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GATEWAY OF BETHESDA ROW A unique, downtown, mixed-use development opportunity

65-unit apartment community with 15,000 square feet of retail Woodmont Avenue, Hampden Lane, Elm Street

Bethesda, Maryland 20814

Jorge M. Rosa The Johns Hopkins University

Carey Business School Edward St. John Department of Real Estate

BU 767.810 Section 51 Real Estate Practicum

December 4, 2008 Practicum Advisor – H. Michael Schwartzman

GATEWAY OF BETHESDA ROW

By: Jorge M. Rosa

TABLE OF CONTENTS

1. Executive Summary

2. Property Description a. Property Information b. Design & Land Planning c. Marketing Strategy d. Unit Amenities e. Common Area Amenties

3. Zoning Analysis a. Existing Zoning Analysis b. MPDU & Workforce Housing

4. Proforma/Construction Analysis a. Proforma Description b. Apartment Proforma Description c. Retail Proforma Description d. Construction Costs – Hard & Soft e. Construction Timeline f. Proforma – Leveraged IRR

5. Submarket Analysis a. Market & Submarket Highlights b. Surrounding Area Analysis c. Transportationd. Lifestyle Amenities e. Employment f. Demographics

6. Apartment Rental Market a. Apartment Market Overview b. Apartment Pipeline c. Sales Comparables d. Land Sales Comparables e. Rental Comparables

7. Retail Rental Market a. Retail Market Overview b. Lease Comparables

8. Mapsa. Macro & Micro Maps b. Major Employers c. Drive Time Analysis d. Multifamily Housing Density e. Average Home Values

9. References


By: Jorge M. Rosa

Executive Summary


By: Jorge M. Rosa

Executive Summary

Gateway of Bethesda Row presents an equity investor a unique opportunity to invest in a Metro located, downtown, infill location at Bethesda Row in Bethesda, Maryland. The proposed development site is located in one of the most affluent neighborhoods in the Metropolitan Washington Area with median household income at $121,577 within a three-mile radius of the site. Downtown Bethesda has a total workforce of 43,000 employees with two major Montgomery County employers, National Institute of Health and the National Naval Medical Center, located just north of the proposed development site at Wisconsin Avenue and Jones Bridge Road in Bethesda. Downtown Bethesda is centered around the Bethesda Metro Station, which provides immediate access to major employers and points of interest throughout the Metropolitan Washington Area. It’s “inside the beltway” location affords its residents access to major thoroughfares including the Capital Beltway (I-495), Interstate 95, and Interstate 270. Residents of Downtown Bethesda and Bethesda Row enjoy various dining options from around the globe and a myriad of national retailers and boutique shops right at their doorsteps.

The site is located in Bethesda Row in Downtown Bethesda at the corners of Elm Street, Woodmont Avenue, and Hampden Lane. The proposed development is a planned 5-story, podium constructed (wood frame over concrete), mixed-use development that will incorporate 65 luxury apartment units with 15,000 square feet of ground level retail and subsurface garage parking. The apartment rental rates surrounding the proposed site are some of the highest in the Metropolitan Washington Area, averaging over $3.00-per-square-foot. Retail rental rates are between $50 - $60-per-square-foot NNN.

The investment opportunity will require an equity investment of $8,632,341 or 30 percent of the total cost to construct the community, which the developer seeks to raise, to successfully develop the site. This equity injection will yield in internal rate of return of 18.11 percent over a 24 month investment period. A land option to purchase the subject property will be used to put the site under contract with an anticipated closing in January 2011. The land option allows the developer and investors the right or option to purchase the land, with limited cash obligation, within a period of time agreed upon by each party. This reduces any entitlement risks and permits the developer and investors to cancel the contract prior to the expiration of the feasibility period, thereby reducing entitlement risk. Once the feasibility period is complete, the money held in earnest by the seller will be at risk at which point a cancellation will result in forfeiture of the deposit. Any money spent for due diligence is at the prospective purchaser’s expenses. The land option will also restrict other potential purchasers from optioning or acquiring the land during this period. The current land value is $5,000,000.

One of the major obstacles that the developer and equity partners will have to overcome is the rapidly decreasing land values as a result of the new underwriting standards issued by banks over the last six months. New debt underwriting requirements for apartment communities include 70 percent loan-to-cost (LTC), one point bank fee, interest rates at 290 to 390 basis points over Libor, and an exit cap rate at 6¾ percent for apartments inside the Capital Beltway. These new underwriting standards have made


By: Jorge M. Rosa

debt more expensive and will require lower land values to meet investor returns of at least an 18 percent IRR. Additionally, new minimum equity returns requirements by investors have increased from 14 percent to 18 percent, according to Mark Coletta of Fairfield Residential, have decreased land value further. Using the new debt underwriting standards and equity returns requirements, the current acquisition price for the subject site is $5,000,000 or $76,923/unit. As compared to mid-2007, when the land would have been valued at $10,600,000 using old underwriting standards of 80 percent LTC, interest rates at 200 to 300 basis points over Libor, and a 5½ percent exit cap rate to yield a 13.98 percent IRR. The question then becomes; will the current owner sell his/her property based on today’s value or hold the property until the market returns?


By: Jorge M. Rosa

Property Description Property Information

Design & Land Planning Marketing Strategy

Unit Amenities Common Area Amenities


By: Jorge M. Rosa

Project Description

Montgomery County Property ID #: 07-00489638 07-00488361

Property Address: 4900 Hampden Lane & 4907 Elm Street Bethesda, MD 20814

Type of Project: A 5-story luxury podium apartment community with ground floor retail.

Number of Units: 49 market rate units 6 workforce housing units 10 moderately priced dwelling units 65 total units

Total Land Area: 27,450 square feet or 0.63 acres

Gross Building Square Footage: 85,785 square feet

Average Unit Size: 909 square feet

Current Zoning: C-2 (General Commercial)

Existing Building Description: The property an existing two-story, commercial building with retail space on the first and second floors. Existing tenants include an auto body shop, Ritz Camera, and a dry cleaner. The second floor retail, previously occupied by Washington Sports Club and retail space previously occupied by Bethesda Dance Studio, with entrances located off of Hamden Lane, are currently vacant.


By: Jorge M. Rosa

Existing Property Pictures

Intersection of Elm Street & Woodmont Avenue: Existingcorner building previously occupied by Washington Sports Club and Ritz Camera

Intersection of Hampden Street & Woodmont Avenue: 2-story existing strip center occupied by Community Auto Service and Cleaners

Elm Street: Existing auto care facility occupied by Qualtro Auto Body, Inc.


By: Jorge M. Rosa

Bethesda Row Sidewalks

Design & Land Planning Construction and design of Gateway of Bethesda Row will take advantage of the site attributes, including flow of pedestrian and vehicular traffic along roadways, and neighborhood characteristics. The newly constructed apartment community will be architecturally conforming to the style and era of the surrounding office, retail, and apartment buildings in an effort to establish continuity throughout Bethesda Row. Some unique design features, however, will be incorporated to establish some individuality from the surrounding buildings.

Bethesda Row is an extremely pedestrian and bike friendly community and was designed to encourage visitors to get out of their cars and walk or ride a bike. The greatest amount of foot traffic can be seen along the block bounded by Arlington Road to the west, Woodmont Avenue to the east, Elm Street to the north, and Bethesda Avenue to the south. This block contains the highest concentration of restaurants and retail space. The Giant grocery store can be found on Arlington Road between Bethesda Avenue and Elm Street. Bike lanes are found on Woodmont Avenue which funnels

bike traffic to the Capitol Crescent Trail. Street parking can be found along Woodmont Avenue, Bethesda Avenue, and Elm Street and a 917-space parking garage with entrances off of Elm Streets and Bethesda Avenue. 279-public-surface-parking-spaces can also be found at the south and east corners of Woodmont Avenue and Bethesda Avenue. The highest volume of vehicular traffic is along Woodmont Avenue and Arlington Road with secondary and tertiary traffic along Bethesda Avenue and Elm Street. Traffic along Bethesda Avenue and Elm Street is typically slowed by pedestrians crossing mid-block as a result of smaller street widths and vehicles entering the public parking garage. As a precaution, drivers tend to slow down to yield to jaywalking patrons. To accommodate the current pedestrian and vehicular traffic conditions, Gateway of Bethesda Row will situate ingress/egress to the underground parking and service ramp along Hampden Lane. The location of these garage and service entrances will allow for minimal disruption to heavy pedestrian traffic located along Elm Street and vehicular

Barnes & Noble at Bethesda Row


By: Jorge M. Rosa

traffic along Woodmont Avenue. Hampden Lane is a tertiary roadway with residential and secondary retail uses.

The main pedestrian entrance to Gateway at Bethesda Row will be located along Woodmont Avenue. This location will maximize roadside visibility of vehicular traffic and will not exacerbate prime storefront retail space along Elm Street. The corners of Woodmont Avenue and Elm Streets and Woodmont Avenue and Hampden Lane will be the principal locations for retail space since these locations capture both vehicular traffic and pedestrian traffic. Signage for the apartments will be located on the façade on both Woodmont Avenue and Elm Street.

Gateway of Bethesda Row will be podium construction which consists of concrete on the first level and wood frame construction on the upper levels. This construction type has numerous advantages. First, podium construction is much cheaper than all concrete or steel construction. Second, though an all wood frame constructed building is cheaper than podium construction, wood frame construction is limited in height. Wood frame construction is not permitted to exceed five stories in height (though it is typically four stories). Three-A wood frame construction

Podium Construction Example


By: Jorge M. Rosa

allows wood frame buildings to exceed four stories, however, the fifth story requires that the entire building have a higher fire rating which increases the construction cost for the entire development. Additionally, three-A construction has not been successfully completed yet in the Metropolitan Washington Area. Third, podium construction restricts any noise created on the ground floor. This is ideal for apartment communities containing restaurants because it will allow restaurants to stay open later without disturbing residents of the apartment community.

Gateway of Bethesda Row will incorporate many of the building characteristics that are prevalent throughout Bethesda Row. Many buildings have brick façades that vary in colors and include decorative, artistic designs, such as, stars or artistic accents. Some buildings combine brick with stucco or exposed concrete. In some areas within Bethesda Row, more modern architecture can be found, in particular in the entryways. Entryways, in many cases, are constructed of steel with a steel and glass awning. Light fixtures are also integrated into the façade that light public-use spaces surrounding the buildings. Windows or balconies, in some instances, have steel banisters.

Various Facades of Bethesda Row

Bethesda Row Hardscape Sidewalk & Restaurant Outside Seating


By: Jorge M. Rosa

The sidewalks of Bethesda Row are lined with mature landscaping, shrubbery, fountains, park benches, potted plants, and bicycle racks. Sidewalks, lined with awnings for each retail store or restaurant overhead, are approximately 10’ wide with red brick in a diagonal design and tree pits spaced approximately 30’ apart. The sidewalk area directly in front of restaurants is used for outside dining during the warmer months for patrons of that restaurant. Pedestrians pass between the restaurant storefront and outside diners. Fountains can be found on the corners of Woodmont & Bethesda Avenues and Arlington Road & Bethesda Avenue. These public-use amenities seen in Bethesda Row and parts of Downtown Bethesda will be incorporated into the public-use space for Gateway of Bethesda Row. More specifically, the development will include park benches, shrubbery, flowers, and some public art near the main entrance to the apartment community. The public area at the corner of Elm Street & Woodmont Avenue will contain either a circular park bench with a mature tree to mirror the southwest corner of Elm Street & Woodmont Avenue or will be lined with a public seating area with a decorative public art.

Public Art


By: Jorge M. Rosa

Marketing Strategy

An effective marketing strategy will need to be employed in order to maximize the value of the proposed development. In examining the characteristics of the surrounding area and potential competitive apartment product, four distinctive characteristics are prevalent:

High-level of interior finishes in apartment product Affluent demographics High rental rates Lack of upscale services

What seems to drive the high rental rates and high-level of interior finishes is the affluency of the surrounding area. The median household income of residents within a one, three, and five-mile radius are $105,782, $121,577, and $96,063, respectively. This is between 10 percent and 39 percent more than the median household income of Montgomery County. High income levels, more often than not, demand a higher-level of unit amenities than what might be expected in an average apartment community. Luxurious or “condo-like” finishes, such as, granite countertops, stainless steel appliances, and hardwood floors are, in many cases, standard apartment features to attract this demographic.

The rental comparables for Gateway of Bethesda Row are much higher than the overall Bethesda/Rockville high-rise apartment market. According to the Delta Associates, Third Quarter 2008 Class A Apartment Market Report, rents for the Bethesda/Rockville high-rise market averaged $2,447 or approximately $2.51 per square foot. The rental comparables for subject property averaged $2,659 or $2.81 per square foot with Upstairs at Bethesda Row boasting the highest rents at $2,973 or $3.00-per-square-foot. These high rental rates can be attributable to the affluent demographic surrounding Gateway of Bethesda Row and the lack of Class A, luxury apartment supply.

The niche market for Gateway of Bethesda Row, based on the rental comparables and demographics, are both young business professionals with high income levels that lack adequate funds for a single family home down payment and wealthy empty nesters looking to downsize and urbanize. The amenities package proposed will more than adequately appease this demographic. “Condo-like” finishes and superior service that provides residents both convenience and a “worry-free” lifestyle will set Gateway of Bethesda Row apart from its competition.

Luxury Unit Interior


By: Jorge M. Rosa

These services will be geared toward resident’s on-the-go. Resident services will include house cleaning, dog walking, concierge, “service receiving” for house calls, valet dry cleaning, and car care/detailing services. These services are intended to cater toward wealthy young business professionals and empty nesters with limited personal time to take care of many everyday or periodic responsibilities. Residents who elect to use these services will be charged a premium on their rent. These services will be offered to residents as a package deal, offering multiple services for a single price.

In order to effectively market Gateway of Bethesda Row, ads will be run in the various apartment guides (both online and in print) for the Washington, D.C. Metro Area including, ApartmentGuide, Apartment Showcase, For Rent, and Apartments.com. These marketing tools will showcase the apartment to a wide range of potential renters regionally and nationally (individuals looking to relocate to Washington, D.C.). Most of the marketing “buzz” for the proposed project will be generated at the site itself by

individuals who work in Bethesda and visitors/ patrons of Bethesda Row. During construction, signs will be strategically placed on the site to market the coming apartment community and retail. Once the building is complete, adequate signage on the exterior of the building and sidewalks will be required to continually capture this traffic.

One of the most important components of an effective marketing strategy is lease-up. During the lease-up period, concessions (or specials) will be used to entice potential residents into leasing at the community. Concessions are effectively free rent or discounted rent for a specified period of time in which a property owner sacrifices some revenue in exchange for occupancy. In other instances premiums service charges can be waived as part of a concession. Excessive vacancy for long periods of time will ultimately lead to investment failure. The use of concessions can stimulate increased absorption of vacant units. As the community approaches stabilization, concessions will be scaled back. Once stabilized, an apartment community ideally looks to maintain rental occupancy between 94 percent and 96 percent. This small vacancy allows a management community the ability to “push” or increase rents, further enhancing the future revenue stream. However, should occupancy fall below the 94 percent threshold; concessions could be used to lease vacant units.

The contracted property management company will implement a pre-leasing program to enhance lease-up pace. During construction, marketing material used on the site will contain the contact information (phone & email) of the management company. This will allow individuals interested in leasing a unit to pre-lease. Pre-leasing will be conducted via telephone and email at the corporate office of the management company to eliminate


By: Jorge M. Rosa

additional cost of leasing retail space nearby for leasing activities. Pre-leasing will commence approximately one to two months prior to completion of the community. An efficient pre-leasing program will allow for immediate occupancy of approximately 35 percent once the community is complete. The ground-level retail space will be leased using a retail broker during construction.

Exit Strategy

Gateway of Bethesda Row is currently projected to be sold to institutional or private investor in 4th quarter 2012 as a fully occupied apartment community. However, a condo conversion can be implemented as an alternative exit strategy for the apartment community. Though Washington, D.C. has seen a glut of condominium conversion and new condominium construction over the past several years, “downtown” locations have been more favorable than suburban areas. The site’s access to major employment, retail/lifestyle amenities, and various modes of transportation add to the site’s locational appeal. Additionally, the apartment community’s size at 65 units may not make it an ideal investment opportunity for a potential investor at disposition because the community does not provide economies of scale. Larger apartment communities are more efficiently operated because the same size staff that is required to run a 200-unit apartment community as is required to run a 65-unit apartment community. This fact will undoubtedly limit the amount of interest to acquire the community as an apartment community at disposition because, in many instances, institutional investors will look to purchase a larger community for efficiency. However, this smaller, 65-unit apartment community will be a great condo play for a variety of reasons, including:

1. The smaller building limits potential market risk. With a conversion projected to occur in 4th quarter 2012 or 1st quarter 2013, the current condo oversupply in the market should be absorbed. Limited new product will be introduced due to new lending requirements that have effectively stopped potential condo projects.

2. Converting this building may provide a good deal of internally generated sales. It can be expected that a fairly high capture rate of existing rental tenants will become purchasers of the condominiums.

3. Conversion of an existing asset of this type should sell itself well because the prospective purchasers can physically see the product that will be purchased. The inventory is immediately available to the converter for marketing versus new product sales that have to wait until completion.

4. Small buildings may be preferable to the target market because it provides a sense of exclusivity.


By: Jorge M. Rosa

5. The project will not require major construction financing to facilitate conversion as unit standard finishes will already meet market requirements.

In speaking with Seth Poteck of McWilliams/Ballard, he felt that the size of the units would be ideal for a future condo conversion. Currently, condos in the Downtown Bethesda Market (Lionsgate and Trillium) are being marketed from the mid-$500,000’s to the mid-$700,000’s. Seth added that presently condo absorption in the Bethesda Submarket is four units per month, but can move as high as ten units per month if and when the market improves.


By: Jorge M. Rosa

Kitchen

Granite countertops in all kitchens Stainless steel name brand appliances Frost-free refrigerators with icemakers Microwave ovens Multi-cycle dishwashers Double stainless steel recessed sink with garbage disposals Ceramic tile floors Chef’s island Custom cabinetry Gas range

Bedroom & Bathroom

Garden-style soaking tub Walk-in showers Ceramic tile floors and tub surrounds Granite or Corian countertops Dual basin sink vanities Walk-in closets Linen closets Plush carpeting in bedrooms Expansive windows with vertical blinds

Unit Common Areas

Solid core entry doors with door viewer, brass door knocker, and privacy lock Hardwood flooring in foyer, living and dining areas Formal dining area Full-size, Energy-Star, washers & dryersEnergy efficient triple-paned windowsExpansive windows Crown molding* Fireplaces*

Image of typical kitchen

Image of typical bathroom

Image of typical living area


By: Jorge M. Rosa

Plasma television mount above fireplace (pre-wired)* Designer track lighting* Balconies*Individually controlled, energy efficient HVAC units Fire sprinkler system Pre-wired for intrusion alarm Pre-wired for cable television and high-speed internet access

* Selected Units

Community Amenities

24-hour concierge service 24-house professional, on-site maintenance Valet dry cleaning service Convenience service (dog walking, maid service, service requests) State-of-the-art fitness center Business center with fax & copying machine Resident lounge with wireless internet access, plasma TV, and decorative furniture Billiards room Elevators Underground garage parking Ground level retail

Image of club room

Image of fitness area


By: Jorge M. Rosa

Zoning Analysis Existing Zoning Analysis

MPDU & Workforce Housing


By: Jorge M. Rosa

Zoning Analysis

The proposed development site is zoned C-2, which permits the construction of “dwellings” as by-right and a myriad of retail/commercial uses by-right including but not limited to, a book store, drug store, eating and drinking establishment excluding a drive-in, etc. in the standard development outlined in Section 59-C-4.1 of the Montgomery County Zoning Ordinance. Dwellings are defined by the Montgomery County Zoning Ordinance as “a building or portion thereof arranged or designed to contain one or more dwelling units.”

The C-2 zone text promotes the use of public transportation (Metro and the Bethesda Circulator) in areas in and around the Central Business District. Further, the zone encourages “housing with commercial uses in close proximity to Metro station located in Central Business Districts.” Bethesda Metro Station is part of the Washington Metropolitan Area Transit Authority (WMATA) “Red Line” and provides immediate access to numerous points of interest (employment and entertainment) throughout the Metropolitan Washington Area. The Bethesda Circulator provides free bus service every ten minutes to numerous stops throughout Downtown Bethesda vicinity and the Bethesda Metro Station. The proposed development site is situated adjacent to a bus stop for the Bethesda Circulator and is located 0.15 miles or approximately 800 feet from the nearest Metro entrance to the “Red Line” located the intersection of Woodmont Avenue and Bethesda Metro Center North Lane.

The zoning ordinance permits for a building height of three stories or a maximum of 42 feet for the construction of a commercial building. However, the building height can be increased to 75 feet if the building accommodates a mix of commercial space with residential and satisfies the following criteria:

The residential component must be a minimum of 60 percent of the overall FAR The development is at least 300 feet from any “one-family residential use.”

Since the proposed development can meet these two criteria, the building height will be permitted to be increased to 75 feet for the proposed development because the project conforms to both criteria (the development is subject to site plan approval). First, the site will only contain commercial space on the ground level, which will comprise of less than 40 percent of the gross building area. Second, the nearest single family residences are located more than 800 feet away to the west. If the proposed development includes a mix of commercial and residential space, the site’s FAR will be increased from 1.5 to a maximum of 2.5. Commercial space will be limited to a maximum 1.0 FAR and will be limited to the ground floor. Only incidental residential uses are permissible on the ground floor (lobby and loading areas).

The building is required by the zoning ordinance to be set back from the front lot line by not less than 10 feet. Additionally, the building is required to be set back in the rear in accordance with the adjacent R-10 residential zone to the north of the site. No setback is


By: Jorge M. Rosa

required on the side yard along Woodmont Avenue because it is adjacent to the CBD. The R-10 residential zone requires a setback from the rear yard of 30 feet.

“Green area” is also a requirement for the site. The zoning ordinance requires that at least 10 percent of the lot be public use space, which consists of mainly hardscape with trees and bushes and in most cases is not lawn. This requirement can include lawns, decorative paintings, sidewalks, walkways, public plazas, fountains, wooded areas and other active and passive recreational uses. Green area, in general, is must be available for entry or use by occupant and residents of the proposed building and the neighboring community. In speaking with Robert Krononberg of the Montgomery County Planning Board, green area is required to be at ground level and can not be incorporated as part of the structure as a green roof. It is required to be openly available to the public and located in a prominent area of the building site.

Any newly constructed residential community is required by Montgomery County to include Moderately Priced Dwelling Units (MPDU’s) as outlined in Chapter 25A of the Montgomery County Code. This inclusionary zoning regulation requires that any rental or for-sale residential development that exceeds 19 units is required to incorporate MPDU’s. The requirement ranges from 12.5% to 15% based on the density bonus granted by Montgomery County. Additionally, if a density bonus is not granted, the development is still required to provide 12.5% MPDU’s at a minimum. Additional density is outlined as follows:

AchievedDensity Bonus

MPDU'sRequired

Zero 12.5%Up to 1% 12.6%Up to 2% 12.7%Up to 3% 12.8%Up to 4% 12.9%Up to 5% 13.0%Up to 6% 13.1%Up to 7% 13.2%Up to 8% 13.3%Up to 9% 13.4%Up to 10% 13.5%Up to 11% 13.6%Up to 12% 13.7%Up to 13% 13.8%Up to 14% 13.9%Up to 15% 14.0%Up to 16% 14.1%Up to 17% 14.2%Up to 18% 14.3%Up to 19% 14.4%Up to 20% 14.5%Up to 22% 15.0%

Source: Montgomery County Code: Chapter 25A


By: Jorge M. Rosa

Additional density from the inclusion of MPDU’s is calculated based on the gross building area intended for residential use only. Commercial space is not used in this calculation. In order to calculate the additional density, the FAR prescribed in the Montgomery County Zoning Ordinance is applied to the total square footage of the land area, the total square footage used for commercial space is removed, and the density bonus outlined in the Montgomery County Code (see chart above) is applied based on the percentage amount of MPDU’s that are included in the residential project. This incentivized inclusionary zoning provides an added benefit if additional MPDU’s are incorporated into a residential development. There is a significant benefit to include an additional 2.5 percent MPDU’s into a residential development. The inclusion of 12.5 percent MPDU’s (required by Montgomery County) yields no density bonus, but the inclusion of 15 percent MPDU’s yields a density bonus of 22 percent.

In addition to the requirement to include MPDU’s into the proposed development, the site will also require the construction of on site workforce housing. Workforce housing units are units that are sold or rented to households with incomes at or below 120 percent of the area wide median income. Chapter 25B of the Montgomery County Code requires that any residential project that is at or above a density of 40 units per acre and is in the Metro Station Policy Area be obligated to provide “not less than 10 percent” workforce housing. Gateway of Bethesda Row will meet both criteria. A 10 percent density bonus is granted for the inclusion of workforce housing in order to accomplish the goal of providing affordable housing to residents. The density bonus is intended to not penalize the developer for this inclusionary regulation and is intended to be neutral in cost.

The maximum unit rent for both moderately priced dwelling units and workforce housing is determined by Montgomery County. Maximum income requirements for MPDU’s is set at 65 percent of the median income for the Washington, D.C. Primary Metropolitan Statistical Area (PMSA), while the maximum income requirements for workforce housing is 120 percent of the median income for the Washington, D.C. PMSA. Both MPDU’s and workforce housing are calculated by multiplying the maximum income permitted by 25 percent and dividing the result by 12 (months). The maximum rents for both MPDU’s and workforce housing is as follows:

In reviewing the Master Plan for The Arlington Road District, no zoning recommendations were made regarding the location of the proposed development site

Moderately Priced Dwelling Units: Maximum Rent

Unit Type 0 BR 1 BR1 BR+ Den 2 BR 3 BR

Household Size 1 1.5 2 3 4.5+MPDU Maximum Annual Gross Income $48,500 $52,000 $55,500 $62,500 $72,250MPDU Rent $1,010 $1,083 $1,156 $1,302 $1,505

Workforce Housing Units: Maximum Rent

Unit Type 0 BR 1 BR1 BR+ Den 2 BR 3 BR

Household Size 1 2 3 4 5+WFHU Maximum Annual Gross Income $76,000 $86,000 $96,000 $108,000 $117,000WFHU Rent $1,583 $1,792 $2,000 $2,250 $2,438


By: Jorge M. Rosa

other than to preserve the existing C-2 zoning. However, one of the main objectives in the Master Plan is to “provide additional housing.” A mixed use development that incorporates retail and residential uses at the proposed development site will encourage Metro ridership. The proposed mixed use site will “reduce the potential for additional employment away from the Metro Core” as outlined in the Master Plan by limiting commercial development to the ground floor.


By: Jorge M. Rosa

Proforma/Construction Analysis Proforma Description

Apartment Proforma Description Retail Proforma Description

Construction Costs – Hard & Soft Construction Timeline

Proforma – Leveraged IRR


By: Jorge M. Rosa

Proforma Description

Equity Amount: $8,632,341 – 30 percent of total project cost

Internal Rate of Return: 18.11 percent

Loan Amount: $20,142,128 – 70 percent of total project cost

Land Close Date: January 2011

Land Acquisition Price: $5,000,000 or $76,923/unit

Sale Date: December 2012

Sale Price: $33,169,815 or $510,305/unit (6.50 percent exit cap rate)

The proforma uses conservative underwriting in order to create realistic returns and conservatively reach investor expectations.

ApartmentsThe unit mix for the apartment community consists of 65 percent one bedroom units and 35 percent two bedroom units with rents for market rate units at $3.12 per square foot, $1.34 per square foot for moderately priced dwelling units (MPDU’s), and $2.21 per square foot for workforce housing units. Rents are escalated by 3.0 percent annually beginning December 2011. Additional rent premiums have been applied at $40 per unit to account for select unit amenities, such as, fireplaces, balconies, floor fees, pet fees, crown molding, and premium services. Premiums for garage parking spaces and storage units were also factored into the proforma at $175 per month and $50 per month, respectively. A 5.0 percent vacancy factor has been applied to the proforma, over 300 basis points higher than the current 1.7 percent stabilized market vacancy reported by Delta Associates in their Third Quarter 2008 Class A Report. Concessions were applied at 4.0 percent.

A four percent management fee was used for the proforma even though the community consists of only 65 units. Typically, smaller apartment communities are subject to a higher management fee because the income generated by the community is insufficient to pay the management companies overhead to operate the community. However, because Gateway of Bethesda Row generates average rents in excess of $3.00-per-square-foot, the management fee will be reduced to four percent, which is 100 basis points higher than what is typical for a larger apartment community. Total operating expenses for the apartment community is just under $10,000-per-unit, which includes the management fee, salaries, advertising, repairs & maintenance, general & administrative, utilities, property taxes, insurance, and a replacement reserve of $250-per-unit-per-month.


By: Jorge M. Rosa

RetailIn speaking with Barry Carty and Emily Groome of Federal Realty Investment Trust (FRIT – owners and operators of much of the retail in Bethesda Row), retail rents today are pegged at between $50 and $60-per-square-foot triple net (tenant pays for all expenses) for Bethesda Row. The proforma uses retail rents of $50-per-square-foot triple net. Barry also recommended that tenant improvements be between $50-per-square-foot and $75-per-square-foot, while leasing commissions ranged from five percent for new leases and two and a half percent for lease renewals. The proforma uses a blended rate of $60-per-square-foot and six percent broker commissions for new leases and three percent for lease renewals.

Construction (Hard & Soft Costs)Jay Johnson and Mark Coletta of Fairfield Development, LLC stated that hard costs for podium construction would be $180-per-square-foot, which is not inclusive of other special projects or a general contractor fee. Base hard costs in the proforma were increased to $190-per-square-foot to account for higher end interior amenities and cost escalations. Marty Mankowski of Fairfield Residential, LLC added that an additional $350,000 in special project fees would cover Pepco vaults in the garage, storm water management, and public art. Total construction cost for Gateway of Bethesda Row, less interest, is $425,573 per unit or $27,662,225.

Environmental contamination was examined at the site due to the existing uses. Currently, a dry cleaning facility and auto body shop are tenants at the site. Barry Carty with FRIT confirmed that the dry cleaning tenant was only a receiver of clothing and the actual cleaning was conducted at an off-site location. Marty Mankowski of Fairfield had stated that auto body tenants that do not have a fueling station on the site typically cause minimal, if any environmental contamination. Additionally, since the soil on the site will be removed for the subsurface garage parking, any contaminated soil will be removed and any treatment will be minimal. A soft cost contingency of $250,000 has been applied to the proforma to account for any unforeseen obstacles that may appear.

TimelineSCHEDULING & TIMINGDescription Month # Month/Year

Land Close Date 1 Jan 11Construction Loan Funding 1 Jan 111st Equity Installment 1 Jan 11Construction Starts 1 Jan 11First Lease (25 Avg. Monthly) 17 May 12First Rent Increase (3.00%) 12 Dec 11Full Delivery (65 units) 19 Jul 12Duration of Construction 1 YR, 7 MOS 01/11 to 07/12Construction Loan Payoff 24 Dec 12Fully Leased (62 Leases) 19 Jul 12Stabilized (95% Occupancy, 62 Units) 21 Sep 12Sale Date 24 Dec 12Holding Period (Land Close thru Sale) 2 YRS 01/11 to 12/12


By: Jorge M. Rosa

Prior to land closing, a land option to purchase will be used to put the site under contract. This allows the developer and equity investors the right or option to purchase the land, with limited cash obligation, within a period of time agreed upon by each party. This reduces entitlement risk and permits the developer and investors to cancel the contract prior to the expiration of the feasibility period, should zoning investigation or due diligence not go according to plan. Once the feasibility period is complete, the money held in earnest will be at risk, at which point a cancellation will result in forfeiture of the deposit. Any money spent for due diligence is at the prospective purchasers expense. The land option will also restrict other potential purchasers from optioning or acquiring the land during this period. The option period in this instance will be for two years. Once the option period has expired, entitlement, due diligence, site planning, and engineering will be completed and permits should be issued.

Construction of Gateway of Bethesda Row should take one year and seven months barring any unforeseen events that would cause delay. Due to the size of the building, the entire building will be required to deliver all at once in July 2012. Pre-leasing will begin on the 17th month of construction to allow for immediate occupancy once units have delivered. Construction will be completed in July 2012. Gateway of Bethesda Row will be fully leased in approximately three months (62 units) with absorption at approximately 25 leases per month. The community will be fully stabilized by September 2012.

Land Acquisition & ReversionCurrently, the financial markets have become more conservative to reduce the riskiness of loans by requiring that addition equity be used in place of debt. Since the credit crunch in late 2007, banks have required larger down payments and have reduced their loan-to-cost percentages from as much as 80 percent loan-to-cost to now requiring 70 percent loan-to-cost according to Miles Spencer of Eastdil Secured. This has had a negative effect on land prices. Additionally, at reversion banks are currently requiring cap rates for apartment communities “inside the Beltway” to be at 6.75 percent according to Chris Feeley of Northmarq Capital. This is an increase of between 100 and 200 basis points in the past year. The interest rate for construction loans is currently 290 to 390 basis points over Libor rate. Banks also will charge one point or a one percent origination fee to cover administrative fees. Points equate to a percentage of the loan principal.

Equity requirements have also adjusted as a result of the credit crisis and the uncertainty in the current real estate market. Over the past six months, equity requirements have changed requiring a higher internal rate of return (IRR) to hedge against market risk. As a result, equity IRR requirements have increased between 400 and 500 basis points to between 18 percent and 19 percent. This increased equity requirement coupled with the new financial underwriting standards has caused a great reduction in land prices.

In analyzing the subject site, certain adjustments were made to account for the sites irreplaceable and superior location. The proforma uses a 70 percent loan-to-cost ratio to access the loan amount. Cap rates should compress slightly to account for the sites locational value. The proforma uses an exit cap rate of 6.5 percent versus the 6.75


By: Jorge M. Rosa

percent that is currently required. A 7.5 percent interest rate was applied to the construction loan in the proforma. Based on the construction costs, rental rates for the apartments and retail components, expense data, and new underwriting standards applied to the proforma, the maximum value for the land is $5,000,000 or $76,923 per apartment unit. The sale of Gateway of Bethesda Row in December 2012, using a 6.5 percent exit cap, results in a reversionary value of $33,169,815 or $510,305 per unit. The overall investment in Gateway of Bethesda Row yields an 18.11 percent internal rate of return.


By: Jorge M. Rosa

Submarket Analysis Market & Submarket Highlights

Surrounding Area Analysis Transportation

Lifestyle Amenities Employment

Demographics


By: Jorge M. Rosa

Market & Submarket Highlights

Residents of Gateway of Bethesda Row will be afforded immediate access to Metro rail via the Bethesda Metro Station (Red Line) located within a three minute walk from the community. Metro provides immediate access to numerous points of interest throughout the Metropolitan Washington Area.

Gateway of Bethesda Row will be part of a dynamic urban community that combines a mix of office, retail, and residential uses along pedestrian friendly streets. Bethesda Row’s retail amenities combine world cuisine with boutique and national retailers to create an excellent ambiance with numerous lifestyle amenities.

The proposed development will be located near two of Montgomery County’s major employers, National Institute of Health and the National Naval Medical Center which employ 18,627 and 4,500 workers, respectively. The National Naval Medical Center expected to grow by approximately 2,200 jobs by September 2011.

According to Delta Associates in consultation with Dr. Stephen Fuller of George Mason University, job growth for the Metropolitan Washington Area is projected to total 23,900 new employees for all of 2008 and is estimated to add 29,000 and 42,500 jobs during 2009 and 2010, respectively.

Nearly 71 percent of the population within a three-mile radius has a household income of $75,000 or more per year, nearly two and a half times the national average.

The Bethesda/Rockville Submarket boasted the highest apartment face rent and effective rent for Class A high-rise apartments in Suburban Maryland on average during 3rd quarter 2008 averaging $2,447 and $2,205, respectively.

Washington, D.C. had the highest annual net absorption for Class A apartments in the nation for the 12 months ending September 2008 with 6,872 units. This was the fourth straight quarter in which Class “A” absorption exceeded 5,000 units. Apartment absorption for the Metropolitan Washington Area accounted for nearly 11 percent of the total Class “A” apartment absorption nationwide.

Washington, D.C. boasts one of the highest apartment occupancy rates in the nation. The average apartment occupancy rate for all investment grade apartments in the Metropolitan Washington Area compares favorably with the nation (97.0 percent versus 94.0 percent, nationally).

Bethesda has out performed the Metropolitan Washington Retail market as a whole boasting a vacancy rate of only 2.60 percent versus Washington, D.C.’s 4.1 percent. Additionally, rental rates in Bethesda are more that $16.30 per square foot higher than the overall Metropolitan Washington Area at $42.88 per square foot.


By: Jorge M. Rosa

Bethesda Row Retail

Bethesda, Maryland & Surrounding Area

The proposed development project, Gateway of Bethesda Row, is strategically situated inside the Capital Beltway (I-495) in “Downtown” Bethesda, Maryland. Bethesda, Maryland is located approximately one and a half miles northwest of the boarder of The District of Columbia and is situated in Maryland’s most populous jurisdiction, Montgomery County. Bethesda’s estimated population of 55,277 residents enjoys numerous locational lifestyle amenities, entertainment, dining, and abundant employment opportunities.

Downtown Bethesda is centered around the Bethesda Metro Station, which is located at the confluence of Old Georgetown Road (Route 187) and Wisconsin Avenue (Route 355) and the intersection of Montgomery Avenue/East-West Highway (Route 410) and Wisconsin Avenue. Downtown Bethesda has evolved as a major edge city in the Metropolitan Washington Area that is comprised of numerous high-rise office towers, single family and multifamily residential buildings, and innumerable restaurants providing international and domestic cuisine, as well as entertainment venues and boutique shopping opportunities. One of the major developments that has made Downtown Bethesda so endeared was the development of Bethesda Row by Federal Realty Investment Trust (FRIT) in 1993.

Bethesda Row is regarded by many in the development community to be one of the most successful mixed-used developments in the county. Bethesda Row was the recipient of three prestigious awards in 2002 – an Urban Land Institute for Excellence, a Congress for New Urbanism Charter Award, and a Washington Smart Growth Alliance Recognition Award. It combines a mix of office, retail, and residential uses along pedestrian friendly streets. The storefront retail

of Bethesda Row provides various dining options from around the globe including Indian, Greek, Spanish, Italian, Vietnamese, and Mexican cuisines. Additionally, a myriad of national retailers and boutique shops including Barnes & Noble, Apple Store, Urban Chic, Discovery Too, and Urban Country can be found along Woodmont Avenue, Bethesda Avenue, and Elm Street. During late spring, summer, and early fall, tables set outside each individual restaurant are packed with patrons dining on the 10’ wide brick sidewalks that are lined with mature trees.

Bethesda Metro


By: Jorge M. Rosa

Many cyclists, runners, and individuals looking for a leisurely stroll, brisk run or bike ride venture to Bethesda from various parts of the Metropolitan Washington Area. At the southwest corner of Bethesda Avenue and Woodmont Avenue near the entrance to the Barnes & Noble Bookstore, is the entry point to the Capital Crescent Trail. The Capital Crescent Trail is an 11-mile trail that connects Georgetown in Washington, D.C. to the Lyttonsville area of Silver Spring, Maryland. The Trail was once used as a single-track rail line of the Baltimore and Ohio Railroad and was converted to biking and jogging trail for area residents to enjoy. Many area residents commute to and from Bethesda using the 7-mile stretch of the Capital Crescent Trail that connects Bethesda to Georgetown on a daily basis. The Capital Crescent Trail connects many residential, commercial, and employment centers along this route. It is a key amenity to Downtown Bethesda.

Transportation

The proposed development site is in close proximity to major thoroughfares including the Capital Beltway (I-495), Interstate 95, and Interstate 270, Montgomery County’s major north-south route. Wisconsin Avenue (Route 355) and Connecticut Avenue (Route 185) afford residents immediate access to major employment centers and entertainment in Washington, D.C., Chevy Chase to the south, and Rockville, Montgomery County’s capital, to the north. Downtown Rockville, where many of Montgomery County’s county offices are located, is only eight miles to the north along Route 355, while Chevy Chase, another major employment and retail destination, is located one and a half miles to the south.


By: Jorge M. Rosa

Metro

Most importantly, Gateway of Bethesda Row will be within a three minute walk to the Bethesda Metro Station, which is part of the Washington Metropolitan Area Transit Authority (WMATA) “Red Line.” Metrorail is a 106.3 mile rail network comprised of 86 stations that provides immediate access to numerous points of interest (employment and entertainment) throughout the Metropolitan Washington Area. Metro, at various stations, connects with the Maryland Area Regional Commuter (MARC) train which provides railway access Frederick, MD and Baltimore, MD and numerous points of interest between. The MARC train can be accessed at the Rockville, Union Station, Greenbelt, & New Carrollton Metro Stations.

Once constructed, Gateway of Bethesda Row will be located at a bus stop for the Bethesda Circulator, which provides free bus service to numerous stops throughout Bethesda Row, Woodmont Triangle and the Bethesda Metro. It makes scheduled stops through Downtown Bethesda every ten minutes.

Shopping

Gateway of Bethesda Row will be located within a 20-minute drive of four major regional shopping centers: White Flint Mall, Westfield’s Montgomery Mall, Westfield’s Wheaton Mall, and Tysons I & II Galleria. These four regional shopping centers draw millions of area residents annually.

Mall Total S.F. Anchor Tenants

White Flint Mall 800,000 s.f. Lord & Taylor, Bloomingdales, Borders Books & Music, Dave & Busters

Westfield's Montgomery Mall 1,224,877 s.f. Nordstrom, Macy's, Crate & Barrel, Sears, Apple Store

Westfield's Wheaton Mall 1,644,895 s.f. JCPenney, Macy's, P&G Theatre, Target, Giant

Tysons Galleria I & II 2,200,000 s.f.Bloomingdales, Macy's, Neiman Marcus, The Ritz Carlton, Saks Fifth Avenue, Lord & Taylor

Additionally, just south of Bethesda in Chevy Chase, MD, is one of the most luxurious retail districts in the county, The Collection at Chevy Chase. It is comprised of over 100,000 square feet and is home to major fashion tenants such as Bvlgari, Cartier, Christian Dior, Gucci, Jimmy Choo, Louis Vuitton, Ralph Lauren, and Tiffany & Co.

Bethesda Circulator Bus


By: Jorge M. Rosa

Adjacent to The Collection at Chevy Chase, Mazza Gallerie, a 300,000-square-foot enclosed shopping center, is anchored by Neiman Marcus, Saks Fifth Avenue, and Ann Taylor.

Employment

According to the Bethesda Urban Partnership, Downtown Bethesda has a total workforce of 43,000 employees. However, located between Wisconsin Avenue and Old Georgetown Road in the northern section of Bethesda, not Downtown, are two of Montgomery County’s largest employers. The National Institute of Health (NIH), Montgomery County’s largest employer, employs 18,627 workers, according to the NIH website (www.nih.gov), at its headquarters in Bethesda. NIH is composed of 27 institutes and centers and is part of the U.S. Dept. of Health and Human Services. Its primary purpose is to conduct and support medical research for the federal government. NIH has a total funding of nearly $27.9 billion.

The National Naval Medical Center, currently Montgomery County’s fifth largest employer, provides health care to countless military personnel and presidents. The medical facility is located on Wisconsin Avenue across from the NIH and it is one of the nation’s largest and most renowned navy medical centers in the county. According the National Naval Medical Center website (www.bethesda.med.navy.mil), the Naval Hospital employs nearly 4,500 workers at its Bethesda, MD campus. However, as a result of the base realignment and closure (BRAC) initiative, Walter Reed Army Medical Center in Silver Spring, MD will be merging with National Naval Medical Center on Wisconsin Avenue and will create about 2,200 additional full-time staff positions to the facility. It was reported in a March 4, 2008 article in the Washington Business Journal that “the Navy anticipates 261,000 square feet in renovations and 690,000 square feet in new construction” as a result of the merger. The move is expected to be completed by September 2011. The new medical facility will be renamed the Walter Reed National Military Medical Center.

Demographics

Bethesda, MD and the immediate surrounding area around Gateway of Bethesda Row boasts a highly educated and wealthy population. This area outperformed the nation, the State of Maryland, and Montgomery County, MD in educational attainment and income statistics. The educational attainment of the population surrounding Gateway of Bethesda Row with at least a Bachelor’s degree is 78 percent within a one-mile radius, 76 percent within a three-mile radius, and 65 percent within a five-mile radius. Additionally, nearly 71 percent of the population within a three-mile radius has a household income of $75,000 or more per year, nearly two and a half times the national average.

Naval Medical Center


By: Jorge M. Rosa

Educational Attainment: 2008 Estimated Population Statistics0 - 1 mile 0 - 3 miles 0 - 5 miles

Bachelor's Degree 32.11% 30.28% 27.22%Master's Degree 21.23% 22.30% 19.24%Professional School Degree 15.00% 14.79% 11.77%Doctorate Degree 9.96% 9.12% 7.02%

Total with at lease a Bachelor's Degree 78.30% 76.49% 65.25%Source: Claritas, 2008

Demographics: 1-3-5 Mile Radius of Gateway at Bethesda Row0 - 1 mile 0 - 3 miles 0 - 5 miles

Est. 2008 Average Household Income $149,122 $164,737 $138,233Est. 2008 Median Household Income $105,782 $121,577 $96,063Est. 2008 Per Capita Income $68,240 $71,618 $59,790% of Households making $75,000+ 65.3% 70.7% 60.9%Source: Claritas, 2008

National & Regional DemographicsU.S. Maryland Mont. Co.

Est. 2006 Average Household Income $65,527 $83,367 $115,225Est. 2006 Median Household Income $48,451 $65,144 $87,624Est. 2006 Per Capita Income $25,267 $31,888 $43,073% of Households making $75,000+ 29.7% 42.9% 57.1%Source: Census, American Factfinder, 2006

The Montgomery County Planning Office is expecting the Bethesda/Chevy Chase Planning Area to grow 21.6 percent by 2020 (using 2005 as a base year) and 29.4% by 2030. This population growth will undoubtedly increase the housing demand.

Population GrowthPlanning Area 2005 2010 2015 2020 2025 2030Bethesda/Chevy Chase 92,375 101,343 108,798 112,287 116,786 119,495

0.0% 9.7% 17.8% 21.6% 26.4% 29.4%Source: Census, American Factfinder, 2006


By: Jorge M. Rosa

Apartment Rental Market Apartment Market Overview

Apartment Pipeline Sales Comparables

Land Sales Comparables Rental Comparables


By: Jorge M. Rosa

2.3%3.0%

4.2%5.1% 5.2% 5.2%

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Third Quarter 2008

National Rate:6.0%

Source: REIS and Delta Associates: September 30, 2008

6,872

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4,087

2,927

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Annual Net Absorption of Class A ApartmentsMajor Apartment Markets

12 Months Ending September 2008

National NetAbsorption:62,752 Units

Source: REIS and Delta Associates; September 30, 2008.

The Rental Market & Supply Pipeline

The Washington, DC Metropolitan Area continues to out-perform most major apartment markets

in the country. This is mainly due to:

Solid job market, supported by federal government procurement

Transient workforce that has produced a large pool of Class-A renters by choice

Would-be condo purchasers are now renting

The economic fundamentals for Washington, D.C. have remained strong. Job growth for the metro area increased by 35,400 jobs over the 12 months ending July 2008, ranking third among large metro areas. According to Delta Associates Third Quarter 2008 Report in consultation with Dr. Stephen Fuller of George Mason University, job growth is projected to total 23,900 new employees for all of 2008 and is estimated to add 29,000 and 42,500 jobs during 2009 and 2010, respectively. Additionally, Washington, D.C.’s unemployment rate in August 2008 was 4.1 percent, significantly lower than the nation’s 6.1 percent level.

According to Delta Associates Third Quarter 2008 Class “A” Report, Class “A” apartment absorption for the Washington, D.C. metro area for the 12 months ending September 2008 was 6,872 units. This was the highest absorption ever recorded for the Washington Metro and the fourth straight quarter in which annualized Class “A” absorption exceeded 5,000 units. Washington, D.C. accounted for nearly 11 percent of the total Class “A” apartment absorption nationwide boasting the highest absorption level in the nation. These numbers are particularly noteworthy in light of the fact that the number of projects has increased by over 50 percent since last year.

More importantly, Washington, D.C. boasts one of the lowest apartment vacancy rates in the nation. The average vacancy rate for all investment grade apartments in Metropolitan Washington Area compares favorably with the nation (97 percent versus 94 percent nationally). When compared to other major metropolitan areas, Washington, D.C. was 2nd

behind only the New York City in terms of apartment vacancy rates.


By: Jorge M. Rosa

In 2007, financial institutions have adopted more stringent underwriting standards as a result of the “Credit Crunch.” Lending institutions are requiring larger down payments to hedge against their risk of a potential depreciation in home value. These new standards have prevented many would be first-time home buyers from purchasing condos currently in the market. Washington, DC’s apartment market has benefited from these stricter underwriting standards and has converted would be first-time home buyers to luxury class-A apartment renters.

Overall, Montgomery County’s key indicators are positive with some exception. According to the Delta Associates’ Third Quarter 2008 Class-A Apartment report, the Bethesda/Rockville Submarket boasted the highest face rent and highest effective rent for Class A high-rise apartments in Suburban Maryland on average during 3rd quarter 2008 averaging $2,447 and $2,205, respectively. Overall vacancy for Class-A high-rise apartment communities is just over one quarter at 25.3 percent, while stabilized vacancy is a mere 1.7 percent down from 2.6 percent 12 months earlier. The high overall vacancy is due to the number of units that have been added to the market over the past 12 to 18 months. As of 3rd quarter 2008, 2,946 units are either currently marketing or are under construction and 527 units are expected to deliver within the next 36-months. This influx of new product has had a profound effect not only on overall vacancy, but on rent growth and concessions/leasing specials.

Market Indicator

Bethesda/Rockville

Submarket

Suburban Maryland

Total/Weighted Average

Number of Units Surveyed 3,258 4,177

Rent LevelsFace Rents @ September 2008 $2,447 $2,275Concessions as a % of Face Rents 9.9% 8.7%Effective Rents @ September 2008 $2,205 $2,067Effective Rents Per Square Foot @ September 2008 $2.26 $2.18

Per Annum Effective Rent Increase to September 2008

Since 1989: 4.2% 4.3%Since 9/30/2003: 4.5% 4.5%Since 9/30/2007: -6.0% -5.1%

Vacancy: September 2008

Overall: 25.3% 22.3%Stabilized: 1.7% 1.6%

Vacancy: September 2007

Overall: 2.6% 2.8%Stabilized: 2.6% 2.8%

Absorption Trends 9(2008) --

Source: Delta Associates, Third Quarter 2008 Class-A Apartment Report, Table 2.6

Since 3rd quarter 2003, rent growth for the Bethesda/Rockville High-Rise Submarket has sustained an overall growth rate of 4.5 percent annually. Over the last 12 months, rents have actually declined by at rate of -6.0 percent. The decrease in rent can be attributable to two main causes: First, high ownership expectation to meet investor returns and/or a management strategy to have an “edge” over the competition to aid in lease-up. High ownership expectations are a direct result of a failed condo product that had to be reprogrammed as a luxury rental


By: Jorge M. Rosa

community. Second, as a marketing strategy, a management company will lower rents to appeal to a similar demographic as a competing community would attract at a higher price, effectively attracting renters with the idea of “getting more for your money” at your community.

Concessions for class-A high-rise communities in the Bethesda/Rockville Submarket, at 9.9 percent – equivalent to over one month free rent, is currently higher than other high-rise submarkets in Suburban Maryland and The District. However, use of concessions is more prevalent during the lease-up period and is a common leasing strategy to stabilize a newly constructed property.

Absorption for the Bethesda/Rockville High-Rise Submarket has been quite low at nine units per month for recently delivered market-rate projects. A healthy average absorption pace for a high-rise apartment community would be between 20 and 25 units per month. During period of low supply and high demand, absorption can reach a high as 40 units per month. The absorption rate of nine units per month indicates that there is a large disconnect between supply and demand in the overall market. In speaking with Shannon Lepai of Bozzuto Management (Property Manager of Upstairs of Bethesda Row), the average leasing pace for their community was 45 units per month, much greater than the overall Bethesda/Rockville Submarket. The high absorption rate at Upstairs at Bethesda Row Apartments is attributable to the “ground zero” location as part of Bethesda Row in Downtown Bethesda, its proximity to numerous retail amenities, and its proximity to Metro and the Central Business District. Consequently, the proposed development site will share the same locational attributes and quite possibly the same absorption.

As the existing apartment pipeline is absorbed in the Bethesda/Rockville Submarket, many of the market indicators, such as current rent growth and concessions, should improve. Currently, the supply pipeline is “front heavy,” meaning that the majority of the existing pipeline is either currently marketing or is under construction. The existing pipeline outlook for the Bethesda/Rockville Submarket is as follows:

Under construction/currently marketing – 2,946 units Likely to deliver in the next 36 months – 527 units Longer-term planned/rumored – 1,951 units

According to Grant Montgomery of Delta Associates, the long-term absorption average for the Metropolitan Area is 19 units per month per project. However, absorption is currently at 15 units per month per project. Based on these current and historical absorption rates, the existing apartment pipeline that is either under construction/currently marketing or likely to deliver in the next 36 months for the Bethesda/Rockville Submarket should be substantially absorbed within one and a half to two years. Longer-term planned/rumored projects were excluded from this calculation because in many instances these planned projects are in the preliminary stages of development and, in some instances, do not actually get developed. These sites, however, show potential long-term future supply. Once fully entitled with a developer, these sites could become competition to a potential development project.

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MAPPOINT SCREEN: 11 7/8” X 8 1/2”

Rent Comparables


0 mi 0.2 0.4

!

SUBJECT

The Palisades of Bethesda

The Metropolitan

The Upstairs at Bethesda Row

The Whitney at Bethesda Theatre

The Chase at Bethesda North


By: Jorge M. Rosa

Studio Unit Type # Units S.F. $/Unit $/S.F.The Chase at Bethesda North Efficiency 16 498 $1,743 $3.50The Palisades of Bethesda Efficiency 30 464 $1,500 $3.24The Metropolitan - Renovated Efficiency 4 534 $1,683 $3.15The Whitney at Bethesda Theatre Efficiency 18 600 $1,848 $3.08The Metropolitan - Unrenovated Efficiency 11 496 $1,454 $2.93Total/Averages: 79 510 $1,631 $3.20

One Bedroom Unit Type # Units S.F. $/Unit $/S.F.The Chase at Bethesda North 1BR/1BA 48 750 $2,500 $3.33The Palisades of Bethesda 1BR/1.5BA/Penthouse 22 976 $3,165 $3.24The Upstairs at Bethesda Row 1BR/1BA 56 736 $2,243 $3.05The Metropolitan - Renovated 1BR/1BA/Jr. 14 602 $1,793 $2.98The Palisades of Bethesda 1BR/1.5BA 1 900 $2,650 $2.94The Whitney at Bethesda Theatre 1BR/1BA 129 798 $2,337 $2.93The Chase at Bethesda North 1BR/1.5BA 9 846 $2,477 $2.93The Chase at Bethesda North 1BR/1BA 15 858 $2,466 $2.87The Metropolitan - Renovated 1BR/1BA 41 785 $2,207 $2.81The Metropolitan - Unrenovated 1BR/1BA/Jr. 12 595 $1,592 $2.68The Metropolitan - Unrenovated 1BR/1BA 44 781 $1,981 $2.54The Palisades of Bethesda 1BR/1BA 130 793 $1,969 $2.48Total/Averages: 521 783 $2,220 $2.83

One Bedroom/Den/Loft Unit Type # Units S.F. $/Unit $/S.F.The Metropolitan - Unrenovated 2BR/1BA 3 855 $2,193 $2.56The Metropolitan - Renovated 2BR/1BA 4 869 $2,556 $2.94The Upstairs at Bethesda Row 1BR/1BA/Den 12 1,105 $3,315 $3.00The Upstairs at Bethesda Row 1BR/1BA/Loft 6 1,028 $3,345 $3.25Total/Averages: 25 1,019 $3,066 $3.01

Two Bedroom Unit Type # Units S.F. $/Unit $/S.F.The Whitney at Bethesda Theatre 2BR/2BA 78 1,228 $3,254 $2.65The Palisades of Bethesda 2BR/2BA 80 1,104 $2,788 $2.53The Palisades of Bethesda 2BR/2.5BA/Penthouse 26 1,687 $5,403 $3.20The Metropolitan - Unrenovated 2BR/2BA 39 1,062 $2,713 $2.55The Metropolitan - Renovated 2BR/2BA 32 1,083 $3,076 $2.84The Upstairs at Bethesda Row 2BR/2BA 35 1,046 $3,130 $2.99The Chase at Bethesda North 2BR/2BA 32 1,026 $3,067 $2.99The Chase at Bethesda North 2BR/2BA/PH 2 1,580 $4,549 $2.88Total/Averages: 324 1,162 $3,205 $2.76

Two Bedroom/Den/Loft Unit Type # Units S.F. $/Unit $/S.F.The Whitney at Bethesda Theatre 2BR/2BA/Den 18 2,046 $4,834 $2.36The Upstairs at Bethesda Row 2BR/2BA/Den 12 1,287 $3,633 $2.82The Upstairs at Bethesda Row 2BR/2BA/Loft 36 1,186 $3,559 $3.00Total/Averages: 66 1,439 $3,920 $2.72

Three Bedroom + Unit Type # Units S.F. $/Unit $/S.F.The Palisades of Bethesda 3BR/2.5BA 9 1,395 $3,625 $2.60The Palisades of Bethesda 3BR/3.5BA/Penthouse 1 2,519 $7,550 $3.00The Palisades of Bethesda 4BR/3.5BA/Penthouse 1 2,721 $8,365 $3.07The Metropolitan - Unrenovated 3BR/2BA 8 1,353 $3,635 $2.69The Metropolitan - Renovated 3BR/2BA 4 1,335 $3,980 $2.98Total/Averages: 23 1,476 $4,067 $2.75


By: Jorge M. Rosa

The Upstairs at Bethesda Row Unit Type # Units % Units S.F. Avg. Rent $/S.F.7131 Arlington Road 1BR/1BA 56 35.7% 736 $2,243 $3.05Bethesda, MD 20814 1BR/1BA/Den 12 7.6% 1,105 $3,315 $3.00(301) 654-5529 1BR/1BA/Loft 6 3.8% 1,028 $3,345 $3.25

2BR/2BA 35 22.3% 1,046 $3,130 $2.992BR/2BA/Den 12 7.6% 1,287 $3,633 $2.822BR/2BA/Loft 36 22.9% 1,186 $3,559 $3.00Total/Average: 157 100.0% 990 $2,973 $3.00

Year Built: 2008

Occupancy: 83% - In “Lease-up”

Concessions: Discounted rents on selected vacant units.

Premium Fees: Floor Fee: $10 per floor per month Street View: $30 per month Sundeck Access: $300-$400 per month Storage Units: $125-$150 per month Garage Parking: $150 per month 2nd Garage Space: $175 per month Reserved Parking: $225 per month Tandem Parking: $275 per month Month-to-Month: $250 over market

Common Area Amenties24-hour concierge service Garage parking Storage unitsBusiness center Ground level retail SundeckControlled access entry Open air terrace Valet dry cleaning serviceFitness center Resident cyber lounge Wireless high-speed internet

Unit Amenities9' ceilings Dual vanity bathroooms* Loft apartments*Balcony/patio* Full-size washer & dryer MicrowaveBreakfast bar* Garden-style soaking tub Palladian windowsBuilt-in computer nooks* Granite countertops Pantry*Ceramic tile Hardwood floors Refrigerator w/icemakerDishwasher Kitchen islands* Stainless steel appliancesDisposal Linen closets Walk-in closets*select units only


By: Jorge M. Rosa

The Whitney at Unit Type # Units % Units S.F. Rent $/S.F.Bethesda Theatre Efficiency 18 7.4% 600 $1,848 $3.087707 Wisconsin Avenue 1BR/1BA 129 53.1% 798 $2,337 $2.93Bethesda, MD 20814 2BR/2BA 78 32.1% 1,228 $3,254 $2.65(301) 907-0151 2BR/2BA/Den 18 7.4% 2,046 $4,834 $2.36

Total/Average: 243 100.0% 1,014 $2,780 $2.74

Year Built: 2003

Occupancy: 90%

Concessions: Discounted rents on selected vacant units with a 12-month lease.

Premium Fees: Floor Fee: $10 per floor per month Vaulted Ceilings: $25-$75 per month View: $15-$45 per month Fireplace: $25 per month Balcony: $25 per month Storage Unit: $35 per month Garage Parking: $125 per month 2nd Garage Space: $175 per month

Common Area Amenties24-hour concierge service Fitness center Resident loungeBusiness center Garage parking Swimming poolControlled access entry Guest suite SundeckCourtyard House sitting serviceElevator Pet car service

Unit Amenities6' windows Dishwasher MicrowaveBalcony* Disposal Pantry*Bay window* Fireplace* Picnic/bbq areaBreakfast bar* Full-size washers & dryers Refrigerator w/icemakerCeramic tile Garden-style soaking tub* Stainless-steel appliancesComputer nook* Granite countertops* Walk-in closetsCorian countertops* Linen closets Walk-in showers**select units only


By: Jorge M. Rosa

The Palisades of Bethesda Unit Type # Units % Units S.F. Rent $/S.F.4835 Cordell Avenue Efficiency 30 9.7% 464 $1,500 $3.24Bethesda, MD 20814 1BR/1BA 130 41.9% 793 $1,969 $2.48(301) 725-4723 1BR/1.5BA 1 0.3% 900 $2,650 $2.94

1BR/1.5BA/Penthouse 22 7.1% 976 $3,165 $3.242BR/2BA 80 25.8% 1,104 $2,788 $2.532BR/2BA/Den 10 3.2% 1,277 $3,375 $2.642BR/2.5BA/Penthouse 26 8.4% 1,687 $5,403 $3.203BR/2.5BA 9 2.9% 1,395 $3,625 $2.603BR/3.5BA/Penthouse 1 0.3% 2,519 $7,550 $3.004BR/3.5BA/Penthouse 1 0.3% 2,721 $8,365 $3.07Total/Average: 310 100.0% 974 $2,642 $2.71

Year Built: 2003

Occupancy: 94%

Concessions: None.

Premium Fees: Pet Fee: $35 per cat per month Floor Fee: $10 per floor per month Garage Parking: $125 per month

Common Area Amenties24-hour concierge service Fitness center Resident loungeBusiness Center Garage parking Rooftop sundeckControlled Access Entry Guest suite Sky lounge*Courtyard High-speed elevators Valet dry cleaning* Available to penthouse units only

Unit Amenities11' ceilings* Full-size washers & dryers Monthly maid service*6' windows Garden-style soaking tub* Refrigerator w/icemaker9' ceilings Granite backsplash Saflok electronic entryBalconies* Granite countertops Stainless-steel appliances*Ceramic tile Hardwood floors* Track lightingDark wood cabinetry High-speed internet access Walk-in closetsDishwasher Linen closets Walk-in showers*Fireplace* Microwave Wine racks**select units only


By: Jorge M. Rosa

The Metropolitan Unit Type # Units % Units S.F. Avg. Rent $/S.F.(Renovated Units) Efficiency 4 4.0% 534 $1,683 $3.157620 Old Georgetown Road 1BR/1BA/Jr. 14 14.1% 602 $1,793 $2.98Bethesda, MD 20814 1BR/1BA 41 41.4% 785 $2,207 $2.81(301) 652-1555 2BR/1BA 4 4.0% 869 $2,556 $2.94

2BR/2BA 32 32.3% 1,083 $3,076 $2.843BR/2BA 4 4.0% 1,335 $3,980 $2.98Total/Average: 99 100.0% 871 $2,494 $2.86

Unrenovated Units Unit Type # Units % Units S.F. Avg. Rent $/S.F.Efficiency 11 9.4% 496 $1,454 $2.931BR/1BA/Jr. 12 10.3% 595 $1,592 $2.681BR/1BA 44 37.6% 781 $1,981 $2.542BR/1BA 3 2.6% 855 $2,193 $2.562BR/2BA 39 33.3% 1,062 $2,713 $2.553BR/2BA 8 6.8% 1,353 $3,635 $2.69Total/Average: 117 100.0% 870 $2,254 $2.59

Blended Unit Mix Total/Averages: 216 100.0% 870 $2,364 $2.72

Year Built: 1997

Occupancy: 96%

Concessions: None.

Premium Fees: Floor Fee: $10 per floor per month Garage Parking: $150 per month

Common Area AmentiesBusiness center Garage parking Storage roomsConcierge service Party room SundeckControlled access entry Resident lounge Swimming poolFitness center Sauna Valet dry cleaning

Unit AmenitiesBalcony* Formica countertops Wall-to-wall carpetingBreakfast bar* Linen closet Washers & dryersCeramic tile bathroom Microwave* White cabinetryCrown molding* Pantry White-on-white appliancesDishwasher Refrigerator w/icemakerDisposal Track lighting**select units only


By: Jorge M. Rosa

The Chase at Bethesda North Unit Type # Units % Units S.F. Rent $/S.F.4903 Edgemoor Lane Efficiency 16 13.1% 498 $1,743 $3.50Bethesda, MD 20814 1BR/1BA 48 39.3% 750 $2,500 $3.33(301) 654-2502 1BR/1BA 15 12.3% 858 $2,466 $2.87

1BR/1.5BA 9 7.4% 846 $2,477 $2.932BR/2BA 32 26.2% 1,026 $3,067 $2.992BR/2BA/PH 2 1.6% 1,580 $4,549 $2.88Total/Average: 122 100.0% 823 $2,577 $3.13

Year Built: 1989

Occupancy: 94%

Concessions: Discounted rents on selected units.

Premium Fees: Pet Fee: $35 per pet per month Hardwood Floors: $100 per month Storage Units: $75 per month Garage Parking: $120 per month

Common Area AmentiesFitness center Sundeck Resident loungeSwimming pool Concierge service Controlled access entry

Unit Amenities6' windows Granite countertops Track lightingBalcony or patio Hardwood floors* Walk-in closetsBreakfast bars Kitchen pantry Wall-to-wall carpeting*Ceramic tile kitchens Linen closets Washers & dryers - stackableFireplaces* Stainless steel appliances*select units only


By: Jorge M. Rosa

Retail Rental Market Retail Market Overview

Lease Comparables


By: Jorge M. Rosa

The Retail Market

The Washington, D.C. Retail Market’s overall market indicators remain quite strong. Though vacancy rates were at 4.1 percent for 2nd

quarter, vacancy rates have increased by 20 basis points from 3.9 percent in 1st quarter 2008 and 80 basis points over the last 12 months ending 2nd quarter 2008. However, net absorption was positive with 28,297 square feet being absorbed during 2nd quarter 2008, rebounding from a negative absorption of 11,132 square feet in 1st quarter 2008.

Additionally, rental rates have increased 3.1 percent since 1st quarter 2008, but have decreased overall by 5.42 percent over the past 12 months ending 2nd quarter 2008. Rental rates were $25.75 per square foot during 1st quarter 2008, $26.56 per square foot during 2nd quarter 2008, but were $28.00 per square foot at the end of 3rd quarter 2007.

The Bethesda/Chevy Chase Submarket has an overall vacancy rate of 4.6 percent for 2nd

quarter 2008 with just over 310,000 square feet of retail space in the pipeline. New product that is being delivered in the market is pre-leased at 98.8 percent. Net absorption for the submarket is just over 6,100 square feet per month. Additionally, rents overall were at $40.68 per square foot for 2nd quarter 2008.

Total Retail Market StatisticsExisting Inventory Vacancy YTD Net YTD Under Quoted

Market # Blds Total GLA Direct SF Total SF Vac % Absorption Deliveries Const SF RatesBethesda/Chevy Chase 218 2,629,987 106,400 121,404 4.6% 6,152 68,338 313,800 $40.68Source: CoStar Property

Construction ActivityUnder Construction Inventory Average Bldg Size

Market # Bldgs Total GLA Preleased SF Preleased % All Existing U/CBethesda/Chevy Chase 3 313,800 310,000 98.8% 12,064 104,600Source: CoStar Property

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Source: CoStar Washington, D.C. Retail Market 2nd Quarter 2008 Report


By: Jorge M. Rosa

More specifically, Bethesda has statistically outperformed the Metropolitan Washington Area Retail Market as a whole. Bethesda boasts a vacancy rate of only 2.60 percent which compares favorably with Washington, D.C.’s 4.1 percent. Additionally, rental rates in Bethesda are more that $16.30 per square foot higher than the overall Metropolitan Washington Area at $42.88 per square foot. According to Barry Carty of Federal Realty Investment Trust (FRIT), Bethesda Row has leased retail space ranging from $50 to $60 for NNN leases and The Shoppes at Bethesda on Hampden Lane has leased retails space ranging from $30 to $65 per square foot for NNN leases.

David Dochter with Cushman & Wakefield stated that close-in urban markets will not be greatly affected by the loss of consumer confidence and current economic conditions. He expects that rental rates, absorption, and vacancy rates will remain steady in urban locations, such as Bethesda, while suburban location will fair less favorably as a result of the economic crisis. Bethesda, an established urban submarket, will fair very well during these difficult economic times due to the existing office supply and existing residential product, as well as proposed product, surrounding Bethesda Row.

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References


By: Jorge M. Rosa

References

U.S. Census Bureau www.census.gov

U.S. Department of Labor – Bureau of Labor Statistics www.bls.gov

Claritas, Inc., Claritas 2008: Demographic Updates: Pop Facts 1-3-5 radius of 4907 Hampden Lane, Bethesda, MD 20814

The Maryland-National Capital Park and Planning Commission www.mncppc.org

Maryland Department of Business & Economic Development www.choosemaryland.com

Montgomery County Maryland www.montgomerycountymd.gov

National Institutes of Health www.nih.gov

National Naval Medical Center www.bethesda.med.navy.mil

Bethesda Urban Partnership, Inc. www.bethesda.org

Washington Metropolitan Area Transit Authority www.wmata.com

Bethesda Row www.bethesdarow.com

Coalition for the Capital Crescent Trail www.cctrail.org

The Collection at Chevy Chase www.thecollectionatchevychase.com

Westfield Shopping Centers www.westfield.com

White Flint Mall www.shopwhiteflint.com


By: Jorge M. Rosa

McCaffery Interests www.mccafferyinterests.com

Bethesda Row Arts www.bethesdarowarts.org

Senate Square Apartments – Washington, D.C. www.senatesquaretowers.com

Killian, Erin (March 4, 2008), Clark, Balfour Beatty win $641M Naval Medical Center Contract, The Washington Business Journal, Washington, D.C.

A Collaborative Publication (September 30, 2008), Third Quarter 2008 Report: Mid-Atlantic Class A Apartment Market & Mid-Atlantic Condo Market, Delta Associates, Washington, D.C.

A Collaborative Publication (June 2008), Mid-Year 2008: Washington, D.C. Retail Market Overview, The CoStar Group, Bethesda, MD

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