Bildalot Apartments Site Feasibility Study Presented by: Melissa Shauer, PE and Andrew Gibson, Principal M&A Architecture

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March 29th, 2012 Thaddeus Bildalot 3552 Sunshine Drive Middleberg, MN 55555 Dear Thaddeus, M&A is pleased to present these site analyses for your upcoming apartment complex construction project. This report utilizes data provided by you, your fellow Rotary club member, and site observations by M&A. M&A believes acquiring the Gum Shoe Lofts site from the city of Middleberg would be the best option. This site will put more money in your pocket faster, Thaddeus. It is a unique and challenging opportunity to create the apartment complex youre looking for that M&A would love to take on. Please see the following feasibility study for a thorough analysis of why the Gum Shoe Lofts site would be best. We look forward to helping you make the right choices as you move forward with this apartment complex project. Should you have any questions, comments, or concerns regarding this feasibility study, please feel free to call us at any time. Well be in touch by the end of the week via phone regarding your decision on this project. M&A

Melissa Shauer, PE

Study Goals This study was commissioned to explore the feasibility of two different sites in the City of Middleberg as potential locations for a new apartment complex. The goal is to give Thaddeus Bildalot sufficient information to compare the sites and make an informed decision regarding which site best meets the needs set forth by the apartment complex. Building Size In determining which of these sites will be best able to accommodate the future apartment complex, a size for the proposed building must be established. For this study, we are using two building sizes, one for each sites capabilitya 36-unit building, and a 28-unit building. These building sizes and characteristics will be broken down in greater detail below in each sites section. Parking Each site has the potential for parking available both on-site and on nearby streets. Building Floor Plates For the sake of comparison, the existing Gum Shoe Lofts building will be used as a base model for the other sites structure. The Gum Shoe Lofts building is three stories tall. The Farmington Cove site could easily support this or any other structure, so this will be used as a starting point.

Proposed Site Scenarios The following two scenarios were studied for this report: Scenario #1 The building will be located at Farmington Cove on land already owned by Thaddeus Buildalot. The structure will be newly constructed, and contain 36 units with surface parking.

Scenario #2

The building will be a reconstruction of the existing Gum Shoe Lofts site. The building is three stories tall, and could be rehabilitated to contain 28 units with a combination of surface and nearby street parking.

The site analyses have been conducted to determine if each site could accommodate the proposed apartment complex. Comparative cost estimates are provided as well to aid in the decision making process. Zoning Considerations Each site is part of a zoning district; only certain types of uses are allowed in each. The zoning district for each site is indicated for each of the following site analyses. In order to build the apartment complex at any of the proposed sites, the project may require a zoning variance from the City of Middleburg. This process may have an impact on the project timeline.

Figure 1. Proposed site locations for Bildalot Apartments

Civil Engineering Considerations Detailed civil engineering analysis is beyond the scope of this report, but it is important to note that each site studied will pose different civil engineering challenges. Major considerations include storm water management, environmental concerns (wetlands), and site utilities. In general, the larger and more undeveloped the site, the easier to manage excess runoff. Existing developed sites that are already tied into a storm water system must be studied to prove that expanding development does not exceed the capacity of the existing system and trigger the need for potentially expensive upgrades. Flood Hazard Flood information and maps are on record with the city or county municipal offices. The proposed sites are located outside the 0.2% annual chance floodplain, as indicated by FEMA Flood Insurance Rate Maps. Flood hazard is not a consideration for any of the sites. Conceptual Site Plans M&As land planners developed conceptual site plans for each site illustrating the characteristics of the site and how they could be utilized for the proposed apartment complex. The goals for the site designs included the following: The site should accommodate as many apartment units as possible There should be room for extra amenities, such as meeting rooms, laundry facilities, exercise rooms, etc Site constraints and existing structures/utilities will dictate the final size of the building The building will be built/reconstructed and oriented to optimize the maximum use of natural light within it Adequate parking as dictated by number of apartment units in the proposed structure

The Gum Shoe Lofts site also provides for a 3500 sqft retail space on the first floor of the building. For the sake of this feasibility study, this retail space will be counted as an asset, but the other space will not be discounted for not having a similar capability.

Scenario 1: Thaddeus Bildalots existing property at Farmington Cove will be converted into a multi-story apartment complex. [figure of floorplan?] Assessment of site The site is 2.75 acres of farmland near the city limits of Middleberg, MN. Zoning Multifamily residential, surrounded by single family residential. A small commercial parcel is located diagonally across the intersection. Location and surrounding landmarks 1 mile from the regional Technical College, bordered by farmland with the potential for future development. Number of potential apartment units 36, combination of single bedroom/double bedroom and single occupancy up to four-person occupancy. Parking Surface, adequate for the number of units according to needs and code. Potential complex amenities Meeting room, laundry, and exercise room. Stormwater management The building would need to be tied into existing systems. Furthermore, about half an acre of wetland on-site is in need of rehabilitation. Total estimated cost per unit $123,055 Time to market absorption 1 year Debt to equity 75% (including original 2001 purchase price). Estimated unit vacancy rate 10% Time to cash flow 30 units rented Average cash-on-cash return after debt service and taxes 9.2%

Commentary: This scenario is advantageous in that Mr. Bildalot has owned the land for 6 years, and has successfully leased it for profit. However, if the site is converted to the apartment complex, Mr. Bildalot will need to consider the importance of lost income from leasing the land. This location has the potential for future development surrounding the site. Building an apartment complex here may be the incentive other businesses need to come to the area. The site is located a mile away from the Technical College, and so could market to the student population. A large disadvantage is the need to tie this building into the Citys stormwater system. Modeling performed by M&As hydrologic design division shows that this apartment complex would not generate more runoff than the system is capable of handling, but the cost and additional time of tie-in needs to be taken into account. The rehabilitation of the wetland also will add time and money to the project. However, the wetland could be a draw for renters looking for a complex away from the city, with a more natural feel to it. The proposed building offers the basic amenities of a meeting room, exercise room, and laundry. Renters looking for other amenities (on-site tanning, computer lab, retail facility) may look to other buildings for them. However, the retail space across the street may be adequate instead of having a store within the building. If the area around the site continues to develop as expected, more services renters are looking for may arrive. This building could support 36 traditional apartment units, one- or two-bedroom, rated for occupancy of 1 to 4 people. This range of units is appealing to a wide range of renters. Although student housing is typically single-bedroom, the wide array of apartment types will ensure a diverse community of renters in addition to students. We do not believe that this will impact the number of units rented.

Scenario 2: The Gum Shoe Loft property and existing building will be retrofitted to fit the needs of Mr. Bildalots proposed apartment complex. Assessment of site and existing building The site is 1.12 acres, with a 36,000 sqft, three story building. The building could be remodeled to accommodate more modern apartments. There is approximately 3,500 sqft of retail space on the first floor. Land acquisition costs $1, using tax increment financing. Zoning Multifamily residential, commercial. Location and surrounding landmarks One block off Main Street, and roughly three blocks from the central part of downtown Middleberg. Number of potential apartment units 28 nontraditional units Parking 42 cars on-site, as well as nearby street parking. This is adequate for the needs of the building. Potential complex amenities Meeting room, laundry, exercise room, retail space on first floor. Stormwater management The building is already tied into city systems, and no extra concerns need to be taken. Total estimated cost per unit $160,710. Time to market absorption 10 months Debt to equity 68%, with both the land appraisal value of $250,000 and the City tax incentives of $250,000 included. Estimated unit vacancy rate 10% Time to cash flow 24 units rented Average cash-on-cash return after debt service and taxes 10.4%

Commentary This site is attractive because of its low cost and tax credits. Acquiring this site would still allow for profit to be made on leasing the Farmington Cove site. It will also allow for Thaddeus Bildalot to establish himself as a pioneer for bringing business and economic vitality back to the downtown Middleburg area. Having non-traditional apartments may be of greater appeal to students attending the Technical College. Having a retail center on the first floor of the building will also be a great draw for students who may be too busy with studies to go shopping elsewhere. This will also increase profit for whatever retail partner comes into this project. Being so close to Middleburgs downtown will also be of interest to potential renters, and perhaps increase the pool of applicants (e.g., commuters who have been waiting to move closer to work, etc). The buildings existing tie-ins and lack of watershed in need of redevelopment is also desirable, as it means the building will be ready for operation that much quicker and easier. With the site being vacated in 1982, existing systems will need to be inspected for compliance with modern code, but based on initial estimates we do not believe that will lead to greater project costs. The existing building has an aesthetic appeal very different from modern construction. The concrete, timber, industrial-era windows, and clean architectural lines are visually striking. Cleaning up the building and re-signing both it and the surrounding area will no doubt serve as its own advertising.

Cost Breakdown of Each Site Farmington Cove Gum Shoe Lofts Sitework $ 229,000.00 $ 227,000.00 Building Costs $ 3,551,000.00 $ 3,339,000.00 FF&E $ 24,000.00 $ 24,000.00 Recommended Contingency $ 200,000.00 $ 500,000.00 Soft Costs (excluding land) $ 426,000.00 $ 410,000.00 Total Estimated Cost $ 4,430,000.00 $ 4,500,000.00 per unit $ 123,055.00 $ 160,710.00

Conclusions and Recommendations: M&A recommends acquiring the Gum Shoe Lofts site for the future home of Bildalot Apartments. We believe the returns on this property in conjunction with continued profit from leasing the Farmington Cove site make this the most economical choice. The initial cost of acquisition and renovation will lead to greater profit shortly down the road. We recommend performing a more detailed analysis on the existing buildings mechanical and electrical systems, and updating as needed according to code Potential renters for the 3,500 sqft first floor space should be scouted The existing interior spaces must be evaluated and redone according to the needs and wants of the Owner The exterior should be cleaned and touched up New signage should be designed and put into place on the building and around the city

The Gum Shoe Lofts site is exactly what Bildalot Apartments needs to be a viable, economical solution.