Treasure Hills Apartments Harlingen, Texas

Treasure Hills Apartments Harlingen, Texas Preliminary Market Feasibility Analysis Prepared for Mr. Roy D. Williams Vice Presiden/Senior Underwriter Oppenheimer Multi Family Housing 2500 Northwinds Parkway, Suite 100 Alpharetta, GA 30009 By Capitol Market Research, Inc. 901 Rio Grande, Suite 201 Austin, Texas 78701 (512) 476 5000 On May 31, 2012

Harlingen Market Area Definition In order to accurately represent the demand for multi family units at the subject site, regional demand for housing must first be disaggregated to the neighborhood or market area level. This process of disaggregation is often accomplished by segmenting a geographic region into smaller apartment submarkets or neighborhoods. The market area delineated for the subject property must be small enough to capture relevant local trends and product preferences, but it also must be large enough to capture all of the current and potentially competitive properties along with important employment and activity generators. The subject property is located at 1901 E. Treasure Hills Boulevard, north of US Route 77 and east of Texas State Highway Loop 499 inside the City of Harlingen. The market area defined for this project is most appropriately defined as the Harlingen market area, delineated generally by Willacy County to the north, Laguna Madre to the northeast, Brownsville to the southeast, Hidalgo County to the west and the United States Mexico border to the south. Land uses in the area include single family residential, retail and commercial uses along with a substantial amount of acreage in agricultural production. The definition of the market area must take into consideration the availability of relevant information, particularly demographic area and data obtained from comparable and competitive projects. Census tract geography is most often used to delineate market areas because the data available from the census is critical to thorough and relevant analysis of the market. This area is comprised by the following Cameron County 2010 Census tracts: 101, 102.01, 102.03, 103.01, 103.02, 104.01, 104.02, 105, 106.01, 106.02, 107, 108, 109, 110, 111, 112, 113.01, 113.02, 114, 115, 116, 117, 118.01, 118.02, 119.01, 119.02, 119.03, 120.01, 120.02, 121.01, 121.02, 125.07, 125.08. 1

Harlingen Market Area: 2010 Census Tracts 103.01 102.01 101 102.03 103.02 104.01 104.02 9800.01 106.01 106.02 108 105 107 Harlingen 109 110 111 112 113.01 120.01 118.01 113.02 119.01 118.02 114 117 119.02 San Benito 115 122 120.02 121.01 116 119.03 121.02 125.05 124.01 125.06 M E X I C O Brownsville Date: May 2012 Path: Z:\GIS\Projects\2012\2010_census.mxd ± 0 1 2 Miles

Harlingen Market Area Apartment Market Conditions Overview In May 2012, Capitol Market Research surveyed 26 apartment communities in the Harlingen market area that altogether contain a total of 2,606 units. Currently, the market area occupancy is 95.3%. Net average rents (including concessions) are $0.71 per square foot. A significant portion of the multi family product in the Harlingen market area is relatively old, and of the 2,606 total units, only 927 (35.6%) have been built (completed) since the beginning of 2000. New Construction New construction in the Harlingen market area has been sporadic, with units being delivered in only 10 of the last 25 years. The most notable new completions in the market area are three highly amenitized market rate projects added in 2002, 2006, and 2010 respectively, Reata Apartments Stoneleigh Apartments, and Village at Paseo Real. More recently, two lower quality market rate projects with no project amenities were added in 2008 and 2009, respectively, North Ridge Apartments and Stone Oak Townhomes. These properties are all leasing well; however, the projects with no project amenities are achieving much lower rental rates. North Ridge Apartments (2008) is 100% occupied but is only averaging rental rates of $0.75 per square foot. In addition, Stone Oak Townhomes (2009) is 98.7% occupied but is only averaging rental rates of $0.64 per square foot. On the other hand Stoneleigh (2006) is 96.7% occupied and is achieving rental rates of $0.92 per square foot. The Village at Paseo Real (2010), located in the neighboring town of San Benito, is 94.4% occupied and is achieving rental rates of $0.88 per square foot. At the apex of the Harlingen market area is the Reata Apartments (2002) with May 2012 occupancy at 94.4% and an average rental rate of $1.08 per square foot. The Reata Apartments has the highest average rental rate in the market area, with a 52.1% premium over the market area average of $0.71 per square foot. Occupancy An apartment occupancy rate above 95.0% is considered theoretically full. The occupancy rate for the Harlingen market area is therefore considered theoretically full at 95.3%, with only 122 available apartment units out of the total of 2,606 units. Average Rents Average rental rates (net rents including concessions) in the Harlingen market area are relatively low, with an overall average of $0.71 per square foot. However, when you take into account that the majority of the market area is dominated by older properties with limited, if any, project amenities and a lower, builder grade finish out, it becomes clear that the market area averages do not accurately reflect the potential for a higher quality project. The three newer, amenity rich projects, Stoneleigh, Reata, and Village at Paseo Real, are achieving rental rates far above the market area average at $0.92, $1.08, and $0.88 per square foot, respectively. 3

Market Outlook The Harlingen market area is currently inundated with older, often smaller complexes with limited amenities. This has caused the market area average rent per square foot to remain stubbornly low. In contrast, the newer, amenity rich, complexes are able to demand much higher rental rates. As the market area continues to grow and newer apartment projects begin appearing more frequently, the average rental rates will begin to climb. In addition, many older projects will eventually be phased out completely. Currently, there are no projects in the Harlingen market area under construction. In addition, the only planned project in the market area is the the subject property, Treasure Hills Apartments, with 140 units planned. The proposed Treasure Hills Apartments are located at 1901 E. Treasure Hills Boulevard, north of US Route 77 and east of Texas State Highway Loop 499 inside the City of Harlingen. 4

Table (1) Average Rent and Occupancy Harlingen Market Area Map No. Project Address YOC Total May 2012 May 2012 Units Occupancy Average Rent 1 Buckingham Manor 1601 Haverford 1976 69 91.3% $0.56 2 Cornerstone Apartments 2115 East Vinson Avenue 1996 168 96.1% $0.88 3 Harrison Manor 601 S. 17th Street 1979 50 100.0% $1.05 4 La Casita Apartments 1608 Sam Houston 1980 170 64.7% $0.54 5 Madrid Apartments 401 Grimes 1983 30 100.0% $0.71 6 Morgan Place 1702 Morgan 2000 22 100.0% $0.63 7 North Ridge Apartments 2710 Los Amigos Drive 2008 64 100.0% $0.75 8 North Start Village 411 Lozano Street 1970 56 100.0% $0.95 9 Oak Terrace 902 S. Loop 499 1995 50 100.0% $0.61 10 Palm Terrace Apartments 1501 Sam Houston 1982 124 99.2% $0.53 11 Parkwood Townhomes 2505 S. Parkwood 1968 50 100.0% $0.54 12 Reata Apartments 3102 Haine Drive 2002 144 94.4% $1.08 13 Riverview Apartments 1325 S. 77 Sunshine Strip 1974 72 97.2% $0.71 14 Robin Hood Apartments 615 South F Street 1971 69 100.0% $0.93 15 Rosemont of Highland Garden 1902 E. Tyler Avenue 2003 174 97.7% $0.52 16 Sierra Apartments 2901 Haine Drive 1985 208 94.7% $0.85 17 Skyline on Grimes 2828 E. Grimes 1982 120 100.0% $0.65 18 Spring Creek 1410 Morgan Blvd. 1965 110 94.5% $0.56 19 St. James Apartments 1902 E. Washington 1979 120 100.0% $0.63 20 Stone Oak Townhomes 20502 Oak Hollow Lane 2009 77 98.7% $0.64 21 Stoneleigh 905 N. Loop 499 2006 180 96.7% $0.92 22 The Sundance Apartments 1402 Vermont 2000 176 99.4% $0.77 23 The Timbers Apartments 1500 Sam Houston 1980 60 91.7% $0.55 24 Valencia Apartments 2002 North G Street 1999 73 100.0% $0.74 25 Windstar Apartments 2802 North 7th Street 1998 80 100.0% $0.55 26 Village at Paseo Real 349 Helen Moore Road 2010 90 94.4% $0.88 Total/Averages 2,606 95.3% $0.71 Source: Captiol Market Research Apartment Survey, May 2012 Note: We were unable to collect any data from two apartment complexes in the market area, despite repeated calls, so they were eliminated from the analysis. The complexes that were excluded were Southwest Properties and Camino Real Apartments rent_occ.xls 5

!( 20 ED CAREY DR Harlingen Market Area: Existing Apartments!( 25!( 2 COMMERCE ST!( 24 N 77 SUNSHINE STRIP!( 8 H A R L I N G E N!( 5 GRIMES ST MORGAN BLVD!( 19!( 6!( 18!( 17!( 7 UV 499!( 21!( 14 TYLER AVE HARRISON AVE!( 15!( 3!( 11!( 9!( 13 1 TAFT AVE 10!(!( 4 23 HAINE DR!( 16!( 12 Treasure Hills Apartment Site ") FM 509!( 22 S A N B E N I T Date: May 2012 Path: Z:\GIS\Projects\2012\Harlingen\existing_apts.mxd ± 0 0.15 0.3 Miles 26!(!( Apartment Location

Harlingen Market Area Apartment Demand The City of Harlingen is located in Cameron County, where Brownsville is the county seat. In 2010, the thirty three U.S. Census tracts that encompass the City of Harlingen had a total population of 162,036, which was approximately 39.9% of the Cameron County total (406,220). Population in the Harlingen market area has increased by 14.6% from 141,454 in 2000 to 162,036 in 2010, and accounted for 29.0% of the Cameron County growth over the last 10 years. An absorption forecast for the market area can be calculated from this historical capture rate, and results in an average annual absorption for the market area of 274 for the 2012 through 2016 time period. Table (2) Multi Family Unit Demand Harlingen Market Area Year Forecasted County Population Growth Capture Rate % Multi New Population HH Size New HH % Renter Family (County) Multi Family Demand 2012 10,525 29.0% 3,051 3.22 949 29.7% 97.3% 274 2013 10,525 29.0% 3,051 3.22 949 29.8% 97.3% 275 2014 10,525 29.0% 3,051 3.21 949 29.8% 97.3% 275 2015 10,525 29.0% 3,051 3.21 949 29.9% 97.3% 276 2016 10,374 29.0% 3,007 3.21 936 29.9% 97.3% 272 Prepared by: Capitol Market Research, May 2012 Notes: County population forecast based on the population forecast obtained from Texas State Data Center, Scenario 1.0, February 2009. Capture rate based on average historical growth of the market area vs. Cameron County. Household size decreases by the same rate of growth observed between 2000 and 2010 for the market area. Tenure split increases by the same rate of growth observed between 2000 and 2010 for market area. Percent multi family is based on recent MSA building permit data from the Real Esate Center at Texas A&M University. Dem.ForecastCalc_Harlingen.xls 7

Market Area and Subject Absorption Forecast Based on historical data from the U.S. Census, combined with a Cameron County population forecast from the State Data Center, CMR has prepared an apartment demand forecast that shows an annual demand for new apartment units that averages 274 units per year from 2012 2016. The timing of the identified planned project (Treasure Hills Apartments) is shown below in Table (3). By combining the current market conditions with the plans for new unit construction developed in the previous section, an absorption analysis for the market area and the subject project can be developed and is shown in Table (4) below. Based on the supply and demand calculations shown below, it appears that the Harlingen market area will maintain an equilibrium condition throughout the forecast period with a continuing possibility of upward pressure on rents and increases in occupancy. Table (3) Proposed Project Timing Harlingen Market Area Map No PROJECT UNITS 2012 2013 2014 2015 2016 Future 1 Treasure Hills Apartments 140 0 0 140 0 0 0 Supply Totals: 140 0 0 140 0 0 Annual Demand: 274 275 275 276 272 Annual Demand Less New Construction: 274 275 135 276 272 Cummulative Excess Demand (Supply): 274 549 684 960 1,232 Source: Capitol Market Research Developer/Broker Interviews, May 2012 CompSites.xls Table (4) Subject Absorption Forecast Harlingen Market Area Year Annual Multi Family Demand Units Added Subject Units Proportionate Market Share Competitive Market Share Average Market Share Subject Absorption 2012 274 0 0 0.0% 0.0% 0.0% 0 2013 275 0 0 0.0% 0.0% 0.0% 0 2014 275 140 140 50.9% 51.0% 50.9% 140 2015 276 0 0 0.0% 0.0% 0.0% 0 2016 272 0 0 0.0% 0.0% 0.0% 0 Totals 1,372 140 140 140 Prepared by: Capitol Market Research, May 2012 CompSites.xls 8

Harlingen Market Area Comparable Property Analysis Unit Mix, Sizes and Rents Analysis The subject property is planned to consist of 140 units of class A apartments in the western quadrant of a 40 acre property. CMR has identified six newer apartment communities that are similar in construction and product type to the subject property. Two of the comparables, the Reata and Stoneleigh, are located in the Harlingen market area. The remaining four comparable properties are located in neighboring cities. The San Pedro Apartments and the Plantation Apartments are located in Mission, The District is located in McAllen, and the Village at Paseo Real is located in San Benito. 1 Tables (5) through (9) on the following pages provide specific data for each of the comparable properties regarding unit mix, availability by unit type, total average rent and rent per sq. ft. An evaluation of the data on the following pages reveals that 45.2% of the total units among the comparable properties consist of one bedroom one bath units, 5.9% are two bedroom one bath units, two bedroom two bath units account for 41.3% of the total units and three bedroom two bath units account for 7.7% of the total units. The average size of the one bedroom units is 668 sq. ft., the two bedroom one bath units average 931 sq. ft., two bedroom two baths average 1,000 sq. ft., and the three bedroom two bath units average 1,277. The vacancy rate for each of these unit types is currently low at 4.1%, 0.6%, 2.5%, and 0.2% respectively. Occupancy for the comparable projects is currently 92.6%; however, the occupancy rate increases to 95.1% when the Plantation Apartment property, which is currently in lease up, is removed. The comparable property average net rent per sq. ft. (including concessions) based on Capitol Market Research s May 2012 survey is $1.00, 40.8% higher than the Harlingen market area average ($0.71). The higher average rent among comparable properties is attributable to the superior amenity packages, which often include a swimming pool, Jacuzzi, club house, exercise room, etc. In addition, these competitive properties typically offer carports and detached garages. The comparable property one bedroom units currently average $1.09 per sq. ft., which is 28.2% higher than the Harlingen market area one bedroom average rent per sq. ft. ($0.85), and $727 total average rent, which is 32.9% higher than the market area one bedroom total average rent ($547). The comparable two bedroom one bath units average $0.98 per sq. ft., which is 36.1% higher than the market area ($0.72) and $911 total average rent, which is 54.1% higher than the market area ($591). The comparable two bedroom two bath units average $0.93 per sq. ft., which is 34.8% higher than the market area ($0.69) and $936 total average rent, which is 38.7% higher than the market area ($675). Finally, the comparable three bedroom two bath units average $0.99 per sq. ft., which is 47.8% higher than the market area ($0.67) and $1,267 total rent, which is 74.0% higher than the market area ($728). 1 Capitol Market Research acknowledges the presence of three additional potential comparable properties, The Mosaic, Reserve at Cimarron, and Bella Rose. However, CMR was unable to establish contact with property management during the timeframe of this report. 9

Map No. YOC Project Table (5) Total Units By Type Comparable Properties Total Units Eff. 1/1 2/1 2/1.5 2/2 3/2 3/2.5 3/3 3+ Bdrm 1 2012 Plantation Apartments 192... 96...... 80 16......... 2 2002 Reata Apartments 144... 88 24... 32............ 3 2006 San Pedro Apartments 268... 96 36... 96 40......... 4 2006 Stoneleigh 180... 120...... 60............ 5 2006 The District 144... 20...... 112 12......... 6 2010 Village at Paseo Real 90... 40...... 40 10......... Total 1,018... 460 60... 420 78......... % of Market 100.0%... 45.2% 5.9%... 41.3% 7.7%......... Source: Capitol Market Research, Harlingen Apartment Survey, May 2012 Map No. YOC Project Table (6) Available Units By Type Comparable Properties Total Units Eff. 1/1 2/1 2/1.5 2/2 3/2 3/2.5 3/3 3+ Bdrm 1 2012 Plantation Apartments 192... 23...... 11............ 2 2002 Reata Apartments 144... 3 4... 1............ 3 2006 San Pedro Apartments 268... 9 2... 9 2......... 4 2006 Stoneleigh 180... 5...... 1............ 5 2006 The District 144........................... 6 2010 Village at Paseo Real 90... 2...... 3............ Total 1,018... 42 6... 25 2......... % of Market 7.4%... 4.1% 0.6%... 2.5% 0.2%......... Source: Capitol Market Research, Harlingen Apartment Survey, May 2012 Map No. YOC Project Table (7) Average Square Foot by Type Comparable Properties Total Units Eff. 1/1 2/1 2/1.5 2/2 3/2 3/2.5 3/3 3+ Bdrm ` 1 2012 Plantation Apartments 192... 665...... 1,048 1,433......... 2 2002 Reata Apartments 144... 668 1,005... 1,075............ 3 2006 San Pedro Apartments 268... 734 881... 954 1,200......... 4 2006 Stoneleigh 180... 596...... 936............ 5 2006 The District 144... 787...... 1,006 1,364......... 6 2010 Village at Paseo Real 90... 677...... 1,038 1,234......... Total 1,018... 668 931... 1,000 1,277......... Source: Capitol Market Research, Harlingen Apartment Survey, May 2012 Unit_Type.xls 10

Map No. YOC Project Table (8) Average Gross Rent by Type Comparable Properties Total Units Eff. 1/1 2/1 2/1.5 2/2 3/2 3/2.5 3/3 3+ Bdrm 1 2012 Plantation Apartments 192... $796...... $1,058 $1,468......... 2 2002 Reata Apartments 144... $796 $963... $1,030............ 3 2006 San Pedro Apartments 268... $753 $877... $901 $1,200......... 4 2006 Stoneleigh 180... 598...... 764............ 5 2006 The District 144... $775...... $995 $1,400......... 6 2010 Village at Paseo Real 90... $718...... $795 $1,055......... Total 736... $727 $911... $936 $1,267......... Source: Capitol Market Research, Harlingen Apartment Survey, May 2012 Map No. YOC Project Table (9) Average Rent per Square Foot by Type Comparable Properties Total Units Eff. 1/1 2/1 2/1.5 2/2 3/2 3/2.5 3/3 3+ Bdrm 1 2012 Plantation Apartments 192... $1.20...... $1.01 $1.02......... 2 2002 Reata Apartments 144... $1.19 $0.96... $0.96............ 3 2006 San Pedro Apartments 268... $1.03 $1.00... $0.94 $1.00......... 4 2006 Stoneleigh 180... $1.01...... $0.82............ 5 2006 The District 144... $0.98...... $0.99 $1.03......... 6 2010 Village at Paseo Real 90... $1.06...... $0.77 $0.85......... Total 736... $1.09 $0.98... $0.93 $0.99......... Source: Capitol Market Research, Harlingen Apartment Survey, May 2012 Unit_Type.xls 11

Harlingen Market Area: Comparable Apartments 281 H i d a l g o C o u n t y W i ll a c y C o u n ty C a m e r o n C o u n ty E D I N B U R G «107 77 M I S S I O N FM 494!( 1!( 3 «495!( 5 M c A L L E N FM 2061 S A N J U A N FM 907 A L A M O FM 493 D O N N A 83 FM 88 W E S L A C O M E R C E D E S 83 FM 1479 UV 499!( 4 H A R L I N G E N!( 2!( 6 S A N B E N I T O 281 M E X I C O Date: May 2012 Path: Z:\GIS\Projects\2012\Harlingen\comp_apts.mxd ± 0 2.5 5 Miles!( Comparable Apartment Location

Harlingen Market Area & Subject Absorption Forecast Conclusion The proposed Treasure Hills Apartments project is located in Harlingen, Texas, approximately 12 minutes from downtown Harlingen. The site is located close to US Route 77 and Texas State Highway Loop 499 as well as several higher end subdivisions and a golf course. The subject market area currently contains 2,606 apartment units in 26 complexes, with 35.6% of the units built after 2000. The overall average rent per square foot for the Harlingen market area as of May 2012 is $0.71, with an average total rent of $617. The market area occupancy among the 26 projects is currently 95.3%. Average square footage among the properties ranges from 658 square feet for a one bedroom one bath, to an average of 1,115 square feet for a three bedroom two bath. The subject property will be developed with 140 class A apartment units. CMR has identified two comparable properties in the Harlingen market area and two properties in the nearby McAllen area that are similar in product type, including Reata Apartments, Stoneleigh, San Pedro, Plantation Apartments, Village at Paseo Real, and The District. The average rent per square foot for the comparable properties were most recently reported at $1.00, with an occupancy rate of 92.6% (95.1% without the Plantation property that is currently in lease up). The higher average rent among comparable properties is attributable to the superior amenity packages, which often include a swimming pool, club house, exercise room, etc. In addition, these competitive properties typically offer carports and detached and attached garages. Using a population forecast obtained from the Texas State Data Center for Cameron County (Scenario 1.0 February 2009) and a 29.0% capture rate for the market area, CMR estimates that the rental unit demand in the Harlingen market area is approximately 274 units annually through 2016. At the present time, the subject property is the only site planned for multi family development in the Harlingen market area. There are no other announced construction starts in the market area. The historical data obtained from Apartment Market Date Research shows a slowly increasing occupancy rate and increasing rents from 2005 through Q1 2012. With strong projected demand and little new supply, the average rents should continue to increase over the next two to three years. Based on the foregoing data and analysis provided in this report, development of the subject tract is considered feasible as currently positioned in the Harlingen market area. Considering an average annual demand for multi family rental units of 274 per year, the higher average rent per square foot of comparable properties, and positive population growth in the market area, a new high quality construction apartment community should be well accepted in the market area 13

when the first units are delivered in 2013. Based on supply vs. demand estimates and the leaseup rates achieved by projects in the subject market area, the subject should be well received in the market with a lease up rate of at least 14 units per month. Based on the foregoing data and analysis, Capitol Market Research has determined that the proposed 140 unit class A apartment community (to be started in 2013) is market justified and feasible for delivery to market in 2013. 14

Table (10) Historical Apartment Summary Harlingen: 2007 2012 Year Number of Units Units Occupied Occupancy Rate Rent per Sq. Ft. 2007 2,696 2,486 92.2% $0.61 2008 2,583 2,392 92.6% $0.63 2009 2,582 2,406 93.2% $0.66 2010 2,582 2,448 94.8% $0.69 2011 2,582 2,453 95.0% $0.70 2012 2,582 2,461 95.3% $0.71 Source: Apartment Market Data Research, LLC Multi Family Housing Report 2007 2012 hist_occ_riograndevalley.xls 15

Table (11) Historical Apartment Summary Rio Grande Valley: 2007 2012 Year Number of Units Units Occupied Occupancy Rate Rent per Sq. Ft. 2007 16,008 15,368 96.0% $0.62 2008 16,396 15,839 96.6% $0.64 2009 16,815 16,058 95.5% $0.65 2010 17,073 16,527 96.8% $0.67 2011 17,972 17,541 97.6% $0.69 2012 17,906 17,440 97.4% $0.70 Source: Apartment Market Data Research, LLC Multi Family Housing Report 2007 2012 hist_occ_riograndevalley.xls 16