SUBMITTED BY: PRACTICUM ADVISOR: H. Michael Schwartzman

Transcription

1 SUBMITTED BY: Jason Klippel Johns Hopkins University - SPSBE Edward St. John Department of Real Estate Course , Practicum in Residential Real Estate Term: Fall 2007 PRACTICUM ADVISOR: H. Michael Schwartzman

2 KENSINGTON TOWN SQUARE TABLE OF CONTENTS I. Executive Summary 3 II. Site and Current Use 6 III. Development Potential 9 IV. Kensington Town Square Development Program 4 V. Development Team 6 VI. Stabilization / Valuation / Investment Strategy 9 VII. Geographical Reference / Photography 25 VIII. Market Analysis 33 IX. Building Design 42 X. Development Schedule 5 XI. Financial Projects / Development Budget 55 XII. Appendix: Tax Records 68 Bibliography 74 Page 2 of 75 4/29/2008

3 I. EXECUTIVE SUMMARY Kensington Town Square is a proposed mixed-use development in Kensington, Maryland, which is located in Montgomery County approximately 4.2 miles North West of Washington, DC. The development will include 280 residential units with 5,777 net leaseable square feet of ground floor retail and two levels of below grade parking. The project site is well located in an established neighborhood on Connecticut Avenue in the south part of the Kensington commercial district. Historically, Kensington was defined as a rural community until the late 800s when the B & O Railroad brought a rail station to the area that increased commerce in this community. Even today, the town is still marked by small scale development because of the northwest branch of the Metro redline passes by Kensington to the west. Kensington Town Square will be the first development of its kind in this market and it will help redefine Kensington by bringing a class A residential building to the community. The proposed street retail will attract higher quality retailers that will activate the community, thereby creating a destination. The proposed development requires the assemblage of five (5) parcels bordered by Connecticut Avenue, Knowles Avenue, Detrich Avenue and Howard Avenue (Reference Exhibit #, Shown Below). Four of the five parcels are currently owned by one land owner, RSJ I LLC, while the remaining parcel is owned by the Exxon Corporation. In lieu of acquiring all of the parcels, the business plan is to partner with the existing land owner RSJ I LLC and acquire the parcel owned by Exxon Corporation. The development would be pursued by a partnership between the RSJ I LLC, an institutional equity investor and the developer. The benefit of partnering with the existing landholder is two fold: first, zoning risk is limited during the entitlement phase as there would otherwise be a large capital investment required to acquire the land, and second, the financial return is improved because the required investment capital occurs more slowly along the development timeline. Exhibit # Exhibit #2 Subject Area Detrick Avenue Adjacent Uses: Retail / Commercial / Light Industrial B&O Railroad Exxon Mobile SUBJECT SITE Connecticut Avenue Adjacent Uses: Retail (Safeway and Shell Gas Station) Vicinity Map Knowles Avenue Adjacent Use: Office Local Aerial The above exhibits identify the site s vicinity location as well as a local aerial. The site is located on Connecticut Avenue in Montgomery County, Maryland North of Washington, DC by 4.2 miles. Page 3 of 75 4/29/2008

4 The development is projected to cost $89.2 M and it will require approximately 6.5 years in order to stabilize the property, at which time the business plan is the sell the asset. Below in Table #, the sources and uses for the project are shown, including Acquisition Costs, Hard Costs, Soft Costs and Financing Costs: TABLE # TOTAL SOURCES AND USES (In 000's) Uses Sources % of Total Acquisition Costs $ 6,64 7 % Developer Equity $ 4,04 5 % Hard Costs $ 6,56 69 % Institutional Equity $ 22, % Soft Costs $ 0,740 2 % Construction Loan $ 62, % Financing Costs $ 0,280 2 % Total Uses $ 89,95 00% Total Sources $ 89,95 00% The project equity capital will comprise 30% of total project costs. It will be provided by the institutional equity partner and the developer based on an 85/5 contribution, respectively. The developer will form a partnership with the existing landowner. The developer will provide expertise in project execution and an equity contribution and the land owner will contribute land as their equity without funding development costs. After all of the equity has been invested, construction financing (70% of total project costs) will fund the remainder of the development costs through stabilization, including an interest reserve. The development will require Project Plan and Detailed Site Plan approval by the Maryland National Capital Parking and Planning Commission (MNCPPC) Staff and the Montgomery County Planning Board. The proposed construction is low-rise, four-story stick over a concrete podium for ground floor retail and two levels of poured-in-place below grade parking. The residential component will meet current zoning guidelines that include Workforce Housing (0% of Units) and Moderately Priced Dwelling Units (MPDUs) (5% of Units) which will result in bonus density. The demographic make-up within a three mile radius surrounding the site includes a population of 58,624 in 65,304 households. The median age of the subject population is 38 years old and is comprised of 47.6% male to 52.4% female. Over a five year period from 2007 to 202, the population and the number of households is projected to grow by 2,294 (.45%) and 2,758 (4.22%), respectively. Within the subject area, 4.76% of the households are occupied by one person, while the average size of households across the three mile radius is 2.38 people. The percentage of rental housing is 36% in the subject area. The total household income is $6.3 Billion in the subject area with an average household income of $97,364 compared to Montgomery County s average household income of $9,64. The total retail sales for the three mile radius including food services are $3,422,296 identifying a strong market place for retailers. In 2005, the Base Realignment and Closure (BRAC) for the armed forces recommended integrating the Walter Reed Medical Center with the National Naval Medical Center located in Bethesda, MD. The realignment mandated that the facilities will merge in 20 and Kensington would be a logical choice for these additional workers to take residence. Since the subject property is located only 2.2 miles from Naval Medical Center and one of the closest affordable apartment communities in comparison to alternatives such as Bethesda, it is a natural housing choice for individuals that work at the National Naval Medical Center. Page 4 of 75 4/29/2008

5 The goal of Kensington Town Square is to capitalize on a market desperately in need of new product that will help define the Town of Kensington as a destination. The selected site will be the first of class A development in the Kensington sub-market. From a land use prospective, the development will transform the current land owner s improvement from single story obsolete retail to a class A mixed-use community, which is the highest and best use for the subject property based on current zoning. The market rents are projected to range from $2.50 per net rentable square foot for market rate units to $2.65 for premium units. Rents for the MPDU and Work Force Housing are set in accordance with the Montgomery County Guidelines for median income and gross take home pay. Financially, the project is anticipated to provide a 20% IRR and a 2.0 multiple on total invested capital, thus providing an adequate return to all partners (Institutional Equity, Land Owner and Developer). Therefore, it is recommended that this development be pursued as proposed. Page 5 of 75 4/29/2008

6 II. SITE AND CURRENT USE Site Description The site is location on Connecticut Avenue (Rt. 85), which is a major artery connector between Montgomery County and Washington and has direct access to the Capital Beltway I-495 / I-95. Connecticut Avenue is a 4 miles stretch that connects Aspen Hill, Maryland to Washington, DC passing through Kensington and Chevy Chase, Maryland. Connecticut is a primarily a six (6) lane artery with limited areas where the roadway reduces to four (4) lanes at the north in Aspen Hill and select areas of Washington, DC. Exhibit #3: Aerial Map B&O Railroad Detrick Avenue Adjacent Uses: Retail / Commercial / Light Industrial Exxon Mobile SUBJECT SITE Connecticut Avenue Adjacent Uses: Retail (Safeway and Shell Gas Station) Knowles Avenue Adjacent Use: Office Kensington Town Square (KTS) will be located in the town of Kensington, Maryland, which is located in Montgomery County. The site is bordered by Connecticut Avenue on the east, Knowles Avenue on the South, Detrich Avenue on the West and Howard Avenue on the North. The site area comprises the entire block. Exhibit #3 above identifies KTS as the subject area and the adjacent, existing uses. Page 6 of 75 4/29/2008

7 Exhibit #4 identifies the individual parcels (P48, A-, A-2, B and C) including information with regard to the current ownership, property area, tax value and the zoning information: Exhibit #4 Parcel B RSJ I LLC ET AL 22,653 SF Tax Value (07/0/2008): $907,866 Zoning: C-2 Land Assemblage Kensington, MD Parcel C Exxon Corporation 4,945 SF Tax Value (07/0/2008): $,80,932 Zoning: C-2 Parcel A- RSJ I LLC ET AL 8,082 SF Tax Value (07/0/2008): $842,866 Zoning: C-2 Parcel P48 RSJ I LLC ET AL 62,544 SF Tax Value (07/0/2008): $3,382,500 Zoning: C-2 SITE AREA Parcel P48, A-, A-2, B, C 38,03 SF Total Tax Value (07/0/2008): $8,356,996 The total area of the site is 38,03 square feet or 3.7 acres as shown in Table #2 below. Street frontages are noted below in Table #3. The street frontage along Connecticut Avenue provides significant visibility because it is a major artery in Montgomery County for north-south travel. TABLE #2 TABLE #3 Lot Area Street Frontage PARCEL 48 62,544 SF Connecticut Avenue (E) 398 PARCEL A-2 29,807 SF Howard Avenue (N) 255 PARCEL B 22,653 SF Detrick Street (W) 474 PARCEL A- 8,082 SF Knowles Avenue (S) 378 PARCEL C TOTAL 4,945 SF 38,03 SF The existing uses of the parcels are single story retail with structures that have received limited capital improvements over the past of 20 years. Multiple tenants occupy four structures on the site. The following is a list of the current tenants: Page 7 of 75 4/29/2008

8 Hardware City 7- Continental Subs and Pizza Sound Works Safeway Pharmacy Rosita s Bakery Wachovia Neet n Kleen cleaners Kensington Caboose (Consignment Shop) Hong Kong Chinese Restaurant Kensington Day Spa and Nails International Hair Spa Curves Dr. Barry Ephraim Optometrist H & R Block Exxon Gasoline Station Adjacent Uses (Reference Exhibit #2, Shown Below) North: Across Howard Avenue is the Baltimore and Ohio Railroad Company where the tracks sit at an approximate elevation 40 feet below the site. The train tracks are active today with the MARC train and other material transport rails. The Kensington Station is on the Brunswick Line of the MARC Train which provides access from Martinsburg, West Virginia and Frederick, Maryland to Union Station in Washington, DC. Detrick Avenue Adjacent Uses: Retail / Commercial / Light Industrial B&O Railroad Exxon Mobile East: Across Connecticut Avenue is a site that includes a Shell Gasoline Station and a Safeway Grocery store. The Safeway is currently under renovation reopening in early This will be the primary grocery center in Kensington which should assist in attracting top-tier retailer to the proposed development. Knowles Avenue Adjacent Use: Office SUBJECT SITE Connecticut Avenue Adjacent Uses: Retail (Safeway and Shell Gas Station) South: Across Knowles Avenue there are four structures currently utilized for commercial office. West: Across Detrich Avenue are multiple parcels with one to two story structures used for various commercial and retail uses. Site Limitations and Restrictions The site benefits from its relatively flat topography, but is bound by an active railroad on the North that acts as a buffer between this site and areas further north in Kensington. However, the railroad noise could be a nuisance and a design challenge. Site design considerations will need to focus on maximizing the overall program while creating an inviting development with the adjacent existing railroad. Focusing on noise abatement along the railroad will require design input by utilizing an acoustical engineer. The fact that the existing tracks are 40 feet below the existing site will aid this analysis. It is possible that the Exxon Station contains an environmental hazard that will need to be carefully evaluated by an environmental consultant in the design to prepare for the construction phase of the project. A geotechnical engineer will be commissioned to take soil borings early in the development process to analyze the soil composition which will define the structural integrity for the foundation and identify the excavation requirements. Page 8 of 75 4/29/2008

9 III. DEVELOPMENT POTENTIAL Zoning Review All parcels are currently zoned C-2, which provides for general commercial uses including various types of retail trade, businesses and services. Further, the C-2 zone is intended to promote the effective use of transit facilities in Central Business Districts by encouraging housing with commercial uses in close proximity to Metro Stations in Central Business Districts. The site is located within the Kensington commercial business district and it is located in close proximity to a MARC train station and the Medical Center Metro Station. The MARC Train station is located,35 feet or.25 miles from KTS and Medical Center Metro Station is 2.3 miles from KTS, or a 7 minute bus trip on the Ride On Bus. The C-2 Zone allows a maximum building height of three (3) stories or 42 feet. However, the height can be increased to 65 feet for mixed-use commercial and residential development provided that the residential component consists of a minimum of 60% of the total FAR and that the development is 300 feet away from any single-family residential home. The site programming is based on meeting the residential requirement and the site is not within 300 feet of any single-family residential home; therefore allowing the proposed improvement to achieve a total height of 65 feet. The zoning allows for an increase from.5 FAR to a maximum 2.5 FAR provided that the commercial FAR does not exceed.0 FAR and the ground floor is primarily commercial, except for incidental residential uses such as the building lobby, trash room or loading dock, for example. Based on the C-2 zoning there are two acceptable uses: retail, essentially as it currently exists today, or redevelopment into a mixed-use site with both residential and retail. The highest and best use would be residential and retail consideration format for this site. The zoning code defines the following setbacks from lot lines that need to be incorporated in the site design: Front: Minimum of 0 feet unless a main street development is recommended by the Master or Sector Plan. Neither, the Master nor the Sector Plan identifies this portion of Connecticut Avenue to be a main street location. Side and Rear: No set back is required. No yard shall be less than 3 feet. The zoning requires that a minimum of 0% of the lot area be set aside for green area. Below is the definition of green area from the Montgomery County Zoning Ordinance: Green area: An area of land associated with and located on the same tract of land as a major building or group of buildings, or a prescribed portion of the land area encompassed by a development plan, diagrammatic plan or site plan, to which it provides light and air, or scenic, recreational or similar amenities. This space must generally be available for entry and use by the occupants of the building or area involved, but may include a limited proportion of space so located and treated as to enhance the amenity of the development by providing landscaping features or screening for the benefit of the occupants or those in neighboring areas, or a general appearance of openness. Green area may include but is not limited to lawns, decorative plantings, sidewalks and walkways, active and passive recreational areas including children's playgrounds, public plazas, fountains, swimming pools, wooded areas, and watercourses. Green area does not include parking lots or vehicular surfaces, accessory buildings other than swimming pools, or areas of open space so located, small, or circumscribed by buildings, parking or drainage areas as to have no substantial value for the purposes stated in this paragraph. The site plan will need to need the requirement of the green area and probably need to exceed the requirement of 0% in order to receive project approval because the planning staff and board will scrutinize the amenity package (which includes green area) relative to other developments similar in nature. Page 9 of 75 4/30/2008

10 Additionally, any residential development in a C-2 zone is required to include Moderately Priced Dwelling Units (MPDUs) and Work Force Housing. MPDUs are required to be 2.5% of the total unit count. However, if the development includes 5% MPDU based on unit count, the project receives a 22% bonus density on the residential component. Therefore, 5% MPDUs will be included in the project under optional method zoning. The Work Force Housing requirement stipulates that 0% of the units are designated for workforce housing and the project receives bonus square footage for necessary gross square area required to construct this housing component. Effectively, workforce density is to have a neutral effect on the development. The sector plan describes Kensington as a community with strong ties to Historic Preservation based on the age of the single family homes in the community, as well as its concentration of antique shops on Howard Avenue located east of the proposed development. This development lies outside of the Historic Preservation District. It is also noted in the sector plan that the Central Business District was originally scheduled to have Metro run though Kensington, thus promoting high density development. Since Metro eventually did not run through Kensington, the Sector Plan notes that the CBD designation should be eliminated, this occurred via the Sector Plan Adoption eliminating the Kensington CBD. The Town of Kensington was incorporated in 894 and is currently governed by a Mayor and council form of government. The mayor and four council members serve two year elected terms. In terms of planning review, the council has delegated the review responsibility of planning to Maryland National Capital Park and Planning Commission. The current mayor of Kensington, Peter Fosselman, has prioritized Commercial Revitalization as a legislative priority indicating the need for revised alcohol laws to attract high quality restaurants and greater local authority over commercial development. The proposed project plan entitlement process will be challenging because the site does not fall within a CBD and it is not within close proximity of a Metro (,500 feet). However, the site is adjacent to major public ground transportation, it is within,500 of a MARC Station, and it is located in the Kensington commercial district. Additionally, with the support of the Kensington Mayor and the council, the goal is to seek project plan approval for the site with the additional FAR and Height allowed within the C-2 Zone for mixed-use development. Floor Area Ratio (FAR) and Building Envelope FAR Calculation With the combination of all five parcels, the 3.7 acre site yields a total allowable FAR of SF, or 3.3 FAR. The total proposed FAR includes 64,56 SF of retail and 366,565 SF of Residential. The FAR calculation is based on the following: Property Area minus Retail SF resulting in the Allowance Base Residential Square Footage MPDU Bonus Density If 5% of the total units are MPDUs, then a 22% bonus density can be applied to the Allowable Residential SF Work Force Housing The code requires that 0% of the total units be Work Force Housing. The concept is that the work force housing is supposed to be negligible to the project; therefore, the project receives additional square footage in order to provide the total required WFH units. The work force housing square footage is added to the Allowance Base Residential Square Footage and the MPDU Bones Density to arrive at the total Project Residential SF. The total development SF is determined by adding the retail square footage to the residential square footage. Based on the zoning, it is critical to confirm the program sizing to verify that the limitation of the C-2 Zone has not been exceeded. First, the commercial component is required to be less than.0 FAR of the Page 0 of 75 4/30/2008

11 total development. The retail component is 64,56 SF which is less than 23,086 SF (.0 FAR) indicating that this requirement has been met. Second, the residential is required to be a minimum of 60% of the total FAR. The residential component equates to 85% of the density indicating that this requirement has been met as well. Table #4 shown below details the FAR Calculation for the entire site. Additionally, it calculates the Green Area requirement on the bottom line for the project. For the proposed project, the minimum green area is requirement is 0% of the total site area, or 2,309 square feet. Note: For the purposes of this analysis, additional dedicated land area typically associated with public street improvements is calculated at zero. With the assistance of a civil engineer, this quantity would be determined while developing the project plan submission as the Alta survey for the project is field verified and documented. Table #4 ZONING CALCULATIONS SITE ASSEMBLAGE Parcel 48 Parcel A-2 Parcel B Parcel A- Parcel Exxon TOTAL GROSS TRACT AREA 62,544 SF 29,807 SF 22,653 SF 8,082 SF 4,945 SF 38,03 SF New Non- Residential Use 29,233 SF 3,932 SF 0,588 SF 3,778 SF 6,985 SF 64,56 SF Retail FAR Multiple C-2 Mixed Use Multiple Residential Multiple Allowable Residential GSF 27,27 SF 60,586 SF 46,045 SF 6,427 SF 30,377 SF 280,57 SF Bonus MPDU (22%) 27,968 SF 3,329 SF 0,30 SF 3,64 SF 6,683 SF 6,724 SF WFH (0%),00 SF 5,243 SF 3,985 SF,422 SF 24,279 SF 2,650 SF Total Residential 66,096 SF 79,58 SF 60,59 SF 2,463 SF 39,689 SF 366,565 SF TOTAL Project 95,329 SF 93,089 SF 70,747 SF 25,24 SF 46,674 SF 43,363 SF Green Space (0% Min.) 6,254 SF 2,98 SF 2,265 SF 808 SF,495 SF 2,309 SF Page of 75 4/30/2008

12 Height Restrictions The C-2 zone restricts height to a maximum of 65 provided that the site achieves a residential component of at least 60% and it is located 300 feet away from any single-family homes. The site meets both of these criteria and would therefore be permitted a height of 65. Below is a cross section summary of the project building height including a higher retail floor to support tenant s space requirements and a higher top floor to support the requirements for roof top drains to maintain interior clear ceiling heights: Floor Slab to Slab BUILDING HEIGHT (Feet) Clear Floor Height Cumulative Height Apartments Floor Apartments Floor Apartments Floor Apartments Floor Retail / Apartment Lobby and Offices Ground Floor Entitlement The entitlement process requires support by the planning staff and ultimately approval from the Planning Board for the following: Project Plan, Subdivision and Site Plan. In order to be successful it is necessary to select a highly qualified team which will include the following professionals: Zoning Attorney, Civil Engineer, Project Architect, Landscape Architect, Artist and Traffic Engineer. Additionally, the process requires public interaction as well as coordination and collaboration with the MNCPPC Staff. Overall, the time projected to complete the entire zoning approval / Entitlement process is 30 months with a total cost of $750,000. The project plan approval is the Planning Board approval of use, height, unit count, total SF, SF allocation by use, and public use space quantities. With the approved project plan, work commences on the subdivision plat and site plan approvals. With subdivision, the five parcels will be combined into one parcel. The site plan is a collaborative process with Planning Staff to further define the project by finalizing building location, exterior design, entrance locations, potential façade materials, utility connections, and public use space locations/materials. After receipt of site plan approval, permit drawings can be approved by Montgomery County to start construction. Project Amenities The staff and planning board will evaluate a project s amenity package carefully prior to approval. An amenity package includes on and off site pubic use space, public art, under grounding of utilities, etc. The 0% green area identified previously is synonymous with on-site public use space. For this project, the plan includes on-site public use space, a public fountain / public art component and under grounding of utilities. While the review by staff and the planning board is subjective and independent of previous approvals, the proposed amenity package is comparable to similar approved projects. Building Layout The goal of the building layout on the site is to create a sense of place that will attract residential tenants and will draw retail consumers to the site, activating the development. Therefore, based on an analysis of the site in conjunction with the adjacent streets, the goal will be to emphasis the southeast corner at Connecticut Avenue and Knowles Avenue. With this design element determined, the evaluation progressed with two building footprint options: Page 2 of 75 4/30/2008

13 Option : Utilize the building to define the corner and bring the building as close as possible to the intersection to create a strong urban edge. Option 2: Open up the corner allowing the green space to define the corner and create sight lines into a courtyard whereby street traffic can see the retail and activity within the site. The second option was chosen for the proposed project and it can be seen in the Site Plan in Section IX: Building Design (Page 45). The reason behind selecting the second option is that this site will bring an entirely new element to Kensington including over 55,000 SF of ground floor retail which will activate both the street and interior courtyard. The open sight lines from the Connecticut Avenue and Knowles Corner will draw street traffic into the site enhancing the retail component and the overall development. Site Geometry In addition to calculating the buildings FAR from a code prospective, it is necessary to analyze the proposed structure based on site geometry to understand how to solve land planning challenges while maximizing the project s FAR. The project design is based on a double loaded residential corridor with retail and parking below. The width of a double loaded residential project can range from 65 feet to 84 feet. With an 84 width, the window line decreases based on the depth of residential units created, which is not desirable. Thus, the development s design based on a 75 wide building that will result in the unit depth (window to common corridor) of 34 by 24 wide. Based on establishing the building width and length, a typical floor can be calculated (length by width). The typical floor plate is 69,375 SF. Table #5 identifies the square footage for the ground floor including the allocation to retail and residential, plus calculates the total development square footage. The entire project will consist of 340,030 SF. TABLE #5 BUILDING CONFIGURATION - Based on Site Plan / Site Geometry Base st Change TOTAL Stories Flr Plate Size Quantity Flr Plate Size Quantity SF Retai Ground Floor 57,530 SF Flrs 57,530 SF Residential Ground Floor 5,000 SF Flrs 5,000 SF Residential Floors ,375 SF 4 Flrs 277,500 SF Project Total 340,030 SF FAR Overage / (Under) (9,333) In order to use 00% of the FAR, the building would have to take on a rectangle shape closing in the interior. It is believed that the project s success will be a direct result of creating a public space to draw the community. The corner opening and site lines into the development from the corner of Connecticut and Knowles Avenues will create this draw. Therefore, the approach is to create a community with appeal in lieu of utilizing all of the FAR. Once the design team is engaged the architect will analyze the project ensuring that the FAR is maximized to the greatest extend within the design vision. Architectural elements bays, turrets and dormers can be used to capture the unutilized FAR, while helping to blend the proposed project to the vernacular architecture of the surrounding community. The main traffic entrance to the garage, loading dock and drive isles has been placed on Howard Avenue to the north of the site. Howard Avenue was selected as the primary means of auto ingress and egress as it moves potential traffic congestion off of Connecticut Avenue and will not impact Knowles Avenue. This strategy is expected to be welcomed by the neighborhood citizens. During the entitlement process, the traffic engineer will prepare a traffic study to analyze the impacts to the local traffic caused by the development. Page 3 of 75 4/30/2008

14 IV. KENSINGTON TOWN SQUARE DEVELOPMENT PROGRAM Project Description Kensington Town Square is design to be a mixed-use development with ground floor retail and residential above. The construction will be a podium style ground floor with four floors of 5A stick construction TABLE #6 Project Square Footages GSF Efficiency NSF above two levels of below grade garage parking, as outlined in the building code. The total building gross square footage will be 346,875 SF consisting of 63,375 GSF retail and 282,500 GSF of residential area. As Retail 57,530 SF 90% 5,777 SF shown in Table 6, the Net Rentable Square Footages will be 5,277 SF for retail and 240,25 SF for the residential Residential 282,500 SF 85% 240,25 SF based on the efficiency factor of 90% and 85%, respectively. The building configuration will provide both interior views overlooking at the interior open space of the square as well as exterior views overlooking the adjacent community. TABLE #7 GROUND FLOOR EFFICIENCY AND PROGRAM Gross Buildable Area 69,375 Non-Rentable SF Residential Main Entrance 3,442 Management Office / Amenities 5,000 Loading Dock/Garage Ramp 4,500 Trash Room 850 Corridors, Etc. 4,206 Fire Control Room 00 Net Rentable Retail Area 5,777 The ground floor will be primarily retail, but will also include the Residential Management and Leasing Office, Amenity Area and back of house requirements (Loading Dock, Garage Entrance / Ramps and Trash Room). Table #7 identifies the total non-rentable SF for the ground floor, 4,656 SF, resulting in a net rentable area of 5,777 SF. A retail design consultant will be engaged to layout the retail space ensuring that proper size retail bays are designed and that the design allows for flexibility to enhance the property value when leasing agents are commissioned to attract tenants. Concern for proper retail loading, garbage access and other retail back of house issues are property addressed. The apartment units will be a combination of market rate, Work Force Housing and Moderately Priced Dwelling Units and will be configured in studio, one bedroom and TABLE #8 APARTMENT QUANTITIES two bedroom units. A requirement under the zoning is that Ave Unit SF (Net) Efficiency Unit Quantity the work force housing be 0% of the total unit mix and % 280 that Moderately Priced Dwelling Units be 5% of the Unit Market Rate 20 Mix. Table #8 shows the breakdown of the 280 total units MPDUs 42 on the property. The zoning also requires that the percentages of MPDU and Work Force Housing units be Work Force 28 distributed into Studio, One and Two bedroom units based on the total building allocation. TABLE #9 UNIT QUANTITIES DETAILED Percentage Total Quantities Market Workforce MPDU Studio 7.4% One Bedroom 64.29% Two Bedroom 28.57% % The building unit allocation is heavily weighted toward one bedroom units at 64.29% with the remaining units are studio and two bedroom layouts, 7.4% and 28.57%, respectively. The percentage allocations utilized to set a target range of units by type Page 4 of 75 4/30/2008

15 such that the quantity of market rate units is maximized against required MPDUs and Work Force Housing. The resulting unit count provides a more efficient and profitable building. Therefore, all unit quantities of studio, one bedroom and two bedroom calculate a whole number when multiplied by either 0% or 5% for the below market rate rental units. Table #9 on the previous page displays all unit quantities by unit type and unit configuration. The average square footages by unit type and configuration are shown in Table #0. The square footages were determined by analyzing the required square footage within the market place and ensuring that the total calculated project square footage fell within the building envelope after accounting for a 5% Building Efficiency and yielding Net Useable/Rentable Area. To highlight the market rate units, the one bedroom NSF shall be 840 SF, while a studio is scheduled to be 575 SF and a two bedroom is scheduled to be,00 SF. The unit size for Workforce Housing and MPDUs are scheduled to be smaller than a similar configuration Market Rate Unit. TABLE #0 UNIT SQUARE FOOTAGES (Net SF) The parking garage and loading Market Workforce MPDU Total Quantities dock/trash room are located at the north end of the property facing Studio 575 SF 475 SF 450 SF 0,925 SF Howard Avenue with access from One Bedroom 840 SF 750 SF 700 SF 45,800 SF either cross street of Detrich or Two Bedroom,00 SF 900 SF 850 SF 83,400 SF Connecticut Avenue. The parking 88,025 SF 2,650 SF 30,450 SF 240,25 SF garage is designed to be 335 spaces and based on an efficiency of 375 SF per space, the garage will require a total area of 25,625 SF or two floors below grade. The design will be rectangular with approximate dimensions of 398 north south and 59 east-west. The Table # summarizes the total parking requirements based on the residential and the retail component in the project. TABLE # PARKING REQUIREMENTS Residential # of Units Ratio Total Req d. WFH/MPDU BR / Studios BR General Retail 57, Quantity of Spaces 335 SF Ave Size/Space 375 SF Total Garage SF 25,625 SF Garage Plate 62,83 SF Levels of Garage 2.00 The site design includes a drivable pass though from Howard Avenue to the interior courtyard via a drive isle allowing cars with direct access to the interior retail portion of the project. Additionally, there will be limited street parking on the interior of the development. This will allow for direct access to drop off or pickup of individuals off at retailers or the residential lobby, which will have an entrance at the corner of Connecticut Avenue and Howard Avenue (Reference Section IX: Building Design, Ground Floor Plan on Page 47). A secondary residential entrance is located beneath the pass through from Howard Avenue. Page 5 of 75 4/30/2008

16 V. DEVELOPMENT TEAM The development team will require multiple consultants and team members to execute the project. Various disciplines are necessary to create the project from the entitlement process through the design and construction phase to stabilization. It is critical that the team be assembled from highly skilled, experienced professionals for this type of proposed project. The project returns are dependent on all team members working together in an effective, collaborative and efficient manner to keep this project in line with the proposed schedule. Entitlement Requirements: Project Plan Submission, Subdivision, Site Plan o Zoning Attorney: The Zoning Attorney will analyze the zoning, master and sector plans to ensure that the project conforms to the requirements and develops strategies to argue against any points of contention. Additionally, they are team leaders during the planning process providing recommendations to the Owner for required actions in order to achieve entitlement. o Civil Engineer: The civil engineer with work in conjunction with the architect to layout the building on the site, orchestrate vehicular and pedestrian traffic patterns and identify/size all of the utility connections. Its documents will also identify the location for the Public Use Space and provide calculation for the PUS square footage as well as the total project FAR calculations. o Architect: The architect is the primary designer of the structure and parking garage, analyzing the most effective design option to create a cost effective layout reducing building transitions/transfer beams while providing a high quality design. It is also responsible for creating an effective layout for the various uses, interpreting building code and proposing a structure that maximizes the FAR. o Landscape Architect: The landscape architect will create an effective and creative use of the exterior open space as a project amenity that will assist in gaining approval for the Project Plan and the Site Plan. The design will also create the building s identity on the street level. o Traffic Engineer: A Traffic engineer will analyze the existing condition (Level of Service) of the adjacent roads and forecast the Level of Service based on projected numbers of additional trips that the project will create for the proposed apartment and retail uses. o Geotechnical Engineer: The focus of a Geotechnical Engineer will be to analyze the subsurface conditions of the site, providing information on soil compaction and water table information to assist the design team in developing the foundation structure, and the requirement for a foundation drainage system. o Environmental Engineer: A Phase I Environmental Site Assessment (Phase I ESA) will be prepared which identifies potential or existing environmental contamination liabilities that will assist in defining cost estimates. Based on the existing tenant base, gasoline station and drycleaner, it is likely that a Phase II Environmental Site Assessment, which investigates original samples of soil, groundwater or building materials to analyze for various contaminants. If quantities of contaminants are above EPA approved level, the environmental engineer will be engaged to perform a Phase III Environmental Site Assessment where various remediation techniques are evaluated including cleanup methods, costs and logistics. For analysis purposes, the subject development budget only includes associated for Phase I and Phase II studies as well as a $250,000 hard cost contingency for an unforeseen requirements. Page 6 of 75 4/30/2008

17 Design & Construction Phase Requirements: Design through Permit/Construction Bid Documents, Construction Administration, Site Improvements (Demolition, Sub grade work, Structure/Finishes and Site Improvements) Required Participants: o Architect: The architect will take the drawings from an approved concept in the entitlement phase through Design Development, Schematic Design and Permit/Construction Drawings. The architect is the lead consultant coordinating the entire design team. Through the course of the construction, the architect will review shop drawings/submittals, attend meetings and respond to questions from the construction team. o Interior Designer: The interior designer will provide interior color palates, finish selections and furniture selections for the main building lobby, corridors, amenity areas and the model apartment. The architect defines the structure from the exterior and establishes the building layouts and functions while the interior designer gives the interior spaces character and identity. The interior design is critical to set the building apart from its competition. o Mechanical / Electrical / Plumbing Engineer: The engineers are responsible for calculating the necessary size of all power, domestic water, waste lines, storm lines and HVAC piping and equipment for all uses. These roles are maintained on an on-going basis through the construction phase. o Structural Engineer: The structure engineer will provide the design for the concrete, foundation and other structural components of the project, especially the wood framing for the residential. The goal of the structure engineer is to design a safe structure without over designing the project with unnecessary costs. o Civil Engineer: From the entitlement phase, the civil engineer with continue to define the location of the utility connections, the design for storm water management and building layout on the property. After commencement of construction, the civil engineer s involvement is limited beyond foundation to grade and utility installation confirmation. o Acoustical Consultant: An acoustical consultant will review the partition details, slab detail and the exterior wall details to ensure that the Sound Transmission meets the detail and industry criteria. The acoustical consultant will focus on the north façade analyzing the noise levels of the railroad and any additional insulation requirement for that façade. o Skin/Enclosure/Waterproofing Consultant: This consultant will be engaged to detail the critical exterior details bringing in best practices to minimize the chance for water infiltration. Additionally, this consultant will be integral in testing of the windows/facade before construction to ensure that it meets the project design criteria. o Utility Consultant: In order to execute the amenity package, the team will need to bury the utilities requiring a utility design and interfacing with power, cable and telephone companies servicing the site. The utility consultant will provide this service which is critical to receive approval for the amenity and bring services to the building. o Permit Expeditor: A Permit Expeditor will be engaged to run the building permit providing an interface with the County Permit reviewers. o Construction Manager: The team will engage a construction manager to monitor the construction process and ensure that the project / project communication move as quickly as possible. The goal of the construction manager is to maintain the budget and the schedule. The schedule completion is critical to the financial performance as the interest carry will cost over $300,000 a month toward the end of the construction project. Therefore, the ability to deliver the project on time is critical. o Testing and Inspections Company: The testing and inspection company provide on-site supervision to monitor the installed critical structure. The testing and inspection firm will primarily monitor the concrete installation and the CMU stairwell enclosures. Page 7 of 75 4/30/2008

18 Stabilization Requirements: Advertising Program, Management/Leasing Company and Staffing Required Participants: o Advertising Firm: An advertising firm will be engaged to provide the name, logo, brochure, leasing material, leasing office design and develop a media schedule for the project to ensure that the project advertising budget is maintained and the leasing office receives traffic. o Apartment Management / Leasing Company: The management company will provide a staff to manage the property and lease up through stabilization. The management company will have an on-site manager, leasing consultant, assistance leasing consultant and two to three property engineers. The management team will prepare operating budgets, oversee all service providers, provide on-site day to day operations supervision, collect rent, pay invoices and make distributions to the partners. o Retail Management / Leasing Company: A retail firm will be engaged early in the construction process to begin leasing the retail spaces with the goal of opening with 50% or more pre-leased. The retail management company will not have an on-site representative, but will have a designated manager and building engineer for tenants to contact with issues. The retail company will collect rent, pay invoices and make distributions to the partners. Investment Team Operating Partner: The primary responsibility of the operating partner is to oversee the all team members ensuring that the project vision is carried in accordance with the budget, schedule, and local jurisdictions regulations and as required by partnership agreements with Equity Partners and Loan Documents. Additionally, the operating partner will contribute 5% of the project s required equity. Equity Partner: The equity partner will provide 85% of the projected equity requirement. Traditionally, the equity partner will assign an Asset Manager to oversee their investment. The equity partner may also have an internal construction consultant who will oversee the operating partner through the design and construction phase. Construction Financing: The operating and equity partners will secure a construction lender who will provide financing for the project after all equity has been invested. The construction lender will require that a Lending Engineer be engaged who will review the monthly draws and confirm that the construction work in place aligns with the billings to date. The lending engineering will ensure that the construction financing is not advanced prior to completion of work on-site. Specialty Consultants Real Estate Tax Attorney: If necessary, a tax attorney will be engaged to provide estimates of the property taxes as well as ensuring that the tax assessments during the development process are reasonable. Certified Public Accounting Firm: An accounting firm will be engaged to audit the projects financials annually and provide the necessary requirements of the partnership. Legal: The team will include various attorneys that will specialize in the following: AIA Contracts, land acquisition, partnership documents, loan documents, technology agreements, negotiate retail leases, and the property management team will have a Landlord-Tenant attorney. Page 8 of 75 4/30/2008

19 VI. STABILIZATION / VALUATION / INVESTMENT STRATEGY Income The project will primarily receive income from the following operations: retail tenants, residential operations and parking income from the garage. Residential The market rent used for the residential component in Kensington Town Square is $2.50 per RSF. The projected rent has been analyzed against the competition (reference Section VIII: Market Analysis, Page 33). Additionally, KTS will include 20 premier units with associated rents that average $2.65 per RSF or $2,85 per month for larger, more upscale floor plans with premier views and finishes. In addition to rental income, the property will also generate miscellaneous income for charging for monthly parking fee and a monthly amenity fee. The parking fee is anticipated to average $25 per unit per month and the amenity fee is anticipated to average $50 per unit per month. TABLE #4 MPDU Maximum Rent Calculation Worksheet for FY 2008 Garden Apartment Unit Type Studio BR 2 BR 3 BR Household Size MPDU Maximum Annual Gross Income $40,000 $43,000 $50,000 $50,000 Monthly Gross Income $3,333 $3,583 $4,67 $4,67 MPDU Rent 25% of Monthly Gross $833 $896 $,042 $,042 Utility or Service Provided By Landlord (SELECT APPROPRIATE UTILITIES FOR ASSET) Heating Natural Gas $36 $46 $56 $65 Cooking Electric $5 $7 $2 $6 Other Electrical $0 $4 $8 $23 Air Conditioning $6 $7 $0 $3 Water Heating Natural Gas $ $5 $20 $24 Water $7 $9 $4 $23 Sewer $5 $7 $6 $29 Trash Collection $2 $2 $2 $2 Range/Microwave $7 $7 $7 $7 Refrigerator $7 $7 $7 $7 Subtotal Utilities and Service Charge $06 $3 $72 $29 Studio BR 2 BR 3 BR Maximum MPDU Rent with Utilities $939 $,027 $,24 $,26 Table #4 is a summary of the rental calculation for the Moderately Priced Dwelling units in Montgomery County. Each project in Montgomery County requires that a Rental Offering Agreement be entered into between the developer and the County that outlines the requirements for the MPDUs within a project and the Developer/Future Owner s rights with regard to the on-going ownership and management. Generally, the rental rates are calculated with the intention that no household will pay more that 25% of their gross monthly income for rent. The rental rates are calculated by starting with the maximum income level which is set at 65% of the median income for the Washington, DC Primary Metropolitan Statistical Area. The program sets a maximum annual gross income based on the unit size and applies the 25% of monthly gross income to the calculate the MPDU Rent. In addition to the MPDU rent, the amount is adjusted based on the type of utilities, appliances and services offered. For Kensington Town Square, Table #4 identifies rents based on the unit types is $.60 per SF per month as incorporated in the financial analysis. Page 9 of 75 4/30/2008

20 Retail The retail income will be derived from the 54,79 Gross SF of ground floor retain space. The anticipated rental rate will be $27.50 NNN annually. A NNN lease is one which the lessee pays rent to the lessor, as well as all taxes, insurance, and common area maintenance expenses that arise from the use of the property, or CAM. The projected rent is higher than current rents in Kensington as KTS will be a new, higher level class development than anything presently existing in the submarket, which will command higher retail rents. A premium of 0% above project markets lease rates has been utilized in the subject analysis. Public Parking Parking has been conservatively estimated as additional revenue of $,000 per month which will include the public parking garage supporting the retail, not residential parking. From a management prospective, the garage will require an operator to supervise the parking facility and collect fees. Expenses There are three primary areas of expense for the residential community: General and Administrative, utilities and real estate taxes. Based on similar wood frame properties of eh size proposed, the general and administrative expenses per unit are forecasted to be $3,800 per unit annually. The real estate taxes are calculated as $7.39 per $,000 of assessed value in Montgomery County. Based on an assess value of $62,886,080 (Hard Costs Only), the annual payment will be $464,728, or $,659 per unit. Based on the new construction and a standard Fannie Mae requirement, a capital reserve account has been set aside in the amount of $250 per unit annually. This amount has been included in the Proforma included in Section VI, Financial Projections. Stabilization The construction project is scheduled to deliver in month 63 of the development timeline. The stabilization is defined when the uses have theoretically achieved 00% occupancy and each uses (residential, retail) will be forecasted separately as they perform differently. For the residential component, the stabilization is a function of leases per month and after the one year period, accounting the quantity of residents that opt not to release as this will increase the available inventory. Starting Month: Month 63 Pre-Leased Units (Month ) 40 Based on Pre-Leases Prior to Opening Lease per Month (Months 63 to 79) 6 Leases per Month Post 2 Month Lost Leases: 4 Lost Leases after 2 Months Stabilization: Month 79 Retail is forecasted differently as stabilization is achieved from a square footage prospective in lieu of a unit prospective. Retail has been forecasted based on a pre-lease square footage and a square footage of leasing per month following opening. It should be noted that in actuality the retail leases will come in all shapes and sizes with various timing, but for the modeling purposes of KTS, the forecasted has been straight lined based on a SF per month of occupied, finished space. Below are the statistics for the retail component: Starting Month: Month 63 Page 20 of 75 4/30/2008

21 Pre-Lease Area 30,000 SF Project SF per Month 2,000 SF per Month Stabilization: Month 76 Based on the information above the property is projected to be 00% stabilized in month 79 and the business plan will be to sell the asset (residential and retail) immediately upon stabilization. Valuation The business plan is to sell the asset (or assets Retail and Residential) after stabilization in month 80 which will require marketing the project in Month 72. Below is a summary of the valuation by asset type and a total project valuation after selling costs and payoff of financing: TABLE #5 EXIT STRATEGY / VALUATION APT RETAIL TOTAL Valuation Period (Month): NOI: $ 5,42,34 $,68,702 Exit Cap Rate (Month 80): 6.00% 6.00% Valuation: $ 85,705,233 $ 26,978,368 $ 2,683,60 Sales Costs (%):.50% 3.00% Selling Cost ($): $ (,285,578) $ (809,35) $ (2,094,930) Less Financing: $ (42,505,007) $ (3,66,356) $ (56,66,364) Net Sales Proceeds: $ 4,94,647 $ 2,507,66 $ 54,422,308 Notes: Net Operating Income: The net operating income is the projected income for the year following the month of the sale, Months 8 to 92. The reason is that the purchaser is acquiring an asset based on future performance. For the residential portions, the net operating income is $5,42,34, and the retail net operating income is $,68,702. Cap Rate: The cap rate used for both asset types is 6.0%. For a class A asset, delivering in a Montgomery County, MD, a cap rate of 6% is slightly aggressive for a non-metro market, but should prove acceptable to institutional partners and future purchasers. Another view point is that the cap rate represents the yield on cost of the property for the st year. Therefore, the future investor would be receiving 6.0% unleverred going in return on a core asset. Valuation: the property value is found using the following equation: Value = NOI / Cap Rate Cost of Sale: The cost if sale varies between asset type.5% for the apartment and 3.0% for the retail. The difference is the due to the total projected value and takes this into account a different brokerage firm for each component as the business plan may sell each component (residential and retail) separately if higher total sales prices by use are achievable. The combination of the Retail, Residential and the Parking Garage is $2,683,60, resulting in a total proceeds returned to the partners is $54,422,308 after cost of sale ($2,094,930) and payoff of financing ($54,66,364). The $54,422,308 is the amount returned to the partners on a pari passu basis and used to determine the project IRRs by investor. This evaluation is further defined in Section IV, Investment Strategy. Page 2 of 75 4/30/2008

22 Investment Strategy As the capital markets currently exist at the end of st quarter 2008, there is debt available; however it is available with more conservative underwriting and it is available at a premium in comparison to mid 2007, for example. Recently, underwriting on land value and existing assets is more conservative and deals marketed months ago are resurfacing because the deals are not closing. The market has corrected for land prices on deals that have sold with a condominium exit strategy, commanding a purchase premium in comparison to other uses over the past two years. Additionally, institutional equity partners require a 2 to 8% return on development investments in order to meet the requirements of their funds. Considering the information noted, the challenge of this project has been to financially structure a project that meets the change in market conditions and achieves the required return for equity operating partners. The preferred strategy would be an outright purchase assembling the parcels to maximize control through the entire process. In order to acquire the land on day one in the process, the equity is invested in the deal for a longer term resulting in a total IRR of 3.9% (Reference IX. Financial Projections). Based on the market conditions, an institutional equity partner would not pursue this investment on a pure development basis. A secondary strategy would be for the developer to form a joint venture with the existing land owner and bring the development skill set necessary to execute all aspects of the project for a partnership. Financially, the deal benefits from reducing the original outlay of equity funding required to purchase the land. The equity contribution would commence with acquisition of the Exxon land, which would complete the land assemblage. Overall, this strategy results in an IRR of 24.03% versus 3.9% (Reference IX. Financial Projections). Based on this return, an equity partner would move forward with the deal. The challenge with this structure is that the investment of land by the land owner needs to be incorporated into its overall return. Below this concept is explored further. After forming a joint venture partnership between the developer and the landowner, a single purpose entity, anticipated to be a Limited Liability Company in conjunction with an equity partner, would be formed. The members (equity investor and developer) will fund the project s expenses (Hard Costs, Soft Costs and Interest Carry) based on their percent of ownership (85/5) until 30% of the project s total costs are reached at which point construction financing will commence to fund 70% of the project total costs including an interest reserve. The construction funding will be in place through stabilization, at which time a sale or transition to permanent financing can occur. The strategy of the Kensington Town Square is to sell the asset at the time of stabilization realizing the proceeds at month 80 of the development timeline. The ownership structure is complicated on this project as the land contribution represents value in the process, but does not have a direct cost to the project. As identified above, all project costs will be paid for by the members and the land owner will not be required to pay for any costs. The general concept is that each participant will own a portion of the partnership in relationship to their total investment within the final capital structure. Below is a summary of the calculation used for the ownership percentage: Land Owner: Equity: Developer: Value of Land minus payment funded by the equity investor/developer team members of $4,000,000 during the course of the project to ease the burden of the investment and pay down any outstanding debt. 85% of Total Costs 5% of Total Costs Page 22 of 75 4/30/2008

23 The proceeds will be split Pari Passau based on the ownership percentage. For the developer and the equity partner, their investment return is based on the project costs and the value at reversion. For the Land Holder, the investment return is in comparison to the value of its existing equity in the deal. For this analysis, the land holder s equity has been value based on the following: Land and Existing Improvements: $8,8,328 Existing Debt: ($4,000,000) Investment Basis: $4,8,328 From the calculation above, the current value of the land in $8,8,328 and the assumption is the owner has $4,000,000 in debt carried on the project resulting in $4,8,328 of available equity that is carried forward as its original investment in the deal. The anticipated project return is 22.54%, or a 2.8 multiple with the return of capital and distributions at month 80 within the project timeline. In Table 6 shown below, there is a summary of all of projected returns for Kensington Square as shown for each individual partner. TABLE #6 Equity Structure and Financial Returns Equity Partner Investment Amt Gross Proceeds Distributions IRR MULTIPLE Cash Flow (22,592,73) 39,686,33 7,093, %.76x Land Owner Land Investment (4,8,328) Cash Flow (4,8,328) 2,725,60 2,45,732 Deferred Fee 273, % TOTAL CASH FLOW 7,93, % 2.64x Developer Cash Flow (3,986,854) 7,230,008 3,06,58 Deferred Fee 226, % TOTAL CASH FLOW 3,243,54 6.5%.8x Cost Responsibility % (Deferred Fees) Partnership % Equity Contribution Land 0% 55% 5% ($4,8,328) Equity 85% 72% (22,592,73) Developer 5% 45% 3% (3,986,854) PIE CHART OF CAPITAL STRUCTURE Equity 72% Land 5% Developer 3% Land Owner The land owner will investment all of the land in the Kensington Town Square valued at $8,4,328 and will receive an interim payment of $4,000,000 as a development cost assisting in lost cash flow and the need to retire any outstanding debt prior to the construction period. The land owner will not be required to fund any of the future development costs. In return, its Ownership percentage will be based on the investment of land, or $4,8,328, which will result in a 5% Page 23 of 75 4/30/2008

24 ownership of KTS, or $2,725,60 net proceeds at reversion. The return to the landowner is 8.3%; a multiple of 2.64 based the original estimated equity in the land, $4,8,328. Equity Partner The equity partner will invest 85% of the development costs in the project, or $22,592,73. In return, its Ownership percentage will be based on the invested dollars, which will result in a 72% ownership of KTS, or $39,686,33 net proceeds at reversion. The return to the equity partner is 5.6% for a multiple of.76. Developer The developer will invest 5% of the development costs in the project, or $4,8,328. In return, their Ownership percentage will be based on the invested dollars, which will result in a 3% ownership of KTS, or $43,338,306 net proceeds at reversion. The return to the developer is 6.5% for a multiple of.8. Note the developer receives a higher multiple than the equity partner due to the deferred fees on the project. LEGAL STRUCTURE The strategy for Kensington town Square will be to create a Homeowner Association and a Master Condominium that will include the garage, retail and residential. The goal of the governing documents will be to create separate areas that can be financed, sold and management separately, but work together to create the best value for KTS. For Kensington Town Square, the goal is to analyze selling the retail separately from the residential component targeting specific group seeking these asset types resulting in a premium over a sale of the entire asset. Additionally, a condominium structure will make it easier for the subsequent owner to sell the residential unit as individual condominiums as noted in Alternative Exit Strategy #2. It should be noted that the property taxes will need to be analyzed prior to recording the condominium document ensuring that there is not a dramatic increase due to the legal structure. Alternate Exit Strategy There are two different potential exit strategies that should be explored throughout the process:. Analyze the sale of entitled land allowing another developer to build Kensington Town Square. A sale at the right time may generate required returns while reducing the overall risk to the investors. (Note: it is doubtful that the Land Owner would generate the required returns to make this strategy beneficial as their investment is based on the original contribution of the Land). 2. At the completion of the construction or prior to the sale, a potential exit strategy is to sell the units to individual condominium homeowner in lieu of as a rental community. An analysis will have to include the requirements to sell as condominiums versus a sale as an apartment building. Page 24 of 75 4/30/2008

25 VII. GEOGRAPHICAL REFERENCE / PHOTOGRAPHY This section provides a visual identification of the site from a regional prospective down to site photography of the existing uses. The following maps and photography are included: Regional Map Local Road May Aerial Map Images of the Existing Use and Surrounding Areas Exhibit #5 Subject Area Regional Map: KTS Located as Subject Area Page 25 of 75 4/30/2008

26 Exhibit #6 Subject Site Subject Site Road Map Page 26 of 75 4/30/2008

27 Exhibit #7 B&O Railroad Detrick Avenue Adjacent Uses: Retail / Commercial / Light Industrial Exxon Mobile SUBJECT SITE Connecticut Avenue Adjacent Uses: Retail (Safeway and Shell Gas Station) Knowles Avenue Adjacent Use: Office Aerial Photography Page 27 of 75 4/30/2008

28 Exhibit #8 Site Photography Aerial View Identifying Locations of Existing Photography Note: Arrows are pointing the direction of the images below: PHOTO # Existing Site (Howard Avenue Facing South) Page 28 of 75 4/30/2008

29 PHOTO #2 Existing Retail (Exxon Station) on Subject Site (Howard Avenue Facing South) PHOTO #3 Existing Improvements (From Intersection of Detrich and Howard Avenue facing SE) PHOTO #4 Existing Retail (Hardware City) on Subject Site (Knowles Avenue Facing North) Page 29 of 75 4/30/2008

30 PHOTO #5 Adjacent Uses Diagonal across Connecticut Avenue and Knowles Avenue South of Subject Site PHOTO #6 Adjacent Uses across Knowles Avenue South of Subject Site Page 30 of 75 4/30/2008

31 PHOTO #7 Adjacent Uses across Detrich Avenue South of Subject Site PHOTO #8 Howard Avenue North Boundary Facing East toward Connecticut Avenue Page 3 of 75 4/30/2008

32 PHOTO #9 Adjacent Site East across Connecticut Avenue (Safeway Development) PHOTO #0 Adjacent Site East across Connecticut Avenue (Shell Station with Safeway Development in the Background) Page 32 of 75 4/30/2008

33 VIII. MARKET ANALYSIS The current real estate market is facing turbulent conditions versus the steady capital rich market that existed through 2006 and early The credit crunch caused by the subprime residential lending debacle has worked its way through to commercial assets. Teachmefinance.com defines a credit crunch as follows: A sudden reduction in the availability of loans and other types of credit from banks and capital markets at given interest rates. The reduced availability of credit can result from many factors, including an increased perception of risk on the part of lenders, an imposition of credit controls, or a sharp restriction of the money supply. In discussions with a Wachovia Loan Originator regarding availability of debt products, it is clear that the debt markets are uncertain of where the market is heading, but if financing was to be obtained in the short term the following underwriting guidelines would be a part of their underwriting: Maximum of 65% LTC on select products No to low rent growth in 2008, with only 3% annual growth thereafter Increased spread of 00 basis points from 200 bps to 300 bps in comparison to construction financing deals generated 60 to 90 days ago Stronger desire for recourse terms from the borrower Non-recourse loans will be financed at 50 basis points over recourse loans and will include greater bad boy carve outs and an interest rate hedge restrictions Generally, this leads one to conclude that the cost of capital has increased and the market is hesitant and more conservative with regard to new financial investments. The investment strategy for Kensington Town Square is to joint venture with the current land owner and entitle the project using equity funds. Construction financing would be obtained in 24 to 36 months from project commencement at a point when normalcy is expected to return to the capital markets. Regional Data Montgomery County is located directly northwest of Washington, DC and is primarily a sub-urban community with select urban areas. Montgomery County is one of the most educated counties based on an educational attainment of adults % with graduate degrees and 63.6%, achieve a bachelor degree. The county projects the total population of 962,000 in July 2007, an increase of 0% since Additionally, the county projects a population and household growth of 27,659 people and 6,726 homes respectively, from 2000 to In 2005, MNCPPC Research and Technology Center projected that 77% of the residents drove to work either alone or in a carpool. Transportation Access Kensington Town Center is located with direct access to Connecticut Avenue (MD-85) providing access north and south from Aspen Hill to Washington, DC, while Knowles Avenue provides east-west access to Rockville Pike and Bethesda, MD. The site is located.6 miles from I-495 that provides further access to I-270 and I-95. Public transportation is available by either the MARC train located within walking distance of the site or via the Metro Ride On bus system. The trip from KTS to downtown Washington, DC via the Metro Ride On bus to the Metro the site is approximately 45 minutes (Reference Information below from the Washington Metro Area Transportation Authority (WMATA)). Page 33 of 75 4/30/2008

34 TABLE #7 Site Location / Distance to Select Locations (Distance in Miles) Medical Center Metro Station 2.2 National Naval Medical Center 2.2 NIH Campus Headquarters 2.3 DC / Maryland Border 4.2 MARC Station I Wheaton Plaza 3.0 Safeway 0.0 Ronald Reagan Washington National Airport 23. BWI Airport 33.8 Dulles Airport 27. The information below is provided from the WMATA website which notes that trips from KTS to Farragut North Metro Station located at the intersection of Connecticut Avenue and K Street in Washington, DC via the Metro Ride On bus system to the Metro station is approximately 45 minutes both ways. The trips are estimated at $3.0 each direction resulting in $6.20 cost per day to travel to Washington, DC via public transportation, which is less than fuel and parking costs for a similar daily trip via automobile which is estimated at $2.00 to $6.00 per day based on purchasing a monthly parking pass of $200 per month and using one to two gallons of gas daily. Public Transportation: Traveling from Kensington Town Square to FARRAGUT NORTH To Farragut North Metro Station AM Ride on Bus 34 to Medical Center 7 Minutes Travel to Metro/Waiting for Train 7 Minutes Metro Ride to Farragut North 7 Minutes TOTAL TRAVEL TIME 4 Minutes Fare Total (Senior/Disabled): $3.0 ($.75) Public Transportation: Traveling from FARRAGUT NORTH to Kensington Town Square From Farragut North Metro Station PM Metro to Medical Center 7 Minutes Travel to Bus/Waiting for Bus 3 Minutes Ride on Bus 34 to Medical Center 4 Minutes TOTAL TRAVEL TIME 44 Minutes Fare Total (Senior/Disabled): $3.0 ($.75) Local Demographics (Three Mile Radius) The demographic make-up within a three mile radius surrounding the site includes population of 58,624 in 65,304 households. The median age of the subject population is 38 years old and is comprised of is 47.6% male to 52.4% female. Over a five year period from 2007 to 202, the population and the number of households is projected to grow by 2,294 (.45%) and 2,758 (4.22%), respectively. Within the subject area, 4.76% of the households are occupied by one person, while the average size of households across the three mile radius is 2.38 people. The percentage of rental housing is 36% in the subject area. The total household income is $6.3 Billion, with an additional demographic information is provided in Table #8 on the following page) average household income of $97,364 compared to Montgomery County s average household income of $9,64. The total retail sales for the three mile radius including food services are $3,422,296. Page 34 of 75 4/30/2008

35 Table #8 Ring Demographics - Executive Summary Description Miles 3 Miles 5 Miles POPULATION BY YEAR Population (4//2000) 3,596 52, ,52 Population (//2007) 3,523 58, ,956 Population (//202) 3,364 60,98 40,547 Percent Growth (2007/2000) Percent Forecast (202/2007) HOUSEHOLDS BY YEAR Households (4//2000) 5,525 6,03 57,438 Households (//2007) 5,636 65,304 67,62 Households (//202) 5,708 68,062 73,387 Percent Growth (2007/2000) Percent Forecast (202/2007) POPULATION CHARACTERISTICS Median Age Male 6,328 75,487 93,758 Female 7,95 83,37 23,98 Density 4, , , HOUSEHOLD CHARACTERISTICS Households (//2007) 5,636 65,304 67,62 Families 3,398 38,035 0,04 Non-Family Households 2,238 27,269 66,607 Housing, Owner Occupied 4,47 4,784 03,897 Housing, Renter Occupied,29 23,520 63,724 Average Size of Household Median Age of Householder Median Value Owner Occupied ($) 337, ,09 323,887 Median Rent ($),350,29,228 Median Vehicles Per Household HOUSING CHARACTERISTICS Housing, Units 5,77 67,346 72,629 Housing, Owner Occupied 4,47 4,784 03,897 Housing, Renter Occupied,29 23,520 63,724 Housing, Vacant 35 2,042 5,008 INCOME CHARACTERISTICS Total Household Income ($) 647,45,535 6,358,248,439 7,903,993,49 Median Household Income ($) 9,32 75,629 76,436 Average Household Income ($) 4,878 97,364 06,82 Per Capita Income ($) 47,878 40,084 43,995 RETAIL SALES Total Retail Sales (including Food Services) ($) 65,350 3,422,296 6,89,907 Page 35 of 75 4/30/2008

36 Base Realignment and Closure (BRAC) In 2005, the Base Realignment and Closure (BRAC) for the armed forces recommended integrating the Walter Reed Medical Center with the National Naval Medical Center located in Bethesda, MD. The realignment will include construction and renovation of approximately 800,000 square feet in Bethesda that will add 4,200 additional medical and administrative personnel from the Army and Air Force to join the existing staff at the Bethesda Location. Naval Medical Center is located 2.2 miles from the Kensington Town Square, or 7 to 5 minutes by Ride On bus. The realignment mandated that the facilities will merge in 20 and Kensington would be a logical choice for these additional workers to take residence. Development Activity The Kensington sub market has been characterized by limited commercial space with limited growth in over the past decade. Perhaps the most notable change to the area is the new Safeway Grocery store located on Connecticut Avenue where an obsolete Safeway was razed to make way for a new Safeway that includes redesigning of the entire site. Otherwise, the past decade includes the following limited real estate development: Chevy Chase Bank (Connecticut Avenue) Two Storage Facilities (Metropolitan Avenue) Limited Capital Improvements throughout Kensington s Commercial District (primarily story retail center focus on the service needs of the local community) Limited Office Space The goal of Kensington Town Square is to capitalize on a market desperately in need of new product that will help define the Town of Kensington as a destination. Competitive Set Kensington Town Square will be the first class A residential product in the area and will set a new standard. The area is primary comprised of single family homes that surround the commercial core. The comparables used to forecast rents at Kensington Town Square includes The Chase Apartments, Grosvenor Tower, The Montgomery and Kensington House. The challenge was to find market data on local product that would be similar in nature of construction quality to the subject project. In order to assess forecasted rent with the comparable product, a comparability factor was used to decrease or increase the applicable rent. Therefore, communities near a metro would be more desirable than KTS resulting in a comparability factor of less than.0, while older communities without direct access to metro and convenience retail would less desirable resulting in a comparability factor of greater than.0. Below is a brief description of the comparable product including Table #9 providing a summary of the rents forecasting the rent for Kensington Town Square. Reference the Appendix for additional information on each comparable. The Chase Apartments (Bethesda, MD) Well located community in Bethesda, MD with direct access to Metro and local retailers resulting in rents over $3.00 per S.F. per month. Comparability Factor: 0.7 Grosvenor Tower (Rockville, MD) High rise product located in Rockville, MD with access to Metro with sub $2.00 rents per SF per month. Comparability Factor: 0.85 Page 36 of 75 4/30/2008

37 The Montgomery (Wheaton, MD) Low rise product located in Wheaton, MD with access to Metro and local retailers with sub $2.00 rents per SF per month. Comparability Factor:.95 Kensington House (Kensington, MD) High rise product located in Kensington, MD with no access to Metro or local retailers with $2.00 rents per SF per month. Comparability Factor:. Table #9 The Chase Apartments Grosvenor Tower The Montgomery Kensington House Beds Bath Studio $3.2 $3.5 $2.0 $2.2 $2.59 Bed / Bath $3.08 $2.56 $.86 $.90 $2.6 Bed/ Bath Den Loft $.57 $.57 2 Beds / 2 Bath 2 $3. $2.74 $.93 $.96 $.64 $.8 $.75 2 Bed/2 Bath Den 2 $.95 $.99 3 Beds / 2 Baths 2 $2.05 $2.06 $.5 3 Bed/3 Bath Den 3 $2.2 $2.2 AVERAGE $3.3 $2.82 $.97 $2.09 $.88 $.92 $2.00 Comparability Factor Comparable Rent per SF $2.9 $.97 $.77 $.88 $.79 $.83 $2.20 Annual Escalation 4% 4% 4% 4% 4% 4% 4% Future Value (20) $2.78 $2.49 $2.24 $2.37 $2.26 $2.3 $2.79 AVERAGE MARKET RENT $2.50 Kensington Town Square Forecasted Rent Market Rent $2.50 Premium Rent $2.65 After applying the comparability factor and calculating rents, a 4% escalation was applied to arrive at a future rent based at construction completion at lease up. The average rent market rent was calculated to be $2.50 in 20. For the Kensington Town Square the forecasted rent for market rate is $2.50 per SF per Month and the premium rent is $2.65 per SF per Month. Page 37 of 75 4/30/2008

38 KENSINGTON HOUSE APARTMENT 0225 Frederick Avenue Kensington, MD Beds Baths Starting Rent Square Ft. Rent PSF Studio $, $2.59 $, $ $, $ $, $.5 Property Features Pool Controlled Access Handicapped Access Elevators Extra Storage Units Unit Features Air Conditioning Cable Ready Hardwood floors High Speed Internet Available Walk in Closets Kitchen Dishwasher, Garage Disposal, Refrigerator Laundry Room Balcony/Deck/patio Page 38 of 75 4/30/2008

39 THE MONTGOMERY 0 Georgia Avenue Wheaton, MD Full Half Rent PSF Beds Baths Baths SqFt Rent Range Bed/ Bath Loft 873 $,62 $,655 $.86 $.90 Bed/ Bath Den Loft 994 $,564 $,564 $.57 $.57 Bed/ Bath Den 265 $,58 $,939 $.25 $.53 Bed/ Bath Live/Work 495 $,996 $,996 $.34 $.34 Bed/ Bath 776 $,89 $,52 $.53 $.96 2 Bed/2 Bath Den $2,429 $2,474 $.95 $.99 2 Bed/2 Bath Duplex $2,06 $2,4 $.47 $.56 2 Bed/2 Bath $,747 $,92 $.64 $.8 3 Bed/2 Bath $2,720 $2,735 $2.05 $ Bed/3 Bath Den $3,498 $3,498 $2.2 $2.2 Community Amenities: Concierge Resort-style pool 24-hour fitness center Business center Barbeque grills Great room w/plasma TV, prep kitchen and patio dining Cat and dog-friendly Garage parking Wheaton Metro Station (red line) across the street Close to I-495 and I-270 Across the street from the Westfield Wheaton Mall Not far from University of Maryland, College Park Short distance to Wheaton Regional Park and Rock Creek Park Movie theaters, dining and entertainment venues minutes away in downtown Silver Spring Apartment Features: Studio, one, two, and three-bedroom apartments and lofts Spacious floor plans 9-foot ceilings Vaulted ceilings * Wall-to-wall carpet Large walk-in closets Linen closet Central heat and air Private balcony Built-in computer niches * Chef-caliber kitchen Breakfast bar/kitchen island * Pantry White-on-white appliance package Gas oven Dishwasher Microwave Ice-maker Disposal Soaking tub Cable-ready Individual washer and dryer Page 39 of 75 4/30/2008

40 GROSVENOR TOWER 030 Grosvenor Place Rockville, MD Community Features Business Center Clubhouse Covered Parking Emergency Maintenance Extra Storage Fitness Center Garage High Speed Internet Access Public Transportation Swimming Pool Apartment Features Air Conditioning Balcony Cable Ready Dishwasher Microwave New/Renovated Interior Oversized Closest View Washer and Dryer In Unit Style Beds Ba SqFt Rent Range Rent PSF Deposit Alton 845 $,700 $,865 $2.0 $2.2 $500 Buckley 2 2,90 $2,25 $2,225 $.86 $.87 $500 Charleston 2 2,08 $2,40 $2,70 $.93 $.96 $500 Davenshire 2 2,238 $2,30 $2,340 $.87 $.89 $500 Edwards 2 2,60 $2,200 $2,260 $.90 $.95 $500 Page 40 of 75 4/30/2008

41 THE CHASE APARTMENTS AT BETHESDA METRO 4903 Edgemoor Lane Bethesda, MD 2084 Beds Baths Rent Range SqFt Rent PSF Studio $,600 $, $3.2 $ $2,25 $2, $3.08 $ $3,090 $4, $3. $2.74 Property Features Assigned Parking Garage Parking Fitness Center Pool Controlled Access Elevator Extra Storage Units Apartment Features Carpeting Fireplace Hardwood Flooring Walk In Closets Dishwasher Garbage Disposal Refrigerator Washer and Dryer In Unit Balcony / Deck / Patio Page 4 of 75 4/30/2008

42 IX. BUILDING DESIGN Site Plan Goals The goal of KTS is to design the project with two primarily functions:. Strong sightlines at the corner of Connecticut Avenue and Knowles Avenue. 2. Create an Apartment Building with a Connecticut Avenue Address In order to achieve these goals, the building has been oriented with a public use space at the corner intersection of Connecticut and Knowles Avenues creating a strong presence on this predominate corner. The apartments lobby will be at the corner of Connecticut Avenue and Howard Avenue achieving the second goal. Façade / Property Features The building skin is based on a combination of 55% solid surfaces such as masonry and 45% glass / window systems. The apartment units will include Aluminum windows at the bedrooms and full height slab-to-slab panelized systems at the living rooms in increase the natural light in the units. The apartment lobby main entrance will face Connecticut Avenue and will include the following services/amenities: Management Office, Leasing Office, Fitness Center, Business Center and Club Room. The community will also feature a pool for the apartment residents located on the roof in the North West corner. In order to accomplish this amenity feature, the structural section of the building in this location will need to be designed differently to accommodate the added weight. Unit Description The primary living feature of the apartment units will focus on an open living plan, minimizing the quantity of walls and door, and in unit access connections to cable/internet/telephone services providers. The kitchens will be open to the living area and select units will feature partial height partitions that section off the bedroom from the living area without doors enclosing the bedroom. The access to technology will focus on providing the capability for homeowners to be able to choose between Comcast, Verizon FiOS or DirectTV differentiating the choices available to the consumer. All units will include Stainless Steel appliances including refrigerator, dishwasher, electric range, disposal, microwave with recirculating hood, and a full size washer & dryer. The finish level will be defined as follows: maple cabinets, granite counters in the kitchen, cultured marble counters with integral bowl in the bathroom, vinyl wire closet shelving, mini-blinds at all windows, vinyl wood flooring in the kitchens and select unit living spaces, carpet in the living spaces and the bedrooms, oversized porcelain tile in the bathrooms with full height bath surrounds and three tone white paint finish (white ceiling, off white partition and semigloss white base). Interior unit doors will feature a two panel with smooth finish and the trim will be paint grade jointed pine throughout (profile TBD by the interior designer). The trim package throughout the units (light fixtures, kitchen/bath hardware and fixtures, etc) is based on a nickel finish which will be satin in dry areas and polished in wet areas. All units will be individually sub metered for gas, water and electricity requiring individual residents to be responsible for their use. The units will be equipped with gas hot water and HVAC systems (heat gas, air conditioning electrical). Retail Specifications The retail base building construction will provide a cold dark shell without storefront as this will provide retailers the opportunity to incorporate the storefront into their design to create more retail identity. In the leasing agreement with retailers there will be requirements for acceptable storefront design and an Owner approval requirement for signoff. The goal of allowing retailers to control the storefront is to enhance Page 42 of 75 4/30/2008

43 their operation and allow the building design and character to evolve based on the retailers, as well as to create individuality for the retailers adding flavor to the project at the pedestrian level. The following page shows samples of completed work that displays the level of finishes and the quality proposed for Kensington Town Square. The level of finish is anticipated to provide first-rate market rate unit in the sub-market. Following the photos are concept drawings showing the proposed development through a site plan, garage plan, typical floor plan and two sections. Page 43 of 75 4/30/2008

44 Photo : Sample Lobby Photo 2: Apartment Typical Kitchen Photo #3: Fitness Center Photo #4: Media Center Photo #5: Billiard Room Page 44 of 75 4/30/2008

45 Garage Entrance SITE PLAN Roof Amenity Green Space Site Drive Isles and Angled Parking Building Design Feature Pool Public Art Amenity Water Feature Property Line KTS Street Light Tree

46 Garage Entrance Ramp Down Main Lobby / Management / Leasing Office GROUND FLOOR PLAN Retail Amenity Green Space Site Drive Isles and Angled Parking Stair and Egress Amenity Water Feature Loading Dock Management and Leasing Office

47 Amenity Water Feature Units Amenity Green Space Site Drive Isles and Angled Parking TYPICAL FLOOR PLAN Stairwells and Egress Chases and Closets S S S S S

48 Garage Entrance Typical DIMENSIONAL PLAN Ground Floor Plate Amenity Green Space Site Drive Isles and Angled Parking Building Design Feature Amenity Water Feature Property Line KTS Street Light Tree

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