Attachment 4 - Exhibit 10
M EMORANDUM
To: John Shenk, LG Business Park, LLC
From: Teifion Rice-Evans, Ashleigh Kanat and Walker Toma
Subject: Albright Development, Reduced Area Alternative Feasibility
Analysis; EPS #121103
Date: April 4, 2013
At the request of LG Business Park, LLC, Economic & Planning Systems,
Inc. (EPS) has independently evaluated the financial feasibility of
developing the 350,000-square foot Reduced Area Alternative and
compared the development feasibility of the Reduced Area Alternative
relative to the 550,000-square foot Proposed Project. The purpose of
this analysis is to provide planning level guidance on the viability of
different development configurations under current market conditions.
It should be noted that changes in market conditions and/or unforeseen
changes to development costs could alter the conclusions of this
analysis.
EPS developed financial feasibility pro formas (see Tables 1 and 2) to
demonstrate the results of our analysis. The analyses are based on a
combination of standard, industry-accepted development cost
assumptions; EPS-vetted, project-specific assumptions provided by the
Developer; and, market revenue research based assumptions developed
internally by EPS. Applying these assumptions (described further
below), EPS has estimated the potential development return for the
Reduced Area Alternative and the Proposed Project. In EPS experience,
a return on cost of 7 to 9 percent is typical (calculated as annual
stabilized income divided by total project costs). EPS has identified a
development return of 7 percent as the minimum “hurdle rate” required
for development feasibility.
EPS tested the robustness of our analysis by varying the lease revenue
assumptions to determine how sensitive the development return is to
changes in revenue. The results of the sensitivity analysis are shown on
Table 3.
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Key Findings
1. Under EPS’s base case lease rate assumptions ($40 per square foot), the Reduced
Area Alternative is not financially feasible as the development return is below 7
percent.
The Reduced Area Alternative is projected to generate approximately $12.6 million in net
annual income. Projected development costs, including land costs, are approximately $199.1
million. This results in a development return of 6.3 percent, below the 7 percent “hurdle rate”
EPS identifies as an indicator of feasibility.
2. Under EPS’s base case lease rate assumptions ($40 per square foot), the Proposed
Project is financially feasible with a development return of 7.1 percent.
The Proposed Project is projected to generate approximately $19.8 million in net annual
income. Projected development costs, including land costs, are approximately $280.5
million. This results in a development return of 7.1 percent, a return on costs that EPS
identifies as marginally above the “hurdle rate” required for feasibility.
3. A sensitivity analysis to test the robustness of these findings suggests that the
Reduced Area Alternative remains infeasible even under improved market
conditions.
Increasing the annual lease revenue to $42 per square foot results in a development return
of 6.6 percent (still below the hurdle rate of 7 percent). Reducing the annual lease revenue
to $38 per square foot further erodes the development return to 6.0 percent.
The development return under the Proposed Project increases to 7.4 percent when annual
lease revenues increase to $42 per square foot. The development return decreases to 6.7
percent when annual lease revenue decreases from $40 per square foot to $38 per square
foot.
Site Description
The 21.5-acre- Los Gatos Business Park site is currently developed with ten buildings (total of
250,000 square feet of existing development) and accompanying surface parking at the
intersection of Winchester Boulevard and Albright Way in Los Gatos. The existing buildings
consist of one and two-story office/R&D developments and were constructed in the 1970s and
1980s. The Project site is bounded by Highway SR 85 to the north, Winchester Boulevard to the
west, and the Los Gatos Creek Trail to the east.
Project Description
Proposed Project
The Proposed Project consists of four 4-story, 137,500-square foot buildings with a height limit
of 65 feet, totaling 550,000 square feet of office/R&D space. In addition to a reconfiguration of
the existing surface parking, the Proposed Project would include a structured parking garage to
accommodate the site’s parking.
Reduced Area Alternative
The Reduced Area Alternative calls for the construction of four buildings (two 2-story buildings
and two 3-story buildings). The four buildings would total 350,000 square feet of R&D/office.
The Reduced Area Alternative would include a minimum of 1,155 parking spaces, consisting
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primarily of surface spaces with a small structured garage to accommodate approximately 80
spaces.
Methodology
EPS has prepared financial pro formas for the Reduced Area Alternative and the Proposed Project
that estimate the financially feasibility of development. Development feasibility is indicated by a
return of 7 percent or higher (a typical range is 7 to 9 percent). Development return is
calculated as annual net income divided by total project costs (including land). A development
project that generates returns below the feasibility “hurdle rate” of 7 percent is unlikely to attract
the necessary financing and would likely not result in development.
Key Revenue Assumptions
Lease Revenue
To identify an appropriate lease rate, EPS reviewed market comparables in the Silicon Valley
region, as there are few, if any, appropriate comparables available in Los Gatos specifically.
Annual lease rates for new, finished Class A office space range from $40 to $48 per square foot
in multi-tenant buildings. Because the Owner is developing the space to warm shell conditions
(which does not include improvements such as interior walls, flooring, fixtures, etc.) rather than
full build out, achievable lease rates for this project will be lower than for finished spaces. In
addition, unlike most of the available office development reflected in the comparables, these
buildings are designed to attract single-tenant users who will take the full square footage. Such
an arrangement is expected to be reflected in a discounted rent to account for the scale of the
space being occupied when compared to lease rates for smaller or multi-tenant leases.
Therefore, in this analysis, EPS assumes a lease rate of $40 per square foot of warm shell office
space. EPS also considered the location of the site relative to roadways and transit and the
provision of tenant improvements of approximately $50 per square foot.
Tenant Improvements
Tenant improvements (TIs) represent a cost to the Landlord but they are tied to achievable lease
rates. In EPS’s experience, TIs vary widely, depending on market conditions, the quality and
condition of the space (in this case brand new warm shell construction), and the type of tenant.
Tech tenants often require higher TIs due to specific heating/cooling needs related to their
technology infrastructure. For these pro formas, EPS has estimated TIs of $50 per square foot.
Key Cost Assumptions
Land Cost Basis
The land cost basis of $52 million was provided by the property owner.
Hard Costs
Direct construction costs vary between the Proposed Project and the Reduced Area Alternative.
Direct construction costs for the Proposed Project are assumed to be $160 per square foot based
on EPS experience in Silicon Valley for similar product types, assuming a warm shell condition.
The cost per square foot is increased to $170 for the Reduced Area Alternative to reflect the loss
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of cost efficiencies associated with the shorter buildings.1 This $10 differential (approximately 6
percent) is conservative. EPS spoke with construction experts who felt a 10 to 15 percent
differential would be appropriate depending on the number of “middle floors”.
Garage construction costs also vary by alternative and according to the same “efficiency” logic.
The Proposed Project will include a structured garage (ground level parking and one level of deck
parking) for approximately 965 spaces. The Reduced Area Alternative will include a structured
garage for approximately 80 spaces. Per space savings are realized in the larger garage as fixed
costs (elevator, ramp, etc.) can be spread across more spaces. This analysis assumes $25,000
per space (not including soft costs) for the Reduced Area Alternative garage and $20,000 per
space (not including soft costs) for the Proposed Project.
Demolition Costs
Demolition costs can vary widely. EPS has assumed $3.50 per square foot, applied to the
existing development of 250,000 square feet
Off-Site Costs
The off-site work estimate is provided by the owner and includes a new signalized intersection,
the connection of four existing signalized intersections, street widening, and a new bus stop pad.
EPS has no basis to verify or adjust this estimate.
Soft Costs
In EPS’s experience soft costs can vary from 20 to 50 percent of hard costs depending on length
and challenges of entitlement period, Agency-specific development fees, and other project-
specific factors. EPS has used a soft cost ratio of 30 percent of hard costs, excluding tenant
improvements, fees, and miscellaneous other costs. Soft costs include architecture and
engineering, other professional services, taxes and insurance, and other soft costs. Other soft
costs include testing and inspection, surveys, environmental, construction period real property
taxes, construction period insurance costs, construction period, common area maintenance
(CAM) expenses, financing costs, and emergency prevention costs. EPS has included a
“Miscellaneous Costs” line item to account for potential lease buy-outs of existing tenants.
Permits and Fees
Permits and fees estimates vary by Project/Alternative. EPS researched the City’s
development impact fees based on readily accessible fee information and prepared
fee estimates for the Proposed Project and the Reduced Area Alternative. Owner
Costs
Owner costs include leasing commissions, project administration and management costs, and
owner contingency.
1 There is a difference in cost of constructing the bottom and top floors of a structure (e.g., grading,
foundation, utilities, and HVAC improvements) versus the middle floors, which are less expensive to
construct.
Table 1
Pro Forma: Reduced Area Alternative
Albright Development; EPS #121103
ItemAmount
DEVELOPMENT PROGRAM
Gross Building Square Feet350,000
Net Leasable Area (sq.ft.)100%Efficiency Ratio350,000
Parking Spaces
Structured80
Surface1,075
Total Parking Spaces1,155
ANNUAL INCOME
Lease Revenue
Annual Income (NNN) [1]$40.00/sq. ft./yr.$14,000,000
(less) Vacancy/Mgmt/Reserves [2]10.0%of Gross Revenue($1,400,000)
Net Annual Income$12,600,000
DEVELOPMENT COSTS
Land Cost Basis [3]$52,000,000
Hard Costs
Demolition/ACM Abatement/Utility Removal [4]$3.50/existing bldg. sq. ft.$875,000
Direct Costs$170/gross sq. ft.$59,500,000
Garage Work [5]$25,000/structured space$2,000,000
On-Site Work$20/site sq. ft.$18,835,000
Off-Site Work [6]$3,850,000
Subtotal, Hard Construction Costs$85,060,000
Soft Costs
Soft Costs [7]30%of Hard Costs$25,518,000
Permits and Fees [8]2%of Hard Costs$1,750,000
Tenant Improvements [9]$50/net leasable sq. ft.$17,500,000
Miscellaneous Costs [10]1%of Hard Costs$500,000
Total Soft Costs53%of Hard Costs$45,268,000
Owner Costs
Leasing Commissions [11]$18/net leasable sq. ft.$6,300,000
Project Admin./Mgmt.3%of Hard and Soft Costs$3,910,000
Owner Contingency5%of Hard and Soft Costs$6,516,000
Total Owner Costs20%of Hard Costs$16,726,000
Total Costs$199,054,000
Return on Cost [12]6.3%
[2] 10% is typical of other pro formas EPS has prepared.
[3] Provided by the Owner.
[4] Demolition costs based on existing square footage of 250,000.
[12] Typical return on cost is 7 to 9 percent.
Sources: Loopnet; Silicon Valley brokers; LG Business Park, LLC; Economic & Planning Systems, Inc.
Assumption
[10] Miscellaneous costs include potential lease buy-outs.
[11] Leasing commission estimate assumes $18 per gross leasable square foot, and includes commission for both landlord
and tenant brokers. Typical range is between $16 and $20 per square foot.
[1] Annual triple net lease based on Silicon Valley comps and assumes new, Class A construction to warm shell, freeway and
transit accessibility, single tenant lease agreement, and $50 per sq.ft. TIs.
[6] Off-site work estimate is provided by the Owner and includes a new signalized intersection, the connection of four existing
signalized intersections, street widening and a new bus stop pad.
[7] Soft costs include architecture and engineering, other professional services, taxes and insurance, and other soft costs.
[8] Permit and fee estimate prepared by EPS based on readily accessible fee information.
[9] Tenant improvements vary widely and typically range from $20 to $100 per square foot, with tech tenants often requiring
higher TIs. Higher TIs typically result in lower effective rents.
[5] Garage costs are calculated on a per stall basis and shown without associated soft costs. Including soft costs, per stall
costs equal approximately $32,500. A higher per stall cost, relative to the Proposed Project, is assumed due to the lower
number of total stalls and the need to spread fixed costs across fewer stalls.
fixed cost
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Table 2
Pro Forma: Proposed Project
Albright Development; EPS #121103
ItemAmount
DEVELOPMENT PROGRAM
Gross Building Square Feet550,000
Net Leasable Area (sq.ft.)100%Efficiency Ratio550,000
Parking Spaces
Structured965
Surface970
Total Parking Spaces1,935
ANNUAL INCOME
Lease Revenue
Annual Income (NNN) [1]$40.00/sq. ft./yr.$22,000,000
(less) Vacancy/Mgmt/Reserves [2]10.0%of Gross Revenue($2,200,000)
Net Annual Income$19,800,000
DEVELOPMENT COSTS
Land Cost Basis [3]$52,000,000
Hard Costs
Demolition/ACM Abatement/Utility Removal [4]$3.50/existing bldg. sq. ft.$875,000
Direct Costs$160/gross sq. ft.$88,000,000
Garage Work [5]$20,000/structured space$19,300,000
On-Site Work$20/site sq. ft.$18,835,000
Off-Site Work [6]$3,850,000
Subtotal, Hard Construction Costs$130,860,000
Soft Costs
Soft Costs [7]30%of Hard Costs$39,258,000
Permits and Fees [8]3%of Hard Costs$4,250,000
Tenant Improvements [9]$50/net leasable sq. ft.$27,500,000
Miscellaneous Costs [10]0.4%of Hard Costs$500,000
Total Soft Costs55%of Hard Costs$71,508,000
Owner Costs
Leasing Commissions [11]$18/net leasable sq. ft.$9,900,000
Project Admin./Mgmt.3%of Hard and Soft Costs$6,071,000
Owner Contingency5%of Hard and Soft Costs$10,118,000
Total Owner Costs20%of Hard Costs$26,089,000
Total Costs$280,457,000
Return on Cost [12]7.1%
[2] 10% is typical of other pro formas EPS has prepared.
[3] Provided by the Owner.
[4] Demolition costs based on existing square footage of 250,000.
[12] Typical return on cost is 7 to 9 percent.
Sources: Loopnet; Silicon Valley brokers; LG Business Park, LLC; Economic & Planning Systems, Inc.
[11] Leasing commission estimate assumes $18 per gross leasable square foot, and includes commission for both landlord
and tenant brokers. Typical range is between $16 and $20 per square foot.
[9] Tenant improvements vary widely and typically range from $20 to $100 per square foot, with tech tenants often requiring
[10] Miscellaneous costs include potential lease buy-outs.
Assumption
[1] Annual triple net lease based on Silicon Valley comps and assumes new, Class A construction to warm shell, freeway
and transit accessibility, single tenant lease agreement, and $50 per sq.ft. TIs.
[5] Garage costs are calculated on a per stall basis and shown without associated soft costs. Including soft costs, per stall
costs equal approximately $26,000. A lower per stall cost, relative to the Reduced Area Alternative, is assumed due to the
higher number of total stalls and the opportunity to spread fixed costs.
[6] Off-site work estimate is provided by the Owner and includes a new signalized intersection, the connection of four
existing signalized intersections, street widening and a new bus stop pad.
[7] Soft costs include architecture and engineering, other professional services, taxes and insurance, and other soft costs.
[8] Permit and fee estimate prepared by EPS based on readily accessible fee information.
fixed cost
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Table 3Sensitivity MatrixAlbright Development; EPS #121103
LowBase
HighAlternative$38$40$42Reduced Area Alternative (350,000 sq.ft.
)
6.0%6.3%6.6%
Proposed Project (550,000 sq.ft.)
6.7%7.1%7.4%
Source: Economic & Planning Systems, Inc.
Annual Rent (per sq.ft.)
Economic & Planning Systems, Inc. 4/4/2013
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