This document summarizes an apartment association presentation on Houston apartment market trends. It discusses five categories of apartment properties in Harris County totaling over 591,000 units. Apartments are classified from Class A to E based on amenities, condition, and design. The document outlines adjustments being made to HCAD's 2010 income models based on declining rents, occupancies and increasing concessions. It also notes a decline in new apartment construction activity and increasing capitalization rates reflecting the difficult market. Overall, the Houston apartment market is expected to remain slow during the first two quarters of 2010 as the local economy recovers.

1. Houston Apartment Association Presentation Commercial Property Division Bobby Larry RPA, CAE Division Director Jim Robinson, Chief Appraiser

2. Land Use Codes Definitions Units Stories Properties Units 4209 Apartment Structure 4-20 3,308 36,556 4211 Apartment Garden Style 1-3 2,275 461,686 4212 Apartment High Rise 4 or more 108 18,809 4221 Apartment Subsidized Housing 279 30,209 4222 Apartment Tax Credit (LIHTC) 209 43,889 Within Harris County, there are a total of 6,179 apartment properties, consisting of 591,149 units, classified as State Class Code B1. HCAD has defined five (5) distinct apartment types that are categorized based on size, type, and use. APARTMENT TYPES Jim Robinson, Chief Appraiser

3. Apartment structures are categorized into five (5) building classes. The building classification system was implemented based on rent levels, age, amenities, physical condition, and functional design of the project. The building classes vary from Class “A “ to Class “E”. The Class “E” building classification is utilized exclusively for apartments valued based on the costapproach, which are typically new apartments; older properties in which the current use is no longer the highest and best use, and properties with unique features that do not correspond with the other classifications. Properties with twenty (20) units or less, also referred to as Land Use Code 4209, are also valued using the cost approach method. HCAD’S cost model is based on information received from Marshall & Swift and AIA documentation ascertained during the appeals process. Jim Robinson, Chief Appraiser

5. Tennis Courts

6. Exercise Rooms

7. Cable TV W/D Connections

8. Fireplaces

9. Pets accepted

10. Playground

11. Entrance Gates or Guard

12. Officers living on-site

14. Club House

15. Covered Parking

16. Patio/Balcony

17. Ceiling Fans

18. Outside Storage

19. Perimeter Fence

20. Patrol Service

21. TV Monitored Grounds

22. Valet Services

23. Maid ServiceAge Range No limit on high-rise Typically 1983 to present on low to mid-rise styles GENERAL GUIDELINES FOR APARTMENT BUILDINGS CLASS “A” Jim Robinson, Chief Appraiser

25. Private Entrances

27. Energy Efficient

28. Alarm Systems

30. Swimming Pools

31. Exercise Facilities

33. Jacuzzi

34. Covered Parking

35. Leasing OfficeAge Range Typically 1970 to present GENERAL GUIDELINES FOR APARTMENT BUILDINGS CLASS “B” Jim Robinson, Chief Appraiser

37. Common walkway for several units

38. Some decorative enhancements

40. Security Patrols

44. HCAD delineates Harris County into twenty-eight (28) geographical economic areas. These areas allow us to view market trends and income information based on its location within the county. Apartment Data Services (ADS) uses similar economic boundaries. Jim Robinson, Chief Appraiser

45. TYPE SIZE Efficiency Less than 550 sq. ft. 1 Bedroom 550 – 820 sq. ft. 2 Bedrooms 821 – 1100 sq. ft. 3 Bedrooms 1101 – 1500 sq. ft. and over In apartment valuation, HCAD takes into consideration the average unit size and the total number of bedrooms. This chart below is published by ADS. HCAD also follows these guidelines. Several vendors are utilized to assist in accurate property valuation. To develop income models, information is gathered from various sources which include Apartment Data Services (ADS), REIS Services, Korpacz Investor’s Survey, actual income and expense statements ascertained during the appeals process, as well as other vendors that provide economic information. Jim Robinson, Chief Appraiser

46. Jim Robinson, Chief Appraiser

47. Jim Robinson, Chief Appraiser

48. The appropriate market rents are applied after determining the proper economic area and class. HCAD’s income model takes into consideration whether concessions are given, the stabilized occupancy, and ancillary income if applicable. When this calculation is completed, it generates an effective gross income. The next step is a deduction of market expenses. The income model separates market expenses into the categories of fixed expenses; which include property insurance, and variable expenses; which include but are not limited to payroll, utilities, repairs and maintenance, and marketing. The model then accounts for management fees, franchise taxes, and reserves for replacements. After all of these factors have been considered, the net operating income remains. HCAD’s model utilizes a loaded capitalization rate that uses a component for the effective tax rate. At the conclusion of the appeals process, the income and expense statements received are keyed into the database to be used for future analysis and valuation. This information is vital because of the constant changes in the local market. We are then able to generate reports to analyze market trends for each area, type and class. This allows us to easily determine rental rates and market expenses. HCAD receives the best and most current information available from various sources. This information allows us to accurately place a market value on each property as of January 1 of any given year, according to the State Property Tax Code and USPAP standards. Jim Robinson, Chief Appraiser

49. Jim Robinson, Chief Appraiser

50. Inpreparation for the 2010 tax year and analyzing current market trends, HCAD has recognized a further decline in occupancies and rental rates in the fourth quarter of 2009. This is due to a combination of factors. First, financial markets have frozen across the country, making it difficult to obtain loans to purchase or refinance apartments. Secondly, lenders are requiring a substantially larger equity portion upfront from the investors. Also, the lack of financing and a decrease in demand for apartments have contributed to a decline in new apartment construction locally. Many projects have been put on hold or scaled back. Although Harris County has witnessed an economic downturn, it still remains relatively stable in comparison to the national level. Per the Real Estate Center at Texas A & M University, from December 2008 and December 2009 the statewide unemployment rate increased from 5.7% to 8.0%. Locally, the Houston area witnessed an increase of 3.5%, leaving Houston’s unemployment rate 8.3% during the same time frame. The construction sector witnessed the highest loss of jobs at a rate of 15.4%, or 99,500 total jobs. Although Houston is experiencing record unemployment rates, it still has not seen the vast amount of job losses the nation is witnessing. Per Texas A & M, the U. S. unemployment rate rose from 7.4% in December 2008 to 10% in December 2009. Many local economists anticipate seeing an improvement in employment rates beginning mid-2010, and reaching near normal levels in 2011. Jim Robinson, Chief Appraiser

51. Houston’s economy relies heavily on international trade. The Houston job market is dominated by oilfield service companies, and companies that provide support service for this industry. For Houston to replenish jobs, the international trade level must first be revived. With some foreign countries witnessing economic growth in late 2009, as well as gains in imports and exports, Houston is expected to regain a portion of the jobs lost in this field. As Houston’s employment rates begin to upswing around the middle of 2010, it is expected to see increases in population. This influx of population will increase demand for apartments. The apartment market may well be one of the first segments to rise from the economic downturn. As these influences work through the local economy, apartment demand is expected to rise. Jim Robinson, Chief Appraiser

52. Rental Rates During the third and fourth quarters of 2009 rental rates fell as apartment occupancies dropped. Most communities are now forced to offer free rent or other concessions to maximize occupancy. Per Apartment Data Services (ADS), 67% of apartment communities are now offering concessions. Consequently, Class “A” apartments are providing the largest concessions of 10.2%. Of the 41 sub-markets analyzed by ADS, only 4 have had a rental rate increase in the fourth quarter of 2009. The Northwestern region had the largest increase at 25.9%, having a current rental rate of 89.4 cents per square foot. The remaining submarkets saw declines, ranging from a very slight decrease to double digits. Throughout the metro area, ADS reports that vacancies rose from 11.9% to 15.1% between late 2008 and late 2009. This number includes properties newly opened that have not reached stabilized occupancies. During calendar year 2009, rents declined from an average of 83.8 to 81.6 cents per square foot for the overall market. Hurricane Ike damaged or destroyed many apartment units in late 2008. This temporarily increased the demand for undamaged apartments in some submarkets. Currently, the majority of damaged complexes have either already began or have finished all necessary repairs caused by the storm. Jim Robinson, Chief Appraiser

53. CLS NUMBER OF PROPERTIES AVERAGE RATE CENTS/SF/MO OCCUPANCY CONCESSIONS A 358 117.2 82.6% 10.2% B 1,003 84.2 86.8% 7.1% C 1,017 66.9 82.7% 5.7% D 474 45.5 82.1% 4.0% OVERALL 2852 81.6 84.3% 7.4% Jim Robinson, Chief Appraiser

54. 2009 2010 Rent Per ADS Per ADS Concessions 4% of potential rent 8% of potential rent Occupancy 93% 91% Variable Expenses 25% of effective gross 26% of effective gross Cap Rate 7.50% base 7.75% base 2009 2010 Rent Per ADS Per ADS Concessions 0% of potential rent 6% of potential rent Occupancy 90% 88% Variable Expenses 33% of effective gross 34% of effective gross Cap Rate 8.00% base 8.50% base 2010 INCOME MODEL ADJUSTMENTS CLASS A CLASS B Jim Robinson, Chief Appraiser

55. 2009 2010 Rent Per ADS Per ADS Concessions 0% of potential rent 4% of potential rent Occupancy 88% 86% Variable Expenses 40% of effective gross 41% of effective gross Cap Rate 8.50% base 9.50% base 2009 2010 Rent Per ADS Per ADS Concessions 0% of potential rent 4% of potential rent Occupancy 86% 84% Variable Expenses 50% of effective gross 52% of effective gross Cap Rate 9.50% base 10.50% base CLASS C CLASS D Jim Robinson, Chief Appraiser

56. 2009 2010 Class A 8.50% base 9.00% base Class B 9.00% base 9.50% base Class C 9.50% base 10.00% base Class D 10.50% base 11.00% base 2009 2010 Class A 9.50% base 10.00% base Class B 9.50% base 10.00% base Class C 9.50% base 10.00% base Class D 9.50% base 10.50% base SUBSIDIZED CAP RATES TAX CREDIT (LIHTC) CAP RATES Jim Robinson, Chief Appraiser

57. 2008 Certified 2009 Certified Less New Construction Percent Change 4209 $734,802,867 $749,980,791 $747,528,305 1.7% 4211 $14,604,999,510 $15,101,166,780 $14,423,647,144 -1.3% 4212 $420,313,849 $616,371,694 $419,360,254 -0.03% 4221 $497,426,925 $512,427,698 $489,336,064 -1.6% 4222 $672,515,262 $791,909,068 $753,003,048 11% TOTAL $16,482,374,180 $17,771,856,032 $16,832,874,815 2.0% Market Trends For many years, there was a consistent increase in market values across the board in all property types. This trend has changed during the recent economic downturn. Because of the uncertainty in the economy and apartment market, most investors are choosing a longer holding period as opposed to selling now for a loss. Per Real Capital Analytic’s (RCA) data, the average apartment cap rate is 7.1% for the third quarter of 2009. Per Korpacz, cap rates increased to 7.84% in the third quarter of 2009 nationally. REIS indicates a 12-month rolling cap rate of 8.5% for the local Houston market. Real Capital Analytics has identified forty-three (43) investor grade transactions in Houston. The estimated sales volume totaled $400 million in the first 3 quarters of 2009. 2008 and 2009 Certified Value Comparisons Jim Robinson, Chief Appraiser

58. New Construction: The new construction activity for apartments is declining as expected due to equilibrium, the difficulty to find financing for new projects, and the consumer’s ability to spend money. During calendar year 2009, forty-five new complexes totaling 13,426 units were added to the Houston market. Per ADS, there are 12 complexes under construction at this time, consisting of 2,523 proposed units, which is a downward trend from 2008’s proposed rate of 17,613. Of the new apartment complexes entering the market, four are tax credits and four are senior housing. Due to population growth, the northwest portion of the county, as well as Katy and the far western edge of the county leads in the number of new apartments being constructed. Jim Robinson, Chief Appraiser

59. AKA ADDRESS UNITS KMAP Sheldon Ranch 930 Dell Dale St - Residential 40 498A Cypress Creek at Reed 2910 Reed Rd 132 573B Villas at Shaver 3271 S Shaver 240 576D Preserve at Baywood Red Bluff/Genoa Red Bluff 336 578M Sierra Meadows ** 90 375T Fountains at Memorial City (Condo) 9870 Gaylord 114 490B La Maison on River Oaks 2727 Revere St 423 492U Gables West Ave 2800 Kirby 389 492U Golden Bamboo Village Ph1 12010 Dashwood 57 529E City Place 306 McGowen 185 493P Space Center Plaza Space Center Blvd/Crenshaw 313 618V The Lynn at Country Club Apartments Baker Rd/Emmett Hutto 204 501K TOTAL 2523 Apartments currently under construction as of December “09: * Tax Credit ** Senior Housing Jim Robinson, Chief Appraiser

60. Summary The economy in Houston is expected to remain slow during first 2 quarters of 2010 due to the lack of funding and investor uncertainty. Houston’s apartment rental rates have declined and increasing amounts of concessions are being offered, thus lowering market rents. With unemployment rates steadily increasing, occupancy rates are decreasing. This trend is expected to continue through mid-2010. Many investors have delayed their purchases of apartment properties. New apartment construction has seen a drastic decrease due to the current over-supply of units and lack of funding. This will help the Houston apartment market reach equilibrium when the units begin experiencing positive absorption. As a result of current economic trends, HCAD has addressed changes in the four critical variables in the income model used to value properties. The first component addressed is the market rents, which are carefully researched. As indicated by the market, we have populated the base model for each property segment with a minimum 2% concessions. HCAD has adjusted stabilized occupancies downward by 200 basis points for all property segments. The variable expense category under market expenses has also been indexed upwards. For all income producing properties appraised by HCAD, the capitalization rate has been adjusted upward between 25 and 100 basis points. Jim Robinson, Chief Appraiser