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Financial Strategy FMFADA Board November 19, 2009

This agenda includes an analysis of BAE/RCLCO, capital market conditions, and developers in down markets, as well as recommendations for the revision of the developer RFI/Q/P process. The presentation focuses on the big picture economic conditions and constraints on capital availability. It also explores the pros and cons of a master developer versus multiple developer partners scenario. The recommendation is to adopt a multiple developer approach and reduce the scope of the first RFI/P/Q to the Residential Lease Program.

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Financial Strategy FMFADA Board November 19, 2009

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  1. Financial Strategy FMFADA Board November 19, 2009

  2. Today’s Agenda BAE/RCLCO Analysis Capital market conditions Developers in down markets Current RFI/Q/P solicitation strategy Master versus multiple developer partners FMFADA as “master developer” Recommended revision to developer RFI/Q/P process

  3. BAE and RCLCO Analysis In the course of performing their respective work, BAE and RCLCO have independently come to the same conclusion regarding FMFADA’s master developer RFI/P/Q strategy BAE and RCLCO have conferred over the past several weeks and prepared a joint analysis for FMFADA This presentation shares our analysis and recommendations

  4. Big Picture Economic Conditions National economy emerging from steep recession 8M jobs lost Unemployment at 26-year high Blue Chip Economic Indicators - November Forecast for 2010 Consensus forecast GDP growth @ 2.7% Growth slower than normal recovery 1.4% disposable personal income growth 2% inflation Wall Street Journal Survey - November Survey for 2010 Average forecast of solid 2.9% GDP growth Employment growth slow - 600,000 non-farm jobs Low inflation @1.8% Shape of recovery: Half of respondents: “U-shaped” -slowness followed by solid growth 31% “V-shaped” -strong rebound 11% “L-shaped” - economy stabilizes at lower level 7% “W-shaped” or “Double-dip” recession

  5. Constraints on Capital Availabiliity • Real estate credit markets have been “frozen” for the past 18 months and despite some recent “thawing” remain extremely challenging. • The “great de-leveraging” of commercial real estate is expected to absorb much of real estate capital over the next several years, constraining capital available for new projects. • $950B+/- commercial real estate debt maturing over next three years

  6. Developers in Down Market • Lack of capital will constrain developer response to opportunities at Fort Monroe, particularly for new development • Developers are reluctant to expend precious equity dollars for pre-development activities as would be required for planning new development at Fort Monroe • Soliciting a master developer for the entirety of Fort Monroe will attract interested parties seeking to “tie-up” the property and “wait-out” the market

  7. Current RFQ/RFP Strategy RFP for leasing and property management entity Action: Fiscal year 2010 - NO CHANGE RFQ, RFP, and ENA for Master Developer National outreach Experience and financial resources key criteria Use selection process to get up front concessions Action: Fiscal year 2010 - NEED TO REVISE RFP for marina operator in partnership with U.S. Army Action: Fiscal year 2011 - NO CHANGE

  8. Master Developer Pros and Cons Pros: Single entity handles real estate on behalf of FMFADA Integrated planning and development Access to private/public debt and equity markets “Lean and mean” staffing of FMFADA Cons: Risky: “All of one’s eggs in one basket” Encumbers Fort Monroe if partner’s financial conditions deteriorate Rare for one developer to excel in all development types Financial returns: reduced due to lease “sandwiches” with sub-developer Too many financial pockets to feed Lack of control: economic and programmatic interests not always aligned

  9. The Multiple Developer Scenario Pros: “Best in class” niche developers selected for discrete projects Improves financial returns by: Eliminating master lease Fee development opportunities Direct end user leases Access to private/public debt and equity markets Deal structure can be customized to fit the opportunity Greater control by FMFADA to balance economic and programmatic interests Cons: Lower degree of integrated planning Increases staffing requirements for FMFADA FMFADA assumes master developer role

  10. FMFADA as Master Developer Under a multiple development partner scenario the FMFADA acts as master developer providing: • Integrated planning • Overall real estate marketing and branding • Infrastructure financing and construction • Lease negotiation and execution • Project coordinating and monitoring • Lease administration As a master developer, FMFADA will require a larger staff than previously planned.

  11. Near Term Development Opportunity Prepaid Residential Leaseholds • 174 historic residences • Good to excellent condition • Have value today that can be leveraged • Low-to-moderate capital investment required • Can be offered on a cluster-by-cluster or neighborhood basis • Developer can be engaged on “fee” basis • Developer invests little of own capital and is compensated by a fee (percent of project value and performance bonus) • Leaseholds used as collateral to secure financing

  12. Recommendations • Adopt a multiple developer approach • Reduce scope of first RFI/P/Q to Residential Lease Program • Postpone Industry forum to mid-2010 • Allows participation of new Interim Director of Real Estate • Permits FMFADA to resolve planning, historic tax credit, and infrastructure issues • Time to formulate Residential Leasehold program details • “Soft” Marketing Campaign • Identify and brief potential “best in class” developers • Ensure developer market understands and buys into program • Line up local lender and real estate community support • Need to ensure qualified developer response

  13. Background Slides

  14. Residential Leasehold Program • Concept approved by Board: Offer long-term (50+ year) leases of historic residences with pre-payment of rent Establish endowment/pay for capital costs with proceeds • Issues: • Pioneering product in Hampton Roads • Need to develop support infrastructure (e.g, local lenders, brokers, title companies) • Avoiding fixed rental rates/avoiding “surprises” to leaseholders • Capturing future property appreciation • Examples: • Sea Colony, Delaware • Pensacola, Florida • Jekyll Island, Georgia • Palm Desert/Palm Springs, California • Hawaii • Santa Inez, California • Universities/Colleges • Land Trusts

  15. Capital Requirements: “Three Buckets” Reuse and redevelopment of Fort Monroe will require significant capital at three levels: Low Medium High • Residential • Leasehold • Own land and • improvements “free & • clear” • Moderate unit rehab • Site & parking • improvements • 3rd-party capital • required • New Construction • Own land only • New construction of • improvements & • infrastructure • Highest capital • requirement • Highest level of risk • 3rd-party capital • required • Interim Leasing • Own land and • improvements “free & • clear” • Minor upgrades • Little capital at risk • Exposure to “market” • risk • Leasing and property • management functions • This suggests different contractual arrangements and deal structures with private management and development entities.

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