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MAXIMALLY PRODUCTIVE USE The purpose of this report is two fold: (1) to estimate the maximally productive use of the subject site; and (2) estimate the potential annual cash flow that could be realized from a ground lease. This section deals with estimating the subject's ma~umally productive use, and utilizes the residual technique. This residual technique will first estimate the value of the anticipated development using the Income Capitalization Approach. The Income Capitalization Approach is based on the premise that multiple family and commercial properties are income producing, and that investoR purchase these properties based on their income producing ability. In the Income Capitalization Approach, market rents for the subject property are estimated, the applicable operating expenses are deducted, and the resulting net income is capitalized into a value estimate. This approach is based on analysis of information extracted from the market, and provides a comporison of the subject to other properties of similar character and income producing ability. Secondly, the cost of the anticipated improvements on the site including profit and overhead and absorption are analyzed. This cost estimate will exclude the value of the land and costs of developing the parking structure, building pad, and other improvements. The estimated costs discussed dbove will be subtracted from the estimated Income Capitalization Approach value, resulting in an implied value of the subject site and parking improvement. As noted above, the residual analysis subtracts total development costs from an estimated Income Capitalization Approach value for each of the development scenarios with the exception of Scenario Six. This process results in the underlying value of the land. Several comparable buildings and projects were surveyed to determine appropriate apartment rents and lease rates for office, ground-floor retail, and office/retail space proposed in the various development scenarios. The rents used in this analysis were derived from a review of the comparables and the assumptions for each scenario. Operating expenses were based on series of assumptions that appear in the "Assumptions" charts the corresponds to each scenario as seen below. Total operating expenses are deducted from the total effective gross income reported in the Income Approach table to derive a net operating income. The net-operating income of each development scenario is then capitalized into a value estimate assuming an overall capitalization rate. The capitalization rates used in the analysis were based on information extracted from the market. ~th respect to development costs, a survey of similar projects was completed as well as use of the Marshall Valuation Senrices, a national costing service. The costs used in this analysis were based on a review of the cost comparables and the development program outlined for each scenario. The development costs were then adjusted for developer's profit and overhead and absorption costsb. The following pages include assumptions, an income valuation chart, and project cost chart for each scenario. Narrative continues on page 39. P99289 PALMER, GRO~ 8~ Pi~xo~, INC. 23