METCALFE COMMERCIAL REAL ESTATE, INC



METCALFE COMMERCIAL REAL ESTATE, INC

August 3, 2007 POST OFFICE BOX 233809 (907) 344-4514

01:32 AM ANCHORAGE ALASKA 99523 (FAX) 349-1735

REGARDING: Broker’s Opinion of Land Lease Value

for the Seventy-Three Space Parking Lot Located on the

Northwest Corner of 6th and G in Downtown Anchorage.

I have reviewed the lease executed between Augustine Development LLC (Owned by Jerry Neeser and Mark Pfeffer, partners with John Rubini in the construction of the new Convention Center two blocks away) who leases their property described as,

• Lots 9B and lot 12 of block 53 of the Original Townsite of Anchorage, according to the official plat: Plat number 81-124 of the Anchorage Recording District,

and I have made the following observations, value estimations and conclusions.

The Community Development Authority is a quasi privately operated subsidiary of the Municipality of Anchorage (MOA). Possession of the leased property has been delivered over to the Anchorage Parking Authority — ostensibly for the purpose of operating a 73-space public parking lot.

The closest comparable property (Comp #1) is a seventeen space parking area in the same block, adjacent, and immediately west of the subject property. (Comp #1) shares a property line with the subject property; and there are no obstructions to prevent drivers from driving between the two adjacent parking areas.

Augustine Development, LLC owns both the subject property and Comp #1.

• Diamond Parking leases the 17-space paved parking area (approximately 5,708 Square Foot) from Augustine Development, LLC. Diamond, a privately owned parking lot operator, retails the 17 parking spaces to the public for a profit and pays Augustine Development, LLC a lease fee of approximately $800 per month. (I was unable to discover the exact lease payment amount, but I’m confident that the estimate is most likely within a hundred dollars of the actual monthly amount.)

• Community Development Authority, owned by the Municipality of Anchorage, leases the 73-space (24,511 Square Foot) paved parking area from Augustine Development, LLC. Lease payments of $29,000 per month are made by Anchorage’s Community Development Authority to Augustine Development.

Comparing the Lease Payments:

• Diamond Parking pays Augustine Development approximately $47.06 per month per parking space for the right to operate the 17-space (Comp #1) as a parking facility.

• Anchorage Parking Authority pays Augustine Development $397.26 per month per parking space for the right to operate the 73-space subject property as a parking facility.

The City of Anchorage is paying Augustine Development eight and one half times as much per space and per square foot as Diamond Parking pays to Augustine Development. The fees charged for parking are structured differently but are otherwise quite similar in overall charges to paying customers. Both parking areas charge competitive rates comparable to the rates charged in commercial public parking lots within a four block radius. There appears to be no obvious justification for the extent of the disparity in lease payments.

Obtaining copies of leases from private operators of parking facilities proved difficult, but by making a few phone calls to parking facility operators I was able to determine how most privately owned parking companies determine what they are willing to offer land owners for the right to use their property as a “for profit” parking facility.

Parking facility operators will generally offer private land owners a fixed monthly payment equaling approximately 1/3 of whatever they determine to be the projected likely gross income they could expect to derive from the property. Alternatively, for those land owners willing to share the risk of unexpected shortfalls in income, parking operators will generally offer a fluctuating ½ of whatever the actual parking space rents turn out to be.

The Anchorage Parking Authority offers parking to the public on subject property at the following rates. By viewing and recording the occupancy, I am able to estimate the income with some degree of accuracy.

Prime time parking is: $2 per hour from 6:00 AM to 6:00 PM, Monday through Friday. Maximum possible weekday income per space if 100% full = $24 per space. Times 73 = $1,752 per day times 20 week days = $35,040 per month for prime time. Actual occupancy turns out to be much less. Attached are photos taken at a variety of times to demonstrate the subject property’s typical pattern of occupancy, which appears to be 19% of the maximum possible prime time revenue, or $6,658 per month.

Similar observations of weekends and evenings, (6:00 PM to 6:00 AM) revealed an estimated average of 18% occupancy during evenings and weekends. (See photos attached.) Evenings and weekends comprise a total of 432 hours of parking time offered per month at $0.75 (seventy five cents per hour).

• 432 x $0.75 = $324 x 73 = maximum weekend & evening possible income of $23,652.

• 18% of maximum possible occupancy = estimated weekend & evening income of $4,258 per month.

• Estimated evening parking plus estimated prime time day parking income equals a

combined total projected gross income of $10,915 per month.

The land owner to operator lease value for the lease in question, the 73-space parking area, is a fixed monthly payment structured in a manner that does not require Augustine Development LLC to share in the risk of unexpected shortfalls in income that the Anchorage Parking Authority may experience. The lease is (by general practice standards) therefore worth about1/3 of the projected income to the Anchorage Parking Authority.

One-third of the projected income equals a monthly lease value of $3,639 per month or $49.84 per parking space per month, under standard general practices.

By comparison, the17-space lease on the adjacent lot (Comp. #1) for $47.06 per month per parking space makes it clear that the above estimate of a standard general practices lease value is an accurate estimation of market value.

It is also the professional opinion of this real estate broker — with thirty years experience in estimating projected real estate income and projected real estate values — that the lease in question was likely not an arm’s length transaction. And therefore not an agreement struck between a willing lessee and willing lessor, fairly negotiating to strike a market rate bargain.

In conclusion, I believe that:

Augustine Development LLC is receiving an unwarranted windfall of approximately $25,361 per month, at the expense of the Anchorage tax payers and those who pay the recently increased parking fines.

It is further my suggestion that the transaction warrants investigation for possible impropriety.

Sincerely,

Ray Metcalfe, Broker

Metcalfe Commercial Real Estate, Inc.

REGARDING: Broker’s Opinion of Land Lease Value

for the Seventy-Three Space Parking Lot Located on the

Northwest Corner of 6th and G in Downtown Anchorage.

|[pic] |[pic] |

|SUBJECT PROPERTY |COMPARABLE PROPERTY (Comp #1) |

|= Parking lot at center of photo. |= The lighter colored paved area between two-story building and the subject |

|Photo taken Friday July 27, 2007 @ 3:00 PM |property to its right. |

| |Photo taken Friday July 27, 2007 @ 3:00 PM |

|[pic] |[pic] |

|Photo #1 for occupancy count: at Prime Time parking rates, showing 16% full.|Photo #2 for occupancy count: at Evening parking rates, showing 22% full. |

|Photo taken Friday July 27, 2007 @ 3:00 PM |Photo taken Friday July 27, 2007 @ 8:00 PM |

|[pic] |[pic] |

|Photo #3 for occupancy count: at Weekend Time parking rates, showing 18% |Photo #4 for occupancy count: at Weekend Time parking rates, showing 13% full.|

|full. |Photo taken Sunday July 29, 2007 @ 11:35 PM |

|Photo taken Saturday July 28, 2007 @ 4:00 PM | |

|[pic] |[pic] |

|Photo #5 for occupancy count: at Prime Time parking rates, showing 23% full.|Photo #6 for occupancy count: at Prime Time parking rates, showing 17% full. |

|Photo. taken Monday July 30, 2007 @ 12:OO AM |Photo taken Wednesday August 1, 2007 @ 11:55 AM |

|[pic] |Occupancy Rates of |

| |Subject Property: |

| |Prime Time: |

| |Photo 1 = 16% |

| |Photo 5 = 23% |

| |Photo 6 = 17% |

| |Photo 7 = 19% |

| | |

| |Evenings: |

| |Photo 2 = 22% |

| | |

| |Weekends: |

| |Photo 3 = 18% |

| |Photo 4 = 13% |

|Photo #7 for occupancy count: at Prime Time parking rates, showing 19% full.| |

|Photo taken Thursday August 2, 2007 @ 10:40 AM. |Photos by Ray Metcalfe, Broker |

TABLE 1 – Summary of Comparable Values:

|Community Development Authority Lot |Diamond Lot (Comp. #1) |

|= 73-spaces ~ 24,511 sq. ft. |= 17-spaces ~ 5,708 sq. ft. |

|Lease: $29,000/mo. |Lease Fee: $800/mo. |

|Per Space $397.26/mo. |Per Space $47.06/mo. |

| | |

|This is Approx. 8.5 times, vs. ( |adjacent Comparable lot #1. |

| | |

|Potential Lot Income: |Est. Actual Lot Income |

|Prime Time 20 d/mo. = $35,040/mo. |Prime time @19% = $6,658/mo. |

|Evenings/Weekends = $23,652/mo. |Wkend/Eves @ 18% = $4,259/mo. |

|Maximum Potential Lot Revenues |Projected Actual |

|if Full 100% of time = $58,692/mo. |Gross Income = $10,915/mo. |

| |Standard Practice is 1/3 of above projected income: |

|Lease of $29,000 ~= 50% of 100% full | |

Summary – for the Community Development Authority lot:

|Taxpayer Waste Estimated: |Reasonable City Lease Rate |

|$29,000 minus $3,640 = $25,360/mo. |should be approx. = $3,639/mo. |

|Times 12 = $304,320 per annum in |Or $49.84/space/mo., which closely compares to |

|Add’l Lease Costs to City of Anchorage |$47.06/space per month |

|OR: $10,915 - $29,000 = , |for Comp. #1 lot. |

|An Est. Annual Deficit of |A Windfall of $25,360/month for Lessor (owner of |

| |subject property). |

Supplementary Information

Diamond Parking rents reserved parking spots for the exclusive use of the renter seven days a week, twenty four hours a day in the lot on the south side of Third Avenue, and the west side of H street., directly across Third Avenue from the Snow Goose restaurant, and directly across H street from the parking garage for the state court house. The fee Diamond Parking charges customers to exclusively reserve a parking space in the above described lot is $150 per month. By comparison to the above described type of fixed payment lease, common industry practice would be to make a best effort to project an anticipatable occupancy, and agree in contract to pay a fixed payment of 1/3 of the anticipatable projected rents. At $50 dollars per space, or 1/3 of each $150 expected to eventually be paid by a retail user, the value of the lease payment to the land owner of property suitable for 73 parking spaces would be as follows:

If 100% of 73 spaces in a commercial parking lot were rented at $150 each, the gross monthly retail rental would equal $10,950. The amount that a typical parking operator of such a lot would pay to the land owner on a fixed payment basis would be $3,650 or $5,475 on a share the risk agreement. (The city’s agreement is not a share the risk agreement and I highly doubt that Diamond Parking would rent spaces at that location for $150 per month if they believed they could average a higher return by sticking with an hourly rental rate as is the case with the subject property.)

Some would argue that given time, the occupancy of the subject property will increase. Even if it were 100% full it could not make its payment let alone return a profit comparable to the industry norm. However, for the benefit of the land owners Jerry Neeser and Mark Pfeffer (Owners of Augustine Development LLC, who owns the land leased to the city) who are getting their ducks in order to build a new hotel on the site, the lease includes a cancellation clause. Once the land owners collect their permits and gets their financing lined up, they can give the city a 60 day notice to vacate. The lease could last six months, the lease could last six years. In the meantime, the city of Anchorage is paying his holding costs for his building site. As likely as not, the city will be ordered to vacate long before the parking lot sees a significant increase in public use. At the conclusion of its use as a parking lot, Jerry Neeser and Mark Pfeffer plan to build a hotel on the site which is one block from the new convention center they are building with John Rubini, their partner in that project.

What’s wrong with this picture?

Yours truly: Ray Metcalfe

RayinAK@

Additional comments addeed 10/29/2007

Below are two articles that appeared in the Anchorage Daily News regarding the parking lot discussed above, one written before the above appraisal was published, and one written after. One correction, the surface markings at the parking lot indicate parking 73 spaces, which is the number I used for the above appraisal. In fact, there are 67 spaces. Which tilts the math to appear a bit less onerous than it really is. The message however is well delivered. Subject to time available, I may spend the several hours it would take to recalculate everything. Until then, just a note. “The appraisal above shows the spaces to be rented at $397.26 per month. The correct number is $432.84.”

Parking lot will replace Experience Theatre and former offices

PAVING THE WAY FOR DOWNTOWN'S FUTURE

Anchorage Daily News (AK)

April 7, 2007

Author: RICHARD RICHTMYER

Anchorage Daily News Staff

[pic]

An Anchorage developer that recently bought two downtown buildings announced plans Friday to tear them down and replace them, temporarily, with a 75-space public parking lot.

Venture Development Group -- whose principal owners are developer Marc Pfeffer and contractor Jerry Neeser -- bought the 31,500-square-foot property between Fifth and Sixth avenues and G Street this winter.

The property houses the Alaska Experience Theatre and the former offices of Lounsbury Associates, both of which have stood there for decades. Pfeffer said those two buildings will be torn down starting this weekend, and a gravel parking lot will be in their place in a few weeks. It will be paved this summer, he said.

It won't remain a parking lot forever, though. Eventually there'll be a more ambitious redevelopment project at that site, one that fits with the changing character of downtown, including more contemporary structures and higher density, Pfeffer said.

"It deserves that kind of development, but we have no clue what it's going to be," Pfeffer said. "We're in the business of developing real estate, and now we'll have this in our portfolio and wait for something to come along."

Construction of a new convention center and a related parking garage reduced parking spaces downtown. That new construction is occurring on what used to be parking lots with a total of 420 spaces. Both buildings are scheduled to open in September 2008.

The Anchorage Community Development Authority, which is in charge of city parking, will lease the lot from Pfeffer's group and charge $2 an hour to park there, according to Mayor Mark Begich's office.

The city agreed to lease the lot for up to five years. The developer has the option to terminate the lease after giving 60 days' notice. The city can end the lease any time after the first two years, both sides said Friday.

The city will pay $29,000 a month to lease the lot and will share in revenue from parking fees, said Mary Jane Michael, director of the Office of Economic and Community Development.

The city expects to break even or make a small profit from the lot, she said.

Daily News reporter Richard Richtmyer can be reached at rrichtmyer@ or 257-4344.

City hopes to redo downtown parking lot lease -

NEW DEAL: Lot is losing money and city hopes changes will fix problem.

Anchorage Daily News Staff (AK)

August 31, 2007

Author: KYLE HOPKINS

khopkins@

[pic]

The head of a city parking agency says the city is losing money on its lease of a downtown parking lot and hopes to renegotiate the deal.

The Anchorage Community Development Authority board is considering changes to the deal that would cut the city's payment in half for the lot on Sixth Avenue and G Street, said director Carma Reed.

In return, the owners of the property would get permits for dozens of the parking spaces for their own use during the day, she said.

Thursday night, the board delayed a vote on whether to renegotiate the lease until October, Reed said.

The city currently pays $29,000 a month for 67 parking spaces to Augustine Development, a business owned by developers Mark Pfeffer and Jerry Neeser, Reed said.

The city signed a lease with the developers in February and now charges people up to $2 an hour to park on the lot.

In July, the lot generated roughly $8,000 in revenue for the city, Reed said.

Critics of Anchorage Mayor Mark Begich -- chiefly Ray Metcalfe, a real estate broker and former state legislator -- said the city pays far too much for the spaces at the expense of property tax payers.

Even if the city filled the lot every day it wouldn't break even, he said.

The deal is an unwarranted windfall for the landowners, Metcalfe wrote in an early August analysis of the lease. Like Begich, he is a potential candidate for U.S. Senate in 2008.

Pfeffer said Wednesday it's wrong for Metcalfe to hint the lease was a sweetheart deal.

"I know of other parking lots in the area that bring in more money per space than what the city is paying, and I know of other parking lots that bring in less money per space than what the city is paying," he said.

Among Pfeffer's other investments, he owns the City Hall building, which the city is considering buying.

Reed said talk of renegotiating the parking lot lease began before the criticism started. The city leased the parking spaces hoping to relieve a parking crunch downtown, she said, but fewer people parked there than expected.

Reed said the proposed changes call for the city to pay $14,500 a month instead of $29,000, plus get an extra 17 parking spaces. But overall, the city could have fewer spaces during the day. That's because the proposal also calls for the city to give 35 monthly permits for parking at the lot to Pfeffer and Neeser, who could offer them to their future downtown tenants.

Under the proposal, the developers would also agree to pay Anchorage for 400 monthly parking permits in city-owned lots, which appeals to the city because it will lose revenue from 580 parking permits when the state opens its own downtown parking garage.

"I think if we can renegotiate this, it won't be a loser anymore," Reed said.

Find Kyle Hopkins' political blog online at alaskapolitics or call him at 257-4334.

Opinion

Anchorage Daily News (AK)

September 9, 2007

Author: Staff

[pic]

Parking deal

City overpaid for space

When the Begich administration leased a downtown parking site from influential developer Mark Pfeffer, the city overpaid -- by a lot.

There's not much dispute about that.

The Begich administration has implicitly admitted as much. It's seeking to cut the $29,000-a-month rate in half after just two months.

Another downtown city parking deal, done two years earlier, suggests the terms of Pfeffer's lease were worse than the administration admits. Long-time mayoral critic Ray Metcalfe, a real estate professional, says the deal was eight times the going rate, based on his detailed analysis of a commercial parking lot next door to Pfeffer's.

Mayor Begich and his staff say the city's deal was a high-speed, good-faith effort to solve the parking crunch that everyone expected when work started to build the new convention center on what used to be a huge parking lot. However, that crunch hasn't materialized. The city's new lot, at Sixth and G, sits mostly empty, bringing in less than a third of the revenue the city expected.

The city's chief fiscal officer, Jeff Sinz, dismisses criticism of the bad projections as 20-20 hindsight. When staff at the city's community development authority originally proposed the Pfeffer lease, they said it would be a break-even deal. Sinz says he and other community development authority board members duly questioned that assurance and concluded the price was reasonable, based on those projections.

Critics like Metcalfe say more than bad projections were at work -- the deal was a favor to a developer who's a political ally of the mayor. The new convention center is the mayor's signature project, his political legacy, and to get it built, he has linked his political fortune with developer Pfeffer, one of the principals on the project.

The mayor's skeptics can point to another parking deal where the city paid much less. The city paid one-fourth as much, $107 per month per parking space versus $432, for another short-term lease on the lot behind the new National Park Service building.

The deal on that lot was two years ago, and it's in the less developed eastern half of downtown, while Pfeffer's lot is prime real estate next to the performing arts center.

Pfeffer's lot was paved and ready to use for parking, while the city had to prepare the Park Service site. But the city's preparation costs -- $100,000 to create 88 spots for 36 months -- explain less than 10 percent of the cost difference in the two deals.

All told, the different circumstances can't justify a four-fold difference in what the city paid Pfeffer for his parking lot.

Mayor Begich should expect skeptical scrutiny when his administration pushes a rush-rush deal with a politically influential developer. He should expect even more criticism when that deal proves to be overly generous.

The mayor has a superficially plausible defense, contending that it was a legitimate transaction at the same price the city would have paid any other owner.

Without subpoena power or wiretap authority, it's impossible to know if the mayor's defense is just a smokescreen.

But whether it was favoritism or just an honestly overpriced contract, it turned out to be an embarrassingly bad deal for a mayor who prides himself on his business acumen.

BOTTOM LINE: An overpriced contract with a political ally gives Mayor Begich a black eye.

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