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CB RICHARD ELLIS CONSULTING Sedway Group $/7 CBRE CB RICHARD ELLIS Mr. Larry Carr September 15, 2005 Page 5 command constant rents and operating costs, since the space itself remains the same. CBRE Consulting believes that, given the high levels of R&D space available in the San Francisco Peninsula and Silicon Valley markets, and the tendency of these tenants to prefer a critical mass of like users and competitive rents for more traditional, tilt-up, two story space, that it would take longer to fill the subject property with an R&D tenant versus a traditional office tenant. Consequently, CBRE Consulting does not anticipate market-based occupancy of the property for an R&D tenant until 2012. Consistent with standard R&D market assumptions, the space is assumed to be 90 percent occupied at this time. Property Assessed Valuation. Given its vacant status, CBRE Consulting believes the property is currently overvalued at $63.9 million. Therefore, the analysis assumes the property will be reassessed at a lower value, at least consistent with prevailing market rents. Because the space itself remains the same whether it is R&D or office, we do not expect a material change in rents if the subject property were to be marketed to an R&D user versus a more traditional office tenant. Based upon the office market overview, CBRE Consulting projects that these rents will be $22.20 per year in 2006, the beginning year of the discounted General Fund revenue analysis.4 At this rent level, less an assumption for operating expenses and vacancy allowance, the property would be valued at $41. 7 million (see Exhibit 8). This value estimate assumes an investment grade capitalization rate of 7.0 percent, which would likely be used by the County Assessor for this purpose. It is assumed the property will be sold or reassessed again in 2012, when it achieves stabilized occupancy. The presumed market rent at this time is estimated at $28.40 per year. Net of operating expenses and the vacancy allowance, this translates into a value of $51.6 million, assuming a higher 8.5 percent market capitalization rate. The higher capitalization rate reflects terminal cap rates used currently by institutional investors. In the years between the two assumed revaluations, and after the 2012 property revaluation, the value is assumed to increase 2.0 percent per year pursuant to the provisions of Proposition 13. Other Relevant Assumptions. Other assumptions relevant to the R&D tenant include the following: . a standard employment density of 250 square feet, used to derive the estimated number of office employees working at the complex; a tenant improvement allowance equivalent to $15.00 per square foot (of which $7.50 per square foot is taxable) in 2005, based on market comparables; an R&D user annual electricity rate of $4.11 per square foot (in 2005), based on information reported by Stanford Hospital and Clinics for equivalent office space; and an R&D user annual gas rate of $0.62 per square foot (in 2005), based on information reported by Stanford Hospital and Clinics for equivalent office space. . . . These assumptions are all considered conservative and are documented in Exhibit 3, which contains general assumptions relative to the traditional office tenant as well as Stanford Hospital and Clinics. 4 Class A R&D space in Central San Mateo County typically leases at lower rates; as of September 2005, full service R&D rents for quality space in this area averaged $1.50 to $1.65 per square foot (assuming expenses ranging from $0.40 to $0.50 per square foot). Operating expenses in R&D properties are significantly lower than those for office buildings. T.l.s, too, were estimated at a slightly lower $10 to $15 per square foot. It is likely that, to successfully attract an R&D tenant, subject property lease rates would have to be competitive with market rents, although operating expenses will necessarily remain the same. T.l.s will vary significantly depending on the type of tenant.