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MAXIMALLY PRODUCTIVE USE The purpose of this report is two fold: (1) to estimate the maximally productive use of the subject site; and (2) estimate the potential annual cash flow that could be real'~zed from a ground lecase. This section deals with estimating the subject's maximally productive use, and utilizes the residual technique. This residual technique will first estimate the value of the anticipated development using the Income Capitalization Approach. The Income Capitalization Approach is based on the premise that multiple family and commercial properties are income producing, and that investors purchase these propefies based on their income producing ablity. In the Income Capitalization Approach, ma~lcet rents for the subject property are ~estimated, the applicable operating expenses are deducted, and the resulting net income is capital'~zed into a value estimate. This approach is based on analysis of information ext~acted from the market, and provides a comparison of the subject to other properties of similar character and income producing ability. Secondly, the cost of the anticipated improvements on the site including profit and ovefiead and absorption are analyzed. This cost esfimate will exclude the value of the land and costs of developing the parking structure, building pad, and other improvements. The estimated costs discussed above will be subtracted from the estimated Income Capitalization Approach value, resulting in an implied value of the subject site and parking improvement. As noted cabove, the residual analysis subt~acts total development costs from an estimated Income Capitalization Approach value for each of the development scenarios with the exception of Scenario S'a. This process results in the underlying vdlue of the land. Several comparable buildings and projects were surveyed to determine appropriate apartment rents and lease rates for office, ground-floor retail, and office/retail space proposed in the various development scenarios. The rents used in this analysis were derived from a review of the comparables and the assumptions for each scenario. Operafing expenses were based on series of assumptions that appecar in the "Assumptions" charis the corresponds to each scenario as seen below. Total operating expenses are deducted from the total effecfive gross income reported in the Income Approach table to derive a net operafing income. The net-operafing income of each development scenario is then capitalized into a value estimate assuming an overall capital'¢ation rate. The capital'~zafion rates used in the analysis were based on information extracted from the market. wth respect to development costs, a survey of similar projects was completed as well as use of the Marshall Valuation Service6, a national costing service. The costs used in this analysis were based on a review of the cost comparables and the development prog~am outlined for each scenario. The development costs were then adjusted for developer's profit and ovefiead and absorption costs~. The following pages include assumptions, an income valuation chart, and project cost charf for each scenario. Narrative continues on page 39. P99239 PALMER, Gitom 8~ Pi~xn. INC. 23