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Disclosure Type:
EVENT FILING
Restructuring Agreement
Issue:
130795
Securities:
Thomas Jefferson School of Law (TJSL) and a requisite approving percentage of bondholders have
agreed to a restructuring support agreement with the Trustee and bondholders representing
approximately 89% of the aggregate principal amount of the Bonds described more fully in the
attached.
evidenced by the RSA and the Term Sheet, described herein. Investors are encouraged to contact the
Trustee with any questions regarding the Zolfo Report and/or the information contained in
Exhibit C.
In connection with the negotiations with the Trustee, the Law School obtained an appraisal of
the Law Schools real property located at 1155 Island Ave., San Diego, CA 92101 (the Property)
which serves as security for the Law Schools obligations under the Loan Agreement pursuant to a
deed of trust. The Law Schools appraisal has been provided to the Trustee, its advisors and the
Recipients. Attached hereto as Exhibit D is a copy of the Law Schools appraisal. Investors should
refer to the appraisal for all assumptions, limiting conditions and other factors pertinent to the
conclusions stated therein. The Law School makes no representation regarding the current value of
the Property, whether as part of a negotiated restructuring or otherwise, or whether the Trustee, or the
Bondholders or entity owning the property on behalf of Bondholders will pursue a sale of the
Property following the restructuring or at any other time. The Law School is informed that the
Trustee also obtained an appraisal of the Property and that such appraisal has been provided to
Recipients. Investors are encouraged to contact the Trustee for a copy of the Trustees appraisal.
The Law School is further informed that the Trustee and its advisors have participated in
numerous conference calls with the Recipients during which the parties discussed the materials
which had been shared with the Recipients and the status of the ongoing restructuring negotiations.
THE LAW SCHOOL HAS NOT BEEN A PARTICIPANT IN MOST OF THOSE CONFERENCE
CALLS AND IS NOT AWARE OF THE SUBSTANCE OF THE VERBAL OR WRITTEN
INTERACTION BETWEEN THE RECIPIENTS AND THE TRUSTEE AND ITS
REPRESENTATIVES AND HAS NO DIRECT KNOWLEDGE WITH RESPECT THERETO,
OTHER THAN AS SET FORTH HEREIN. THE DISCLOSURE SET FORTH BELOW AND IN
THE EXHIBITS TO THIS DISCLOSURE ARE INTENDED TO SUPPLEMENT INFORMATION
WHICH WAS SHARED WITH THE RECIPIENTS TO PROVIDE INFORMATION WHICH
MAY BE MATERIAL TO AN INVESTMENT DECISION REGARDING THE BONDS TO
WHICH THE CONFIDENTIAL INFORMATION DISCLOSED TO RECIPIENTS MAY RELATE.
To this point, the parties have not involved the issuer of the Bonds, California Statewide
Communities Development Authority, in the restructuring discussions. The Term Sheet anticipates
the issuer will be asked to consent to the Transaction.
Debt Restructuring Discussions. Prior to entering into the RSA, the Law School and the
Trustee discussed various restructuring proposals. On October 28, 2014, the Law School and the
Consenting Bondholders entered into the RSA. The RSA and attached Term Sheet are attached
hereto as Exhibit A and certain provisions are summarized below. All summaries herein are
qualified in their entirety by the RSA, including the Term Sheet. Investors should read the entire
RSA and the Term Sheet.
Investors are urged to consult their legal, tax and financial advisors with respect to all aspects
of the Transaction and its impact on the Bonds.
THE RSA
Pursuant to the RSA, the Law School and Consenting Bondholders comprising in excess of
(a) 89% of the aggregate principal amount of the Bonds and (b) 87% of the aggregate principal
amount of Tax-Exempt Bonds (the Requisite Consenting Bondholders) agreed to certain terms and
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conditions pursuant to which the Law School and the Consenting Bondholders will work to
effectuate a restructuring transaction related to the Bonds and the Law Schools obligations under the
Loan Agreement, Deed of Trust and related obligations (as defined in the RSA). Pursuant to the
RSA, the Parties will effectuate the Transaction pursuant to the terms of the RSA including the terms
and conditions set forth in the Term Sheet. To this end, each party has agreed to negotiate in good
faith Definitive Documents implementing, achieving and relating to the Transaction which shall
contain terms and conditions consistent with the RSA and the Term Sheet, and to execute and
otherwise support the Definitive Documents. All Definitive Documents shall be reasonably
acceptable in form and substance to the Requisite Consenting Bondholders, the Law School (solely
to the extent the Law School is party to such Definitive Document) and the Trustee (solely for
purposes of causing the implementation of the Transaction to be consistent with the Trustees duties
under the Indenture). The Law School understands that all Bondholders (other than those subject to a
confidentiality agreement with the Law School) will be given an opportunity to join the RSA as a
Consenting Bondholder on the terms set forth in the RSA.
The Law School agrees in the RSA to support the Transaction, subject to compliance with
applicable law in all respects (including receipt of any and all regulatory consents or approvals as
may be required under California Corporations Code Section 5913 or otherwise), for so long as the
RSA is not terminated in accordance with its terms, including using reasonable best efforts to work in
good faith to negotiate the Definitive Documents and consummate the Transaction and any other
transactions contemplated by the RSA.
The RSA is for a limited term expiring following the occurrence of certain events described
in the RSA including failure to implement the Transaction by the date(s) specified, and is subject to
termination under certain circumstances described more fully in the RSA.
As part of the RSA, the Consenting Bondholders direct the Trustee to take no remedial action
or enforcement action of any sort against the Law School for failure to make any Required Payment
(as defined in the Indenture) or perform other covenants with respect to Article 5 of the Loan
Agreement and Consent and Amendment Nos. 2 through 11 (notice of which is available on EMMA
through previous Law School postings). As a result, during the term of the RSA, no remedial action
is expected to be taken against the Law School by or on behalf of the Trustee with respect to the
Bonds or the Loan Agreement or the Deed of Trust which secure the Bonds.
Under the RSA each Consenting Bondholder agrees not to transfer its bonds except to
another Consenting Bondholder (which includes any Consenting Bondholder included in the
signature pages to the RSA or any party that agrees in writing to be bound by the RSA and delivers
to the School and the Trustee a Joinder in the form attached thereto as Exhibit A). The RSA contains
provisions for remedies in the event of a breach by certain Parties, including a right of specific
performance.
THE TERM SHEET
As a condition of the closing of the Transaction, all of the Bonds will be cancelled and the
Law School will be fully released of substantially all of its obligations under the Loan Agreement,
the Indenture, the Deed of Trust and all related documents, including the Bonds, except for its
obligations resulting from the Transaction related to the Lease and the Notes.
Pursuant to an SPV Term Sheet which the Law School understands is to be posted on EMMA
concurrently with this disclosure, the Consenting Bondholders have directed the Trustee to form a
special purpose vehicle (the SPV), to which the School will not be a party, for purposes of
implementing the Transaction on behalf of the Trustee and the Bondholders. The Consenting
Bondholders agree in the RSA to negotiate an operating agreement for the SPV acceptable to both
the Requisite Consenting Bondholders and a majority of the Consenting Bondholders other than the
Requisite Consenting Bondholders (as more fully set forth in the RSA) and the Trustee (solely for
purposes of causing the implementation of the operating agreement at the Closing to be consistent
with the Trustees duties under the Indenture). The Trustee acknowledges in the RSA that the SPV
Term Sheet is consistent with the Trustees duties under the Indenture. The Law School has not
participated in the negotiation of the SPV Term Sheet and is not responsible for its terms or
implementation.
Under the Term Sheet, ownership of the land, building and personalty, including leasehold
improvements, located at 1155 Island Avenue, San Diego, California will be conveyed to the SPV
following conveyance by the Law School of the property by deed in lieu of foreclosure, upon the
terms and conditions set forth in and contemplated by the Term Sheet (as defined below) and as
separately agreed to by the Trustee and the Consenting Bondholders in the SPV Term Sheet.
Pursuant to the Lease Term Sheet, the Law School will lease back the Premises from the
SPV, who will act as the landlord (the Landlord). In addition, pursuant to the Notes Term Sheet,
the Law School will issue a note or notes in favor of the SPV, which will act as the lender (the
Lender), in the amount of $40,000,000, which is the agreed upon amount. Among other things, the
Notes Term Sheet sets forth the terms of the Notes including security, interest rate, maturity,
limitation of payments prior to maturity to certain amounts available from Excess Cash Flow, and
circumstances in which the principal amount of the Notes may be substantially reduced.
It also includes special provisions related to (i) an M&A Transaction, if any should occur,
(ii) relocation costs if the lease terminates sooner than ten years, and (iii) limited financial support in
the event the Law School is required to post a letter of credit to support ongoing student loan funding
eligibility. Moreover, under the Notes Term Sheet, the Lender agrees to work in good faith with the
Law School to provide up to $1 million in cash at closing for certain marketing and public relations
activities in part to address the negative publicity regarding its financial difficulties in 2014.
The Law School is heavily dependent upon students who finance their tuition through federal
student financial aid programs. In the last three full academic years, over 90% of the revenues of the
Law School have been attributable to such student loans. To participate in such programs, the Law
School must obtain and maintain accreditation by an accrediting agency recognized by the U.S.
Department of Education, and certification by the Department of Education (DOE). As a result,
the Law School is subject to extensive regulation by DOE, including the requirement to maintain
certain financial ratios. Any failure or delay by the DOE to provide funding is an Event of Default
under the Lease and the Notes. Although the Transaction is designed to permit the Law School to
meet the requirements of DOE for ongoing student eligibility for federal student financial aid under
the DOEs provisional certification standards, no assurance can be given that the Transaction will be
structured in a way that does result in such compliance or that, if the Transaction is entered into, the
Law School will maintain such compliance and eligibility.
The Notes Term Sheet further contemplates payment by the Law School of an RSA Consent
Fee in the amount of $2.5 million in cash to Lender (to be distributed as determined by the
Consenting Bondholders).
Closing of the Transaction is subject to numerous conditions including receipt of all
regulatory approvals, governmental and third party consents, negotiated representations and
covenants and fully negotiated Definitive Documents acceptable to the parties. While the Term
Sheet requires delivery of certain legal opinions by counsel to the Law School, no such opinions have
been rendered by counsel in connection with entry into the RSA. Also, all expenses of the Lender
and Trustee in connection with the restructuring, the Notes and the ongoing administration of the
Notes are to be paid by the Law School.
The Law School is subject to continuing review by the ABA and compliance with its rules
and guidelines, which are subject to change. The ABA retains the ability to evaluate law schools in
connection with their ongoing accreditation and, accordingly, no assurance can be given with respect
to continuing accreditation.
Maintenance of its existing accreditation is a condition of
implementation of the Transaction and of the Lease and the Notes. As has previously been reported
by the Law School, in filings on EMMA, the ABA has given special scrutiny to the Law Schools
financial condition and the Law School expects the Transaction and the RSA to be subject to further
ABA scrutiny and review.
The parties to the RSA have attempted to structure the RSA and the Term Sheet so that the
Transaction will preserve the status of the Law School as a tax-exempt nonprofit corporation for
federal and state law purposes. Among other things, conveyance of the Property will require notice
to the California Attorney General and may be subject to the approval of the Attorney General.
Pro Forma Financial Projections. The Law School has prepared a ten year financial
projection (the Pre-Restructuring Financial Projections) attached hereto as Exhibit C projecting
net income available for debt service, based on certain assumptions and limiting factors. Such
information has not been prepared in accordance with generally accepted accounting principles
(GAAP). The Pre-Restructuring Financial Projections are based on assumptions made by the Law
School (on matters such as future enrollment, revenues and anticipated expenses), but there can be no
assurance that actual enrollment, revenues and expenses will be consistent with such assumptions.
For example, while the Law School believes its projections for the current fiscal year are reasonable
based on current enrollment, further job cuts must be implemented to achieve the revenue
projections.
The Pre-Restructuring Financial Projections have not been revised to reflect the terms of the
RSA and therefore certain line items are no longer applicable such as Current D/S. In addition, the
pro forma impact of the building lease, the excess cash flow sweep and the transaction fees and
expenses related to the restructuring have not been included in these projections.
Investors should note the following with respect to the Pre-Restructuring Financial
Projections:
1)
Amounts reflected in the line item for Sublease Income will not be realized
pursuant to the Transaction and should be disregarded. Although the Notes Term Sheet
allows the Landlord to sublet a portion of the premises with a resultant reduction in rent paid
by the Law School, such amounts are not shown elsewhere in the projections.
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2)
Amounts shown under the column Budget 2014 are based on projections
initially prepared in May 2014. This column reflects a variance from the Law Schools
unaudited financial statements for the fiscal year ended June 30, 2014. Operating revenues
for the year are estimated to have been approximately $950,000 less than the projection, and
operating expenses are estimated to have been approximately $40,000 less than shown in the
projection. Moreover, net income available for debt service for the year is estimated at $13.4
million, approximately $900,000 less than shown in the projection. This variance is largely
attributable to legal and professional fees associated with the restructuring, as shortfalls in
summer school revenues were largely offset by operating expense reductions against the
amounts projected.
3)
Amounts shown under the column for fiscal year 2015 are generally
consistent in the aggregate with the Law Schools current expectations for fiscal year 2015.
Operating revenues for 2015 assume an enrollment substantially consistent with current
enrollment, and a level of scholarship support on a basis substantially similar to current
scholarship levels. Operating expenses for fiscal year 2015 reflect the current expectations of
the Law School for the Fiscal Year.
4)
Projections of operating revenues and operating expenses for fiscal years
beginning in fiscal year 2016 reflect Law School expectations with respect to enrollment
(declining initially and then stabilizing), tuition (at 2015 levels subject to modest increases in
later years), levels of scholarship and operating expenses subject to modest additional
declines in fiscal year 2016 and thereafter subject to modest annual increases. Income for the
LLM Program is assumed at levels which assume the program is initiated (with ABA
acquiescence) and in operation.
5)
The Pre-Restructuring Financial Projections do not project revenues or
expenses beyond fiscal year 2024. Expenses beyond such period could be materially
different from those projected for prior years, whether as a result of a change in the real
property occupied by the Law School or otherwise.
Actual results realized by the Law School will vary from any projections, and such variance
may be material. Actual operating results may be affected by many factors, including, but not
limited to, increased costs (including occupancy costs), lower than anticipated revenues (as a result
of enrollment or otherwise), employee relations, changes in applicable government or academic
regulation, changes in demographic trends, factors associated with education, competition for
students, and changes in local or general economic conditions.
The Law Schools source of revenues with which to meet its payment obligations under the
Loan Agreement or under the Transaction consist primarily of tuition and fee revenues from its
operations. Future economic and other conditions, including, without limitation, the loss by the Law
School of its accreditation, destruction or loss of its facilities, including by reason of termination of
the Lease, litigation, competition, changes in the demand for legal education offered by the Law
School and increases in expenses may materially and adversely affect the revenues of the Law
School and its ability to make payments on the Bonds or pursuant to the Transaction.
Failure to Implement RSA. If the parties fail to implement a Transaction pursuant to the
RSA, the Law School expects that it will be in default of its obligations under the Loan Agreement
(including its loan repayment obligations), and under the RSA with respect to the RSA Consent Fee.
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While the Law School would expect to continue to negotiate with the Trustee, its advisors and
Bondholders to achieve a workable solution, the Law School cannot predict what actions it or the
Trustee or Bondholders may take with respect to the Bonds.
Tax Treatment. The Transaction will result in the cancellation of all of the Bonds including
Bonds owned by persons who are not Consenting Bondholders. The Law School does not expect
that payments received under the Transaction will be exempt from taxation under Section 103 of the
Internal Revenue Code or for purposes of state law. The Law School has not evaluated the tax
exempt status of the Series 2008A Bonds, retroactive to the date of issuance and expresses no view
with respect to the tax-exempt status of the Bonds as a result of the Transaction or with respect to any
tax consequences to owners arising from the Transaction. The Law School can give no assurance
that tax consequences of the Transaction will not be material to investors in the Bonds. Investors
should consult their tax advisors with respect to any and all tax consequences arising from the
Transaction or the RSA, whether with respect to the Bonds or otherwise.
MISCELLANEOUS
Pending Litigation and Construction Remediation. There has been no material change to
the status of pending litigations from what was previously disclosed by the Law School except as set
forth herein. TJSLs former outside counsel, Barry LePatner, initiated two lawsuits against the
school, USDC Case No. 13CV01950-H-JMA for fraud and breach of contract, and USDC Case
No. 14CV0758-H-JMA for copyright infringement. The Law School reached an agreement with the
LePatner entities to settle these cases for an aggregate payment of $700,000, a portion of which was
funded from Trustee-held funds. The lawsuits have been dismissed.
Attached Disclosure Exhibits.
Exhibits A-D, as referenced above.
A.
Restructuring Support Agreement, including Notes Term Sheet and Lease Term
Sheet
B.
C.
D.
CBRE Appraisal
FORWARD LOOKING STATEMENTS
The material set forth herein contains information material to Bondholders related to
Confidential Information made available to the Trustee and its representatives but it does not purport
to contain all material information with respect to the Bonds or financial condition of the Law
School. The information presented has been obtained from sources which are believed to be reliable
but is not guaranteed as to accuracy or completeness. This does not constitute an update of the
Official Statement dated August 21, 2008, with respect to the Bonds but is presented as an update
regarding restructuring efforts of the Law School.
Material set forth in these materials may consist of, and the words or phrases, are
expected, will continue, is anticipated, estimate, project, forecast, expect, intend and
similar expressions identify forward looking statements within the meaning of the private
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securities litigation reform act of 1995. Such statements are subject to risks and uncertainties that
could cause actual results to differ materially from those contemplated in such forward-looking
statements. Any forecast, including the Pre-Restructuring Financial Projections, subject to such
uncertainties. Inevitably, some assumptions used to develop the forecasts will not be realized and
unanticipated events and circumstances may occur. Therefore, there are likely to be differences
between forecasts and actual results, and those differences may be material.
To estimate revenues and expenses, the Law School has made certain assumptions with
regard to enrollment, net tuition, expenses and other matters in future years. The Law School
believes these assumptions to be reasonable for purposes of this presentation, but to the extent that
any of these assumptions fail to materialize, the net revenues available to pay debt service on the
Bonds, or payments with respect to the Transaction, including lease payments and Notes payments
will, in all likelihood, be less than those projected herein.
The financial information presented has been prepared by internal staff of the Law School
and has not been reviewed by outside auditors of the Law School. Some of the data presented in
tabular or summary form may be subject to more detailed requirements, exceptions or conditions; it
is presented in this fashion to facilitate the ongoing restructuring process.
The information and expressions of opinions herein are subject to change without notice and
delivery of this disclosure shall not, under any circumstances, create any implication that there has
been no changes in the affairs of the Law School since the date hereof. All summaries of the RSA,
the Term Sheets or any terms of the Bonds or other documents are made subject to the provisions of
such documents, respectively, and do not purport to be complete statements of any or all of such
provisions.
ALL PROJECTIONS, FORECASTS, ASSUMPTIONS, EXPRESSIONS OF OPINIONS,
ESTIMATES AND OTHER FORWARD-LOOKING STATEMENTS ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THIS CAUTIONARY STATEMENT.
EXECUTION VERSION
RESTRUCTURING SUPPORT AGREEMENT
October 28, 2014
This RESTRUCTURING SUPPORT AGREEMENT (as amended, supplemented, or
otherwise modified from time to time in accordance with the terms hereof, this Agreement),
made and entered into by and among (i) Thomas Jefferson School of Law (the School), (ii) the
Trustee (as defined herein) and (iii) each holder (a Bondholder and collectively, the
Bondholders), solely in its capacity as a Bondholder of any of the series 2008A tax-exempt
bonds (the Tax-Exempt Bonds) or the series 2008B taxable bonds (the Taxable Bonds and,
together with the Tax-Exempt Bonds, the Bonds), as applicable, issued pursuant to that certain
Indenture dated as of August 1, 2008 (the Indenture) between the California Statewide
Communities Development Authority (the Authority) and UMB Bank (as successor trustee to
The Bank of New York Mellon Trust Company, N.A.) (the Trustee) that is (a) identified on
the signature pages hereto as a holder of claims (the Bond Claims) under that certain Loan
Agreement dated as of August 1, 2008 (the Loan Agreement) between the Authority and the
School, pursuant to which the proceeds of the Bonds were loaned to School or (b) joins this
agreement pursuant to a joinder in the form attached hereto as Exhibit A (each such Bondholder,
a Consenting Bondholder and collectively, the Consenting Bondholders) sets forth certain
terms and conditions pursuant to which the School will effectuate a restructuring transaction with
the support of the Trustee and the Consenting Bondholders. The School, the Trustee and each of
the Consenting Bondholders are referred to herein collectively as the Parties and each
individually as a Party.
RECITALS
WHEREAS, subject to the terms hereof, the Parties have agreed to support a
restructuring transaction (the Transaction) pursuant to a deed in lieu of foreclosure transaction
consistent in all material respects with this Agreement and the Term Sheet (as defined below);
WHEREAS, the Consenting Bondholders have directed the Trustee to form a special
purpose vehicle (the SPV), to which the School will not be a party, for purposes of
implementing the Transaction on behalf of the Trustee and the Bondholders and transferring
ownership of the land, building and personalty, including leasehold improvements, located at
1155 Island Avenue, San Diego, California to the SPV upon the terms and conditions set forth in
and contemplated by the Term Sheet (as defined below) and as separately agreed to by the
Trustee and the Consenting Bondholders;
WHEREAS, subject to the terms hereof, the Transaction will be implemented pursuant
to various agreements and related documentation that will be completed and executed, subject to
the consent of those Consenting Bondholders holding a majority of (a) the aggregate principal
amount of Bonds and (b) the aggregate principal amount of Tax-Exempt Bonds, in each case
calculated as of such date the Consenting Bondholders make such a determination in accordance
with this Agreement and certified as accurate by the Trustee (the Requisite Consenting
Bondholders);
WHEREAS, the Parties are prepared to perform their obligations hereunder subject to
the terms and conditions of this Agreement; and
WHEREAS, in consideration of the promises, mutual covenants, and agreements set
forth herein and for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, each Party, intending to be legally bound, agrees as follows:
1.
Proposed Restructuring
The Parties will effectuate the Transaction pursuant to the terms of this Agreement and
the terms and conditions set forth in: (a) the Lease Term Sheet, attached hereto as Exhibit B; and
(b) the Notes Term Sheet, attached hereto as Exhibit C (collectively, including all annexes
thereto, the Term Sheet), which Term Sheet is expressly incorporated by reference herein and
made a part of this Agreement as if fully set forth herein. For the avoidance of doubt, the Term
Sheet and the Transaction expressly exclude the formation and governance of the SPV, which
shall be subject to a separate term sheet agreed by the Consenting Bondholders (in the form
agreed to between the Consenting Bondholders as of the date hereof, the SPV Term Sheet).
The Consenting Bondholders agree to negotiate in good faith an operating agreement for the
SPV containing the terms set forth in the SPV Term Sheet, and any terms of the operating
agreement not set forth in the SPV Term Sheet must otherwise be reasonably acceptable to (i) the
Requisite Consenting Bondholders, (ii) the Consenting Bondholders holding a majority of the
Bonds held by Consenting Bondholders other than the Requisite Consenting Bondholders and
(iii) the Trustee (solely for purposes of causing the implementation of the operating agreement at
the Closing to be consistent with the Trustees duties under the Indenture; provided, however,
that for the avoidance of doubt, by signing this Agreement the Trustee acknowledges that the
SPV Term Sheet is consistent with the Trustees duties under the Indenture).
2.
Effective Date
This Agreement shall be effective and binding on all Parties immediately upon the
School obtaining the Schools, the Trustees, and the Requisite Consenting Bondholders
signatures (the Effective Date). Upon the Effective Date of this Agreement, the Term Sheet
shall be deemed effective for the purposes of this Agreement, and thereafter the terms and
conditions therein may only be amended, modified, waived, or otherwise supplemented as set
forth in Section 16 herein. Within three business days of the Effective Date (the Public
Disclosure Date), the School shall publicly disclose all material non-public information, which
disclosure shall be subject to approval by the Trustee and the Requisite Consenting Bondholders,
after which all Bondholders (other than those Bondholders subject to a confidentiality agreement
regarding this Transaction with the School) will have five (5) business days to join this
Agreement as a Consenting Bondholder pursuant to the joinder attached hereto as Exhibit A, and
if so joined within such time period shall immediately be effective as against such joined
Bondholder.
3.
Term Sheet
The Term Sheet is expressly incorporated herein and is made part of this Agreement.
The terms of this Agreement and the Term Sheet shall whenever possible be read in a
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complementary manner; provided that, to the extent there is a conflict between the body of this
Agreement and the Term Sheet, the conflicting term of the Term Sheet shall control and govern.
4.
Definitive Documents
Each Party hereby covenants and agrees, severally and not jointly, to (a) negotiate in
good faith each of the documents implementing, achieving and relating to the Transaction
(collectively, the Definitive Documents), which Definitive Documents shall contain terms and
conditions consistent in all respects with this Agreement and the Term Sheet, and (b) subject to
the last sentence of Section 1, execute and otherwise support the Definitive Documents. All
Parties shall have the right to review and comment on the Definitive Documents, and subject to
the last sentence of Section 1, such Definitive Documents shall be reasonably acceptable to the
Requisite Consenting Bondholders, the School (solely to the extent that the School is party to
such Definitive Document) and the Trustee (solely for purposes of causing the implementation of
the Transaction to be consistent with the Trustees duties under the Indenture; provided,
however, that for the avoidance of doubt, by signing this Agreement the Trustee acknowledges
that the SPV Term Sheet is consistent with the Trustees duties under the Indenture), in form and
substance prior to executing such Definitive Documents (or in the case of the Trustee prior to
release of the lien of the Deed of Trust (as defined in the Indenture) and cancellation of the Loan
Agreement, the Bonds and the Indenture).
5.
Each Consenting Bondholder represents and warrants to the other Parties that, as of the
date hereof:
a.
it has all requisite power and authority to enter into this Agreement and to carry
out the transactions contemplated by, and perform its obligations under, this
Agreement and any other ancillary agreements, and the execution, delivery, and
performance by it of this Agreement and any ancillary agreements will not
(i) contravene any applicable provision of any law, statute, rule or regulation, or
any order writ, injunction, or decree of any court or governmental instrumentality
or violate any provision of its organizational documents or (ii) conflict with, or
result in a breach or constitute (with due notice or lapse of time or both) a default
under any material contractual obligations to which it or any of its subsidiaries is
a party;
b.
the execution and delivery of this Agreement and the performance of its
obligations hereunder have been duly authorized by all necessary action on its
part;
c.
such Consenting Bondholder: (i) either (A) is the sole beneficial owner of the
principal amount of Bond Claims set forth with its signature hereto, or (B) has
sole investment or voting discretion with respect to the principal amount of Bond
Claims set forth with its signature and has the power and authority to bind the
beneficial owner(s) of such Bond Claims to the terms of this Agreement; and (ii)
has full power and authority to act on behalf of, vote, and consent to matters
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concerning such Bond Claims and to dispose of, exchange, assign, and transfer
such Bond Claims, including the power and authority to execute and deliver this
Agreement and to perform its obligations hereunder;
d.
subject to Section 12, such Consenting Bondholder has made no assignment, sale,
participation, grant, conveyance, pledge, or other transfer of, and has not entered
into any other agreement to assign, sell, use, participate, grant, convey, pledge, or
otherwise transfer, in whole or in part, any portion of its right, title, or interests in
any Bond Claims that are subject to this Agreement that conflict with the
representations and warranties of such Consenting Bondholder herein or would
render such Consenting Bondholder otherwise unable to comply with this
Agreement and perform its obligations hereunder;
e.
this Agreement constitutes the legally valid and binding obligation of each such
Consenting Bondholder thereto, as applicable, enforceable against it in
accordance with its terms, except as enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium, or other similar laws relating to or
limiting creditors rights generally or by equitable principles relating to
enforceability;
f.
g.
h.
such Consenting Bondholder is able to bear the economic risks of this Agreement
and the Transaction;
i.
such Consenting Bondholder acknowledges that it has either been supplied with
or been given access to information, including financial statements and other
financial information, to which a reasonable investor would attach significance in
making investment decisions, and the Consenting Bondholder has had the
opportunity to ask questions and receive answers from knowledgeable individuals
concerning this Agreement and the Term Sheet and the security therefor so that,
as a reasonable lender, the Consenting Bondholder has been able to make its
decision to enter into this Agreement;
j.
k.
such Consenting Bondholder understands that (a) the Agreement, the Term Sheet
and other agreements contemplated by this Agreement have not been registered
with any federal or state securities agency or commission, and (b) no credit rating
has been sought or obtained with respect to any part thereof and that this
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such Consenting Bondholder acknowledges and agrees that the School, its
officers, employees and agents and the members of its governing board, past,
present and future shall not have any liability to such Consenting Bondholder with
respect to any claim asserted by any other bondholder that may from time to time
become a party hereto as a result of such Consenting Bondholder assigning or
transferring its claim notwithstanding any prohibition herein.
6.
The Trustee represents and warrants to the other Parties that, as of the date hereof:
a.
it has all requisite power and authority to enter into this Agreement and to carry
out the transactions contemplated by, and perform its obligations under, this
Agreement and any other ancillary agreements, and the execution, delivery, and
performance by it of this Agreement and any ancillary agreements will not
(i) contravene any applicable provision of any law, statute, rule or regulation, or
any order, writ, injunction, or decree of any court or governmental instrumentality
or violate any provision of its organizational documents or (ii) conflict with, or
result in a breach or constitute (with due notice or lapse of time or both) a default
under any material contractual obligations to which it or any of its subsidiaries is
a party;
b.
the execution and delivery of this Agreement and the performance of its
obligations hereunder have been duly authorized by all necessary action on its
part, including an appropriate direction by the Requisite Consenting Bondholders;
and
c.
this Agreement constitutes the legally valid and binding obligation of the Trustee
and is enforceable against the Trustee in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium, or other similar laws relating to or limiting creditors rights generally
or by equitable principles relating to enforceability.
7.
The School represents and warrants to the other Parties that, subject to compliance with
applicable law in all respects regarding the Definitive Documents and the Transaction, as of the
date hereof:
a.
it has all requisite power and authority to enter into this Agreement and to carry
out the transactions contemplated by, and perform its obligations under, this
Agreement and any other ancillary agreements, and the execution, delivery, and
performance by it of this Agreement and any other ancillary agreements will not
(i) contravene any applicable provision of any law, statute, rule or regulation, or
any order writ, injunction, or decree of any court or governmental instrumentality
5
the execution and delivery of this Agreement and the performance of its
obligations hereunder have been duly authorized by all necessary action on its
part;
c.
this Agreement constitutes the legally valid and binding obligation of the School
and is enforceable against the School in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium, or other similar laws relating to or limiting creditors rights generally
or by equitable principles relating to enforceability; and
d.
8.
Subject to the terms and conditions hereof and for so long as this Agreement has not been
terminated in accordance with its terms, each Consenting Bondholder shall support the
Transaction and hereby agrees and covenants to:
a.
support and take any and all reasonably necessary and appropriate actions in
furtherance of consummation of the Transaction and this Agreement;
b.
(i) vote or provide any consents required under the Loan Agreement and the
Indenture with respect to its Bond Claims in favor of the Transaction on a timely
basis, and (ii) not change or withdraw such votes or consents (or cause or direct
such vote or consent to be changed or withdrawn);
c.
use reasonable best efforts and work in good faith to negotiate the Definitive
Documents and consummate the Transaction and any other transactions
contemplated hereby;
d.
not directly or indirectly seek, solicit, support, encourage, vote its Bond Claims
for, consent to, take any action, or participate in any discussions regarding: (i) the
negotiation or formulation of any proposal, offer, refinancing, dissolution,
winding up, liquidation, reorganization, plan of reorganization, sale process,
merger, consolidation, business combination, joint venture, partnership, sale of
assets, or restructuring for the School other than the Transaction and as
contemplated by the Term Sheet, (ii) any other action that (x) would interfere
with, delay, or postpone the consummation of the Transaction, or (y) is
inconsistent in any material respect with, or is intended to frustrate or impede
approval and consummation of, the Transaction;
6
e.
to the extent any legal or structural impediment arises that would prevent, hinder,
or delay the consummation of the Transaction, negotiate in good faith appropriate
additional or alternative provisions to address any such impediment; provided that
the economic outcome for the Consenting Bondholders, the anticipated timing of
the Closing Date (as defined below), and other material terms of this Agreement
must be substantially preserved in any such alternate provisions;
f.
with respect to Section 4.1 and Article V of the Loan Agreement and Consent and
Amendment Nos. 2-10 and pursuant to Section 8.2 of the Loan Agreement and
Section 7.05 of the Indenture, direct the Trustee to take no remedial or
enforcement action of any sort against the School for failure to make the Required
Payment (as defined in the Indenture) or perform other covenants with respect
thereto until the termination of this Agreement; provided, however that the School
shall perform all actions necessary with respect to the Loan Agreement or the
Indenture that are reasonably expected to be performed as of the Effective Date to
implement this Transaction and any failure to do so may be considered a cause for
termination under Section 9(g) hereof;
g.
permit all disclosures in any filings by the School with any regulatory agency to
which the School may be subject (including, without limitation, the American Bar
Association (the ABA) and the Department of Education (the DOE)) of the
contents of this Agreement, including, but not limited to, the aggregate Bond
Claims held by all Bondholders; provided that, unless required by law,
governmental, or regulatory authorities or any court of competent jurisdiction and
upon notice to the affected Consenting Bondholder, such disclosures and/or
filings by the School shall not include the individual amount of each Bond Claim
or the identity of each Consenting Bondholder;
h.
i.
comply with all of its obligations under this Agreement and the exhibits attached
hereto (which exhibits are incorporated herein by reference) unless compliance is
waived in accordance with Section 16 of this Agreement.
9.
Subject to the terms and conditions hereof and for so long as this Agreement has not been
terminated in accordance with its terms, the Trustee shall support the Transaction and hereby
agrees and covenants to:
a.
support and take any and all reasonably necessary and appropriate actions in
furtherance of consummation of the Transaction and this Agreement;
b.
use reasonable best efforts and work in good faith to negotiate the Definitive
Documents and consummate the Transaction and any other transactions
contemplated hereby;
c.
take any and all reasonably necessary and appropriate actions consistent with its
obligations under this Agreement and the Term Sheet in furtherance of the
Transaction;
d.
not take any action that is inconsistent in any material respect with, or is intended
to frustrate or impede approval and consummation of the Transaction described
in, this Agreement or the Term Sheet;
e.
with respect to Section 4.1 and Article V of the Loan Agreement and Consent and
Amendment Nos. 2-10 and pursuant to Section 8.2 of the Loan Agreement and
Section 7.05 of the Indenture, pursuant to a direction from the Requisite
Consenting Bondholders, agree not to take any remedial or enforcement action of
any sort against the School for failure to make the Required Payment (as defined
in the Indenture) or perform other covenants with respect thereto until the
termination of this Agreement; provided, however that the School shall perform
all actions necessary with respect to the Loan Agreement or the Indenture that are
reasonably expected to be performed as of the Effective Date to implement this
Transaction and any failure to do so may be considered a cause for termination
under Section 9(g) hereof;
f.
g.
comply with all of its obligations under this Agreement and the exhibits attached
hereto (which exhibits are incorporated herein by reference) unless compliance is
waived in accordance with Section 16 of this Agreement; and
h.
10.
Subject to the terms and conditions hereof and, subject to compliance with applicable law
in all respects regarding the Definitive Documents and the Transaction, for so long as this
Agreement has not been terminated in accordance with its terms, the School shall support the
Transaction and hereby agrees and covenants to:
a.
support and take any and all reasonably necessary and appropriate actions in
furtherance of consummation of the Transaction and this Agreement;
b.
use reasonable best efforts and work in good faith to negotiate the Definitive
Documents and consummate the Transaction and any other transactions
contemplated hereby;
c.
d.
take any and all reasonably necessary and appropriate actions consistent with its
obligations under this Agreement and the Term Sheet in furtherance of the
Transaction;
e.
not take any action that is inconsistent in any material respect with, or is intended
to frustrate or impede approval and consummation of the Transaction described
in, this Agreement or the Term Sheet;
f.
not pursue any transaction to sell, transfer, lease or otherwise dispose of all or any
part of its property or assets without the prior consent of the Requisite Consenting
Bondholders;
g.
limit the aggregate amount of payments made to Stifel Financial Corp. (Stifel)
on account of Stifels fees and expenses to no more than $250,000.00;
h.
on the Closing Date, reimburse (i) all reasonable and documented fees, costs and
expenses of the Trustee including, but not limited to, fees and expenses of Zolfo
Cooper and counsel to the Trustee in connection with the Transaction and (ii) all
reasonable and documented fees, costs and expenses of Bracewell & Giuliani
LLP, Kasowitz Benson Torres & Friedman LLP and Klee, Tuchin, Bogdanoff &
Stern LLP, each up to an amount of $115,000.00, solely through the Effective
Date of this Agreement;
i.
on the Closing Date, pay to those Consenting Bondholders that are signatories
hereto or have otherwise executed a Joinder hereto as of that date that is five (5)
business days after the Public Disclosure Date a consent fee in an amount of $2.5
million in cash (the RSA Consent Fee), which RSA Consent Fee shall be
distributed to such Consenting Bondholders on a pro rata basis (based upon the
amount of Bonds held by each Consenting Bondholder as compared to the amount
of Bonds held by all Consenting Bondholders);
j.
to the extent any legal or structural impediment arises that would prevent, hinder,
or delay the consummation of the Transaction, negotiate in good faith appropriate
additional or alternative provisions to address any such impediment; provided that
the economic outcome for the Consenting Bondholders, the anticipated timing of
the Closing Date (as defined below), and other material terms of this Agreement
are substantially preserved in any such provisions; provided that such provisions
do not impair the Schools ability to operate or deprive it of the benefits of this
Agreement; and
k.
comply with all of its obligations under this Agreement and the exhibits annexed
hereto (which exhibits are incorporated herein by reference) unless compliance is
waived in accordance with Section 16 of this Agreement.
9
11.
Termination of Obligations
Except as otherwise provided herein, this Agreement shall terminate and all obligations
of the Parties hereunder shall terminate and be of no further force and effect, at 11:59 p.m.
prevailing Eastern Time, on the date that is two (2) business days from the date on which the
respective counsel to each Party receives written notice from the School or the Requisite
Consenting Bondholders, as applicable, of the occurrence of any of the events listed below (each,
a Termination Event), during which two (2) business day period any Party shall have the
opportunity and right to cure the Termination Event, as applicable, unless such Termination
Event is waived in writing by the respective terminating Party:
a.
by the written mutual written consent of the School and the Requisite Consenting
Bondholders;
b.
by the School, the Trustee (solely as to the Trustee being a Party hereunder, which
will not affect any other Parties obligations to perform and abide by the terms
and conditions of this Agreement) or the Requisite Consenting Bondholders, upon
a material breach by another Party of any of its respective representations,
warranties, covenants, or agreements set forth herein;
c.
by the School, the Trustee (solely as to the Trustee being a Party hereunder, which
will not affect any other Parties obligations to perform and abide by the terms
and conditions of this Agreement) or the Requisite Consenting Bondholders, if the
Transaction is not consummated on or before November 15, 2014, subject to
customary post-closing conditions, or such later date as may be reasonably
acceptable to the School and the Requisite Consenting Bondholders, but in no
event later than December 15, 2014;
d.
by the School, the Trustee (solely as to the Trustee being a Party hereunder, which
will not affect any other Parties obligations to perform and abide by the terms
and conditions of this Agreement) or the Requisite Consenting Bondholders, if
any court of competent jurisdiction or other competent governmental or
regulatory authority issues a final and non-appealable order that is not subject to a
stay making illegal or otherwise restricting, preventing or prohibiting the
transactions contemplated by this Agreement and the Term Sheet;
e.
f.
by the School, the Trustee (solely as to the Trustee being a Party hereunder, which
will not affect any other Parties obligations to perform and abide by the terms
and conditions of this Agreement) or the Requisite Consenting Bondholders, if the
ABA, the DOE, the California Attorney General or other regulatory authority
issues a final decision restricting, preventing, or prohibiting the transactions
contemplated by this Agreement and the Term Sheet;
10
g.
automatically on the date that the Transaction has been consummated (the
Closing Date); provided, however, that each of the Parties acknowledges and
agrees that the releases provided in Section 13 of this Agreement and the terms of
indemnification set forth on Exhibit D hereto are enforceable by each signatory
hereto and shall survive the termination of this Agreement due to or following the
consummation of the Closing Date; or
h.
Transfer Restrictions
Each Consenting Bondholder agrees that so long as this Agreement has not been
terminated in accordance with its terms it shall not directly or indirectly (a) grant any proxies to
any person in connection with its Bond Claims to vote or provide any consents required with
respect to the Transaction, or (b) sell, assign, pledge, hypothecate, convey, or otherwise transfer
or dispose of or grant, issue or sell any option, right to acquire, voting, participation or other
interest in any Bond Claims (each a Transfer), except to a party that is a Consenting
Bondholder (which shall include any undersigned Bondholder or any party that agrees in writing
to be bound by this Agreement and delivers to the School and the Trustee a Joinder in the form
attached hereto as Exhibit A). For the avoidance of doubt, this Agreement shall in no way be
construed to preclude any Consenting Bondholder from acquiring additional Bond Claims or any
other interests in the School; provided that any such additional Bond Claims or other interests in
the School shall, upon acquisition, automatically be deemed to be subject to all the terms of this
Agreement. Any Transfer of Bond Claims other than as set forth in this Paragraph 12 is null and
void ab initio. The Consenting Bondholders and the School acknowledge that transfer and
ownership of any Bond Claims or other interest in the Definitive Documents will be restricted to
Approved Institutional Buyers in the same manner that ownership and transfer of the Bonds is so
limited and as otherwise may be required pursuant to applicable securities laws.
11
13.
Releases
Each Party agrees that the following release provisions shall be binding on the Parties
hereto upon the consummation of the Transaction on the Closing Date.
a.
Release of each Release Party by the School and School Release Parties
(i)
Effective as of the Closing Date, the School and each of the Schools
current and former officers, directors, principals, shareholders, members,
trustees, partners, employees, agents, advisory board members, financial
advisors, attorneys, accountants, investment bankers, consultants,
representatives, management companies, fund advisors and other
professionals, and each of their respective predecessors, successors,
subsidiaries, assigns, affiliates, heirs, executors, estates, servants, and
nominees (each, in their capacity as such, a School Release Party, and
collectively, the School Release Parties) hereby fully and
unconditionally releases, acquits and forever discharges, (a) the School,
(b) each Consenting Bondholder (in its capacity as such), (c) the Trustee
(in its capacity as such) ((b) and (c) together, the Trustee/Bondholder
Releasees), (d) each Trustee/Bondholder Releasees current and former
officers, directors, principals, shareholders, members, trustees, partners,
employees, agents, advisory board members, financial advisors, attorneys,
accountants,
investment
bankers,
consultants,
representatives,
management companies, fund advisors, co-investment funds, and other
professionals, and (e) with respect to each of the foregoing (b) through (d),
each of their respective predecessors, successors, subsidiaries, assigns,
affiliates, heirs, executors, estates, servants, and nominees (in their
capacity as such and with the Trustee/Bondholder Releasees, each a
Trustee/Bondholder Released Party and, collectively, the
Trustee/Bondholder Released Parties, and collectively with the
School Release Parties, the Released Parties), from any and all manner
of actions, causes of action, suits, investigations or similar proceedings,
debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties,
covenants, contracts, controversies, agreements, promises, variances,
trespasses, damages, judgments, extents, executions, claims, liabilities,
claims for violations of federal or state securities laws, gross negligence,
fraudulent conveyance, torts, demands and other relief and liabilities
whatsoever, whether known or unknown, foreseen or unforeseen, fixed or
contingent, matured or unmatured, accrued or unaccrued, whether direct,
indirect or derivative, existing or hereafter arising, in law, equity or
otherwise, based in whole or in part on any act, omission, transaction or
occurrence, including without limitation any claims, suits, demands and
causes of action (collectively, Claims), that, in each case, the School
Release Parties had or may have had on or prior to the Closing Date,
relating in any way to the School, including Claims arising out of, relating
to or accruing from their ownership and operation of, any payments
received from or made to, the School, and all other relationships of the
12
School with the Released Parties, including with respect and relating to
every agreement to which the School may have been or is a party with the
Released Parties, the Indenture or the transactions contemplated under this
Agreement or the Term Sheet (collectively, the School Released
Claims); provided that nothing contained herein shall release any
Released Party from its post-Closing obligations under the Definitive
Documents; provided further that nothing contained herein shall operate to
release any Released Party from Claims arising from or relating to any act
or omission by any such Released Party that constitutes fraud; provided
further that in the event that the Transaction is unwound either in an
insolvency proceeding or otherwise, all Claims will be reinstated. This
release is hereby referred to as the School Release.
(ii)
Subject to the provisos in clause (i) above, the School Release Parties,
effective from and after the Closing Date, expressly waives (A) all Claims
relating in any manner to the School Released Claims which arise from
events or conduct prior to the Closing Date, even if such Claims are not
known or suspected to exist in any of the School Release Parties favor,
(B) any assertion that this School Release does not extend to Claims
arising from conduct that occurred prior to the Closing Date hereof and
relating in any manner to the School Released Claims which any of the
School Release Parties did not know or suspect to exist in their favor on
the Closing Date, which if known by them, would have materially affected
this School Release and (C) any and all provisions, rights and benefits
conferred by any law of any state or territory of the United States, or
principle of common law with respect to Claims relating in any manner to
the School Released Claims.
(iii)
(iv)
(v)
Each of the School Release Parties represents and warrants that it has not
sold, assigned, transferred or conveyed all or any portion of the School
Released Claims to any person or entity.
(vi)
In the event that any suit, legal action or other proceeding is commenced
against any of the School Release Parties by any person or entity
13
(ii)
affected this Trustee/Bondholder Release and (C) any and all provisions,
rights and benefits conferred by any law of any state or territory of the
United States, or principle of common law with respect to Claims relating
in any manner to the Trustee/Bondholder Released Claims.
c.
(iii)
(iv)
(v)
(vi)
In the event that any suit, legal action or other proceeding is commenced
against any of the Trustee/Bondholder Released Parties by any person or
entity (including, without limitation, any person or entity not a party to
this Agreement, any trustee or receiver, or any committee of creditors or
other party-in-interest in any bankruptcy proceeding), the
Trustee/Bondholder Released Parties do not waive, release or discharge,
shall retain, and may assert and pursue the Trustee/Bondholder Released
Claims, but only for defensive purposes (including, without limitation, as
counterclaims and crossclaims), and as setoffs, recoupments and/or similar
remedies in such suit, legal action or other proceeding against the person
or entity asserting the suit, legal action or other proceeding and not as
grounds for any affirmative recovery.
Released
Party
by
each
other
(iii)
(iv)
(v)
16
In the event that any suit, legal action or other proceeding is commenced
against any of the Trustee/Bondholder Released Parties by any person or
entity (including, without limitation, any person or entity not a party to
this Agreement, any trustee or receiver, or any committee of creditors or
other party-in-interest in any bankruptcy proceeding), the
Trustee/Bondholder Released Parties do not waive, release or discharge,
shall retain, and may assert and pursue the Mutually Released Claims, but
only for defensive purposes (including, without limitation, as
counterclaims and crossclaims), and as setoffs, recoupments and/or similar
remedies in such suit, legal action or other proceeding against the person
or entity asserting the suit, legal action or other proceeding and not as
grounds for any affirmative recovery.
d.
e.
Each Party to this Agreement acknowledges and agrees that: (i) the releases
granted herein are for valuable consideration, including, but not limited to, the
transactions contemplated by this Agreement and the payments associated
therewith; and (ii) the transactions contemplated by this Agreement and the
payments associated therewith constitute reasonably equivalent value and fair
consideration as such terms are defined in and by Section 548 of the United States
Bankruptcy Code (as defined herein), the Uniform Fraudulent Transfer Act and
the Uniform Fraudulent Conveyance Act as adopted in any jurisdiction, and any
similar statute under applicable law.
f.
The Parties agree that in connection with the consummation of the Transaction,
the Parties will provide a release in substantially the same form as this Section 13
in favor of the Authority, solely on the condition that the Authority (i) consents to
the Transaction as set forth herein and in the Term Sheet and (ii) agrees to provide
a mutual release in favor of each of the Released Parties.
14.
Remedies
The Parties agree that any breach of this Agreement would give rise to irreparable
damage for which monetary damages would not be an adequate remedy. Each of the Parties
agrees that the School and the Consenting Bondholders, as the case may be, will be entitled to
enforce the terms of this Agreement by decree of specific performance without the necessity of
proving the inadequacy of monetary damages as a remedy and to obtain injunctive relief against
any breach or threatened breach. The Parties agree that such relief will be their only remedy
17
against the applicable breaching Party or Parties with respect to any such breach, and that in no
event will any Party be liable for monetary damages under or in connection with this Agreement.
15.
Prior Negotiations
This Agreement supersedes all prior negotiations and documents reflecting such prior
negotiations between and among the School and the Consenting Bondholders (and their
respective advisors), with respect to the Transaction and any other subject matter hereof.
16.
Except as otherwise provided herein, neither this Agreement nor the Term Sheet may be
modified, amended, or supplemented without the prior written consent of each of (a) the School,
(b) the Requisite Consenting Bondholders and (c) the Trustee (solely to the extent such
modification or amendment adversely affects the Trustee); provided that if any modification,
amendment, or supplement treats a group of Consenting Bondholders in a manner which is
disproportionate and adverse to the treatment of another group of Consenting Bondholders, such
modification, amendment, or supplement shall also require the written consent of the Consenting
Bondholders holding a majority of the Bonds in such adversely treated group. Any waiver of
any condition, term, or provision of this Agreement must be in writing and signed by the Parties
entitled to waive such condition, term, or provision.
17.
Independent Analysis
Each Party confirms that it has made its own decision to execute this Agreement based
upon its own independent assessment of documents and information available to it, as it has
deemed appropriate.
18.
Further Assurances
The Parties agree to execute and deliver such other instruments and perform such acts, in
addition to the matters herein specified, as may be reasonably appropriate or necessary, from
time to time, to effectuate the agreements and understandings of the Parties.
19.
Governing Law
This Agreement shall be governed by, and construed in accordance with, the internal
laws of the State of New York. By its execution and delivery of this Agreement, each of the
Parties hereby irrevocably and unconditionally agrees for itself that any legal action, suit or
proceeding against it with respect to any matter under or arising out of or in connection with this
Agreement or for recognition or enforcement of any judgment rendered in any such action, suit,
or proceeding, may be brought in either a state or federal court of competent jurisdiction in the
State of New York. By execution and delivery of this Agreement, each of the Parties hereby
irrevocably accepts and submits itself to the nonexclusive jurisdiction of each such court,
generally and unconditionally, with respect to any such action, suit, or proceeding.
18
20.
No Solicitation
Notwithstanding anything to the contrary, this Agreement is not and shall not be deemed
to be an offer for the issuance, purchase, sale, exchange, hypothecation or other transfer of
securities or a solicitation of an offer to purchase or otherwise acquire securities for purposes of
the Securities Act of 1933 and the Securities Exchange Act of 1934, each as amended, or in any
jurisdiction in which this Agreement would be contrary to applicable securities laws.
21.
No Third-Party Beneficiary
This Agreement is intended for the benefit of the parties hereto and no other person shall
have any rights hereunder.
22.
Counterparts
This Agreement may be executed in several counterparts, each of which shall be deemed
to be an original, and all of which together shall be deemed to be one and the same agreement.
Execution copies of this agreement may be delivered by electronic mail, facsimile, or otherwise,
which shall be deemed to be an original for the purposes of this Agreement.
24.
Headings
The headings used in this Agreement are for convenience of reference only and do not
constitute a part of this Agreement and shall not be deemed to limit, characterize, or in any way
affect any provision of this Agreement, and all provisions of this Agreement shall be enforced
and construed as if no headings had been used in this Agreement.
25.
Settlement Discussions
This Agreement and the Term Sheet are part of a proposed settlement of matters that
could otherwise be the subject of litigation among the Parties hereto. Nothing herein shall be
deemed an admission of any kind. Pursuant to Federal Rule of Evidence 408 and any applicable
state rules of evidence, this Agreement and all negotiations relating thereto shall not be
admissible into evidence in any proceeding other than a proceeding to enforce the terms of this
Agreement.
26.
Notices
All demands, notices, requests, consents, and other communications under this
Agreement shall be in writing, sent contemporaneously to each of the School and the Consenting
Bondholders, and deemed given when delivered, if delivered by hand, or upon transmission, if
19
delivered by email or facsimile, at the addresses and facsimile numbers set forth on Schedule 1
hereto or the signature pages hereto, as applicable.
27.
Representation by Counsel
Each Party hereto acknowledges that it has been represented by counsel (or had the
opportunity to and waived its right to do so) in connection with this Agreement and the
transactions contemplated by this Agreement. Accordingly, any rule of law or any legal decision
that would provide any Party hereto with a defense to the enforcement of the terms of this
Agreement against such Party based upon lack of legal counsel shall have no application and is
expressly waived.
28.
The Trustee and each Consenting Bondholder hereby consent to the disclosure by the
School in any press release or as required by law or regulation of the execution and contents of
this Agreement; provided, however, that except as required by law or any rule or regulation of
any governmental agency, the School shall not, without the applicable Consenting Bondholders
prior consent, (a) use the name of such Consenting Bondholder or their respective controlled
affiliates, officers, directors, managers, stockholders, members, employees, partners,
representatives and agents in any press release or (b) disclose the individual holdings of such
Consenting Bondholder to any person. The School shall (a) consult with the advisors to the
Trustee before the School issues any press release with respect to the transactions contemplated
by this Agreement, (b) provide to such advisors for review a copy of any such press release and
(c) not issue any such press release prior to such consultation and review and the receipt of the
prior consent of such advisors (not to be unreasonably withheld or conditioned).
29.
Severability
Whenever possible, each provision of this Agreement shall be interpreted in such manner
as to be effective and valid under applicable law, but if any provision of this Agreement is held
to be prohibited by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement. In the event that any part of this Agreement is
declared by any court or other judicial or administrative body to be null, void or unenforceable,
said provision survives to the extent it is not so declared, and all of the other provisions of this
Agreement remain in full force and effect only if, after excluding the portion deemed to be
unenforceable, the remaining terms provide for the consummation of the transactions
contemplated hereby in substantially the same manner as originally set forth at the later of the
date this Agreement was executed or last amended.
30.
Except as provided in this Agreement, nothing herein is intended to, does or shall be
deemed in any manner to waive, limit, impair, or restrict the ability of each Party to protect and
preserve its rights, remedies, and interests, including, but not limited to, its claims against any of
the School and any liens or security interests it may have in any assets of any of the School.
Without limiting the foregoing sentence in any way, if this Agreement is terminated in
20
accordance with its terms for any reason, the Parties each fully reserve any and all of their
respective rights, remedies, and interests, subject in all respects to Paragraph 9 in the case of any
claim for breach of this Agreement arising prior to termination.
[Signature Pages Follow]
21
U1VIB BANK
Solely zf~ its Capacity as ru tee
~,
A
me:
Title:
.r cy~
S', ~/, ~P
Exhibit A
Joinder
Agreement to be Bound. The undersigned hereby (A) acknowledges that it has received
and reviewed a complete copy of the RSA and the other documents attached thereto or
provided concurrently therewith, including but not limited to the Instruction Letter, and
(B) agrees that upon execution of this Joinder, it shall become a party to the RSA as a
Consenting Bondholder and shall accept and be subject to, and comply with the
covenants, terms, conditions and provisions thereof (including without limitation (i) the
representations and warranties set forth in Section 5 of the RSA, (ii) the covenants set
forth in Section 7 of the RSA, (iii) effective upon the Closing, the mutual release set forth
in Section 11 of the RSA, and (iv) the terms set forth in each of the Term Sheets), and
shall be entitled to the rights and benefits and subject to the duties and obligations of a
Consenting Bondholder thereunder in the same manner as though the undersigned was an
original party thereto.
II.
Certification. The undersigned hereby certifies that it is the record and beneficial owner
of outstanding Bonds in the following amounts:
III.
$___________
$___________
Address for Notice. For purposes of notice under Section 24 of the RSA, the address of
the undersigned is as follows:
_______________________________
_______________________________
_______________________________
_______________________________
Facsimile #: _____________________
IV.
Issuance of Equity Interests in the SPV. Please select one of the options below regarding
the name of record in which the equity interests in the SPV that are beneficially owned by
you shall be issued.
The undersigned hereby authorizes the SPV to issue the equity interests of the SPV of
which the undersigned shall be the beneficial owner pursuant to the terms of the SPV
Term Sheet in the name of:
the undersigned;
the following designee of the undersigned: _____________________________; or
the Trustee, to be held in a trust to be formed at the Closing for the benefit of the
undersigned and all other Bondholders who elect to have their interests held of record by
the Trustee
V.
Funding of Capital Commitment. Please select one of the options below regarding the
method by which your Capital Commitment shall be funded:
The Trustee is hereby authorized to withhold a portion of the Cash Distribution to
which the undersigned shall be entitled at Closing in an amount equal to the
undersigneds Capital Commitment in an escrow or segregated account;
The undersigned does not want the Capital Commitment withheld from the Cash
Distribution at the Closing, but agrees to fund the Capital Commitment to the SPV
following a Capital Call (and acknowledges that failure to do so could result in, among
other things, the undersigneds forfeiture of its equity interests in the SPV); or
The undersigned does not want the Capital Commitment withheld from the Cash
Distribution at the Closing, but does want any future distributions made by the SPV that
the undersigned would be entitled to as an equity holder of the SPV to be retained by the
SPV in a segregated account to fund the Capital Commitment, until the Capital
Commitment is fully funded. The undersigned agrees that, should such future
distributions be insufficient to fund the Capital Commitment, the undersigned will be
required to fund the remaining portion of the Capital Commitment to the SPV following a
Capital Call (and acknowledges that failure to do so could result in, among other things,
the undersigneds forfeiture of its equity interests in the SPV).
VI.
Wire Instructions. The Trustee is hereby authorized to wire any portion of the Cash
Distribution that is payable to the undersigned at Closing to the following account:
Bank:
_________________________________
Routing Number:
_________________________________
Account Number:
_________________________________
Account Title:
_________________________________
SWIFT Code:
_________________________________
VII.
Governing Law. This Joinder shall be governed by, and construed in accordance with,
the internal laws of the State of New York, without giving effect to the principles of
conflict of laws that would require the application of the law of any other jurisdiction.
*
The undersigned has delivered this Joinder to the Restructuring Support Agreement as of
_____________, 2014.
_________________________________
Name:
Title:
Exhibit B
Lease Term Sheet
For the purposes of this term sheet, the term Building shall mean that
certain building of approximately 305,000 square feet including parking,
currently owned and occupied by Thomas Jefferson School of Law
(TJSL) and located at 1155 Island Avenue, San Diego, California.
For the purposes of this term sheet, the term Premises shall mean that
portion of the Building to be leased to Tenant, as may be reduced by
Landlord as provided below. The Premises may exclude that portion of
the Building currently occupied by The Hall, L.P. (the Caf Tenant)
pursuant to that certain Lease Agreement, dated May 1, 2013 (the Caf
Lease), by and between TJSL and the Caf Tenant.
For the purposes of this term sheet, the term Property shall mean the
Building together with the real property upon which the Building is
located and any other improvements located on such real property.
Landlord:
Tenant:
TJSL
Use:
Tenant may use the Premises for the operation of a law school and
ancillary uses related thereto.
Caf Lease:
Lease Term:
Commencement Date:
Deed-in-Lieu:
Lease Type:
Condition:
Tenant shall accept and lease the Premises as is, where is and with
all faults as of the Commencement Date, without any representation or
warranty of any kind, express or implied.
$5,000,000.
In connection with a Reduction of the Premises (see below), Annual
Base Rent shall be subject to reduction by an amount to be determined
based on a benefit-sharing mechanism to be agreed upon between
Landlord and Tenant in the definitive Lease documentation; provided
that in no event shall the Annual Base Rent payable by Tenant be less
than $4,000,000.
Payment of Rent:
Security Deposit:
None.
In addition to the Annual Base Rent, Tenant shall pay during the Term:
(a) 100% of all operating expenses associated with the Premises and (b)
its pro rata share of Building and/or Property operating expenses,
including for maintenance and repair, insurance premiums and real
property taxes, in each case of (a) and (b) above, subject to customary
exclusions to be agreed in the definitive Lease documentation (together
with other amounts payable by Tenant to Landlord under the Lease,
Additional Rent); provided, however, that Tenant shall not be
responsible for (i) any portion of real property taxes relating to any part
of the Building and/or Property not leased to Tenant, (ii) any increase in
real estate taxes due to tenant improvements occasioned by other tenants
of the Building or (iii) any insurance premiums solely related to the
activities of other tenants of the Building.
Tenant shall have the right, at its own cost and expense, to audit up to the
past two (2) years of operating expenses.
Utilities:
Tenant shall pay all utility fees either directly to the utility provider or, in
the event that Landlord pays the utilities, to Landlord as Additional Rent.
Insurance:
Landlord shall be responsible for the slab, structure, exterior walls and
roof substructure of the Building and for all capital repairs and
replacements to the Premises, the Building and/or the Property
(including, without limitation, the Building systems and utilities serving
the same) (Capital Repairs). Tenant shall reimburse Landlord for its
pro rata share of such Capital Repairs on an amortized basis over forty
(40) years.
Tenant shall, at Tenants sole cost and expense, maintain the Premises in
good operating condition and perform all repairs and replacements to the
Premises that are not Landlords responsibility. Tenant shall operate the
Premises in accordance with all applicable laws.
Remediation:
Tenant will remain responsible for costs and expenses in connection with
those certain remediation actions set forth on Exhibit B (the
Remediation Actions), up to an amount equal to (i) the amount in the
Project Fund (as defined in the Indenture) and two accounts held at UMB
Bank identified as account numbers 141526.11 and 141526.12 (the
UMB Accounts) plus those amounts allocated by the Trustee to the
Project Fund and/or UMB Accounts in or from the Reserve Account (as
defined in the Indenture) (collectively the Construction Reserve) and
(ii) the amount of any proceeds from litigation relating to the
construction defects. Landlord shall have the right (but not the
obligation), in Landlords sole and absolute discretion, to make
additional funds available to Tenant to undertake or complete the
Remediation Actions.
Tenant will indemnify Landlord (and Landlords beneficial owners) and
Trustee from and against all liabilities, losses, damages, costs and
expenses (except for any claims relating to any loss of value of the
Building) arising from: (i) Tenants occupancy, use, or possession of the
Building (whether prior to or after the effective date of the Lease); (ii)
work done by or on behalf of the Tenant in or about the Building, or any
part thereof, including any of the Remediation Actions set forth on
Exhibit B (whether prior to or after the effective date of the Lease);
(iii) any latent defects with respect to the Building (i.e., which are not
specifically identified as requiring remediation on Exhibit B); and
(iv) the presence of hazardous materials at, in, under or above the
Building (a) introduced and/or released by any person or entity prior to
the effective date of the Lease and (b) after the effective date of the
Lease, (i) used, released, stored or transported by or on behalf of Tenant
or (ii) migrating from other property or caused by other parties not under
the Tenants control to the extent Tenant knew or should have known of
such hazardous materials and failed to promptly notify Landlord.
3
Tenant shall not assign any of its interest under the Lease or sublease any
portion of the Premises without the prior written consent of Landlord.
Any direct or indirect transfer of an interest in Tenant or in the Lease
shall be deemed an assignment requiring Landlords prior written
consent. In the event that an M&A transaction is consummated,
Landlords consent may be conditioned on renegotiation of the terms of
the Lease.
Tenant shall not, without the prior written consent of Landlord, execute a
leasehold mortgage or leasehold deed of trust granting Tenants lender a
leasehold security interest in the Premises; provided, that a leasehold
mortgage may be granted to Landlord and its assigns in connection with
the concurrent issuance of notes by Tenant (the New Notes). Tenant
shall remain fully liable under the Lease in the event of any subletting of
any portion of the Premises or assignment of any of Tenants interest
under the Lease.
Subordination:
The Lease shall at all times remain subordinate and subject to any
Mortgage/Deed of Trust or the rights of any mortgagee now or at any
time hereafter encumbering the Premises. Tenant and such mortgagee
shall enter into a commercially reasonable form of subordination, nondisturbance and attornment agreement. Tenant will from time to time
deliver an estoppel statement with regard to the Lease upon request of
Landlord.
Hazardous Materials:
Broker Representation:
Tenant and Landlord each warrant and represent that there is not a broker
representing them in connection with the negotiation of the Lease for the
Premises.
Defaults:
hereunder and such failure shall continue for a period of thirty (30) days
after Tenants receipt of written notice thereof (provided that if such
default is of such nature that the cure thereof cannot be reasonably
achieved within such thirty (30) days, then Tenant shall not be in default
for so long as Tenant shall have commenced cure within such thirty (30)
days and shall be diligently prosecuting such cure to completion), (v)
Tenant abandons or vacates the Premises, (vi) customary events of
bankruptcy and insolvency, (vii) Tenant fails to maintain accreditation
by the American Bar Association or is otherwise in material violation of
applicable Department of Education (Title IV) and/or State Bar of
California rules and regulations, which violation has not been cured after
an appropriate notice period to cure such violations, or (viii) any default
under the New Notes.
If Tenant defaults under the Lease or makes any attempt to terminate the
Lease or abandon the Premises, and regardless of any subsequent reletting of the Premises by Landlord and without prejudice to any other
rights or remedies available to Landlord, Landlord shall have the right to
collect from Tenant, as liquidated damages, the amount of all Rent
reserved under the Lease for the remainder of the Term (it being agreed
by Tenant that such amount would constitute Landlords reasonable
damages).
Reduction of Premises:
Landlord shall have the right, in Landlords sole discretion, upon not less
than six (6) months prior written notice to Tenant, to terminate the Lease
with respect to any portion(s) of the Premises excluding the portions of
the Premises more particularly identified on Exhibit A attached hereto
(the Core Premises) effective not earlier than August 1, 2015 (unless
otherwise agreed by Tenant).
Parking:
Signage:
Exhibit C
Notes Term Sheet
Borrower:
Guarantors:
Collateral:
Interest Rate:
Term:
ECF Sweep:
Covenants:
The Lender shall have the right to appoint one (1) board
observer that will have all of the rights of a member of
Borrowers board of trustees except with respect to the right to
vote.
Marketing Fees:
Events of Default:
Closing Conditions:
Governing Law
New York
Exhibit D
Consenting Bondholder Indemnity Agreement
KE 32957849
TERMS OF INDEMNIFICATION
Reference is made to the Indenture, dated as of August 1, 2008, between the California
Statewide Communities Development Authority and The Bank of New York Mellon Trust
Company, N.A. (the Prior Trustee), pursuant to which the Bonds were issued (as amended or
otherwise modified from time to time, the Indenture). Pursuant to that certain Instrument of
Removal and Appointment, dated as of January 8, 2014, among certain holders of the Bonds and
UMB Bank, n.a. (the Trustee or UMB), the Prior Trustee was removed and UMB was
appointed as the trustee under the Indenture.
Each Consenting Bondholder is hereby a party to that certain restructuring support
agreement dated October 28, 2014 (the Restructuring Support Agreement) 1 and, pursuant to
that agreement, has agreed with the Thomas Jefferson School of Law (the School) to
implement the Transaction described therein. Pursuant to that certain Direction and Indemnity
Letter by and between the Requisite Consenting Bondholders and the Trustee dated October 28,
2014, the Trustee is also party to the Restructuring Support Agreement.
Subject to the terms hereof, each Consenting Bondholder, together with the other
Consenting Bondholders, severally and not jointly hereby agrees to pay and reimburse to the
Trustee and each affiliate, director, officer, employee and advisor of the Trustee (the Trustee and
each such other person being an Indemnified Person) within 30 days following written demand
for, and to indemnify and hold harmless each such Indemnified Person from and against such
Consenting Bondholders Proportionate Share (defined below) of any and all losses (excluding
lost profits), liabilities and judgments (including the documented fees and disbursements of
outside legal counsel incurred in good faith in connection therewith) (collectively referred to
herein as Losses) incurred or suffered by an Indemnified Person in any way, directly or
indirectly, arising out of, or related to (i) the enforcement of the Indemnity contained herein,
(ii) the implementation of the Restructuring Support Agreement and the Transaction
contemplated therein; and (iii) any claims, causes of action, litigation, proceedings, actions or
investigations (collectively, Actions) in connection therewith. Notwithstanding anything
herein to the contrary, the indemnity contained in the foregoing sentence (the Indemnity) shall
not be applicable to any Losses suffered or incurred by an Indemnified Person as a result of (x)
an Indemnified Persons bad faith, gross negligence or willful misconduct or as a result of
UMBs breach of its duties or other material obligations under the Indenture (provided that an
action taken or not taken in accordance with a direction will be per se not covered by this clause
(x)) or (y) UMBs failure to have trust powers or otherwise to be qualified or legally permitted to
act as trustee under the Indenture. For purposes of this paragraph, any determination of whether
an Indemnified Person has engaged in willful misconduct or has been grossly negligent or of
whether UMB has breached its duties or other material obligations under the Indenture (or any
like determination) shall be determined by a final judgment of a court that is binding upon such
Indemnified Person. To the extent required by applicable law, each Indemnified Person shall
take all reasonable steps to mitigate any Losses.
Capitalized terms used and not defined herein shall have the meanings given such terms in the Indenture or the
Restructuring Support Agreement, as applicable.
KE 32957849
No Consenting Bondholder shall be liable for any settlement effected without the prior
written consent (which consent shall not be unreasonably withheld, delayed or conditioned) of
the Consenting Bondholders holding at least 50.1% of the aggregate Proportionate Shares of all
Consenting Bondholders as of the date of such consent and any such settlement must not alter
any Consenting Bondholders Proportionate Share of Losses. The Consenting Bondholders
holding at least 50.1% of the aggregate Proportionate Shares of all Consenting Bondholders as of
the date of such consent shall not, without the prior written consent of an Indemnified Person
(which consent shall not be unreasonably withheld, delayed or conditioned), effect any
settlement of any pending or threatened Actions in respect of which indemnity could be sought
hereunder by such Indemnified Person unless such settlement (a) includes an unconditional
release of such Indemnified Person in form and substance reasonably satisfactory to such
Indemnified Person (which approval shall not be unreasonably withheld, delayed or conditioned)
from all liability on claims that are the subject of such Actions and (b) does not include any
statement as to or any admission of fault, culpability or a failure to act by or on behalf of such
Indemnified Person.
It is agreed that the obligations of each Consenting Bondholder set forth herein and the
Indemnity contained herein shall be several and not joint based upon each such Consenting
Bondholders Proportionate Share. Proportionate Share shall mean with respect to any Losses
subject to the Indemnity hereunder, the principal amount of the Bonds held by such Consenting
Bondholder as set forth on the signature pages of the Restructuring Support Agreement as a
portion of the aggregate principal amount of the Bonds owned by all Consenting Bondholders
party to the Restructuring Agreement and set forth on the signature pages thereto.
In the event amounts are not paid by a Consenting Bondholder within 30 days after
demand hereunder, (a) interest shall accrue from said 30th day at the annual rate of 10% and such
interest shall be payable by such Consenting Bondholder on demand by the Trustee and (b) the
Consenting Bondholder failing to make payment shall be responsible for paying upon demand by
the Trustee the fees and expenses incurred by the Trustee in collecting payment.
Without limiting the transfer restrictions set forth in Section 12 of the Restructuring
Support Agreement, in the event that any Consenting Bondholder liable hereunder (a Seller)
shall sell or otherwise dispose of all or any portion of the Bonds identified on its signature page
to the Restructuring Support Agreement, and the purchaser of such Bonds (a Purchaser)
executes an indemnity in form and substance substantially identical to the terms set forth herein
or otherwise assumes all of such Sellers obligations hereunder with respect to the Bonds sold or
otherwise disposed of (including the corresponding Proportionate Share of each indemnity
obligation hereunder with respect to such Bonds), and delivers such fully executed agreement to
the Trustee, all of such Sellers obligations hereunder with respect to such Bonds shall
automatically terminate (without increase of the Proportionate Share of any other Consenting
Bondholder) other than in respect of payment of obligations which have been incurred hereunder
as of the date of termination. Notwithstanding the foregoing, a Seller shall be relieved of
prospective liability for the Indemnity only if the applicable Purchaser is an Approved
Institutional Buyer (as defined in the Indenture) or otherwise approved in writing by the Trustee.
The Indemnity authorized herein shall be in addition to any other remedies, relief or
indemnification available to each Indemnified Person. The rights and remedies conferred
KE 32957849
hereunder shall be cumulative and the exercise or waiver of any such right or remedy shall not
preclude or inhibit the exercise of additional rights or remedies or the subsequent exercise of
such right or remedy.
Unless otherwise provided herein, all notices, demands and other communications
hereunder shall be in writing and shall be sent by certified mail, by overnight delivery service or
by telephone facsimile and shall be addressed to the the address or facsimile number set forth on
the Trustee or such Consenting Bondholders signature page to the Restructuring Support
Agreement, or in either case to such other person(s) and address(es) as a party shall have
specified by notice in writing to the other. Notices hereunder shall be effective when received.
The obligations of the Consenting Bondholders and the Indemnity set forth herein is
solely for the benefit of the Indemnified Persons and parties hereto, and no other person, firm or
corporation shall have any right, benefit or interest under, or because of, the existence of this
agreement. In no event shall this agreement make us a guarantor of or responsible for your
actions or inactions or in any way give rise to any liability on our part to any third party for any
cause or reason. For the avoidance of doubt, the terms of the Indemnity provided herein shall
supplement, not replace the indemnity obligations provided for in the Indenture, and all such
indemnity obligations provided for in the Indenture shall survive termination of the Indenture.
KE 32957849
EXHIBIT B
EXHIBIT C
ACTUAL1
2013
BUDGET
2014
2015
2016
2017
2018
2021
2022
2023
2024
42,894,531
(7,609,905)
3,546,026
328,665
2,682,720
(445,787)
(2,533,308)
373,851
34,071
67,375
39,338,239
40,280,091
(8,300,000)
2,863,523
300,000
2,822,866
(450,000)
(2,604,461)
64,861
34,976,880
34,062,350
(8,515,587)
2,699,194
200,000
2,907,552
(2,780,990)
2,029
29,080
28,603,628
30,825,229
(9,247,569)
3,066,193
376,380
200,000
2,994,779
(2,836,610)
2,029
735,000
2,163
26,117,594
27,414,284
(9,595,000)
3,259,995
630,403
200,000
3,084,622
(2,893,342)
2,029
1,085,000
2,250
23,190,241
28,178,255
(9,862,389)
3,453,510
937,040
200,000
3,177,161
(2,951,209)
2,029
1,085,000
2,340
24,221,736
29,295,186
(10,253,315)
3,623,847
1,063,563
200,000
3,272,475
(3,010,233)
2,029
1,085,000
2,433
25,280,985
30,456,793
(10,659,878)
3,767,161
1,195,610
200,000
3,370,650
(3,070,438)
2,029
1,085,000
2,531
26,349,458
31,664,865
(11,082,703)
3,916,207
1,225,445
200,000
3,471,769
(3,131,847)
2,029
1,085,000
2,632
27,353,398
32,921,259
(11,522,441)
3,856,437
1,225,445
200,000
3,575,922
(3,194,484)
2,029
1,085,000
2,737
28,151,906
34,227,910
(11,979,768)
4,010,695
1,225,445
200,000
3,683,200
(3,258,373)
2,029
1,085,000
2,847
29,198,983
35,586,826
(12,455,389)
4,171,122
1,225,445
200,000
3,793,696
(3,323,541)
2,029
1,085,000
2,960
30,288,149
13,252,441
893,180
1,097,844
661,012
181,714
16,086,192
11,104,044
819,800
1,085,100
462,561
118,384
13,589,889
10,049,809
744,509
862,074
296,037
120,752
12,073,181
9,479,809
701,351
818,548
278,937
123,167
11,401,811
8,829,809
652,135
767,442
259,437
125,630
10,634,454
8,929,809
659,706
782,820
262,437
128,143
10,762,915
8,929,809
659,706
783,068
262,437
130,706
10,765,726
9,153,055
676,199
802,911
268,998
133,320
11,034,483
9,381,881
693,104
823,271
275,723
135,986
11,309,965
9,616,428
710,432
844,162
282,616
138,706
11,592,344
9,856,839
728,192
865,599
289,681
141,480
11,881,792
10,103,260
746,397
887,597
296,923
144,309
12,178,487
1,455,126
843,133
998,240
647,140
352,390
206,460
4,502,489
1,025,550
810,455
547,996
517,388
225,027
142,850
3,269,266
940,745
826,664
105,056
527,736
229,528
145,707
2,775,435
882,715
843,197
107,157
538,290
234,118
148,621
2,754,100
933,008
197,061
109,300
549,056
238,800
151,594
2,178,820
983,238
201,003
111,486
560,037
243,576
154,625
2,253,966
1,027,682
205,023
113,716
571,238
248,448
157,718
2,323,825
1,065,378
209,123
115,990
582,663
253,417
160,872
2,387,444
1,104,513
213,306
118,310
594,316
258,485
164,090
2,453,020
1,145,144
217,572
114,818
606,203
263,655
167,372
2,514,763
1,187,330
221,923
117,114
618,327
268,928
170,719
2,584,341
1,231,130
226,362
119,457
630,693
274,307
174,133
2,656,081
265,684
37,786
118,586
62,084
9,572
512,578
36,354
1,042,645
273,919
50,007
93,040
65,100
10,381
435,899
33,800
962,146
279,397
51,007
94,901
66,402
10,589
852,617
34,476
1,389,389
284,985
52,027
96,799
67,730
10,800
469,669
35,166
1,017,177
290,685
53,068
98,735
69,085
11,016
479,063
35,869
1,037,520
296,499
54,129
100,709
70,466
11,237
488,644
36,586
1,058,271
302,429
55,212
102,724
71,876
11,461
498,417
37,318
1,079,436
308,477
56,316
104,778
73,313
11,691
508,385
38,064
1,101,025
314,647
57,442
106,874
74,779
11,925
518,553
38,826
1,123,045
320,705
58,591
109,011
76,275
12,163
528,924
39,602
1,145,272
327,120
59,763
111,191
77,801
12,406
539,502
40,394
1,168,177
333,662
60,958
113,415
79,357
12,654
550,292
41,202
1,191,541
10YEARPROJECTIONS
2019
2020
OPERATINGEXPENSES
PersonnelExpenses
Salaries&Wages
PayrollTaxes
EmployeeInsurance
EmployeePension
StaffDevelopmentCosts
SUBTOTAL
AcademicProgramExpenses
StudentRecruitment5
CoCurricularActivities6
Dues&Subscriptions
LibraryContinuations
StudentRetention&Travel
Events
SUBTOTAL
AdministrativeExpenses
Printing&Duplication
MailServices
Telephone
OfficeSupplies
EquipmentRental&Lease
ProfessionalExpenses
Taxes&Licenses
SUBTOTAL
NewBuildingExpenses
Rentals&Lease
Repairs&Maintenance
Security
Utilities
Insurance
SUBTOTAL
OtherExpenses
Expensesassocw/newMSL&LLM
Professional&DevExpenses
GovernmentGrantExpenses
FinanceCharges/Miscellaneous
Contingency
SUBTOTAL
TOTALOPERATINGEXPENSES
398,168
596,872
346,262
428,073
258,781
2,028,156
422,200
583,823
335,000
478,360
314,500
2,133,883
430,644
595,499
239,700
487,927
330,225
2,083,996
439,257
607,409
244,494
497,686
346,736
2,135,582
448,042
619,558
249,384
507,639
364,073
2,188,696
457,003
631,949
254,372
517,792
382,277
2,243,392
466,143
644,588
259,459
528,148
401,391
2,299,728
475,466
657,480
264,648
538,711
421,460
2,357,765
484,975
670,629
269,941
549,485
442,533
2,417,564
494,675
684,042
275,340
560,475
464,660
2,479,191
504,568
697,723
280,847
571,684
487,893
2,542,715
514,659
711,677
286,464
583,118
497,651
2,593,569
333,250
234,350
146,700
714,300
24,373,782
234,350
500,000
734,350
20,689,534
85,000
40,000
234,350
500,000
859,350
19,181,351
155,780
60,000
249,037
500,000
964,817
18,273,487
185,665
40,000
264,018
500,000
989,683
17,029,172
231,740
40,000
279,298
500,000
1,051,038
17,369,582
246,625
40,000
294,884
500,000
1,081,509
17,550,224
262,160
40,000
310,782
500,000
1,112,942
17,993,657
265,670
40,000
326,997
500,000
1,132,667
18,436,262
265,670
40,000
343,537
500,000
1,149,207
18,880,777
265,670
40,000
360,408
500,000
1,166,078
19,343,102
265,670
40,000
377,616
500,000
1,183,286
19,802,964
NETINCOMEAVAILABLEFORD/S
CURRENTD/S
ANNUALD/SCOVERAGE
14,964,456 14,287,346 9,422,277 7,844,108 6,161,069 6,852,154 7,730,761 8,355,801 8,917,136 9,271,129 9,855,881 10,485,185
12,079,225 12,077,866 12,076,600 12,077,869 12,074,113 12,077,203 12,078,444 12,074,422 12,075,872 12,077,675 12,074,713 12,076,013
1.24x
1.18x
0.78x
0.65x
0.51x
0.57x
0.64x
0.69x
0.74x
0.77x
0.82x
0.87x
Footnotes
1
2013"Actual"figuresshownherevariesslightlyfrom2013auditedresultsbasedonadifferentpresentationformatandnoninclusionofcertainitems.
>90%revenuearefromtheonlineLL.M.(InternationalTaxation)program.
Parking fees charged to the San Diego Padres.
Annual lease payments made under the Entrada Master Lease (apartment rentals) which expires on 11/30/26. Does not account for the indirect expenses/costs of administering the program.
5
Includes traditional student recruitment activates & online student recruitment costs paid to third-party for the LLM/JSM programs.
6
Annual fees paid to third-party to provide bar exam preparation coursework. The contract ends on July 2016.
3
4
40
EXHIBIT D
May 9, 2014
Interest Appraised
Date of Value
Value Conclusion
As Is
$38,500,000
As Stabilized (Hypothetical)
$63,800,000
Compiled by CBRE
Data, information, and calculations leading to the value conclusion are incorporated in the report
following this letter. The report, in its entirety, including all assumptions and limiting conditions, is an
integral part of, and inseparable from, this letter.
The hypothetical value assuming stabilization is included at the request of the client and according to
the requirements established in Standards Rule 1-2(h) of USPAP. The hypothetical value is based on
the hypothetical condition that the subject property is at stabilized occupancy/income as a leased
investment as of the current date of value of April 14, 2014. The hypothetical value should in no way
be interpreted as being representative of the current or prospective market value of the subject.
The following appraisal sets forth the most pertinent data gathered, the techniques employed, and the
reasoning leading to the opinion of value. The analyses, opinions and conclusions were developed
based on, and this report has been prepared in conformance with the guidelines and
recommendations set forth in the Uniform Standards of Professional Appraisal Practice (USPAP), the
requirements of the Code of Professional Ethics and Standards of Professional Appraisal Practice of
the Appraisal Institute.
The intended use and user of our report are specifically identified in our report as agreed upon in our
contract for services and/or reliance language found in the report. No other use or user of the report
is permitted by any other party for any other purpose. Dissemination of this report by any party to nonclient, non-intended users does not extend reliance to any other party and CBRE will not be
responsible for unauthorized use of the report, its conclusions or contents used partially or in its
entirety
It has been a pleasure to assist you in this assignment. If you have any questions concerning the
analysis, or if CBRE, Inc. can be of further service, please contact us.
SUBJECT PHOTOGRAPHS
vi
vii
viii
MOOT COURTROOM
ix
xi
xii
xiii
Location
535-124-03
As Improved
Office
Land Area
0.69 AC
30,056 SF
Improvements
Property Type
Office
Number of Buildings
Number of Stories
N/A
178,000 SF
Year Built
2011
Condition
Excellent
Major Occupants/Tenants
178,000 SF
6 Months
100.0%
94.0%
1.5%
24 Months
6.50%
Total
Per SF
$6,415,800
$36.04
$2,274,405
$12.78
35.45%
$4,141,395
xxi
$23.27
Total
April 14, 2014
Per SF
$38,750,000
$217.70
$38,500,000
$216.29
$64,000,000
$359.55
$63,725,000
$358.01
Interest Appraised
Date of Value
Value
$38,500,000
Leased Fee
$63,800,000
As Stabilized (Hypothetical)
Compiled by CBRE
Age/condition
Construction quality/architectural appeal
Gold LEED Certified
Size of floor plates
Building systems (connectivity, multi-media)
Weaknesses
Opportunities
Potential for declining submarket vacancy and improving rent growth prospects
Scarcity of large class A space options in downtown or competing submarkets
Threats
Although the office market has been mostly in recovery over the past year countywide, the
improvement has lagged in the downtown submarket and uncertain economic conditions could
slow momentum in tenant demand and rent growth.
Makers Quarter project (proposed; completion not likely for at least 24 months)
EXTRAORDINARY ASSUMPTIONS
An extraordinary assumption is defined as an assumption directly related to a specific assignment,
which, if found to be false, could alter the appraisers opinions or conclusions.
xxii
Extraordinary
assumptions presume as fact otherwise uncertain information about physical, legal, or economic
characteristics of the subject property; or about conditions external to the property such as market
conditions or trends; or about the integrity of data used in an analysis.
We have relied on rentable square footage figures provided by TJSL and referenced in building
plans prepared by Fehlman LeBarre Architect and Planning (dated April 2009). We were not
provided with a current BOMA survey and were unable to reconcile the rentable areas with
building plans. In the absence of BOMA calculations, we have valued the property based on the
reported square footage figure and reserve the right to amend our values should BOMA
calculations be provided in the future.
The subject property is currently encumbered by tax-exempt revenue bonds (Rev Bonds Thomas
Jefferson School Of Law Series 2005 B), which were basically issued for financing the construction
of the subject property. Our valuation assumes no specific financing encumbrance on the subject
property and gives no consideration to any covenants that might be associated with the
aforementioned tax exempt bond encumbrance on the subject property, including any
requirements for occupancy by non-profit entities or space users.
HYPOTHETICAL CONDITIONS
A hypothetical condition is defined as that which is contrary to what exists but is supposed for the
purpose of analysis.
physical, legal, or economic characteristics of the subject property; or about conditions external to the
property, such as market conditions or trends; or about the integrity of data used in an analysis.
The hypothetical value assuming stabilization is included at the request of the client and according
to the requirements established in Standards Rule 1-2(h) of USPAP. The hypothetical value is
based on the hypothetical condition that the subject property is at stabilized occupancy/income as
a leased investment as of the current date of value of April 14, 2014. The hypothetical value
should in no way be interpreted as being representative of the current or prospective market value
of the subject.
Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago: Appraisal Institute, 2010), 73.
xxiii
TABLE OF CONTENTS
CERTIFICATION OF THE APPRAISAL .............................................................................................i
SUBJECT AERIAL VIEWS ............................................................................................................. iii
SUMMARY OF SALIENT FACTS.................................................................................................. xxi
TABLE OF CONTENTS ............................................................................................................ xxiv
INTRODUCTION ...................................................................................................................... 1
AREA ANALYSIS ......................................................................................................................... 7
NEIGHBORHOOD ANALYSIS .................................................................................................. 10
MARKET ANALYSIS .................................................................................................................. 18
SITE ANALYSIS ........................................................................................................................ 36
IMPROVEMENTS ANALYSIS ...................................................................................................... 41
ZONING ................................................................................................................................ 54
TAX AND ASSESSMENT DATA .................................................................................................. 56
HIGHEST AND BEST USE ......................................................................................................... 58
APPRAISAL METHODOLOGY ................................................................................................... 61
SALES COMPARISON APPROACH ............................................................................................ 62
INCOME CAPITALIZATION APPROACH .................................................................................... 71
RECONCILIATION OF VALUE .................................................................................................. 87
ASSUMPTIONS AND LIMITING CONDITIONS .......................................................................... 88
ADDENDA
A Glossary Of Terms
B Legal Description
C Qualifications
xxiv
INTRODUCTION
PROPERTY IDENTIFICATION
The subject property consists of a mid-rise office property located in the downtown San Diego office
submarket, in the city of San Diego, in central San Diego County, 92101. The property address is
1155 Island Avenue. The subject improvements consist of 8 floors of above-grade office and
classroom space over 3 levels of subterranean parking. The improvements total 178,000 rentable
square feet and are situated on a 0.69-acre site (APN 535-124-03) in the East Village portion of
downtown. The improvements were completed in 2011 as a build-to-suit for Thomas Jefferson
School of Law and are currently nearly fully occupied by same as a law school/educational campus
facility. The building consists of high quality, class A, steel frame construction with mainly high image
glass exterior walls and reflects unique architectural design features and amenities. The interior is
highly specialized for the current space user and includes numerous classrooms and lecture halls, a
moot courtroom, a law library, penthouse executive boardroom, and large lobby with circular stairwell
that extends the first three floors of the building. An 8,000 square foot area on the ground floor
along the east side of the building has been leased to a caf/deli tenant, who is currently under
construction on their tenant improvements. The subject is more fully described, legally and physically,
within the enclosed report.
OWNERSHIP AND PROPERTY HISTORY
Title to the property is currently vested in the name of Thomas Jefferson School of Law, who acquired
title to the property on October 24, 2007 (doc #0676518) for an all cash price to the seller of
$9,800,000. The seller was Island Metro, LLC (Barratt American), who had owned the property since
November 1, 2005, when they purchased it for $7,000,000. At the time of the 2007 sale, the
property was improved with some older commercial structures occupied by the VA. To the best of our
knowledge, there have been no other transfers of ownership with regard to the subject in the previous
three years.
PREMISE OF THE APPRAISAL
The following table illustrates the various dates associated with the valuation of the subject, the
valuation premise(s) and the rights appraised for each premise/date:
Date
Date of Report:
May 9, 2014
Date of Inspection:
Dates of Value
As Is:
As Stabilized (Hypothetical):
Interest Appraised
Compiled by CBRE
Office of Comptroller of the Currency (OCC), 12 CFR Part 34, Subpart C Appraisals, 34.42 (g); Office of Thrift
Supervision (OTS), 12 CFR 564.2 (g); Appraisal Institute, The Dictionary of Real Estate Appraisal, 5th ed. (Chicago:
Appraisal Institute, 2010), 122-123. This is also compatible with the RTC, FDIC, FRS and NCUA definitions of market value
as well as the updated Interagency Appraisal and Evaluation Guidelines promulgated in 2010.
Client
Intended use
Intended user
Type of opinion
Effective date of opinion
Relevant characteristics about the subject
Assignment conditions
This appraisal of the subject has been presented in the form of an Appraisal Report, which is
intended to comply with the reporting requirements set forth under Standards Rule 2-2(a) of
2014/2015 USPAP. Pursuant to recent changes to USPAP, the Self-Contained and Summary
Appraisal Report designators are no longer applicable/utilized. Notwithstanding, this Appraisal Report
is intended to be consistent with the level of detail and discussion previously presented in a Summary
Appraisal Report.
Appraisal Institute, The Appraisal of Real Estate, 13th ed. (Chicago: Appraisal Institute, 2008), 132.
Compiled by CBRE
postal address
Assessors records
title documents
applicable tax data
zoning requirements
flood zone status
demographics
operating expense data
comparable data
The
appraisal license requirements. According to the OREA, an individual who is unlicensed may obtain
appraisal experience in any of the following ways:
By providing "significant real property appraisal assistance" to a licensed appraiser and having
the duties the unlicensed individual performs properly identified in the appraisal report. If the
unlicensed individual performs at least 75% of the professional appraisal work and the
appraisal conforms to USPAP, the experience can qualify under Category 10 (Assistance in the
Preparation of Appraisals), up to a maximum of 400 hours;
By performing the entire appraisal process under the direct technical supervision of a licensed
appraiser. The final conclusion to value is made by and the appraisal is signed by the
licensed appraiser, with the unlicensed individual's duties property identified in the report. If
the unlicensed individual performs all appraisal methods customarily used for the assignment
and the appraisal conforms to USPAP, the experience can qualify under Category 1 (Fee and
Staff Appraisal); or
Note: Individuals unlicensed in California may not sign appraisals in federally related transactions,
even if co-signed by a licensed appraiser.
Jeff Rice provided significant professional assistance in completion of this appraisal report. Jeff Rice
completed the following steps within the appraisal process, (regional, neighborhood, market, site,
improvements) under the direct technical supervision of Mark Remick and Robert W. Gutzman, MAI.
The final conclusion to value is made by, and the appraisal is signed by, Mark Remick and Robert W.
Gutzman, MAI.
EXPOSURE/MARKETING TIME
Current appraisal guidelines require an estimate of a reasonable time period in which the subject
could be brought to market and sold. This reasonable time frame can either be examined historically
or prospectively. In a historical analysis, this is referred to as exposure time. Exposure time always
precedes the date of value, with the underlying premise being the time a property would have been on
the market prior to the date of value, such that it would sell at its appraised value as of the date of
value. On a prospective basis, the term marketing time is most often used. The exposure/marketing
time is a function of price, time, and use. It is not an isolated estimate of time alone. In consideration
of these factors, we have analyzed the following:
The following table presents the information derived from these sources.
EXPOSURE/MARKETING TIME INFORMATION
Investment Type
Exposure/Mktg. (Months)
Range
Average
1.0
- 15.0
7.0
2.0
- 18.0
9.0
1.0
6.0
6 Months
AREA ANALYSIS
Moodys Economy.com provides the following San Diego, CA metro area economic summary as
of December 2013.
SAN DIEGO, CA - ECONOMIC ANALYSIS
Indicators
Gross Metro Product (C$B)
% Change
Total Employment (000)
% Change
Unemployment Rate
Personal Income Growth
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
155.6
157 2
157.8
150.0
152 6
155.2
159.8
164.4
169.1
175.8
180.9
2.7
1.0
0.4
-4.9
1.7
1.7
3.0
2.9
2.9
3.9
2.9
184 8
2.1
1,301.6
1,308 8
1,298.9
1,231.2
1,222 5
1,233.3
1,258.8
1,281.1
1,306 2
1,337.5
1,364.0
1,379 5
1.5
0.6
-0.8
-5.2
-0.7
0.9
2.1
1.8
2.0
2.4
2.0
1.1
4.0
45
6.0
9.6
10 5
10.0
8.9
75
66
5.9
5.6
5.4
5.8
48
3.9
-3.2
3.1
6.7
5.8
1.9
65
7.1
5.7
45
Population (000)
2,947.3
2,975 7
3,022.1
3,061.2
3,103.9
3,138.2
3,177.1
3,209.1
3,245.9
3,285.1
3,324.5
3,361.9
Single-Family Permits
4,743.0
3,422 0
2,361.0
1,778.0
2,270 0
2,245.0
2,197.0
2,825.4
6,605 7
8,961.3
9,021.3
8,183 3
Multifamily Permits
4,448.0
4,013 0
2,996.0
1,168.0
1,224 0
3,125.0
3,469.0
3,742 6
2,243 7
2,602.5
2,684.8
2,768 2
600.3
580 0
409.6
358.6
385 2
370.6
384.6
459 8
478.1
486.2
488.9
497 5
56,005.2 43,188 6 21,822.0 31,198.3 33,367.9 29,303.9 38,249.6 28,576 8 18,129 3 18,149.9 16,278.0 16,933 2
-20.5
3,892.0
-2 6
15.1
12.2
16 7
9.5
14.8
58
8.9
9.8
9.4
70
7,304 0 12,927.0 19,250.0 21,820 0 19,746.0 16,054.0 12,355.1 11,658 2 11,141.3 11,871.9 12,928 0
RECENT PERFORMANCE
San Diego's recovery strengthened at the end of 2013 as construction and consumer spending picked
up and state and local government budgets improved. Total payrolls continue to rise despite declines
in mortgage lending and federal government jobs. The unemployment rate has risen back above 7%
as the labor force has halted its earlier decline. Housing market indicators are cooling. House prices
are not rising as fast now that the inventory of homes for sale is starting to swell.
TOURISM
Stronger U.S. and Mexican economies in 2014 and 2015 will boost growth in San Diego's critical
visitor-dependent industries. Passenger traffic at San Diego International Airport recovered from a
federal budget sequester-impacted decline at the beginning of the year, limiting the damage to a
modest 2% decline for the first three quarters of 2013 compared with a year earlier. The increase of
visitors, particularly from Mexico and other foreign countries, helped to lift hotel occupancy rates
during the peak summer season to their highest level since 2006. The San Diego Convention Center
forecasts more than 850,000 attendees in 2014, which would be the most since 2008.
Investments to expand tourism-related infrastructure will boost longer-term prospects. Construction has
begun on a transborder terminal linking the metro area to the Tijuana International Airport in Mexico.
In addition to offering an alternative to the metro area's constrained airport, the new transnational
terminal will allow cross-border travelers to bypass the often-congested land border crossings, a big
convenience for international business travelers.
FEDERAL BUDGET
The recent two-year federal budget deal eliminates a major drag for San Diego. The reversal of some
of the automatic budget sequester cuts included in the deal will help to shield spending at the metro
area's numerous military bases and for weapon systems designed and built locally such as unmanned
aerial vehicles. An early sign of the impact of the deal is the expected increase for 2014 in military
building and refurbishments at San Diego shipyards. Meanwhile, a more diverse client base will
benefit the local industry. In light of delayed Navy spending, shipyards have been securing civilian
contracts such as building natural gas tankers. Longer term, the Pentagon's growing focus on the
Pacific Rim and rising demand for UAVs will favor the metro area and its defense contractors.
FINANCE
Mortgage lenders and other financial service firms are scaling back in response to rising interest rates,
representing a near-term drag on improvements elsewhere in the economy. Since July, employment in
credit intermediation employment in the metro division has fallen by 800 jobs, or almost 4%. The
decline is more than double the U.S. drop over the same period. Longer term, a revitalized housing
market and demand for new mortgages over the next two years will help to offset the temporary
decline in refinancing and loan servicing jobs in San Diego.
CONCLUSION
San Diego's recovery is forecast to strengthen in 2014 and 2015 as its visitor-dependent and housingrelated industries strengthen and deferred military spending resumes to benefit military bases and
defense contractors. The unemployment rate will likely dip below 7% by the middle of 2014 and
employment is anticipated to surpass its previous peak by the end of the year, slightly later than the
U.S. In the long term, the metro area is well-positioned to take advantage of high-value-added tech
research and development and the Pentagon's reorientation toward the Pacific Rim. High business and
living costs will still limit growth to be on par with that of the U.S.
NEIGHBORHOOD ANALYSIS
10
Horton District
The original Horton district is in the southwest portion of the Centre City area and is generally
bounded by Broadway, Union Street, G Street, and 4th Avenue. The Horton district is centered
around the 1,000,000 square foot Horton Plaza regional shopping center, which was completed in
1988. Horton Plaza has been an economic success to date and has been generally fully leased.
Other major uses in the Horton district include the 15-story, 452-room Omni Hotel, the 20-story
Wells Fargo Bank Building comprising 385,000 square feet and built in 1982, and the 330,000
square foot Central Savings Tower office building completed in 1976. The Federal Office Building
and court facilities are also located in the Horton District. The historic Balboa Theatre renovation was
completed in 2008 and now includes a 1,300-seat live-performance facility. The other planned
development is a proposed 362-unit Marriott Renaissance hotel, which will be on the north side of G
Street between 2nd and 3rd Avenues.
Columbia District
The Columbia district is defined by the area bounded by Ash Street, Union Street, "F" Street and the
San Diego Harbor. The Columbia redevelopment plan essentially established a guide for
development of much of western downtown with West Broadway as the main commercial and Class A
office corridor. The Columbia plan was intended to provide for the expansion of the central business
district westward with Class A office space and the greatest intensity of development along Broadway.
The Columbia district and west Broadway was the focus for the downtown revitalization in the 1980's
and early 1990's. The boom cycle brought approximately $800 million worth of high-rise
construction and major architectural face-lifts on Broadway between San Diego Bay and 15th Street.
Most of the development, however, shifted from commercial to residential development over the past
10 or so years as the markets shifted. The 23-story office tower called Broadway 655 was delivered
to the market in 2006 at the southeast corner of Broadway and Kettner. Other new or planned
residential projects include the 36-story Bosas Pacific Highway at Ash (completed 2007), the Bosa
Pacific Highway at E (completed 2009), the recently completed 43-story Electra and the Elle
condominiums, the planned Santa Fe Parcel 6, the partially completed Grand at Santa Fe Place, and
the planned remodel of the YMCA to include 261 SROs.
Other major projects include the recently completed cruise ship terminal expansion, a 700,000
square foot expansion of the County Courts facilities (adjacent to the Civic Center) and a 426,000
square foot expansion of the US Federal Courthouse facility. The latter was completed in late 2012.
Also, in the planning stages is the redevelopment within Embarcadero Park and the 800-room, threehotel Lane Field project.
12
Marina District
The Marina district is along the south edge of the downtown area near and along the bay front. The
boundaries of the Marina district are generally F and G Streets to the north, Fourth Street and the Gas
Lamp district to the east, Harbor Drive to the south, and Pacific Highway to the west. The San Diego
Convention Center, completed in late 1989, and Seaport Village are the focal points for the Marina
district. The San Diego Convention Center hosted the 1996 Republican Convention and construction
is complete on an expansion that has roughly doubled the size of the San Diego Convention Center to
1.7 million total gross interior sq. ft. The building now consists of 525,701 sq. ft. of contiguous exhibit
space; an additional 90,000 sq. ft. of multi-function space in the Center's Sails Pavilion that can also
be used as exhibit space; 204,114 sq. ft. of meeting space including two 40,000 sq. ft. ballrooms;
and 284,494 sq. ft of pre-function, lobby and registration areas.
Adjacent to the convention center is the former Hotel Intercontinental (now Marriott, with 1,364 rooms
in two towers); the recently expanded Hyatt Regency, a 33-story, 875-room hotel; and the newly
completed, 30-story Hilton San Diego Bayfront. The later features 1,190 rooms and is across from
the Petco Park.
There are currently several planned projects in the area, the largest of which is the Navy Broadway
Complex, which is tentatively proposed for 1.3 million square feet of office, 160,000 square feet of
retail/commercial, and 350,000 square feet of other uses. The Navy Broadway Complex project
was touted by CCDC as one of the most exciting redevelopment opportunities in downtown, but it
was voted down by the Coastal Commission in late 2011 pending design modifications. It is intended
to anchor the $230 million North Embarcadero Visionary Plan to rebuild the public space from the
airport to Seaport Village, creating a grand esplanade and adding more than 12 acres of new
waterfront plazas and park lands. Other projects in the area will also contribute open space that will
eventually give the public at least 28 acres on and near the Bay.
The downtown area is improved with two traditional grocery stores, which includes the freestanding
44,223 square foot Ralphs supermarket constructed over a subterranean parking structure and the
Albertsons supermarket on the bottom floor of the Market Street Village apartment building in East
Village.
Little Italy
North of the Columbia neighborhood and south of Laurel Street between I-5 and the waterfront, Little
Italy was the traditional home of Italian families whose brothers, sons, fathers and husbands formed
the hard-working backbone of San Diego's once-thriving commercial tuna fishing industry. Although
large-scale commercial fishing is no longer prevalent, the district's southern European character
remains. Always a "neighborhood" first and then a commercial and light industrial center, Little Italy
sense of community is perhaps best typified by the new Washington Elementary School and CCDC's
13
development of the adjacent Amici Park, which serves both as a playground for the school and a park
including a bocce ball court for the community. The India Street commercial strip is dominated by
Italian restaurants and art and graphic studios/galleries, retailers and low-rise offices.
Core District
Roughly running from Broadway north to A Street, between Union Street and Twelfth Avenue was
downtown's fashionable business and entertainment quarter until the urban core's decline began in the
1960s. The eastern end of the Core was the site of early residential and related development
(including Alonzo Horton's second home and the B Street School), while its Broadway frontage and
western sector were dominated by Horton House (replaced by the U.S. Grant Hotel),
commercial/financial and retail enterprises in low- to high-rise structures. In the 1920s, grand
movie/live performance theaters were built such as the Fox (now Copley Symphony Hall) and the
California Theatre (slated for rehabilitation).
Existing notable structures in this neighborhood include the Westgate and U.S. Grant hotels, the City
Administration Building complex, Community Concourse and the Civic Theatre, the new Central Jail,
San Diego Trolley stops along C Street, and the high-rise offices representing the B Street "Financial
Corridor. The most notable development in this area is the 41-story condominium complex known
as The Vantage Pointe, which was completed in Spring 2009, but recently sold by the foreclosing
lender to an apartment operator.
Civic Center Complex Redevelopment - The site is a four-square-block property, approximately 6.1
noncontiguous acres in size, bound by Front Street, Third Avenue, A and C streets, four blocks west of
the subject. San Diego's Civic Center Complex provides workspace for 1,000 of the City's 3,000
downtown employees, and the City currently spends $13 million annually to lease private office space
for the other 2,000 workers. These leases expire soon (2013 and 2014) and are substantially below
current market rates. In addition, the Civic Center Complex, including City Hall, is in need of an
estimated $125 million in renovations, including seismic retrofitting and removal of hazardous
materials such as asbestos. As a result, Centre City Development Corporation, on behalf of the City of
San Diego, is considering multiple alternatives, including the possible redevelopment of downtown's
Civic Center. The City and CCDC explored the financially feasibility of this project in 2008, but a
decision on the project is on hold due to the Citys financial issues and CCDC funding concerns.
Cortez Hill
North of downtown's Core and south of I-5 between Tenth Avenue and Union Street, the 111- acre
Cortez Hill is two neighborhoods in one. East of Sixth Avenue rises Downtown's highest landmass, the
hill dominated by the El Cortez Hotel. West of Sixth Avenue the "flatlands" area is known as Cortez
West. By the late 1880s, Cortez Hill was Downtown's mansion-covered version of San Francisco's
Nob Hill. Opened in 1927, the El Cortez Hotel was for four decades the social/ceremonial heart of
14
San Diego as well as the city skyline's commanding presence. Despite the closure of the hotel in the
late 1960s, the hill remained a viable neighborhood of historic dwellings, vintage multifamily
structures and more recent residential development, many now renovated by property owners awaiting
the hotel's reuse. The $21-million restoration of the El Cortez Hotel and its conversion into an 85-unit
luxury apartment was completed in 2000, and was sold off as condominiums.
The 14-month
rehabilitation incorporated the original configuration of the building's apartment/hotel units and
restoration of the octagonal Don Room to serve as special-event space. A lushly landscaped terrace
replaced a bunker-like hotel annex added to the property in the 1950s. The work also included
restoration of the grand lobby and the swimming pool, and addition of about 4,000 square feet of
perimeter commercial space for neighborhood-serving businesses.
Gaslamp Quarter
Beginning with his building a wharf at the foot of Fifth Avenue to accommodate trade and commerce
in the 1870s, Alonzo Horton encouraged the development of downtown. Original building owners
include Ulysses S. Grant Jr. and Wyatt Earp. This 16.5-block neighborhood is listed on the National
Register of Historic Places, and the 94 structures identified as historically or architecturally significant
now house more than 70 restaurants and nightclubs, movie theaters, retailers, offices, galleries and
urban live/work lofts. Gaslamp Square phase I was finished in 2004, with phase II delivered in late
2005. There are very few new projects in this area due to its small area, as well as all projects within
this district must be approved by the historic Gaslamp Council.
East Village
The East Village, just east of the Gaslamp Quarter, was once the warehouse district for a growing San
Diego from the late 1800s to the late 1900s. Former warehouses and Victorian buildings have been
transformed into various live/work lofts complimenting the remaining historic elements of the district.
Now known as San Diegos arts district, the East Village is currently the citys primary focus for
redevelopment with the goal to transform the area into a lifestyle destination for business,
entertainment and tourism.
Petco Park
Most notably, the East Village includes the Petco Park baseball-only stadium complex, which opened
in 2004, replacing Qualcomm Stadium as the home park of Major League Baseballs San Diego
Padres. Petco Park is favorably located across the street from the Convention Center, adjacent to the
Gaslamp Quarter, two blocks from the downtown terminal of the San Diego Trolley light rail system.
The ballpark was constructed by San Diego Ballpark Builders, a partnership with Clark Construction,
Nielsen Dillingham and Douglas E. Barnhart, Inc. The construction cost of over $457 million was
partially publicly financed, while the Padres contributed $153 million for a 30% equity stake and
signed a 30-year lease. Petco, Inc. paid $60 million over 22 years for naming rights of the stadium.
15
Petco Park is recognized as one of the more spectacular MLB ballparks, combining the good sight
lines for baseball with panoramic views of the San Diego city skyline, the San Diego Bay, Coronado,
and Balboa Park. The 42,000-seat open-air ballpark includes 58 suites, 7 restaurants and lounges, 6
tower lofts and 5 party suites. The Western Metal Supply Company building serves as a focal point in
left field. The four-story brick building is a historic San Diego landmark that is now home to the
Padres team store, a roof-top private party area, a restaurant, and a bar. The project also included
the 512-room Omni hotel, which is connected to the ballpark via a pedestrian bridge.
New/Proposed Development (I.D.E.A District)
Relatively newer or recently completed projects include the Hilton San Diego Bayfront (previously
described) and Hotel Indigo, a 200-room boutique hotel, and the Thomas Jefferson School of Law.
The new $200 million San Diego Central Library was recently completed and is located at the corner
of Park Boulevard and J Street, just one block from DiamondView Tower. The architecturally unique
project encompasses about 500,000 square feet in 9 stories.
The I.D.E.A district (Innovation, Design, Education and Arts) is a 93-acre sustainable, mixed-use
development covering 35 city blocks in the upper East Village area driven by a design-services job
cluster.
throughout San Diego. The $2 billion development will potentially include nearly 7 million square
feet of studio, residential, retail and hotel space, with the potential for 10,000 new jobs and $20+
million in incremental revenue for the area.
Other major proposed projects include IDEA1 (Lowes), Ballpark Village, and Makers Quarter. The
latter is $900 million, 5-block, mixed-use project that is conceptually proposed for 1,250 apartments,
800,000 square feet of office area, 200,000 square feet of retail and cultural space, and a hotel.
The Ballpark Village project was recently approved and is a 37-story, $250 million residential tower
that is proposed for 688 units (apartment or condos yet to be determined).
IDEA1 is a planned urban mixed-use project with creative office space, apartments and street-level
retail. Located on the full block (1.37 acres) bounded by E, F, Park and 13th streets, the five-story,
225,000-square-foot, mixed-use project is planned to include 63,000 square feet of creative office
space, 10,000 square feet of street-level retail and eateries, and 218 apartments surrounding a large
interior courtyard. The groundbreaking of IDEA1 is scheduled for first quarter 2015 with completion
in the first quarter of 2017.
Chargers Stadium Concept
One of the options for the proposed NFL football stadium housing the San Diego Chargers is a site in
the southeast East Village Area. Conceptually, the proposed $1+ billion state-of-the-art stadium
would be funded by a combination of Chargers and City contributions, taxpayers, NFL G3 Program,
16
stadium naming rights and proceeds from the sale of the Qualcomm site in Mission Valley, but the
project is very preliminary at this point and has a lot of hurdles to clear to become a reality.
Immediate Surroundings
The subject is located in the southeast portion of the downtown area, within the East Village District,
several blocks east of the Gaslamp District and about two blocks northeast of Petco Park. The
property is bordered by 11th and Island Avenues, and Park Boulevard. The subject is surrounded by
mostly low and mid-rise multi-family residential (condos and apartments) constructed mainly within the
past 8 to 10 years, including the Entrada Apartments, which has a housing agreement with TJSL. The
San Diego Trolley runs along the east side of the subject down the middle of Park Boulevard (12th
Avenue). The new Central Library is a half block south of the subject, at J Street and Park Boulevard.
Further south is the Ballpark Village site. Immediately west is the Padres Parkade facility and multiresidential (condos-2006 built).
CONCLUSION
The downtown San Diego/Centre City area is one of the countys major business centers, is among
the largest office submarkets, and is largely recognized as the countys hub for government operations
and the legal community. The downtown area is evolving into a vibrant niche urban residential living
environment with an abundance of amenities in the Gaslamp, Little Italy, and Ballpark areas, which
has also helped improve its appeal among office space users. The subject is in a mostly residential
district, several blocks north and east of the Gaslamp and Ballpark areas with its restaurants and
entertainment amenities. The site is a secondary location for office uses.
17
MARKET ANALYSIS
SAN DIEGO OFFICE MARKET
Through the fourth quarter of 2013, vacancy rates continued to decline, albeit moderately, and
absorption has remained positive for 17 consecutive quarters as businesses continue to expand. The
San Diego office market continued to progress through the end of the year as all real estate indicators
experienced year-over-year improvement. This trend is expected to continue during the near-term as
the overall economic situation is also improving due to the regions strong concentration of
technology, defense, professional and business services companies along with positive overall
demographic trends, all key drivers of local growth. That said, the trend could be negatively impacted
by looming defense budget cuts.
From 2010 through 2012, class A positive net absorption fueled improvement in office market
fundamentals. As class A space filled up and rental rates increased, many tenants seeking value
turned to class B space in 2012. In San Diego suburban office submarkets, class B positive net
absorption in 2012 was 28.3% greater than class A absorption. Throughout the entire county, class B
absorption kept pace with class A absorption. With a lack of large blocks of available class A office
space, the class B sector is expected to continue to improve through the first half of 2014.
Assuming overall market fundamentals continue to strengthen in San Diego, it is important to look at
a few indicators specific to the office market segment, and one key indicator of market health is job
growth. According to a recent report published by CBRE Econometric Advisors, job growth has been
gaining momentum during the past year and is forecast to see further increases during the near-term,
assuming no major cutback in the defense sector locally.
Office employment, the primary determinant of demand, is defined as certain categories within the
financial and service employment sectors in which workers typically occupy office space. Over the last
five years, office employment has declined by 1.4%. During 2012, office employment grew by 4.8%
and 3.0% in 2013. Office employment peaked in San Diego in 2006 at 299,600 jobs and still has
not yet returned to previous highs. Office employment is forecast to grow 3.0% per year over the next
six years, with projections to surpass its previous employment high in 2014.
For the fourth quarter of 2013, the following table summarizes the supply and demand characteristics
of the overall market and submarkets of the San Diego Metropolitan area as compiled by CBRE, Inc.
The table includes multi-tenant, competitive office buildings with over 10,000 square feet of rentable
building area.
The overall market area and the local submarket have maintained stabilized occupancy rates over the
past two years. Over the same time frame, rental rates have been following a moderately increasing
trend.
18
19
Demand
Historical Net Absorption Trends - San Diego
The following is a summary of net absorption trends in the San Diego County office market over the
past decade.
For San Diego County, annual net absorption was up nearly 15 percent in 2012, which was the third
consecutive yearly increase and the strongest in nearly 7 years. Fourth quarter 2013 net absorption
was negative 116,869 square feet, which was a sharp decrease from the positive 87,437 square feet
absorbed in the third quarter and down significantly from the fourth quarter in 2012 with 384,244
square feet. Quarterly net absorption had been positive over the past several years as illustrated
above, which supports the consensus among most market participants that a recovery in the office
market has been underway, albeit moderate in the near term.
Countywide, nearly three quarters of the submarkets had positive net absorption for the fourth quarter
of 2013, and end of 2012. This positive activity was influenced by several major lease transactions
including the new 248,000 square foot FBI offices in Sorrento Mesa, 81,881 square feet for Petco in
Scripps Ranch, 51,252 for Liberty Mutual in Mission Valley, and 50,435 square feet for Union Bank in
UTC.
20
Vacancy
The San Diego Countys office market has experienced moderate fluctuation in vacancy over the past
ten years. This trend is illustrated in the following graph.
For the fourth quarter of 2013, direct vacancy for the county was mostly unchanged from the prior
quarter (13.2 percent), but it is down from the first quarter 2013 rate of 14.1 percent and 15.5
percent at the end of 2012, one year earlier. As illustrated above, vacancy trended upward from
2005 through 2009 with the more recent vacancies showing a significant decline from the peak.
While vacancy rates have been improving over the past couple of years, they are expected to remain
relatively high through the first half of 2014 until economic conditions stabilize more and employment
growth improves. Current vacancy rates in the major submarkets range from a low of 1.2 percent in
the 56 Corridor to a high of 23.1 percent in Scripps Ranch and 32 percent in Miramar.
21
22
23
Year
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
Source:
Number of
Total
Transactions Total Sales Volume Bldg Area (SF)
18
$345,644,846
1,553,788
20
$463,065,902
1,908,341
17
$312,128,500
1,667,972
15
$325,145,000
1,380,752
5
$51,674,000
324,484
15
$283,805,000
1,372,744
32
$713,038,000
2,644,649
23
$536,457,000
2,057,572
24
$432,069,550
2,090,117
27
$521,164,158
2,340,032
26
$408,719,440
2,243,388
26
$352,020,240
2,273,649
23
$277,204,160
1,775,602
22
$237,417,000
1,978,349
26
$240,755,111
2,163,108
22
$229,444,100
1,777,437
25
$209,730,882
2,120,544
28
$191,920,372
2,378,906
23
$138,621,442
1,895,777
Costar Comps
24
Average
Price/SF
$232.17
$242.65
$187.13
$235.48
$159.25
$230.92
$278.83
$260.72
$206.72
$222.72
$182.19
$154.83
$156.12
$126.81
$111.30
$129.09
$104.12
$84.37
$73.12
Average
Cap Rate
6.88
6.3
6.83
8.15
6.9
5.85
6.61
6.26
7.76
7.7
8.4
10
9.13
9.7
9.14
8.92
9.27
10.52
10.56
Year
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
Source:
Number of
Transactions
9
12
12
6
5
4
13
10
15
18
10
12
5
8
7
10
9
5
10
Costar Comps
Total
Total Sales Volume Bldg Area (SF)
$548,695,500
1,746,636
$754,835,500
4,056,596
$622,775,000
3,064,376
$272,538,000
1,156,035
$176,420,000
1,224,355
$486,765,000
1,081,557
$1,557,103,000
3,993,967
$1,180,200,000
3,531,803
$1,356,403,849
4,806,274
$1,554,930,163
5,812,116
$592,960,000
3,330,685
$565,777,978
3,303,737
$276,750,000
1,568,295
$326,487,490
2,250,175
$224,288,500
1,509,576
$374,036,000
2,663,167
$247,463,000
2,308,468
$168,315,000
1,311,237
$233,578,000
3,108,655
Average
Price/SF
$314.14
$186.08
$203.23
$235.75
$198.96
$450.06
$389.86
$334.16
$282.22
$267.53
$201.92
$171.25
$176.47
$145.09
$148.58
$140.45
$107.20
$128.36
$84.95
Average
Cap Rate
6.5
6.47
5.73
8.37
5
4.59
5.95
5.93
6.22
7.28
8.03
8.31
9.09
9.01
8.21
9.07
11.51
13.2
Through the end of the 4th quarter of 2013, the sales volume for office properties under 150,000
square feet fell short of the volume of 2012 but exceeded the annual sale volumes since 2007. Price
per square foot is slightly lower than 2012, while the average cap rate is slightly higher. For office
assets over 150,000 square feet, the year-to-date sale volume through 4th quarter exceeded last year.
The price per square foot increased significantly over 2012 due to several portfolio sales of
institutional quality assets with prices in the $386 to $397 per square foot range.
25
26
Location
Occupancy
DiamondView Tower
92%
655 W. Broadway,
San Diego, CA
87%
Emerald Plaza
88%
600 W. Broadway,
San Diego, CA
84%
550 W. C Street,
San Diego, CA
94%
96%
100%
Subject
Compiled by CBRE
The comparable properties surveyed generally represent the newest and/or highest quality office
properties in downtown and would represent the most direct competition for the subject, assuming
vacant and available for lease. All of the properties are located on major streets or have prominent
locations (i.e. DiamondView next to Petco Park). DiamondView would likely represent the most direct
competitor for the subject due to its generally similar age/quality and East Village location, but it has
a superior location next to Petco Park with its amenities and views/ambiance. The other comparables
are five to ten blocks north and west of the subject along the Broadway or B Street financial corridor,
which are much more prominent office locations.
Large Leases-Downtown
The following is a summary of large space lease transactions in downtown over the past several years.
As is evident, there has been very limited leasing activity for spaces larger than 100,000 square feet
and none of the tenants below were educational in nature. The Sempra Energy lease is a ground-up,
build-to-suit on a redevelopment site near Petco Park. They will be relocating from their current
functionally obsolete building at 101 Ash Street (273K SF). In addition to the City lease below, they
have recently or are currently in the process of renewing two leases at 120,000 and 230,000 square
feet, both at very discounted rates in the $1.15 to $1.25 range, gross.
30
Tenant
Sempra Energy
City of San Diego
Arrowhead General
Insurance
DLA Piper
Alliant Insurance
AECOM
Kleinfelder West
Regus
Bumble Bee Foods
Source: CBRE
Lease Rate
300,000
103,327
89,520
Jul 1, 2015
Sep 1, 2013
Jul 9, 2013
300 mos
72 mos
120 mos
Confidential
$1.25 FSG
$2.25 FSG
401 B Street
701 B Street
401 W A Street
550 W C Street
402 W Broadway
900 10th Avenue
81,163
54,442
46,007
42,932
35,904
29,531
Sep 1, 2012
Aug 1, 2013
Oct 4, 2014
Aug 2, 2013
Oct 24, 2012
Apr 1, 2014
129 mos
78 mos
85 mos
120 mos
84 mos
144 mos
Confidential
$2.25 FSG
Confidential
Confidential.
$2.00 FSG
Confidential
Term
144 mos
96 mos
96 mos
84 mos
60 mos
42 mos
12 mos
72 mos
84 mos
50 mos
92 mos
84 mos
102 mos
TIA
Turnkey
$50
$45
$45
$3
As-Is
As-Is
$18
$75
Turnkey
$20
$31
$8
Bernardo Terrace (110K SF) Purchased by Palomar Community College District in June
2010 as a new, vacant spec office building with excess land for two additional buildings,
31
110,000 square feet each, or a total build-out of 330,000 square feet. The building was
vacant at sale and purchased for approximately $285 per square foot, plus additional value
for the excess land. The property is located in the Rancho Bernardo master planned
community, about 10 miles south of Palomar Colleges main campus.
St. Augustine University Campus (79K SF) Bought in April 2013 for $370 per square foot by
the tenant, St. Augustine University for Health Sciences, this property is located in San Marcos,
in north-inland suburban San Diego County and consists of three two-story, concrete tilt-up
buildings in a very secondary/tertiary office/commercial location. The buyer was the tenant
pursuant to an 11-yr lease expiring in 2019. They basically exercised an option to purchase
at a fixed OAR of 7 percent applied to their lease income at the time, which was about $2.50
per square foot, triple net, and significantly over-market. The rent was based on an original
build-to-suit lease agreement and a percent of cost. The seller considered the price to be
significantly over-market.
SD Christian College (55K SF) This property is located in Santee (east county) and was
bought in May 2012 for $110 per square foot by the San Diego Christian College for a new
campus. The property consists of 10 freestanding office buildings that were vacant at sale.
They were sold by the developer, who had constructed them on a spec basis for sale to
individual buyers, but the sale program failed.
32
important to consider that major educational space users are constrained by cost due to changing
economics in their business.
Other than USD, the largest private colleges in San Diego are National University, University of
Phoenix, Alliant University, and Point Loma Nazarene, and none are likely space users for the entire
subject building. National University has multiple locations throughout the region, and their main
campus is in Kearny Mesa, which is reportedly under-utilized. University of Phoenix is also in
suburban Kearny Mesa and occupies 55,000 square feet and renewed their lease in 2011 at their
current location. Alliant occupies about 300,000 square feet in suburban Scripps Ranch and has
ample land for expansion. Point Loma Nazarene has an established campus overlooking the ocean
in Point Loma and has no offsite expansion space requirements or interest at present.
The New School of Architecture is reportedly in the market for approximately 150,000 to 200,000
square feet of space.
100,000 square feet of space in several older buildings and are looking to expand. However, their
rental pricing expectations are reportedly conservative, consistent with class B or C space rent levels.
The subjects marketability as a multi-tenant building would likely be above average and appeal to a
variety of traditional and non-traditional space users, including educational, creative office,
technology and government tenants, but not without significant interior space modifications. The
buildings immediate proximity to the Trolley would likely appeal to the government and educational
space users.
Creative Office Concept
The creative office concept has synergy with the broader artistic theme of the East Village area and
would likely appeal to design and media development companies that do not prefer a high image
location, along with small technology firms looking to re-locate into downtown. The creative office
space concept is relatively new to the San Diego office market, but it is becoming increasingly popular
among certain sectors of the space user marketplace, particularly among technology companies,
design firms, media organizations and other creative types. Creative office space is loosely defined,
but it is generally characterized as any space with one or more of the following features: exposed
ceiling, floor, structural beams, or a renovated project that restores a buildings character or involves
a re-imaging of an architecturally dated building.
The following is from a recent CBRE report on the creative office market in Los Angeles:
Creative space has long been reserved for companies like entertainment and media
firms, ad agencies, architects, technology and other industries that rely on the creative
class of workers as their core competency. Demand for this type of space surged in the
late 1990s during the dot-com boom as tech companies created work environments filled
with collaborative workstations, shared office space and creative outlets for their ultra33
creative workforce. Now, demand for creative space is increasing once again as the
working environment is more global, more mobile and more diverse than ever before.
The growing demand for creative space has now extended into the more traditional office
environment as many real estate companies, financial firms, law firms and other
traditional office tenants are showing interest. Many of these firms are interested about
developing a creative workplace strategy by eliminating the traditional cube environment
and executive offices in favor of highly-functional shared workplaces. These strategies
focus on space optimization, increased collaboration, enhanced culture, employee
wellness, and the ability to attract, engage and retain top talent.
CONCLUSION
The Downtown submarket is currently experiencing an over-supply of available office space, but is
showing some signs of recovery/improvement.
trends/conditions in the near-term given the current economic state. Given the historical demand for
space in the submarket, the lack of available land for future development, and the increasing
desirability of downtown as a residential location, the long-term prospects are positive for the
Downtown office submarket. The subjects marketability is to a niche space user market and most
likely on a multi-tenant basis given its location and size. The subject is would also appeal to a single
space user, but its marketability is much more limited as currently improved and the population of
prospective large space users is very limited, especially among the education community.
34
PLAT MAP
35
SITE ANALYSIS
The following chart summarizes the salient characteristics of the subject site.
SITE SUMMARY
Physical Description
Gross Site Area
0.69 Acres
Island Avenue
190 Feet
11th Avenue
150 Feet
None
None
Shape
Topography
Zoning District
Rectangular
Generally Level
Centre City Planned District: Employment/
Residential Mixed-Use (CCPD-ER)
06073C-1885G
Flood Zone
Adjacent Land Uses
Zone X
Mainly multi-family residential, with some street
level retail.
Earthquake Zone
None
Comparative Analysis
16-May-12
Rating
Access
Average
Visibility
Functional Utility
Traffic Volume
Average
Average
Adequacy of Utilities
Assumed adequate
Landscaping
Minimal
Drainage
Assumed adequate
Below average
Utilities
Provider
Adequacy
Water
City of SD
Yes
Sewer
City of SD
Yes
Natural Gas
SDG&E
Yes
Electricity
SDG&E
Yes
Telephone
AT&T/Verizon
Yes
Mass Transit
MTD
Yes
Other
Yes
No
Unknown
Detrimental Easements
Encroachments
Deed Restrictions
Common Ingress/Egress
Source: Assessor's Parcel Map, Inspection, City of San Diego, FEMA, Alquist Priolo
36
LOCATION
The subject site comprises approximately half of a city block and is bounded by Island and 11th
Avenues, and Park Boulevard (12th Avenue), in the city of San Diego, county of San Diego, California
92101. The street address is 1155 Island Avenue. Ingress and egress is available to the site via one
curb cut on 11th Avenue.
SOILS
A soils analysis for the site has not been provided for the preparation of this appraisal. In the absence
of a soils report, it is a specific assumption that the site has adequate soils to support the highest and
best use.
EASEMENTS AND ENCROACHMENTS
We were not provided a preliminary title report in conjunction with this appraisal and assume no
adverse easements or encroachments exist. It is a formal assumption of this report that there are no
title issues that negatively impact the use, marketability, or value of the subject site.
FLOOD ZONE
According to flood hazard maps published by the Federal Emergency Management Agency (FEMA),
the site is within Zone X, as indicated on the indicated Community Map Panel No. 06073C-1885G,
dated 16-May-12. This zone designation is defined as follows:
FEMA Zone X (unshaded): Zones C and X (unshaded) are flood insurance rate zones
used for areas outside the 0.2-percent-annual-chance floodplain. No Base Flood
Elevations (BFEs) or depths are shown in this zone, and insurance purchase is not
required.
37
known active faults in California. Cities and Counties affected by the identified zones must limit
certain development projects within the zones unless geologic investigation demonstrates that the sites
are not threatened by surface displacement from future faulting.
According to Fault-Rupture Hazard Zones in California published in 1992 by the California
Department of Conservation, Department of Mines and Geology, the subject is not within an area
affected by the Alquist-Priolo Special Studies Zone Act. Related development limitations, therefore, do
not apply.
ENVIRONMENTAL ISSUES
CBRE, Inc. has not observed, yet is not qualified to detect, the existence of potentially hazardous
material or underground storage tanks which may be present on or near the site. The existence of
hazardous materials or underground storage tanks may have an effect on the value of the property.
For this appraisal, CBRE, Inc. has specifically assumed that the property is not adversely affected by
any hazardous materials and/or underground storage tanks which may be present on or near the
property.
CONCLUSION
Overall, there are no known factors that prevent the site from development to its highest and best use,
as if vacant.
From a physical standpoint, the site is considered adequate for many types of
development.
39
IMPROVEMENTS LAYOUT
40
IMPROVEMENTS ANALYSIS
The subject property is an 8-story, mid/high-rise office building with a three-level, below-grade
parking garage. The following is a description of the improvements based on our physical inspection
and review of building plans. Upper floor plans are provided at the end of this section. The following
table summarizes the subjects building areas and general layout of the improvements.
IMPROVEMENTS SUMMARY
Property Type
Office
Number of Buildings
Number of Stories
Year Built
2011
N/A
178,000 SF
(Multi Tenant)
Renovated:
Major Tenants
Thomas Jefferson School of Law (owner/user)
178,000 SF
5.92
Parking Improvements
Parking garage
Total Spaces:
176
1.0
GBA (SF)
Office Component
207,000
Parking Garage
87,024
Total
294,024
28,000 SF
2011
Actual Age
3 Years
Effective Age
1 Years
55 Years
54 Years
Functional Utility
See comments
NRA (SF)
178,000
178,000
Usable
Area (SF)
Load
Factor
N/A
N/A
-
N/A
N/A
The subject building was originally constructed as a build-to-suit for the Thomas Jefferson School of
Law and reflects distinctive architecture, and is highly specialized and upgraded for their current use,
including two floors of classrooms, a large law library comprising two floors, penthouse boardroom,
outdoor balcony terraces on the 5th and 8th floors, and a large ground floor reception lobby.
Thomas Jefferson School of Law occupies the entire building. The first five floors have no windows on
the south side of the building as they back up to the adjacent building on the south portion of the
block.
41
The ground floor includes the reception lobby, administrative offices, and vacant space that is current
vacant and proposed for occupancy by a restaurant/deli. The reception lobby is unusually large and
includes a circular staircase within an atrium feature that extends to the third floor ceiling. Ground
floor finishes are highly upgraded, including extensive use of polished stone and hardwood paneling.
The second and third floors are improved with mainly classrooms, including a moot courtroom,
three large classrooms (79-person capacity each) with semi-circular seating, and various
seminar/conference rooms on the second floor. The third floor has two large classroom/lecture halls
(136-person capacity each), several other smaller classrooms, and a conference room.
The law library is on the fourth and fifth floors, as well as the student lounge or organization area.
The library areas are mainly open with bookcases. There are also some library administration offices
on the fourth floor and a bank of student study rooms along the south side of the building on same
floor.
The sixth and seventh floors are mainly improved with administrative and executive offices for TJSL
employees. The build-out includes a large number of private offices, conference rooms and office
support areas.
The eighth floor includes a large boardroom, kitchen, and faculty staff lounge. The boardroom has
extensive decorator upgrades and a high, open ceiling to the underside of the roof structure. A large
outside terrace patio is located on the south side and a small terrace patio area is on the north side.
The remainder of this floor includes mechanical/support areas for the building.
BUILDING AREA
Please refer to the Resource Verification table in the Scope of Work for the source of the building area
size.
CONSTRUCTION DETAILS
The basic construction features are summarized as follows.
Foundation/Floors:
Floors:
42
Basement:
Ground/Upper Floors:
Structural Frame :
Exterior Walls:
The exterior walls are mainly tinted curtain wall glass (light green
and clear) panels in aluminum frames, along with concrete, stone,
and composite accent panels for architectural appeal.
Roof Cover:
Photovoltaic/Solar Panels:
Interior Detail
The primary feature of Class A buildings is the fireproofed structural steel frame, which may be welded, bolted, or riveted
together. The fireproofing may be masonry, poured concrete, plaster, sprayed fiber, or any other type which will give a high
fire-resistant rating.
The primary characteristic of Class B Buildings is the reinforced concrete frame in which the columns and beams can be
either formed or precast concrete. They may be mechanically stressed, and the structure is fire resistant.
Class C Buildings are characterized by masonry or reinforced concrete (including tilt-up) construction. The walls may be
load-bearing, i.e., supporting roof and upper floor loads, or nonbearing with open concrete, steel, or wood columns, bents,
or arches supporting the load.
Class D buildings are characterized by combustible construction. The exterior walls may be made up of closely spaced wood
or steel studs as in the case of typical frame house, with an exterior covering of wood siding, shingles, stucco, brick, stone
veneer, or other materials. Otherwise they may consist of an open skeleton wood frame on which some form of curtain wall
is applied, including, pre-engineered pole buildings.
Class S buildings are characterized by incombustible construction and prefabricated structural members. The exterior walls
may be steel studs or an open steel skeleton frame with exterior single or sandwich wall coverings consisting of prefabricated
or sheet siding. (Source: Marshall Valuation Service)
43
Floors:
Interior Walls:
Ceilings:
HVAC:
Fire Protection:
Electrical:
SUSTAINABILITY/LEED CERTIFICATION
The subject is LEED Gold certified. Modifications and upgrades to achieve certification include the
photovoltaic system; high efficiency building envelope, which creates lower heating and cooling
demands that, in turn, require smaller, more efficient mechanical equipment; the cool roof
membrane; recycled materials used for some interior finishes; and water use efficiencies (landscaping
and plumbing).
44
45
3 Years
Effective Age
1 Years
55 Years
54 Years
Compiled by CBRE
The overall life expectancy is based upon our on-site observations and a comparative analysis of
typical life expectancies reported for buildings of similar construction as published by Marshall and
Swift, LLC, in the Marshall Valuation Service cost guide. While CBRE, Inc. did not observe anything to
suggest a different economic life, a capital improvement program could extend the life expectancy.
CONCLUSION
The improvements consist of a basically new build-to-suit office building with specialized features to
accommodate the space requirements for Thomas Jefferson School of Law. The positive features of
the building are its high quality/image exterior and distinctive architectural design, integrated
communication and multi-media systems, interior finishes, and large floor plates. Its negative features
are its specialized interior layout, especially on the 2nd and 3rd floors, low parking ratio, and potential
space inefficiencies (ground floor lobby and 8th floor). Otherwise, there are no significant factors
considered to adversely impact the marketability of the improvements.
46
47
48
49
50
51
52
53
ZONING
The following table and map summarize the subjects general zoning requirements.
ZONING SUMMARY
Current Zoning
Legally Conforming
Uses Permitted
Zoning Change
Not likely
Category
Zoning Requirement
Maximum Height
500 Feet
Minimum Setbacks
Front Yard
0 Feet
0 Feet
0-10 Feet
Rear Yard
0-10 Feet
Minimum FAR
3.50 : 1
Maximum FAR
6.00 : 1
5.92 : 1
Parking Requirements
175 spaces
176 spaces
54
spaces. The PDP also calls for various design criteria, which was assume was incorporated into the
subject building during development.
The subject appears to be a legal, conforming use within the current zoning in terms use and FAR,
and its parking is assumed to be conforming subject to special use permit.
55
2013/2014
535-124-03
$89,605,314
Exemption
($89,605,314)
Subtotal
$0
Assessed Value @
100%
Special Assessments:
100%
$63,725,000
1.182770
1.182770
$0
$753,720
25,290
25,290
Total Taxes
$63,725,000
$0
General Tax:
Direct Cap
Pro Forma
$25,290
1.222456
$779,010
The special assessments include charges for the Downtown Property Business Improvement District
PBID, County Mosquito/Rat Control, and county and municipal water standby charges. The PBID is
the largest of these at $25,259.86 and is an annual assessment to help fund marketing,
maintenance, and improvement projects for downtown businesses. It is based on building square
footage. The other charges are generally based on lot area rather than assessed value, and generally
do not have a fixed maturity, but are rather based on an annual budget to provide the services.
56
The
consequences of this reassessment have been considered in the appropriate valuation sections. The
new property taxes would be based on the published tax rate and with the special assessments added
as a lump sum.
57
legal permissibility;
physical possibility;
financial feasibility; and
maximum profitability.
Highest and best use analysis involves assessing the subject both as if vacant and as improved.
AS VACANT
Legal Permissibility
The legally permissible uses were discussed in detail in the site analysis and zoning sections of this
report.
Physical Possibility
The physical characteristics of the subject site were discussed in detail in the site analysis. Overall, a
wide range of legally permissible uses would be physically possible.
Financial Feasibility
The financial feasibility of a specific property is market driven, and is influenced by surrounding land
uses. Based on the subjects specific location and physical characteristics, development of the site
with a mixed-use project consisting of multi-residential and retail, which is most complimentary to the
surrounding land uses, would represent the most likely financially feasible option. Our analysis
indicates that the downtown apartment submarket is in a stabilized condition. Our recent appraisal
experience in downtown also indicates that current rent levels would likely support the cost of new
multi-family housing, which is also supported by the low vacancy levels in the submarket, the low
vacancy of the comparables, new construction, and the strong leasing in new projects. However,
there is also currently a significant amount of apartments currently under construction, which would be
a concern.
For-sale residential (condominiums) also represents a logical option. Market conditions are showing
strong signs of improvement within the broader San Diego county area and the downtown area as
supply has declined significantly due to the lack of new construction over the past 5 plus years
combined with continued historically low interest rates. However, the recovery is in the early stages
and there is a significant amount of proposed development proposed in the downtown area and
especially within the East Village area. As such, while condominium development may be feasible, it
is likely overly speculative in the near-term.
58
Current office market conditions (submarket vacancies and demand levels) and development activity
indicate development of the site with an office use is not likely economically feasible at this time due
to the current over-supply conditions and uncertainties in the financial markets and demand
generators for space. The limited options for construction financing would also be an obstacle for a
proposed speculative development.
Maximum Profitability
The final test of highest and best use of the site as though vacant is that the use be maximally
productive, yielding the highest return to the land. In the case of the subject as if vacant, the
maximally productive use of the subject site is for a low to medium-density, mixed-use residential
project that also includes a ground floor commercial/retail component.
CONCLUSION: HIGHEST AND BEST USE AS VACANT
Based on the foregoing, the highest and best use of the site as though vacant would be for residential
development with ground floor retail.
AS IMPROVED
Legal Permissibility
To the best of our knowledge, the subject improvements are a legal, conforming use of the site under
current zoning.
Physical Possibility
The subject improvements were discussed in detail in the Improvement Analysis. The layout and
positioning of the existing improvements are functional for the current owner/occupant, and are
functionally adaptable to office use based on comparison to competing properties in the submarket.
Based on the design/layout, assuming vacant, the improvements would be the most functionally
utilized for small to medium size office space users.
Financial Feasibility
The financial feasibility for an office property is based on the amount of rent that can be generated,
less operating expenses required to generate that income; if a residual amount exists then the land is
being put to a productive use. As will be indicated in the Income Capitalization Approach, the subject
is capable of producing a positive net cash flow and utilization of the improvements for office uses, as
improved, is considered financially feasible, assuming sufficient TI allowance is offered to new tenants
on the vacant space. The current educational use is assumed to represent a feasible use for the
current occupant based on the original build-to-suit design.
59
opportunistic/value-add investor (private equity); the owner-user buyer market would likely be very
limited given the subjects size and downtown location.
60
APPRAISAL METHODOLOGY
In appraisal practice, an approach to value is included or omitted based on its applicability to the
property type being valued and the quality and quantity of information available.
COST APPROACH
The cost approach is based on the proposition that the informed purchaser would pay no more for the
subject than the cost to produce a substitute property with equivalent utility.
This approach is
particularly applicable when the property being appraised involves relatively new improvements that
represent the highest and best use of the land, or when it is improved with relatively unique or
specialized improvements for which there exist few sales or leases of comparable properties.
SALES COMPARISON APPROACH
The sales comparison approach utilizes sales of comparable properties, adjusted for differences, to
indicate a value for the subject. Valuation is typically accomplished using physical units of comparison
such as price per square foot, price per unit, price per floor, etc., or economic units of comparison
such as gross rent multiplier. Adjustments are applied to the physical units of comparison derived
from the comparable sale. The unit of comparison chosen for the subject is then used to yield a total
value. Economic units of comparison are not adjusted, but rather analyzed as to relevant differences,
with the final estimate derived based on the general comparisons.
INCOME CAPITALIZATION APPROACH
The income capitalization approach reflects the subjects income-producing capabilities. This
approach is based on the assumption that value is created by the expectation of benefits to be derived
in the future. Specifically estimated is the amount an investor would be willing to pay to receive an
income stream plus reversion value from a property over a period of time.
valuation techniques associated with the income capitalization approach are direct capitalization and
the discounted cash flow (DCF) analysis.
METHODOLOGY APPLICABLE TO THE SUBJECT
In valuing the subject, the sales comparison and income capitalization approaches are applicable and
have been used to determine the market value of the subject. The cost approach is excluded due to
the difficulty in accurately estimating an adjustment for depreciation, especially related to functional
utility and the specialized improvements. Additionally, this approach would involve estimating land
value based on a highest and best use vacant that is not consistent with the highest and best as
improved or its current use. As such, this method also would not likely be relied upon by the typical
investor for the subject property.
61
Name
Year
Built
NRA
(SF)
Sale Price
Price
1
Per SF
Occ.
NOI
Per SF
OAR
DiamondView Tower,
350 10th Avenue,
San Diego, CA
Sale
Oct-12
2007
305,255
$121,000,000
$396.39
98%
$25.94
6.54%
Sale
Nov-13
1982
283,786
$73,000,000
$257.24
82%
$19.73
7.67%
Columbia Square ,
1230 Columbia Street,
San Diego, CA
Sale
Aug-13
1990
143,574
$35,000,000
$243.78
93%
$16.61
6.81%
Columbia Center,
401 W. A St,
San Diego, CA
Sale
Nov-12
1982
553,715
$135,000,000
$243.81
72%
$18.72
7.68%
Sale
Sep-13
2001
189,490
$56,850,000
$300.02
90%
N/A
N/A
Sale
Nov-13
2007
90,610
$36,516,000
$403.00
100%
$28.99
7.19%
Sale
Dec-13
2003
110,994
$33,500,000
$301.82
78%
$20.97
6.95%
---
---
2011
178,000
---
---
93.5%
Stab.
$23.27
---
Transaction
Type
Date
Transaction amount adjusted for cash equivalency and/or deferred maintenance (where applicable)
Compiled by CBRE
62
The sales utilized represent the best data available for comparison with the subject property. They
were selected from our research of comparable improved sales from throughout the San Diego areas.
We included comparable sales from the suburban market areas due to the limited recent sale data
involving higher quality, class A, stabilized office properties in downtown San Diego.
ANALYSIS OF IMPROVED SALES
The following analysis assumes the subject is at stabilized occupancy. A deduction from stabilized
value for lease-up costs is addressed at the end of this section.
Improved Sale One
Diamond View Tower is located in the East Village, about one block southwest of the subject and is
adjacent to Petco Park, about 2 to 3 blocks southeast of the subject. The building was built in 2007
and totals 305,000 square feet and reflects high quality with extensive amenities, including retail
(restaurants, cleaners, coffee), health club, conference and entertainment facilities, and views
overlooking the ballpark. Major tenants include Cox Communications (62,050 SF), FIDM (33,563
SF), and Comerica Bank (28,564 SF). Existing office rents at sale ranged from $2.65 to $4.30 per
square foot per month, full service gross, and were mostly over-market at sale. However, this building
generates rental rates at the high end of the downtown office market due to its location next to Petco
63
Park and overlooking the field. The property includes 1.2:1,000 SF parking in an on-site parking
garage and parking rights within the adjacent Parkade Garage that increases its parking ratio to
3.5:1,000 SF. The property sold to a local investment group with institutional equity sources at a
purchase price of $121 million or $396 per square foot, which equates to an overall capitalization
rate (OAR) of 6.54% based on the first-year operating pro forma.
This comparable provides an overall superior indication of value per square foot for the subject, which
is mainly due to building design (functionality)/amenities and location. This is evident in the
comparables higher rents on recent leases and asking rents, and its NOI per square foot. Date of
sale is a partially offsetting inferior factor mainly due to the increase in market rents in this property
since the sale, which has a positive impact on value.
Improved Sale Two
The Bank of America Plaza property is located in the north-central portion of the downtown financial
district, on the northwest corner of 5th Ave and B Street, about 6 to 7 blocks northwest of the subject.
The was constructed in 1981 and renovated in 2009 with new lobby atrium and common area
improvements, but it still has very average quality exterior appeal. The property was 84% occupied at
the time of sale. There are two major tenants on long term leases: Bank of America and County of
San Diego, both with about 65% of the building. Current vacant space is being marketed at $2.15 to
$2.30 per square foot per month, full service gross, with recent leases at $2.05 to $2.15 per square
foot for mid-floor space. The sale in November 2013 closed at $73,000,000 ($257.24/SF). The
transaction was a direct, off-market deal and not listed for sale. Sumitomo Corporation acquired the
property from Westbrook Partners and no financial data was available, although we understand the
BofA rent was over-market by 10 to 20 percent. The property had previously sold in December 2011
at a price of $60,150,000 ($211.96/SF).
Overall, this comparable provides a very inferior indication of value per square foot for the subject,
which is mainly due to quality/appeal, age/condition, and occupancy at sale. Location and
functional utility are partially offsetting slightly superior factors. The net impact of these factors is
reflected in the comparables lower NOI per square foot than the subject, despite the over-market
BofA rent.
Improved Sale Three
The Columbia Square comparable is located on the northwest corner of Columbia Street and B Street
in the west portion of downtown San Diego. It is a 12-story, multi-tenant office building that includes
a five-story (including two subterranean stories) parking garage as part of the main building. The
south side of the building has no windows, which is a functional issue. The building was 93 percent
occupied with recent leases from $1.85 to $2.05 per square foot per month on a gross plus electricity
basis. The leases are generally on a modified gross basis with the tenants responsible for paying for
64
their own electricity (sockets and lights only) and a pro rata share of all expenses over a base year
amount. A major capital improvement program was completed in 2007. The property was not on
the market when the buyer approached the seller. The buyer also owns the property across the street
(Columbia Center). The sale closed in August 2013 at a price of $35,000,000 ($243.78/Sq.Ft.) with
a reported cap rate of 6.8 percent.
This comparable provides an overall very inferior indication of value per square foot for the subject,
which is mainly due to quality/appeal and age/condition. Location and functional utility are partially
offsetting slightly superior factors. The net impact of these factors is reflected in the comparables
much lower NOI per square foot than the subject.
Improved Sale Four
This is the late-2012 sale of Columbia Center, a 27-story high rise office building with a prominent
upper floor profile in the downtown skyline. The rentable area includes 18,633 square feet of retail
space on the bottom floor. There is a three-level subterranean parking garage that is master-leased
to Ace parking. The building has undergone multiple renovations over the past 10 years, most
recently in 2009 with its lobby and common areas. Asking rent for space at the time of sale was
$2.15 to $2.60 per square foot, full service gross, but the most recent leases transacted after the sale
were in the range of $2.15 to $2.40. Occupancy at sale in November 2012 was 72%. The property
was encumbered by a fixed rate CMBS loan of $98,000,000 at 5.28% interest-only through October
1, 2015 that cannot be paid off without significant pre-payment/defeasance costs. The listing broker
with Eastdil indicated he thought the price included little or no premium for the existing debt. A
representative for CBRE Capital Markets division (mortgage brokerage), indicates the financing was
likely close to neutral or near market terms at the time given the loan-to-value and non-stabilized
occupancy characteristics at the time.
November 2012 after being in escrow for nearly 10 to 12 months. This property last sold for $181
million in 2007 and $167 million in 2005.
Overall, this comparable provides a very inferior indication of value per square foot for the subject,
which is mainly due to quality/appeal, age/condition, occupancy at sale, and market conditions at
sale. Location and functional utility are partially offsetting slightly superior factors. The net impact of
these factors is reflected in the comparables lower NOI per square foot than the subject.
Improved Sale Five
Rio San Diego Plaza is located on the northwest corner of Rio Bonito Way and Rio San Diego Drive in
the Mission Valley submarket, about 4 to 5 miles northeast of the subject. The property consists of a
6-story, class A, 189,490 square foot multi-tenant office building with stone and glass exteriors. It
was 89.5% leased at the time of sale. This institutional quality investment property was sold by AEW
Capital Management to Prudential Real Estate Investors in September 2013 at $56,850,000
65
($300/SF). The seller, AEW, had previously acquired the property in December 2006 for $72.0
Million ($380/SF). Currently, the building is 92 percent leased with available space being marketed
at $2.30 per square foot, gross plus utilities, which equates to approximately $2.45 full service gross
equivalent.
Based mainly on quality/appeal and age/condition, this comparable provides an overall inferior
indication of value for the subject. Location and functional utility are partially offsetting slightly
superior factors. The suburban location is more desirable in terms of access and character of
surroundings.
Improved Sale Six
This comparable involves the three-story Building A within the larger four-building Discovery
Corporate Center complex in the Rancho Bernardo submarket, in north-inland San Diego County.
The buildings are generally all the same with dryvit, Kynar, and reflective glass panel exteriors, and
were constructed in 2007 and 2011. The comparable building was constructed in the first phase in
2007. It was 100 percent leased at sale to Broadcom, a tenant with strong corporate credit. Their
contract rent was over-market. Broadcom also fully leases Buildings B and C, and a portion of
Building D in the same complex, but not a part of the comparable sale. The buyer in this transaction
was Drawbridge, who previously purchased Buildings B and D in December 2012. This was an offmarket transaction.
Overall, this comparable provides a superior indication of value per square foot for the subject, which
is mainly due to the lease in place with Broadcom on the entire building, including their over-market
contract rent, remaining term, and strong credit, which all contributed to a leased fee premium for the
property. These factors are reflected as an adjustment for Property Rights Conveyed. Location and
functional utility are also superior factors.
factor.
Improved Sale Seven
This property is on the north side of Waxie Way, on the south side of the 56 Freeway, near the 15 and
163 freeway interchanges, in the Kearny Mesa suburban district in the city of San Diego. It is a high
image, 5-story building with garage and surface parking. The building was 78% leased to eight
tenants at sale. The vacancy reflects the recent loss of TDK and State of Cal. Rents on recent leases
at sale had been in the $2.30 to $2.40 range, gross plus utilities. This property was not listed for
sale. The transaction involved an atypical transfer of seller's interest in the property wherein seller
received units (put options for shares) in an UPREIT managed by Stockbridge RE. The price was based
on an appraised value price that both buyer and seller accepted. However, this is not a normal
market transaction and, thus, should be given limited consideration. It is included mainly for
informational purposes.
66
This comparable provides an overall inferior indication of value per square foot, which is mainly due
to its occupancy at sale and quality/appeal. Location and functional utility are partially offsetting
superior factors.
Supplemental Data 655 West Broadway Sale
This property is located on the west side of downtown near the subject. The building was built in
2005 and totals 376,000 square feet and reflects one of the highest quality buildings in the
submarket. The building sold as part of a larger 32-building portfolio sale on March 26, 2013, with
an allocated price of $145,673,000 or $386.71 per square foot. No other information was
available regarding the sale, which is why it is only included as supplemental data. Overall, this
comparable provides a slightly superior indication of value per square foot for the subject, which is
mainly due to its superior location and functional utility.
Supplemental Data Merrill Lynch Bldg Listing
This is a 26-story, class A-/B+ building one block southeast of the subject and is class B building in
the submarket. The building was constructed in 1982 and has a full reflective glass exterior with a
panoramic southerly view. The building is under-parked at a ratio of 0.70 per 1,000 square feet of
building area. Currently, this property is 86 percent occupied with available space being marketed at
$2.35 to $2.50 per square foot, full service gross, but recent leases are in the range of $2.15 to
$2.25 range.
The property was listed for sale in Q3 2013 and recently sold to Emmes Asset
Management for an undisclosed price, which is why it is only included as supplemental data. It was
sold along with 707 Broadway, which are both owned by Equity Office, for a total reported price of
approximately $155 million or about $207 per square foot. The price was discounted for the overall
vacancy at sale (apx 20%) and the B-/C investment quality of the 707 Broadway building (renovated
1960s-built).
SUMMARY OF ADJUSTMENTS
Based on our comparative analysis, the following chart summarizes the adjustments warranted to each
comparable.
67
Subj.
Pro
Forma
---
Transaction Type
Sale
Sale
Sale
Sale
Sale
Sale
Sale
Transaction Date
Oct-12
Nov-13
Aug-13
Nov-12
Sep-13
Nov-13
Dec-13
---
2007
1982
1990
1982
2001
2007
2003
2011
283,786
143,574
90,610
110,994
178,000
Year Built
NRA (SF)
Sale Price
305,255
1
Price Per SF 1
$121,000,000
$396.39
$73,000,000 $35,000,000
$257.24
$243.78
553,715
189,490
$135,000,000
$56,850,000
$243.81
$300.02
$36,516,000 $33,500,000
$403.00
---
$301.82
---
Occupancy
98%
82%
93%
72%
90%
100%
78%
93.5% Stab.
NOI Per SF
$25.94
$19.73
$16.61
$18.72
N/A
$28.99
$20.97
$23.27
6.54%
7.67%
6.81%
7.68%
N/A
7.19%
6.95%
---
$396.39
$257.24
$243.78
$243.81
$300.02
$403.00
$301.82
OAR
Adj. Price Per SF
Property Rights Conveyed
Financing Terms 1
0%
0%
0%
0%
0%
-10%
0%
0%
0%
0%
0%
0%
0%
0%
Conditions of Sale
0%
0%
0%
0%
0%
0%
0%
5%
0%
0%
5%
0%
0%
0%
$416.21
$257.24
$243.78
$256.00
$300.02
$362.70
$301.82
Location
-5%
-5%
-5%
-5%
-5%
-5%
-5%
Size
0%
0%
0%
0%
0%
0%
0%
Age/Condition
0%
10%
10%
10%
5%
0%
0%
Quality of Construction
0%
25%
25%
25%
15%
10%
15%
Functional Utility/Parking
-5%
-5%
-5%
-5%
-5%
-5%
0%
Occupancy
Total Other Adjustments
0%
-10%
10%
35%
0%
25%
15%
40%
0%
10%
0%
0%
10%
20%
$374.59
$347.27
$304.73
$358.40
$330.02
$362.70
$362.18
Transaction amount adjusted for cash equivalency and/or deferred maintenance (where applicable)
Compiled by CBRE
68
Entrepreneurial Profit
Additionally, value-added investors typically measure profit based on a load or premium on the
overall capitalization rate or unleveraged return they can achieve on a vacant property similar to the
subject. Our research and interviews with local investors indicates this load or premium typically
ranges from 25 to 100 basis points, with properties like the subject near the higher portion of the
range because of its assumed vacancy. Based on the foregoing, we estimate a reasonable profit
factor of 75 basis points over the concluded going-in OAR (as-stabilized), or an approximate 7.25%
OAR, which yields a stabilized value of $57,122,684 based on the stabilized NOI estimate by direct
capitalization (See Income Approach). This value is $6,591,079 less than the indicated stabilized
value by direct capitalization, which represents our estimate of entrepreneurial profit/incentive for
assuming the risk of lease-up.
The Lease-Up Discount Analysis schedules for each building are shown below. Given local brokerage
agreements, leasing commissions are based on 6.5 percent of gross scheduled market rent and an
average lease term of 5 years, as concluded in the income approach herein.
LEASE-UP SUMMARY
Estimated Downtime
Rent Loss from Downtime
Base Rent Abatements (Free Rent)
24 Months
($12,831,600 x 50.0%)
($534,000 x 7.0 mos
Leasing Commissions
$6,415,800
$3,738,000
$2,915,640
$5,594,286
Sub-Total
$18,663,726
Plus: Profit
$6,591,079
Total
$25,254,805
Rounded
$25,255,000
Compiled by CBRE
69
Value Per SF
Value
178,000
$355.00
$63,190,000
178,000
$365.00
$64,970,000
VALUE CONCLUSION
Indicated Stabilized Value
$64,000,000
Lease-Up Discount
($25,255,000)
$38,745,000
Rounded
$38,750,000
Value Per SF
$217.70
Compiled by CBRE
70
This
approach is based on the assumption that value is created by the expectation of benefits to be derived
in the future. Specifically estimated is the amount an investor would be willing to pay to receive an
income stream plus reversion value from a property over period of time. The two common valuation
techniques associated with the Income Capitalization Approach are direct capitalization and the
discounted cash flow (DCF) analysis.
DIRECT CAPITALIZATION
Direct capitalization is the method used to convert a single years estimate of income into a value
indication. In direct capitalization, a precise allocation between return on and return of capital is not
made because investor assumptions or forecasts concerning the holding period, pattern of income, or
changes in value of the original investment are not simulated in the method. Direct capitalization is
most appropriate when analyzing a stable income stream and in estimating the reversion at the end of
a holding period. Using this method, the following sets forth the process:
1. Estimate the Potential Gross Income (PGI) from all sources that a competent owner should
be able to generate from a property based on existing and/or market rents.
2. Deduct an estimate of Vacancy and Collection Loss (VCL) to arrive at an Effective Gross
Income (EGI) estimate.
3. Deduct operating expenses from the estimate of EGI. The result is an estimate of the
stabilized Net Operating Income (NOI).
4. Estimate an Overall capitalization rate (Ro, or OAR).
5. Divide the NOI by Ro, resulting in a value estimate at stabilized occupancy.
6. Adjust the stabilized value to account for as is condition, if applicable.
DISCOUNTED CASH FLOW ANALYSIS
The discounted cash flow (DCF) analysis is a detailed analysis used when the future income is
expected to be variant, usually as a result of numerous lease obligations and/or anticipated changes
in income and expenses. It is also particularly relevant when institutional buyers are the most likely
purchasers of the subject because institutional buyers often place great weight on this analysis. The
DCF analysis specifies the quantity, variability, timing, and duration of NOIs and cash flows.
Selecting the proper yield rate (discount rate) is essential. CBRE must consider the target yield sought
by investors as well as yields derived from comparable sales and/or market information. The
methodology is:
1. Estimate the before-tax cash flows for each period of a projected holding period net of
any capital expenditures such as leasing expenses and tenant improvements.
71
properties in downtown. A more detailed description of each comparable is included in the Addenda.
72
73
Subj.
Property Name
and Location
Year
Built
Occ.
NRA (SF)
Expense
Basis
DiamondView Tower
350 10th Avenue,
San Diego, CA
2007
92%
305,255
FSG
2005
Emerald Plaza
402 West Broadway,
San Diego, CA
1991
1991
1989
1989
2011
87%
88%
84%
94%
96%
100%
376,703
364,160
581,136
357,477
394,031
178,000
FSG
FSG
FSG
FSG
FSG
Tenant
Name
Lease
Area (SF)
Lease
Date
Lease
Term
Base Rent
TIA/SF
Escalations
Herron Law
1,016
Feb-14
3.3 Yrs.
$3.35 PSF
$2.50 PSF
3%/yr
Jack Oatman
1,026
Dec-13
3.3 Yrs.
$3.25 PSF
$0.00 PSF
3%/yr
Quoted
---
---
---
$3.40 PSF
$10.00 PSF
3%/yr
20,053
Jan-14
10.00 Yrs.
$3.05 PSF
$20.00 PSF
3%/yr
5,761
Apr-13
5.00 Yrs.
$2.45 PSF
$40.00 PSF
3%/yr
Quoted
---
---
---
$3.00 PSF
$20.00 PSF
3%/yr
Flat
4,960
Feb-14
5.5 Yrs.
$2.11 PSF
$0.00 PSF
4,110
Feb-14
1.0 Yrs.
$2.43 PSF
$0.00 PSF
Flat
2,481
Feb-14
3.0 Yrs.
$2.20 PSF
$0.00 PSF
3%/yr
Quoted
---
---
---
$2.25 PSF
$0.00 PSF
3% Annual
3,348
Sep-13
5.0 Yrs.
$2.30 PSF
$0.00 PSF
4.5%/yr
3,615
Jul-13
2.0 Yrs.
$2.00 PSF
$0.00 PSF
4.5%/Year
7,015
Jun-13
5.0 Yrs.
$4.00 PSF
$0.00 PSF
4.5%/Year
Teris
12,803
Jun-13
7.0 Yrs.
$2.00 PSF
$50.00 PSF
4.5%/Year
Quoted
---
---
---
$2.55 PSF
$0.00 PSF
Nego.
1,070
Aug-13
5.0 Yrs.
$2.40 PSF
$18.00 PSF
3%/yr
Veritext Corp
10,923
Aug-13
10.9 Yrs.
$2.25 PSF
$62.00 PSF
2.5%/yr
12,511
Jul-13
10.0 Yrs.
$2.05 PSF
$61.00 PSF
3%/yr
Virgina Nelson
2,046
Jun-13
3.0 Yrs.
$2.15 PSF
$1.50 PSF
3%/yr
Quoted
---
---
---
$2.65 PSF
$7.00 PSF
3%/yr
Altep, Inc.
3,414
Mar-14
3.2 Yrs.
$2.06 PSF
$0.00 PSF
4%/yr
3,071
Feb-14
3.0 Yrs.
$2.10 PSF
$0.00 PSF
4%/yr
Littler Mendelson
17,649
Dec-13
5.0 Yrs.
$2.20 PSF
$25.00 PSF
4.5%/yr
2,500
Aug-13
5.0 Yrs.
$2.20 PSF
$40.00 PSF
4.5%/yr
Quoted
---
---
---
$2.50 PSF
$0.00 PSF
3-4%/yr
FSG
Compiled by CBRE
74
75
the subject is a superior amenity for tenants. For law firms and attorneys the proximity to the court
houses is an important locational factor, but other types of office space users do not have that same
location requirement and the proximity to the ballpark, as well as the eateries, bars and restaurants in
the East Village and Gaslamp Quarter is an appealing locational factor for the subject. Overall, this
comparable provides a similar to slightly superior indication of market rent for the subject.
Comparable No. 3
Emerald Plaza is a 30-story high rise office complex and mixed use project, which includes a 27-story
Wyndham Emerald Plaza Hotel (436 rooms) and 3-story atrium lobby. It is located at West Broadway
and Columbia Street in the western end of the downtown area near the Federal Courthouse, County
Court House, Trolley and commuter rail. The hexagonal architectural design and green neon lighting
makes this building one of the premier landmark buildings of the San Diego skyline. 400 spaces of
subterranean parking provide 1.7/1,000 SF. The building is 88 percent leased with available space
marketed at $2.25 to $2.85 per square foot, full service gross. Recent leases had rates of $2.10 to
$2.43 per square foot, full service gross. Free rent was typically less than one month per lease year
and tenant improvement allowances ranged from as-is for shorter term leases up to $30 per square
foot for long term leases.
This comparable has hexagonal floor plates, which are difficult for space planning of office layouts.
The shared atrium lobby and entries for the office tower and hotel is confusing for visitors to the office
tenants and inhibits direct access to the office elevator lobby. The building design restricts rooftop
signage and limits eyebrow signage at street level. Overall, this comparable is inferior to the subject
in appeal, age, utility, but its location is overall similar to slightly superior mainly due to its higher
profile on Broadway and proximity to the courts, which is partially offset by its inferior proximity to the
ballpark and Gaslamp Quarter. This comparable reflects inferior market rents for the subject.
Comparable No. 4
One America Plaza is a class A, 34-story high rise office building and located on West Broadway at
Kettner Boulevard across the street from the Santa Fe Depot, the Coaster commuter rail and Amtrak
station. The building has a Trolley station on the ground floor. The comparable is considered to be
one of the premier office buildings downtown with high quality finishes and the signature architectural
design offers unobstructed views of San Diego Bay. The building has an underground garage parked
at 2 per 1,000 square feet with no tandem parking. The occupancy was high for several years but a
major tenant, Latham and Watkins with 77,147 square feet comprising the 16 through 19 floors,
relocated out of the building in February 2014. The building is 84 percent leased with direct vacant
space marketed at $2.25 to $2.85 per square foot, full service gross. Another major law firm tenant
in the building, Luce Forward, with 111,000 square feet is currently offering 44,226 square feet for
sublease at $2.25 per square feet. The US Bank ground floor branch was renewed for 5 years at
76
$4.00 per square foot, full service gross. Other recent office leases had lease rates from $2.00 to
$2.30 per square foot, full service gross.
While this comparable has superior views and a higher parking ratio than the subject, the age, size of
vacancy, and overall quality/appeal are inferior factors. Location is similar to slightly superior for the
same reasons as Emerald Plaza. Overall, this comparable represents an inferior indication of market
rent for the subject.
Comparable No. 5
The 550 Corporate Center is a class A, 20-story building in the west portion of downtown along West
C Street at Columbia Street, near the Trolley station and the Santa Fe Depot. The property has a
granite and tinted glass exterior with open air lobby with extensive green marble. The building is 94
percent leased with available office space ranges marketed at $2.50 to $2.65 per square foot, full
service gross. All of the recent leasing activity involved new deals with rates from $2.05 to $2.40 per
square foot, full service gross. The retail bank branch space in the lobby is available at $3.00 per
square foot.
Overall, based mainly on quality/appeal and age/condition, this comparable is an inferior indication
of market rent for the subject. Location and parking are partially offsetting slightly superior factors.
Comparable No. 6
The 21-story class A office property located at 501 West Broadway (formerly known as the Koll
Center) is located at West Broadway at Columbia Street, near the Trolley station and commuter rail in
the western portion of downtown. The building is 96% leased with 20,786 square feet vacant.
Currently, available space is being marketed at $2.35 to $2.50 per square foot, full service gross,
depending upon floor and views. Recent leases had start rates of $2.20 to $2.25 per square foot on
a full service gross basis.
Overall, based mainly on quality/appeal and age/condition, this comparable is an inferior indication
of market rent for the subject. Location and parking are partially offsetting slightly superior factors.
MARKET RENT CONCLUSION-OFFICE
Based mostly on comparables 1 and 2 due to location and/or age/quality, we conclude a
reasonable market rent for the subject of $3.00 to $3.25 per square foot per month, full service
gross, and correlate to the low end due to the subjects untested nature in the market for lease. This
rent conclusion assumes a typical 5 to 10-year lease term (7-yr average) and annual increases of 3.0
percent per year. These rates also assume a tenant improvement allowance of approximately $25.00
to $40.00 per square foot for new leases of previously occupied space, and approximately $7.50
(mid-point $5 to $10) for renewals to mainly clean carpet and paint, if necessary. The higher average
77
rate of $40.00 is applicable to the 2nd and 3rd floors and the shell space on the ground floor due to
their unique layout, limited tenant market, and likelihood for conversion to office if an educational
tenant cannot be found. The 4th and 5th floor library areas are mainly open and would likely be
readily adaptable to standard office. We also assume 7 months free rent on initial leases, declining to
3 months thereafter based on the expectations for stronger market conditions in late 2014/2015 and
thereon.
The following depicts the market rent conclusions for the subject:
MARKET RENT CONCLUSIONS
Category
Office Space
NRA (SF)
178,000
Percent of Total SF
100.0%
$3.00
7 Mos
Reimbursements
FSG
Annual Escalation
3.0%
$25-40
$7.50
7 Years
Compiled by CBRE
Based on recent investment sales activity, investors will use an approximate five to ten percent vacancy
and collection allowance in their income pro formas with a multi-tenant office property with stable
submarket fundamentals. A portion of the allowance is to account for the default risk with the tenants
and a portion is to account for the rent loss and releasing costs at the termination of the existing
leases. This is also consistent with the calculation of net operating income for most of the investment
sales used to derive an overall capitalization rate. A lower allowance is applicable with longer lease
terms, generally 10 years or longer, and tenants with strong financials. However, it is important to
note that the allowance for vacancy is not intended to mirror the average vacancy rate for the given
submarket, but is rather an allowance or hedge for future rollover of leases.
Investors typically quantify their vacancy assumption based on existing leases, probabilities of renewal,
and typical downtime or releasing periods to secure a new tenant. Assuming a downtime between
leases averaging approximately 12 months, a 70 percent renewal probability, and average 7-year
lease terms, the average vacancy on rollover is approximately 4 percent. Assuming a more
conservative 50 percent renewal probability, the average vacancy increases to 7 percent.
Overall, we will conclude a 7.5 percent stabilized vacancy and collection allowance, which is
primarily a hedge for future vacancy at the end of the prospective lease term(s) of 7 years. It also
includes an allowance of 1.0 to 2.0 percent for credit loss/tenant default.
PARKING INCOME
Significant income from parking garage operations is typical with downtown office buildings, including
daytime monthly revenue, transient revenue, and parking coupon/validation revenue. The subjects pro
forma parking income is detailed as follows:
PARKING INCOME
Year
$/Space
$/SF
$1,634,036
$4,311
$4.07
Comparable 2 (2012)
$996,024
$3,037
$3.26
Comparable 3 (2013)
$1,663,896
$2,801
$2.97
$528,000
$3,000
$2.97
CBRE Estimate
Total
Compiled by CBRE
EXPENSE REIMBURSEMENTS
The subjects office lease(s) are assumed to be based on a full service gross lease structure, which
requires the owner to pay all operating expenses and the tenants to reimburse the owner for their pro
rata share of increases in repairs and maintenance, janitorial, utilities, real estate taxes, property
insurance, general and administrative, and property management expenses over a base year expense
stop. The subjects other income is detailed as follows:
79
EXPENSE REIMBURSEMENTS
Year
Total
CBRE Estimate
$0
$/SF
$0.00
Compiled by CBRE
Since our direct capitalization analysis assumes the subject is leased at market rent and terms, and is
based on the first year of occupancy, which would be the tenants base year, no reimbursement
revenue is included therein.
OTHER INCOME
Other income is supplemental to that derived from leasing of the improvements.
This includes
categories such as forfeited deposits, antennae income, late charges, after-hour utility charges, et
cetera. The subjects other income is detailed as follows:
OTHER INCOME
Year
Total
CBRE Estimate
$0
$/SF
$0.00
Compiled by CBRE
In the absence of adequate operating history, we include no income for this category.
EFFECTIVE GROSS INCOME
The subjects pro forma effective gross income is as follows and is based on the foregoing analysis of
each income component.
EFFECTIVE GROSS INCOME
Year
Total
CBRE Estimate
$6,415,800
% Change
-
Compiled by CBRE
80
OPERATING HISTORY
Year-Occupancy
2012
100.0%
Total
Income
Rental Income
$/SF
2013
100.0%
Total
$/SF
2014 Budget
Total
100%
$/SF
$0.00
$0.00
Parking Income
Other Income
Expense Reimbursements
$0
$0.00
$0
$0.00
$0.00
403,375
General Operating
2.27
$0
428,073
$0
$0.00
2.40
Total
92.5%
$/SF
$5,927,400
$33.30
488,400
2.74
$0
$0.00
$6,415,800
$36.04
$0
$0.00
$779,010
$4.38
115,700
0.65
478,360
$0.00
CBRE
Estimate
2.69
-
445,000
2.50
267,000
1.50
311,500
1.75
Janitorial
178,000
1.00
Management Fee
160,395
0.90
17,800
0.10
$403,375
$2.27
$428,073
$2.40
$478,360
$2.69
$2,274,405
$12.78
($403,375)
($2.27)
($428,073)
($2.40)
($478,360)
($2.69)
$4,141,395
$23.27
#DIV/0!
#DIV/0!
81
#DIV/0!
2.5%
EXPENSE COMPARABLES
The following table summarizes expenses obtained from comparable properties.
EXPENSE COMPARABLES
Comparable Number
Location
NRA (SF)
Expense Year
CBRE
Estimate
Downtown SD
Downtown
Downtown SD
305,255
401,444
520,000
2012 Budget
2013
2013
$43.15
Expenses
$/SF
$30.37
$/SF
2014
$28.28
$/SF
$36.04
$/SF
$4.58
$2.81
$2.62
$4.38
Property Insurance
1.22
0.57
0.53
0.65
Utilities
3.47
1.45
2.74
2.50
General Operating
2.37
1.56
1.73
1.50
1.59
3.07
3.56
1.75
Janitorial
0.79
1.12
1.21
1.00
Management Fee
0.86
0.78
0.74
0.90
0.94
1.32
0.58
0.10
$15.82
$12.69
$13.71
$12.78
36.7%
41.8%
48.5%
35.5%
2.0%
2.6%
2.6%
2.5%
Compiled by CBRE
Total
$/SF
Expense Comparable 1
N/A
$15.82
Expense Comparable 2
N/A
$12.69
Expense Comparable 3
N/A
$13.71
CBRE Estimate
$2,274,405
Compiled by CBRE
82
$12.78
On a stabilized basis, the appraisers estimate is within the range of the comparables, albeit at the low
end, which is likely due to its relatively new construction and lower R&M and utilities
requirements/efficiencies.
NET OPERATING INCOME CONCLUSION
The subjects net operating income is detailed as follows:
NET OPERATING INCOME
Year
Total
CBRE Estimate
$/SF
$4,141,395
$23.27
Compiled by CBRE
DIRECT CAPITALIZATION
Direct capitalization is a method used to convert a single years estimated stabilized net operating
income into a value indication. The following subsections represent different techniques for deriving
an overall capitalization rate for direct capitalization.
Comparable Sales
The OARs confirmed for the comparable sales analyzed in the Sales Comparison Approach are as
follows:
COMPARABLE CAPITALIZATION RATES
Sale
Sale Price
Date
$/SF
Occupancy
OAR
Oct-12
$396.39
98%
6.54%
Nov-13
$257.24
82%
7.67%
Aug-13
$243.78
93%
6.81%
Nov-12
$243.81
72%
7.68%
Sep-13
$300.02
90%
N/A
Nov-13
$403.00
100%
7.19%
Dec-13
$301.82
Sale
Indicated OAR:
78%
6.95%
93%
6.50-7.00%
The comparables indicate OARs ranging from 6.54 to 7.68 percent, which are generally based on
the actual price and stabilized NOI. The high end of the range, comparables 2 and 4, are nonstabilized properties with relatively high vacancy and discounted prices for lease-up costs. Excluding
these two sales, the OARs range from 6.54 to 7.19 percent.
DiamondView Tower, which is arguably the most competitive property with the subject in the
downtown submarket. Its OAR was inflated somewhat because of over-market rent and it sold during
83
inferior investment market conditions, which are both inferior factors that would result in its OAR being
higher than reasonable for the subject. That said, it has a superior location and strong tenant credit
in place at sale, both partially offsetting superior factors.
Based on the foregoing analysis, we conclude a reasonable OAR for the subject at 6.50 to 6.75
percent.
Published Investor Surveys
The results of the most recent National Investor Survey, published by CBRE, Inc., are summarized in
the following table.
OVERALL CAPITALIZATION RATES
Investment Type
OAR Range
Average
6.25% -
6.75%
Class B
6.50% -
7.00%
Class C
7.50% -
8.00%
5.50% -
9.00%
7.16%
6.25-6.50%
The subject is considered to be a class A property (age/quality) in an A-minus office location in the
San Diego metro area. These factors suggest a reasonable overall capitalization rate that is near the
middle to higher portion of the range for A-grade buildings in the investor survey.
Market Participants
The results of recent interviews with knowledgeable real estate professionals are summarized in the
following table.
OVERALL CAPITALIZATION RATES
Respondent
Royce Hudson
Confidential
Louay Alsadak
Company
OAR
Irvine Company
6.50-7.00%
Emmes
6.00-7.00%
CBRE
Indicated OAR:
6.00-7.00%
6.00-7.00%
In deriving an appropriate overall capitalization rate for the subject, several market participants were
interviewed and consulted in gathering applicable information. The rates noted above assume typical
contract to market differential and their opinions are for class A office in downtown San Diego in
84
general. None were able to provide an opinion for the subject, but the general consensus is the
typical buyer will give credit for the subjects age and quality/appeal.
Capitalization Rate Conclusion
The following table summarizes the OAR conclusions. Most consideration is given to the comparable
data.
OVERALL CAPITALIZATION RATE - CONCLUSION
Source
Indicated OAR
Comparable Sales
6.50-7.00%
6.25-6.50%
Market Participants
6.00-7.00%
CBRE Estimate
6.50%
85
$/SF/Yr
$36.00
Total
$6,408,000
Vacancy
6.00%
(2.16)
(384,480)
Credit Loss
1.50%
(0.54)
(96,120)
$33.30
$5,927,400
Parking Income
2.97
528,000
Other Income
0.00
Expense Reimbursements
Vacancy & Credit Loss
7.50%
0.00
(0.22)
(39,600)
$36.04
$6,415,800
$4.38
$779,010
0.65
115,700
Utilities
2.50
445,000
General Operating
1.50
267,000
1.75
311,500
Janitorial
1.00
178,000
0.90
160,395
0.10
$12.78
17,800
$2,274,405
Management Fee
2.50%
35.45%
$23.27
OAR
Indicated Stabilized Value
$4,141,395
/
6.50%
$63,713,763
$63,725,000
Rounded
(18,663,726)
Lease-Up Discount
(6,591,079)
Entrepreneurial Profit
Value Indication - As Is
$38,470,195
Rounded
$38,500,000
Value Per SF
$216.29
Matrix Analysis
Cap Rate
Compiled by CBRE
86
Value
6.25%
$47,598,600
6.50%
$45,050,000
6.75%
$42,690,300
RECONCILIATION OF VALUE
The value indications from the approaches to value are summarized as follows:
SUMMARY OF VALUE CONCLUSIONS
As Is
April 14, 2014
As Stabilized
(Hypothetical)
April 14, 2014
$38,750,000
$64,000,000
$38,500,000
$63,725,000
Reconciled Value
$38,500,000
$63,800,000
Compiled by CBRE
In the Sales Comparison Approach, the subject property is compared to similar properties that have
been sold recently or for which listing prices or offers are known. The sales used in this analysis are
considered comparable to the subject, and the required adjustments were based on reasonable and
well supported rationale. However, the Sales Comparison Approach is given secondary emphasis in
the final value reconciliation.
The Income Capitalization Approach is applicable to the subject property since it could be an income
producing property leased in the open market. Market participants are currently analyzing properties
based on their income generating capability. Therefore, the Income Capitalization Approach is
considered to be a reasonable and substantiated value indicator and has been heavily weighted in the
final value estimate.
Based on the foregoing, the market value of the subject has been concluded as follows.
MARKET VALUE CONCLUSION
Appraisal Premise
Interest Appraised
Date of Value
Value Conclusion
As Is
$38,500,000
As Stabilized (Hypothetical)
$63,800,000
Compiled by CBRE
87
88
89
90
ADDENDA
ADDENDUM A
GLOSSARY OF TERMS
cash equivalency
disposition value
extraordinary assumption
An assumption directly
related to a specific assignment, which, if found to be
false, could alter the appraisers opinions or conclusions.
Extraordinary assumptions presume as fact otherwise
uncertain information about physical, legal, or economic
characteristics of the subject property; or about conditions
external to the property such as market conditions or
trends; or about the integrity of data used in an analysis.
See also hypothetical condition.
leased fee
See leased fee estate
leasehold
See leasehold estate
liquidation value
market rent
market value
rent
See
full service lease
net lease
market rent
contract, coupon, face, or nominal rent
effective rent
shell rent
2000
BOMA
Experience
Exchange
Report,
Income/Expense Analysis for Office Buildings (Building
Owners and Managers Association, 2000)
use value
ADDENDUM B
LEGAL DESCRIPTION
RealQuest.com - Report
Page 1 of 2
Location Information
Legal Description:
County:
Census Tract / Block:
Township-Range-Sect:
Legal Book/Page:
Legal Lot:
Legal Block:
Market Area:
Neighbor Code:
PAR 1
SAN DIEGO, CA
51.00 / 2
APN:
Alternate APN:
Subdivision:
Map Reference:
Tract #:
School District:
School District Name:
Munic/Township:
535-124-03-00
10/24/2007 / 10/12/2007
$9,800,000
676518
Deed Type:
1st Mtg Document #:
GRANT DEED
676519
11/01/2005 / 10/13/2005
$987,000
FULL
950338
GRANT DEED
/
/
535-12
A,B
107
/
/
$44.86
11/01/2005 / 10/10/2005
$924,000
950337
GRANT DEED
Prior Lender:
Prior 1st Mtg Amt/Type:
Prior 1st Mtg Rate/Type:
/
/
Site Information
Land Use:
Lot Area:
Lot Width/Depth:
Commercial Units:
# of Buildings:
Zoning:
PUBLIC SERVICE
30,056
x
1
1
6
Acres:
Usable Lot:
Lot Shape:
Bldg Width/Depth:
Building Class:
Water Type:
0.69
$89,605,314
$10,453,314
$79,152,000
Assessed Year:
Improved %:
Appraisal Dist:
Fire Dist:
Garbage Dist:
2013
88%
County Use:
State Use:
Site Influence:
Sewer Type:
Topography:
Water District:
Property Tax:
Tax Area:
Tax Year:
Tax Exemption:
Equal Rate:
Equal Year:
$25,290.22
08242
2012
60
SOUTHERN CALIF150
Tax Information
Total Value:
Land Value:
Improvement Value:
Total Taxable Value:
Market Value:
Property Characteristics
Year Built / Eff:
Gross Area :
Building Area :
Tot Adj Area:
Rentable Area:
Addition Area:
Ground Floor Area:
Base/Main Area:
Upper Area :
Above Grade :
# of Stories:
Other Rooms:
Other Improvements:
Bldg Comments:
Parcel Comments:
/ 1965
22,000
22,000
Total Rooms/Offices:
Total Restrooms:
Garage Area:
Garage 2 Area:
Garage Capacity:
Parking Spaces:
Basement Area:
Pool:
Pool Area:
Quality:
Condition:
Heat Type:
Heat Fuel:
Air Cond:
Construction:
Exterior wall:
Interior wall:
Roof Type:
Roof Material:
Foundation:
Floor Type:
Floor Cover:
http://pro.realquest.com/jsp/report.jsp?&client=&action=confirm&type=getreport&recordno=0&r... 1/23/2014
ADDENDUM C
QUALIFICATIONS
1985
REAL ESTATE EDUCATION
1984
April 1992
May 1989
August 1991
December 1993
July 1994
September 2000
July 2004
July 2006
September 2010
PROFESSIONAL ASSOCIATION
California OREA General Certification No. AG009535
1992 to Present
PROFESSIONAL EXPERIENCE
Over 18 years of Real Estate Appraisal and Consulting experience throughout the San Diego and greater Southern
California area.
CBRE, Inc. (formerly Coldwell Banker)
Senior Real Estate Appraiser
Bank of America, Real Estate
Senior Appraiser
1986 - Present
1985 - 1986
1984
1984
Phone:
1987
Professional Courses/Seminars: Litigation Seminar (numerous times); Real Estate Appraisal Principles;
Basic Valuation Procedures; Basic Capitalization Theory/Techniques; Advanced Capitalization
Theory/Techniques; Uniform Standards of Professional Appraisal Practice (every two years); Report
Writing and Valuation Analysis; Advanced Applications; The Law and Value; Eminent Domain;
Advanced Sales Comparison and Cost Approaches; Business Practices and Ethics (multiple times);
Special Purpose Properties; Income Valuation of Small, Mixed-Use Properties; Subdivision Valuation;
Appraiser as Expert Witness; Litigation Appraising; Condemnation Appraising; Federal and California
Statutory and Regulatory Law Course; numerous seminars and workshops
LICENSES/CERTIFICATIONS/CERTIFICATES
Member, Appraisal Institute (MAI) Designation Number 11482 (1999)
California Certified General Real Estate Appraiser, Number AG025646 (1996)
Appraisal Institute Litigation Certificate Program, Certificate of Completion (2010)
EMPLOYMENT
CBRE, Inc. Valuation & Advisory Services
Director, Los Angeles Office
1993 to Present
1990 to 1993
1989 to 1990
EXPERIENCE
Experience in appraising various property types including office buildings, retail centers, industrial
buildings, multi-family buildings, golf courses, self-storage, hospitality properties, gas stations, vacant
land (including underwater land parcels), skilled-nursing and assisted-living facilities, single-family
residences, subdivisions, easements, and small income-producing properties.
Reports have been used for purchase and sale, financing, collateral management, estate purposes,
property tax appeals, eminent domain proceedings, bankruptcies, and general real estate litigation.
Guest speaker for the Southern California Chapter of the Appraisal Institute.
EXPERT WITNESS
Qualified as an expert witness in U.S. District Court, U.S. Bankruptcy Court, and California State
Superior Court in real estate appraisal (civil and criminal court) and in forensic economics (civil court).
Testified before the Los Angeles County Assessment Appeals Hearing Officer as well as the Orange
County and San Diego County Assessment Appeals Boards.