 734,800 Recordation Tax on Construction Loan LTCR of 65% 1.45% of Const. Loan 0.94% 1,048, % 173,137 Financing Fee 1.00% of Const. Loan 0.65% 723, % 119,405 Interest Carry - Rate 6.00% Interest Rate 3.90% 4,339, % 716,430 Subtotal 12.2% $ 13,568, % $ 2,239,762 Total Multipliers 17.9% $ 19,966, % $ 3,296,037 Wage Premiums on Construction Costs Only 0.0% $ % $ 18,370,000 Total Additional Multipliers When Included in Development Budget 17.9% $ 19,966, % $ 3,296,037 TOTAL EST. COST BURDEN FOR DEVELOPMENT ON CITY ACQUIRED LAND 0% $ % $ 21,666,037

52 EXHIBIT E APARTMENT LAND SALE PLATS

53 th Sale Street, NW Sale K Street, NE

54 Sale Florida Avenue, NW th Sale to Street, NW

55 EXHIBIT F SUBJECT PHOTOGRAPHS

56 Elevations From the Corner of 14th & U Streets Building Elevation From 14th & V Streets 14th Street Looking North From U Street V Street Frontage Looking Toward 14th Street

57 14th Street Frontage Looking South From V Street Interior Hallway Looking Toward V Street V Street Frontage From 14th Street Atrium Looking Toward V Street

58 Typical Office Configuration Typical Hallway at the West Side of the Atrium