Denver Apartments

A 174-unit, LEED®-Gold, Mixed-Use, Multi-Family Apartment Building

Denver, CO 80211 September 2013

PROPOSED LOAN TERMS Denver’s Cherry Creek Neighborhood

A to-be-formed single-purpose entity Managing Member: Apartment Community Development, LLC Borrower Co-Managing Member : Denver Apartments, LLC (an open-ended Fund formed in 2004 with a gross asset value of $1 billion)

Guarantors Apartment Community Development, LLC Completion Guaranty provided by Guarantors. Requesting quotes for the Partial Repayment Guaranty being provided by: Guarantee - Guarantors only - Guarantors and Denver Apartments, LLC. Commitment Date October 7, 2013 Up to 75 percent loan-to-cost Loan-to-Cost

Up to $44,000,000 Loan Amount

First, for the recapitalization of the borrower after the acquisition of the land in an amount of 75 percent loan to cost. Second, for the construction Loan Purpose of the improvements. Vertical construction shall commence on or about December 2013 - January 2014.

December 1st, 2013 Loan Closing

Construction Substantial Completion: 20 months Period Either a: 1. Five-year total term (3+1+1) Term 2. Twelve- (12) year construction/perm loan with maximum interest only flexibility.

Best rate available. Interest Rate

Most competitive percentage possible. Lender Fees

Prepayment No pre-payment penalty at any time Penalty

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1 Project Summary 4 1.1 Overview 4 1.2 Project Schedule 7 1.3 Building Program 7 2 Financials 10 2.1 Capital Structure 10 2.2 Project Income and Expenses 13 2.3 Project Budget 15 3 Market 17 3.1 Denver Metro 17 3.2 Downtown Denver 18 3.3 Location 19 3.4 Direct Competition 22 4 Project Description 24 4.1 Overview 24 4.2 Sustainability & LEED 26 4.3 Entitlements 28 5 Risks 30 5.1 Development 30 5.2 Environmental 31 6 Team 32 6.1 Project Team 32 6.2 Apartment Community Development, LLC 33

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Project Summary

1.1 Overview

Apartment Community Development, LLC, the region’s top developer of LEED®-certified multi- family projects, proposes a new development in Cherry Creek North, one of Denver’s premier retail and residential districts. Apartment Community Development (“ACD”) has closed on the site and received zoning which allows for the planned 174-unit, 12-story, mixed-use, multi-family LEED®-Gold building (the "Project").

Cherry Creek North

Following is an overview of the project’s capitalization and summary:

Equity: 95 percent of the Project’s required equity will be invested by Denver Apartments, LLC 5 percent invested by Apartment Community Development.

Leverage: Anticipated loan-to-cost ratio of 75 percent. Debt coverage ratio in excess of 1.5x percent upon stabilization, which is defined as 94 percent occupancy, anticipated within 24 months of the Project’s Certificate of Occupancy.

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Table 1 - Project Summary Development Summary: Cherry Creek Units: 174 Average Unit Size: 930 Average Rent (2015): $2,131 Average Rent per Sq.Ft. (2015): $2.29 Return on Cost (2016): 7.4% Cash-on-Cash Return (2016): 17.5% Investor Leveraged IRR 25.3% Investor Un-Leveraged IRR 11.2%

Cost Summary: Chery Creek Land Cost as a % of Total Cost 15% Land Cost Per Unit $43,880 Land Cost Per SF $296 Total Cost/Net Leasable Sq. Ft. $310 Hard Cost/Net Leasable Sq. Ft. $204 Hard Cost/Gross Sq. Ft. $114 Hard Cost Per Unit $196,208 Cost Per Unit: $297,230 Projected Returns: 23% IRR

Project Cost: Total Project costs will be approximately $51.7 million The Project’s aggregate cost per residential unit is approximately $297,000.

Development Team ACD’s high-quality, budget-sensitive approach to multi-family LEED®- certified buildings explains how the company emerged from the Great Recession as one of Denver’s best-respected developers. As testament to ACD’s performance, the Project marks the third time that a Denver Apartments investment entity has invested in an ACD development.

Location: The Site is in one of the most desired neighborhoods in the Rocky Mountains, and one of the most prestigious addresses in Denver. Cherry Creek North is arguably the premier shopping and dining neighborhood between Chicago and the West Coast, attracting national concept restaurants from the world-renowned Dr. Andrew Weil’s just-opened True Foods to timeless and established luxury retailers like Hermes. High barriers to entry due to zoning and neighbor resistance have meant virtually no new residential rental development in Cherry Creek in the past twenty years. The Cherry Creek North area is demonstrably different than Downtown Denver, and pent-up demand for the location as well as the Project’s finishes and amenities will boost absorption, retention and rental rates.

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Target Market: With its ready access to shopping, top-tier restaurants, the Country Club and golf course as well as its central location within Denver, the coveted address will, ACD believes, appeal to three primary market segments:

1. High-Income Cherry Creek Employees – Given the recent new-construction and renovation of high-quality, high-priced office buildings in Cherry Creek, there are increasing numbers of high-income in-migrants that have come to work in these oil and gas, legal, wealth management, hedge fund and other offices. These highly-educated employees are very often coming from highly-walkable cities like San Francisco, New York, Boston and Chicago. They are drawn to Cherry Creek for its walkability and high-quality shopping and public spaces. The Project will fit naturally for this highly-selective demographic.

2. Mountain Pied-à-Terre - ACD expects that this Cherry Creek North location will attract a substantial number of high-net-worth, full- and part-time mountain dwellers who wish to have a pied-à-terre in a shopping and dining district, more vibrant and comfortable than downtown.

3. Younger, Fashion-Conscious – As Cherry Creek is the center of fashion for the Rocky Mountain region; ACD anticipates that younger residents will be drawn to the property for its adjacency to Cherry Creek’s fashion and retail scene. These are residents who will gain identity from this adjacency.

Rental Rates & Unit Layout: Cherry Creek North is a classic example of demand outstripping supply. The Cherry Creek neighborhood, long one of Denver’s most sought-after addresses, nonetheless has had a shortage of high-rise apartment units. Despite not being located in Cherry Creek North, occupancy is historically extremely tight for high-rise units at the Seasons II. As a result, current Cherry Creek North rental rates are high and vacancy low. The Seasons II in Cherry Creek East is a prime example: built in 2009, the property has enjoyed low vacancy rates and high rents despite challenging unit layouts. And despite an average unit size of nearly 1,200 and a location that is inferior to the Project’s, the Seasons II commands over $2.20 per square foot rents. The Project’s projected rental rates of $2,130, or $2.29 per square foot, appears reasonable relative to the market considering:

Average Unit Size - 930 square feet, a quarter smaller than the Seasons II Location - Within the walkable, “village” feel of Cherry Creek North ACD Experience – ACD as a manager has achieved significant premiums in its managed properties and has developed a recognized skill at driving revenues by creating community.

Additionally, ACD has a proven track record of understanding a market, designing units and

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amenities for that market and exceeding market rents with superlative self-management. ACD’s LEED®-Gold multifamily project on the edge of Denver’s Central Business District, is exceeding all projected performance metrics. The property is achieving $2.11 per square foot (inclusive of parking) net effective rents. The project, which received its TCO in December and began move- ins on December 26th, 2012, is currently 60 percent leased, only four months after delivery of the Certificate of Occupancy. Despite the fact that location is generally considered an “emerging” neighborhood and the competitive properties have arguably better-located properties, ACD has been able to beat the effective net rent (inclusive of parking) of its competitive set of $1.86 per-square-foot rents.

The prior project’s success is achieved in large part by understanding and delivering the market’s goals and aspirations.

1.2 Project Schedule

The Project's Development Team anticipates a 20-month construction period with early occupancy on the lower floors starting in summer 2015.

Table 2: Project Schedule

Pre-Development & Development Schedule Land Closing April 2013 Loan Commitment August 2013 100 Percent Construction Documents October 2013 Construction Commencement December 2013 Pre-Leasing Activities April 2015 Occupancy July 2015 Construction Completion/Certificate of Occupancy December 2015

1.3 Building Program

Unit Size: The Project’s 174 dwelling units range in size from 514 square feet to 1,548 square feet. The average unit size is 930 square feet. Almost all dwelling units will have outdoor balcony space.

Retail/Commercial: The first floor will contain approximately 4,000 square feet of commercial space, allowing for a prominent restaurant that meshes well with the residential lobby and will become a residential leasing asset as well as an identity “icon” for the building. A high- end restaurant is the targeted occupant, and the building

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design will include requisite restaurant infrastructure, including a grease trap, grease duct, 600 amp service, heating and cooling ready for distribution. The proforma includes $70 per foot for landlord-provided tenant improvements. The expected rent is $40 per foot which is likely low given recent comps such as True Foods (starting at $33 and rising to $38 with $100 of TI per foot) and Del Frisco’s on First and St. Paul which higher still.

Building Amenities: An energized, high-functioning residential lobby that feels like a gathering place for the Cherry Creek North neighborhood; first-floor bike shop/Velo Room for resident use and a set of tools and air pump for neighborhood use on the exterior of the building; exercise room; spectacular rooftop deck and community kitchen.

® “LEED : Sustainability, a guiding principal of ACD and Denver Apartments, LLC., has become a powerful marketing advantage. The Project will be Figure 1 - Community kitchen certified as LEED Gold. This will be ACD’s sixth LEED-certified project. Beyond the certification, though, is ACD’s intelligent use of sustainability as a means of helping residents to reach their aspirations.

“Whether you’re a tree-hugger, dollar-hugger or health-hugger, LEED has something for you,” is a mantra of ACD’s marketing of LEED and sustainability. ACD Figure 2 - Rooftop fitness has become expert in using LEED and sustainability to engage the prospective resident in what the company believes are a set of aspirational, ecumenical marketing benefits that sustainability can afford.

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Table 3: Project Summary

Cherry Creek North Apartments - Summary Information

Project Summary Number of Residential Units 174 Total Gross Square Footage 281,325 Average Unit Size 930 % Studios 20% % 1 Bed/1 Bath 56% % 2 Bed/2 Bath 22% Land (Acres) 0.59 Land (SF) 25,704 Density of Development (Units/Acre) 295 Total Parking Spaces 219 Staff Parking 5 Retail Parking 10 Retail at Grade 4,000

Development Information Base Rent Yield on Cost (NOI/Total Project Cost) 10% Unleveraged IRR 11% Leveraged IRR 25% Project Budget $51,717,998 Finished Project Cost/Unit $297,230 Completion Period (Total Months of Construction) 20

Project Captilzation Debt $38,788,498 Equity $12,929,499 Total $51,717,998 Interest Rate - Interest Rate Only 4.00% Interest Rate - Amortized, 25 Years 4.50%

Operating Information Stabilized Net Operating Income (2017) $3,772,183 Average Monthly Rent Per Residential Unit $2,131 Average Monthly Rent Per Sq. Ft. (2015) $2.29 Annual Operating Expenses Per Residential Unit (2017) $7,119 Lease-up Velocity (units per month) 11 Lease-up Period to Stabilization (months) 16 Retail Rent Per Gross Square Foot $40

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2 Financials

2.1 Capital Structure

Equity: The Project’s primary equity investor is Denver Apartments, LLC, an open-ended, commingled real estate fund established in 2004 as an “enhanced” real estate fund. The fund invests in a nationally diversified portfolio of stabilized, income-producing assets, plus value- added and development projects. Denver Apartments will contribute approximately 95 percent of the project equity to the Project. The fund’s objectives include investing is a well-diversified real estate portfolio of office, industrial, retail and multi-family assets; to pursue an “enhanced” investment strategy that will combine the income generating attributes of stabilized assets with higher, risk adjusted returns available from value added and development opportunities. In 2Q, the fund had a gross asset value of $1 billion across 51 investments and 15 markets.

The remaining equity will be contributed by an entity owned by Apartment Community Development.

Percent of Percent of Sources of Cash Amount Budget Equity ACD $671,040 1% 5% Denver Apt's $12,258,459 24% 95% Cash Equity $12,929,499 100% Loan $38,788,498 75% Total Capitalization $51,717,998 100%

Debt: Project debt is assumed to represent 75 percent loan-to-cost, with the equity contributed Denver Apartments and ACD. The debt service coverage ratio is anticipated to be in excess of 1.5x upon stabilization in 2017. The partnership may be interested in a log-term (two-year /ten-

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year), fixed-rate construction/mini-perm loan that is interest-only for the two years of construction and converts, without fee, to a ten-year permanent loan.

Table 5: Debt Service Coverage Ratio.

Amortized Construction Loan Interest-Only 30 Year Debt Coverage Ratio >200% 163% Loan-to-Cost 75% 75% Loan 38,788,498 38,788,498 Interest Rate 4.00% 4.50% Yearly Payment 1,551,540 2,358,427

Funding Schedule: The partnership has invested over $8,000,000 in land acquisition and predevelopment equity. Upon closing of the construction loan in late August 2013, 75 percent of the $8MM invested cash will be returned to the partnership. From the closing date forward until all of the roughly $13MM in equity is invested into the project, no loan funds will be drawn. At closing the partnership will capitalize the loan interest that will be due on the loan between the loan closing and that point at which all equity proceeds have been invested. Demolition is expected in December 2013. Vertical construction is anticipated in the beginning of 2014.

Hold Period: Denver Apartments, the Co-Managing Member, will decide when to sell the Project asset. The intention of the Co-Managing Member is to keep the development as a long- term asset.

Returns: While the project is anticipated to be a long-term hold, for valuation purposes the pro forma anticipates a sale at year five, which yields a 23-percent leveraged IRR or a 10-percent unleveraged IRR.

Table 6: Yield Analysis

Yield Analysis 2014 2015 2016 2017 2018 Return on Cost 7.1% 7.3% 7.4% Cash-on-Cash Yield $12,929,499 N/A 16.6% 17.2% 229.3% Debt Coverage Ratio (Amortizing Loan) 100% 157% 160% 163%

Table 7: IRR Calculation

IRR Calculation Pre-Development Construction Lease-Up S t a b i l i z e d O p e r a t i o n s 2012 2013 2014 2015 2016 2017 Cash Investment (12,929,499) Cash Flow from Operations 750,983 2,144,182 2,220,643 2,300,958 Sale in Year 2017 with 2018 Income @ Cap Rate of: 6.00% $66,134,547 Repayment of Debt (38,788,498) Cash Flow (12,929,499) 0 750,983 2,144,182 2,220,643 29,647,006 Investor Leveraged IRR 23% Investor Un-Leveraged IRR 10%

Table 8: Cash Flow After Debt Service

Cash Flow After Debt Service 2015 2016 2017 2018 Net Income Prior to Debt Service 1,526,523 3,695,722 3,772,183 3,852,498 Lease-Up Reserve 776,000 - - - Interest-Only through 2017; Amortizing Thereafter (1,551,540) (1,551,540) (1,551,540) (1,551,540) Cash Flow after Debt Service 750,983 2,144,182 2,220,643 2,300,958

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Table 9: Capital Budget Summary

Cherry Creek Arts Festival

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2.2 Project Income and Expenses

ACD likes to explain that its projects are attractive to “Tree Huggers, Dollar Huggers and Health Huggers” alike. Tree huggers are attracted by the building’s sustainability features. Dollar huggers as well as tree huggers value the building’s LEED®-Gold certification as it cuts energy bills by at least 50 percent compared to code-built multi-family buildings, an annual savings of up to $700 to $1,000. And health huggers rent in the building due to its high indoor air quality. Careful selection of materials and the handling of materials and systems during construction result in a much improved indoor air quality which appeals to those suffering from allergies, asthma, and other environmental sensitivities.

ACD’s recent projects have been able to produce a premium of approximately five to ten percent compared to the competitive properties. Though not statistically significant, at least part of this premium may be due to the marketing of LEED.

Competitive Rents: The average unit size of the comparable first-class apartments is in excess of 1,000 square feet. The monthly weighted market average rent for such properties is in the range of $2,300 per unit per month, or in the range of $2.20 per month per square foot. See more in Section 3.4 – Direct Competitors.

Revenue: The projected stabilized Gross Revenues are $5.2 million in 2016, the second year of operations.

Residential Rental Income is projected to account for 86 percent of the project’s gross income; retail (6%), parking (7%) and storage/other income (3%) account for the remainder.

Commercial Space: The 4,000 square feet of commercial space is scheduled to lease at an annual rate of $40 per square foot with a Tenant Improvement budget of $70 per foot.

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Table 10: Rental Assumptions

Net Living Area 2015 Rental Assumptions Unit Type/Description # of Units % of Total Net Sq Ft Total Sq Ft Rent/Unit Rent/Sq Ft Monthly Rent Yearly Rent

Studio 38 20% 591 22,458 $1,500 $2.54 $57,000 $684,000 One Bedroom/One Bath 97 56% 901 87,397 $2,150 $2.39 $208,550 $2,502,600 Two Bedroom/Two Bath 39 22% 1,331 51,909 $2,700 $2.03 $105,300 $1,263,600 Totals and Averages 174 100% 930 161,764 $2,131 $2.29 $370,850 $4,450,200

Parking: The Project will have 219 parking spaces. Parking spaces are projected to lease for $140 per space per month. This parking revenue will generate approximately $350,000 annually, representing seven percent of the projected gross revenue. Parking for the retail will be effected by valet parking off-site at one of the nearby parking structures. No agreement currently exists for this off-site parking.

Other Income: Other projected income includes storage space rent, application fees, late payment fees, pet rent, and utility reimbursements.

Project Operational Expenses: The following expenses have been generated by the actual operations of the comparable set of properties that most resemble the Project.

Table 11: Operating Expense Summary

Operating Expenses Management Fee (3.0%) 93,542 3% 147,234 3% 150,325 3% 153,482 3% General and Administrative (Excl. Labor) 54,000 2% 55,080 1% 56,182 1% 57,305 1% Payroll (Manager, Leasing, Maintanance) 579,850 21% 537,447 11% 548,196 11% 559,160 11% Utilities 48,000 2% 48,960 1% 49,939 1% 50,938 1% Maintenance 66,000 2% 67,320 1% 68,666 1% 70,040 1% Taxes 208,800 8% 212,976 4% 217,236 4% 221,580 4% Insurance 30,450 1% 31,059 1% 31,680 1% 32,314 1% Marketing Department 108,000 4% 66,096 1% 69,600 1% 70,992 1% Reserve 45,000 2% 45,900 1% 46,818 1% 47,754 1% Total Operating Expenses 1,233,641 100% 1,212,072 100% 1,238,641 100% 1,263,565 100% Expenses per Unit 7,090 6,966 7,119 7,262 2.3 Project Budget

As developer of the two recently completed multi-family projects, ACD benefits from the most up-to-date development and construction cost data in the region. Further, no other developer in the Rocky Mountain region has more experience in the design, development and construction of LEED® multi-family projects. This allows for highly-accurate construction and development cost estimating for the Project.

As a developer, ACD has never exceeded its final development budget. The Project’s total development cost estimate of $296,000 per unit (inclusive of the land and commercial space) is emblematic of the efficiency that the company brings to urban-core, LEED®-certified multi-family projects where total development costs typically exceed $330,000 per unit for non-LEED® multi- family projects.

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Table 12: Project Budget Summary

PROJECT BUDGET as of 6-18-13 Units 174 GSF 297,230 % Project $Per Gross BUDGET Budget Square Foot Pre-Development Acquisition and closing costs 7,725,135.00 14.94% $25.99 Development costs 2,877,908.95 5.56% $9.68 Finance Costs 2,370,166.67 4.58% $7.97 Design Fees 1,479,000.00 2.86% $4.98 Plan review and permits 230,790.00 0.45% $0.78 Tap fees and impact 594,997.22 1.15% $2.00 Marketing & Management 390,000.00 0.75% $1.31 Construction Hard Costs 34,300,000.00 66.32% $115.40 Total Project Costs 49,967,997.83 96.62% $168.11 Owner Contingency 150,000.00 0.29% $0.50 Developer Contingency 1,600,000.00 3.09% $5.38 TOTAL CONSTRUCTION & PREDEVELOPEMENT 51,717,997.83

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3 Market

3.1 Denver Metro

The Denver Metro area has one of the most robust metropolitan economies in North America and anticipates significant growth in jobs and population over the next ten years. Nearly all of the key metrics used to measure a healthy economy are positive: increasing job growth; in-migration of the young and highly-educated; and an active civic and government culture that encourages investment in public works and transportation. The following is a summary of statistics culled by MetroDenver.org.

Population: nearly 2.9 people call Metro Denver home, and the area has a growth rate that has outpaced the national rate every decade since the 1930s. By 2020, Metro Denver’s population is anticipated to increase by 10% to more than 3.2 million. By 2035, the population Civic Center Park is expected to grow to 4.2 million

In-migration: much of Metro Denver’s population growth is due to the in-migration of highly educated workers from other states. In 2015, Metro Denver is estimated to have net-migration of 15,400 residents. Along with California, Texas, Arizona and Florida, leads the nation in in-migration.

Education: Colorado has one of the nation’s most educated workforces, ranking second among the 50 states (behind Massachusetts) for percentage of residents – 37% - with a bachelor’s degree or higher.

Infrastructure Investment: metro-area voters approbed the Regional Transportation District’s (RTD) FasTracks mass transit expansion that will connect every corner of the region with 122 miles of light rail, commuter rail, and bus rapid transit by 2016. The project leveraged over one billion in federal funds.

Multi-family rental: the following is a summary of market statistics from Denver’s leading apartment appraisal group, Apartment Appraisers and Consultants, from their Fourth Quarter 2012 Statistic/Trends Summary for Metropolitan Denver 50+ unit apartment properties.

Vacancy: Metropolitan Denver’s average vacancy rate for stabilized communities having 50 units or more settled at 4.97 percent. The rate remains 42 basis points below the year-ago fourth quarter rate of 5.40 percent.

Rents: Last quarter the metro region posted a record increase; not much movement was seen between last quarter and this, although overall the rent is $52 psf or 5.6% higher than one year ago.

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New Construction: Throughout the Metro Area, five new properties either broke ground, or were on the verge of starting construction, with a total of 771 units. In the CBD, the second phase of the 134-unit Manhattan started construction, and ACD’s 231- unit project broke ground in April. In other areas of the Metro Area, Apartments at Observatory Park near the closed on its construction loan, and is vacating the existing buildings before demolition begins. The bulk of these units will not be completed until 2013. Including tax credit projects, the properties currently under construction and recently completed are projected to deliver a total of 1,600 units during 2011 and 800 units during 2012. Typically, the Metro Area has seen annual increases in supply of between 4,000 (2013) units and 9,000 units (2014). 3.2 Downtown Denver

Downtown Denver has become one of the nation’s top models of successful downtown redevelopment. Denver, along with Seattle, San Francisco and Washington, DC ranked in the top ten of the Urban Land Institute’s (“ULI”) 2010 Emerging Trends list.

With a downtown population (1.5 mile radius) of 63,000, Downtown Denver has surpassed the “magic” residential population count of 50,000, which represents a population density which, like Portland, Boston, Seattle or Chicago, creates vibrant, liveable, walk-able downtowns.

Figure 1 - Downtown Denver Population Growth

Employment base: Denver’s downtown maintains approximately 116,000 daytime employees. The downtown office market vacancy is currently decreasing, and, according to Downtown Denver, is at 12.3 percent. Rental rates continue to rise, and the year over year direct average rate is up seven percent.

Cultural Facilities: Downtown Denver is a cultural center of the Rocky Mountain West, showcasing: The largest performing arts facility west of New York’s Lincoln Center, the 5,000-seat, multi-stage Center for Performing Arts;

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The $110 million Daniel Libeskind-designed ; The Michael Graves-designed Central Library, one of the top U.S. libraries; , home of the baseball team; and the Pepsi Center, home to Denver’s professional basketball and hockey teams.

Prominent Downtown Denver amenities include: Colorado History Museum Cherry Creek bike path The “flagship” Colorado REI store Paramount Theater Blue Bear outside Convention Center Denver Pavilions, with 52 shops, restaurants and a 15-screen movie theater Historic Larimer Square Tabor Center The Auraria Higher Education Center, the largest urban college campus in the country, serving approximately 40,000 students per day.

Pepsi Center

3.3 Location

The Project is located in one of Denver’s most desirable neighborhoods. Just a few miles from Downtown Denver, the area is the premier shopping destination between Chicago and San Francisco. The sixteen-block neighborhood boasts over 1.3 million square feet of office space, 1.1 million square feet of retail, two hotels, and an average market value of its residential units of $1.3 million. The

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neighborhood recently wrapped up “The New North” project, an $18M streetscape renovation project that has won several national design awards, generated positive economic returns for local businesses, and attracted international brands like Lululemon and Kate Spade.1

Shopping & Restaurants: The area boasts over 400 businesses, of which 74% are locally- owned and operates. Luxury brands such as Hermes, Kate Spade and Eileen Fisher have chosen the area for their flagship stores. Crate and Barrel, Room and Board, and Design Within Reach all have a retail presence within the neighborhood.

The area is also home to some of the City’s most beloved and best restaurants, including the Cherry Cricket and the just-opened True Food Kitchen, founded by the internationally-acclaimed and Harvard-educated holistic health expert, Dr. Weil.

Food & Groceries: A Whole Foods market anchors the southwest neighborhood boundary, and a Safeway is less than a block away from the Site itself.

Events: the area hosts a number of events throughout the year, including: The Cherry Creek Arts Festival draws over 350,000 guests (July) The Cherry Creek North Sidewalk Sale (July) Cherry Creek North Food & Wine (August) Fashion Night Out, a sparkling event that concluded with an outdoor, world-class fashion show on an 88-foot runway down the newly refurbished Fillmore Plaza (September)

Employment & Tourism: as the number one visitor’s shopping destination in all of Colorado, the area has strong economic fundamentals, with: Over 6,000 employees earning $517 million in salaries and wages $282 million in retail sales in 2011 $8 million in sales tax revenue for the City and County of Denver A doubling of out-of-state visitation in the last five years 80 percent of visitors are college-educated Visitors come, on average, nine times per month

Transit: Easy access to the 22-mile Bike path Two B-cycle locations Bus lines A ten minute drive (3 miles) to Downtown Denver A ten minute bike ride to Downtown Denver along the bike path A thirty-five minute drive to Denver International Airport

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3.4 Direct Competition

The following matrix is representative of the competitive set of properties for the project. All are either located within the area, or are properties under construction in less desirable locations.

The average monthly rent of the existing, comparable properties is approximately $2,300 or $2.20 per foot.

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Land Comparisons: Recent land sales in Downtown Denver have exceeded $50,000 per unit. At $41,000 per door, the location has a lower comparable basis than many of its competitors and offers a premium location. ACD’s previous projects in Downtown Denver have ranged from $30-35,000 per unit. Below is an estimate of recent land sales in the area. As previously noted, the area has seen little to no new construction due to zoning restrictions and neighborhood resistance.

Table 13: Land Comparables

Light Rail

Rocky Mountains Denver Capitol

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4 Project Description 4.1 Overview

The Project will provide 174 rental units in a twelve-story structure. The first floor of the building will contain approximately 5,000 square feet of commercial retail space.

The lobby will take on the character of an urban hotel lobby and possibly have an open connection to the upscale restaurant ACD hopes to locate in the retail space. An early search for a restaurant has identified several prospective tenants which will be symbiotic both to the vibe of the lobby and to the marketing message of the Project.

And rather than hiding management staff from tenants, as is typical in apartment rental lobbies, the management will staff the front desk like a hotel, providing the air of a concierge service. The lobby will thus accommodate telecommuters, entrepreneurs, and enable the “see and be seen” vibe desired by many urban dwellers. ACD has seen great success with this model; its most recent project is beating its projections by nearly 10% relative to absorption.

Table 12: Project Goals

Key Project Goals Returns ~23-percent Internal Rate of Return Transit A walkable project in the heart of Cherry Creek Sustainability LEED®-Gold Certified Reducing energy demand by at least 50 percent compared to like-sized multi-family buildings, which potentially increases investor returns and speeds unit absorption and Energy resident retention. Because of its energy efficiency, the Project may also be eligible for federal tax credits supporting energy efficiency and renewable energy. Continuing successful sustainability programs such as ACD’s Solar Renter model and Innovation initiating ground-breaking new programs such as the One Planet Living pioneering Eco Concierge program designed to instill and promote a sense of community.

A unit mix reflective of current and forecast market demand will work towards faster absorption and lower turnover:

The Development Team has kept many of the most popular design elements from its recent projects, and added certain design and finish elements, including kitchen islands, European-

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styled kitchens, spacious closets and ceiling heights in excess of nine feet. Befitting this location and the long-term ownership goal, the finish level of this project will be noticeably higher than any of ACD’s prior projects.

Table13: Project Amenities, Design & Finishes

Selected Amenities, Design & Finish Items LEED®-Gold LEED®-Gold, with an emphasis on energy conservation and resource efficiency. Certification To create tenant participation in sustainability, it is the Development Team’s goal to Energy Feedback create a feedback loop to alert residents to their energy usage. Solar/Renewables Solar panels will produce a portion of the Project’s electricity. To the greatest extent commercially reasonable, unit and common space finishes will Environmental be environmentally-sensitive, including: European-styled, no-added- Messaging/Material urea/formaldehyde kitchen cabinets; counter tops with recycled content; and FSC- Selections certified wood products. Variety A range of unit sizes to accommodate market desires and financial capacities. Fitness Center A large fitness center with high-quality commercial equipment Hybrid vehicles and/or one or more shared-use vehicles may be available for resident Alternative Means use, allowing some two-car households to give up ownership of an auto, and freeing of Transportation some one-person households from auto ownership. Additionally, ACD is exploring various transportation demand management options. A large, vibrant and active lobby area staffed by concierge-style management Sense of Place personnel, a beverage service, a computer bar, and varied messages of sustainability help create a sense of community.

4.2 Sustainability & LEED

Leadership in Energy and Environmental Design (“LEED®”) is a third-party green building rating system developed in 2000 by the non-profit U.S. Green Building Council (“USGBC”) and now governed by the non-profit Green Building Certification Institute (“GBCI”). Internationally

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accepted, it is the most rigorous benchmark for the design, construction, and operation of high- performance green buildings. LEED® requires buildings to meet and certify certain benchmarks related to energy and water conservation, construction materials sourcing, and building occupant and environmental health. ACD produced the Rocky Mountain Region’s first LEED®- certified multi-family project, the first multi-family high-rise, and what is likely the country’s first HUD 221 (d)(4) LEED Gold certified building.

A building’s degree of sustainability is reflected in the level of LEED® certification it achieves: Certified, Silver, Gold, or Platinum.

ACD prides itself on both understanding and quantifying results. The company values performance metrics, and LEED and resource (energy and water) conservation lend themselves to analysis. Based on its experience with its four prior LEED®-certified projects, ACD believes that LEED® certification not only helps to create properties of greater enduring value, but that these properties perform better than their market competitors. All of ACD’s projects have benefited from a message of sustainability backed by performance.

First Cost: Many developers report the costs to achieve LEED® certification in the range of three to six percent of total development costs. To date, ACD’s integrated approach to design and construction has resulted in incremental costs of no more than 2.5 percent for achieving LEED®-Gold certification.

Energy Use Reduction: The results of ACD’s process are striking: in the first full year of building occupancy a project achieved a reduction in energy usage of more than 50 percent compared to comparable new-construction, LEED®multi-family projects. The project’s average resident’s electric utility bill is less than $15 per month, half to a third of other downtown residential buildings’ expenses.

Water Use Reduction: The Project will be designed to reduce water consumption by up to 50 percent, thereby mitigating the cost for residents of probable increases in potable water costs.

Dollar Huggers, Health Huggers, Tree Huggers: Lower operating costs are a win for both the Project’s ownership and the Project’s residents. Better indoor air quality, a priority under the LEED system, appeals to residents with environmental sensitivities. And increasingly, highly sustainable buildings are the home of choice among all demographics.

The concept of the Project is to deliver LEED®-certified, high-quality rental units in a location that will only increase in value. This strategy leads to faster absorption, higher retention and faster rent growth.

LEED® Market Performance: CoStar, the office building national market research firm, prepared a statistically-significant study which concluded that LEED®-Certified office buildings experience a 3.8 percent higher occupancy and 3 percent higher rental rate than non-LEED® buildings, as well as a nearly 7 percent higher return on investment. LEED®-Certified office buildings also see an average increase of 5 percent in building values compared with conventional buildings, according to a 2010 study by McGraw-Hill Construction, CBRE and the University of San Diego (the second phase of an ongoing study).

While there is not yet enough multi-family data from which to infer the effect of LEED® with any statistical significance, the Development Team found that anecdotally, LEED®-Certified multi-

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family properties, according to several managers interviewed in New York City, achieve up to an 8 percent premium in rent and higher-than-average market occupancy rate.

Based upon the published research and owner and operator testimony, it is reasonable to infer that a similar premium for multi-family LEED® projects will, in time, be documented.

Compared to the national EPA average for multi-family buildings, ACD’s condominiums demonstrated remarkable energy savings in its first year (see below table). Whereas the EPA considers a building’s annual consumption of electricity and natural gas on a per-square-foot basis to be 49.5 kBtu (British Thermal units), the property’s energy use is only 18.5 kBtu, a 63 percent reduction. Further, compared to a new-construction multi-family building in Downtown Denver which was measured by Xcel Energy over the same period of time, the project’s energy usage was 50 percent less. These savings should act as an additional marketing differentiator for the Project and strengthen brand identity.

4.3 Entitlements

The development will be the third collaboration between ACD and Denver Apartments, LLC. Their first partnership, a LEED Gold multi-family building in Downtown Denver, set a record per unit sales price for the entire Rocky Mountain region. Their next project, an under-construction multi-family development in Denver’s Central Platte Valley, just completed pouring its 9th of 13 floors and is already garnering both resident and investor interest. This current project was born when Denver Apartments, LLC requested that ACD identify a top-tier multi-family site in Cherry Creek North.

Within a month after Denver Apartments, LLC’s request, ACD identified the site. Soon after, the company had the 25,704 square-foot parcel of land under contract. Since then, ACD has been in the process of entitling the parcel.

Due to restrictive zoning and neighborhood pressure, high density development in the region has been limited in recent years. As a result, there is a deep and unmet desire for housing and as the first and highest quality project to enter the market, the project will benefit from pent up demand. Although the Project design conforms to the newly adopted and city-council approved Area Plan, the Area Plan does not go into effect until 2014. Therefore, ACD is in the process of rezoning the land in order to begin construction ahead of any competitor.

The First Reading at City Council passed via a unanimously-supported motion. Final (second) Reading occurs on Monday April 15th. The purchase and sale contract stipulates a closing the day after the rezoning is approved.

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5 Risks

The real estate development process involves the continuing evaluation, limitation and mitigation of the risk of building. 5.1 Development

1. Slower market absorption than projected: Mitigation: Members of the Development Team have been building commercial and residential projects in Central Denver since 1990. ACD principals have a history of successfully marketing multi-family projects.

2. Entitlement-related construction delays: Mitigation: This is the Development Team’s sixth large-scale project approved through the City of Denver. The Development Team has good relationships with City officials who control the approval process and the field inspections. Final Reading of the rezoning is scheduled for April 15, 2013.

3. Materials or labor costs increase: Mitigation: A guaranteed maximum price (GMP) will be agreed to between a third party general contractor and the Development Team.

4. It is impossible to anticipate Acts of Terrorism or God.

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5.2 Environmental

The site successfully went through the State’s Voluntary Cleanup Program (VCUP) and received a No Further Action (NFA) letter in November 2011. The Colorado Department of Public Health and Environment (CDPHE) administers the VCUP program, which provides both federal and state remedial plan approval in one step. Banks accept NFA letters from the program as assurance that the state or EPA will not order additional cleanup. In essence, receipt of NFA documents that a site has been remediated using the means and methods outlined in the Voluntary Cleanup Plan. As a result, future land owners enjoy “bona fide prospective purchaser” status, which provides liability release relative to the responsibility for previous hazardous substances release as identified in the VCUP. The site had been utilized as a gas station from 1960 to 2008, which prompted the VCUP.

A full Phase I was conducted on the site, and due to the remediation carried out according to the VCUP and the subsequent receipt of the NFA letter, the consultant did not recommend a Phase II.

Denver International Denver Unions Station: Headquarters of Airport the $1B+ FasTracks Program

Confluence Park

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6 Team 6.1 Project Team The Project will benefit from an award-winning team that is expert not only in the development of LEED®-certified, urban, multi-family buildings, but in working with each other. ACD principals are reuniting with a past partner, MKH Architecture, in order to deliver a top-quality project. Additionally, this is the third partnership between ACD and Denver Apartments, LLC.

6.1.1 Investor The Project’s primary equity investor, Denver Apartments, LLC, will invest through its value-add fund. One hundred percent of the co-invest will be provided by the developer.

6.1.2 Architect MKH is an international architecture, interiors, landscape, and planning firm with more than 125 professionals in offices located in Denver, Los Angeles, Phoenix, Washington, DC, Abu Dhabi, UAE and Singapore. The recipient of hundreds of awards since it was founded in 1956, MKH was named a top 20 architecture firm in the U.S. by Architect magazine in 2011 and 2012, and as a 100 Interior Design firm by both Interior Design and World Architecture. In 2012 MKH was also named one of the top five sustainable design firms in the US by Architect magazine. More than 60% of their design staff are LEED accredited, with over 50 projects registered or pursuing LEED certification.

MKH has a strong Denver presence, and deep experience with Mixed Use/Multi-family projects, including mid- and high rise apartments and condominiums, including 1099 Osage, One Lincoln Park, Premier Lofts, Dakota Lofts, Spire, Grant Park Condominiums, and more.

6.1.3 General Contractor ACD will interview several General Contractors (“GC”) and select a maximum of two contractors to assist in pricing the project at early, critical design points. This process will enable ACD to both identify the best GC for the Project and keep the overall Project within budget. ACD will then enter into a negotiation for a Guaranteed Maximum Price (“GMP”) for the Project. Until a GMP has been satisfactorily negotiated, ACD will retain the option to allow alternative GCs to bid for the construction of the Project. This process will enable ACD to build a reliable team while simultaneously keeping the Project budget in check. ACD acted as its own GC for three of its projects and has successfully worked with separate third-party contractors. The Project will benefit from ACD’s extensive knowledge of managing every aspect of the construction process.

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6.2 ACD Development

ACD has earned one of the best reputations in the Rocky Mountain region both for the industry-leading quality of its projects and for the thoughtfulness of its execution. ACD originated as a vertically-integrated developer of urban- core, mixed-income, mixed-use multi-family projects, with in-house design, construction, development, leasing and management functions. As ACD’s success has increased, even in light of the recent market downturn, the company has evolved into a development and property management firm in order to address the increased demand for its services. We believe ACD’s hands-on expertise in all elements of the development, design, construction and disposition of properties, makes it ideally suited to oversee any and all functions of the real estate development process. For the Project, ACD will perform the development, construction oversight, leasing and management functions.

What follows is a list of the company’s recent awards and projects followed by an overview of recent ACD projects.

Awards: ACD received the prestigious Developer of the Year Award by the Denver Business Journal in 2012.

ACD is a two-time recipient of the University of Denver’s Project of the Year Award presented annually by the Burns School of Real Estate.

Environmental Defense Fund – ACD was recognized as a 2009 Innovative Green Business for its solar program.

Project 1: A LEED®-Gold, mixed-use, 219-unit, $50M multi-family project, began construction in the second quarter of 2012. Like all ACD projects, the project is expected to achieve a reduction in energy costs of at least 50 percent as compared to EPA standards, supporting higher asking rents and, likely, increasing tenant retention. The property will likely be the first multi-family project open in the 750+ million dollar redevelopment of Central Platte Valley in the heart of Downtown Denver.

Project 2: A LEED®-Gold, mixed-use, 231-unit, $55M multi-family project, began construction in the second quarter of 2011. The project represents the nation’s first LEED-certified, HUD-insured multi- family project. The building is projected to achieve a reduction in energy costs of at least 50 percent as compared to EPA standards, supporting higher asking rents and, likely, increasing tenant retention.

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Project 3: An eleven-story post-tensioned concrete building located in downtown Denver and was one of the country’s first LEED®-Gold Certified high- rise rental projects. Occupancy began in August, 2010. By June, 2011, the building was 75 percent occupied and achieving the highest per square foot rental rates in Downtown Denver. That same summer the building sold for $308,000 per door, the highest price ever achieved for a multifamily building in the entire Rocky Mountain region.

Project 4: A six-story, 62-unit concrete and stick condo project, met its pro forma projections despite delivering in the worst real estate market in recent history. The project achieved LEED®-Silver certification and delivered a 29 percent IRR to its investors. It received its Final Certificate of Occupancy in August 2008 and sold the last unit in June 2009. The Development Team again performed as its own General Contractor, delivering hard construction costs of $128 per foot rather than the $150+ estimates from third-party contractors. The project’s energy performance is noteworthy. Based on pre-construction energy modeling of the entire building’s energy usage, the building was modeled to consume approximately 35 percent less energy than a comparably-constructed multi- family building.

ACD Condominiums: ACD outperformed its initial pro forma and achieved an IRR of 41 percent. The Development Team, acting as its own General Contractor, delivered the project in 66 weeks. From the outset of the project in August 2005, the construction budget was fixed at $102 per foot. ACD’s ending construction cost was $102 per square foot, with an unspent $60,000 Construction Contingency.

6.2.1 ACD Services

The total fee for development, project management, bookkeeping and LEED® management services is approximately $2 million. The services provided by ACD include are as follows:

Table 17: ACD Fee Summary

Development Management: ACD’s principal’s, both LEED Accredited Professionals, are responsible for development management, including day-to-day decisions regarding the development, achieving the highest possible level of project sustainability within budget, pro forma development and investor management, marketing, loans, agreements and contracts. Their roles include negotiation with land sellers, adjacent neighbors and community organizations, City of Denver staff and elected officials, management of the due diligence process, creation of the development concept, management of the marketing process, selection of finishes and overall execution of the Project.

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Project Management/Owner’s Representative: ACD’s Project Managers ensure the proper and complete performance supervising the third-party General Contractor. They are responsible for review and approval of the construction contract, creation and management of the construction and development budget and schedules, review and approval of the construction loan draw, punch list, retainage and the warranty process.

Management & Leasing: The Director of Real Estate at ACD leads property management and the leasing team. In concert with the ACD principals, she is responsible for all areas of the identity and branding, print and online marketing, interior finish, resident experience and creation of community, and hiring, training and management of staff. Marketing will be augmented with support from an out-of-house marketing and web-based marketing management/search engine optimization firm.