IPT LOCAL LUNCHEON GROUP – SAN ANTONIO

JEFF MOORE- SENIOR DIRECTOR, ONESOURCE® PROPERTY TAX ZACK FLEMING- SENIOR MANAGER, ONESOURCE® PROPERTY TAX

SEPTEMBER 13, 2012

E C O N O M I C T R E N D S , C O M M E R C I A L R E A L E S TAT E U P D AT E , A N D M A N U FA C T U R I N G TA X S AV I N G S O P P O R T U N I T I E S

WHERE DO WE START?

The Economy!• The global, national and local economy is a key driver of

asset values, both real and personal

• The economic cycle, timing and market expectations – must be considered in valuations

• A property tax strategy must link the macro economic cycles and the industry sector cycles to the specific issues impacting our facilities and assets

• So, what’s going on with the economy?

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CONSUMER CONFIDENCE/SENTIMENT

INITIAL CLAIMS FOR UNEMPLOYMENT AND UNEMPLOYMENT RATE

HOUSING STARTS AND PERMITS

INDEX OF LEADING ECONOMIC INDICATORS

TEXAS OUTPERFORMING THE U.S. ECONOMY

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United States Texas

Job growth (non-government) 1.8% 3.0%

Unemployment rate 8.3% 7.2%

Consumer Confidence Index* 65.9 92.7

Home price decline since 2010 30% 4%

* Includes Texas, Louisiana, Oklahoma, Arkansas

EAGLE FORD SHALE – ECONOMIC IMPACT

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Fourteen-county Study Core Region, 2011

• Almost $20 billion total economic impact

• $310 million in state tax revenues

• $211 million local tax revenues

• 38,000 full time jobs supported

– 4300 in Bexar County

• Drilling permits issued: 129 in 2009, 3823 in 2011

(Source: Institute for Economic Development, UTSA, May 2012)

EAGLE FORD SHALE PRODUCTION 2009-2011

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- Gas (tens of MCF)

- Oil (BBL)

- Condensate (BBL)

SAN ANTONIO AREA COMMERCIAL REAL ESTATE MARKET UPDATE Q3 2012

MAJOR PROJECTS

• Helotes Town Center – 200,000 sq.ft. project (2013)

• Boeing – Wichita Operations to SA – over 400 jobs

• Home Development – Plats filed doubled YoY(N/NW)

• Eagle Ford – $25 billion impact south Texas 2011

LOCAL ECONOMY

• Job Growth – Large job losses 2nd half 2011– Metro wide employment rose 2% first half 2012– Citywide unemployment – 6.4%

• Housing– Single Family Permits 4,200 last 12 months– Number distressed Sales Declining

SECTOR UPDATES

• Multi-family

• Retail

• Industrial

• Office

• Hospitality

MULTI-FAMILY

- Occupancy Rate – 92%

- Rental Rates – $.88

- Cap Rates – 6.5%

- Sales Volume – 10%

- Construction – 250%

MULTI-FAMILY – VISUAL

A > B > C

Multi Housing Investment TrendsTrailing 12 Months (in Millions)

Occupancy Rates

CONSTRUCTION FACTORS

• 2011 Lack of Construction – 500 new units

• 1st half 2012 – 975 units brought online

• 2012 year end – 2,800

• 4,000 units under construction currently

• 5,400 units in pipeline

• Most activity in far north central and north west

RENTAL RATE AND VACANCY FACTORS

• Rents – 2011 – rose 2%– 2012 – on track for 3% increase– $700 / month

• Vacancy – 2011 – declined 130 points– 2012 – on track to decline another 70 basis point– 2012 YE – 6.4%

• Recent Sales– Haven at Blanco -$+/-120K per unit (74% Assessed Value)– Palomino – Undisclosed

RETAIL

• Construction

• Vacancy

• Rental Rates

• Deal of the year

VACANCY AND RENTAL RATES

• Vacancy has decreased to 9.5 %– 20 basis points below recession peak levels– High traffic power centers > neighborhood strip centers– Return of consumer spending (finally)

• Rental Rates – Increase 1.3% - $14.58– Concessions – 12.5% asking rents

CONSTRUCTION

• 850,000 sq.ft. new retail space– 2011 – 675,000 sq.ft. new space– Mainly single tenant “net lease” type space

• Very few new listings• Trading at mid-7 cap rates

• Major Moves – HEB – Bandera/1604 – 182,000 sq.ft.– Wal-Mart – Helotes – Ends 2 Year delay

• Thousand Oaks and Nacogdoches◦ Fall 2013◦ 150,000 sq.ft. / 300 new jobs

RETAIL – DEAL OF THE YEAR

• Arbor Parks Shopping Center – 281/1604 – Under Contract – $26 million or $187 PSF– Buyer – RioCan REIT– Seller – Dunhill Partners – 6.7% Yield– 74% LTV– 4.7% Interest Rate– Term – 60 months

INDUSTRIAL

- Lease Rates - $4.15 Distribution-$8.57 Flex

- Absorption – 565,653 SF - Q2 2012

- Construction – 300,000 SF

- Vacancy – 14.5%

MOVERS AND SHAKERS

• Maruchan – aka Ramen Noodles– $325 Million warehouse / 500,000 SF– Fischer Road 410 / 35 S (2013)– NOW HIRING – $7.25 hour – 500 jobs

• Eagle Ford Shale Investment– Contributed 38,000 full-time jobs– 117,000 jobs by 2021 (30 years worth of shale

production)

• U.S. Silica Holdings – Sand Suppliers– 290 Acres SW– 15,000-ton frac sand storage facility (2013)

INDUSTRIAL MARKET SNAPSHOT

INDUSTRIAL – SUB MARKET PERFORMANCE

OFFICE OVERVIEW

• 2011 – 2nd half – 350,000 SF Absorption

• 2012 – Large Vacancies– AT&T – Corporate Campus – 433,00 SF– KCI, NuStar, Kentic Concepts, Nationwide – 350,000 S

• Class C Sales – consisted half trades in 2011– Local Investors – Value-add along 410

OFFICE – CAPITALIZATION RATES

SALES

Volume - Real Capital Analytics Sales Price - Loopnet

LEASE TRENDS

OFFICE – DEAL OF THE YEAR

• Westdale Asset Management buys NW Center and Colonnade 1 (Portfolio Sale)

$17.7 million - $105 SF$33.6 million - $139 SF (pending)

HOSPITALITY INDUSTRY• Few “Arms-Length” Transactions in 2011-2012• Downtown Troubles

– Hotel Indigo Riverwalk – Bankruptcy – sold at Auction for $9,000,000 (defaulted on $16,300,000 loan)

– Hotel Indigo Alamo Plaza – Bankruptcy ($21,000,000 in loans for 4 hotel portfolio in San Antonio)

– St. Anthony – Bought Out of Receivership - Undisclosed– Gunter – Sold in Foreclosure – Undisclosed*

• 2011 Overall Performance– Occupancy – 59.6% – Up 2.0%– ADR – $97.71 – Up 0.9%– REVPAR – $58.27 – Up 2.43%– Still Well Below 2008 Highs

• 2012 Year to Date– 9.38% Increase in Total Room Rev

MIXED USE DEVELOPMENT

• Eilan – Hotel/ Office/ Retail/ Residential

• Pearl – Hotel/ Office/ Retail/ Residential

• Downtown – Planned Office/ Retail/ Residential

MANUFACTURING INDUSTRY TRENDS AND TAX SAVINGS OPPORTUNITIES

MANUFACTURING CAPACITY UTILIZATION RATE

MANUFACTURING CAPACITY UTILIZATION RATE

Strength:• Machinery

• Electrical Equipment

• Fabricated Metal ProductsWeakness:

• Furniture

• Wood products

• Textile and apparel

• Printing

Capacity Utilization varies widely among Manufacturing Subgroups:

COMMODITY PRICES

INDICATORS OF EXTERNAL OBSOLESCENCE

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• Reduced demand and/or excess supply for the product or service

• Changes in consumer preferences

• Intensifying competition– Global (low cost-of-production countries)

– Local/Regional (transportation disadvantages)

• Changes in the economics of the industry

– Cost shifts of materials, labor, utilities and transportation

• Legislation (including environmental) requiring asset disposition, reconfiguration or additional capital investment

External Obsolescence is typically incurable but may not be permanent. The magnitude of an adjustment often varies over time

INUTILITY DEFINED

How does the American Society of Appraisers define Inutility?

“Whenever the operating level of plant or an asset is significantly less than its rated or design capability, and the condition is expected to exist for some time, the asset is less valuable than it would otherwise be. Such a penalty for inutility can be a measure of the loss from this form of economic obsolescence.”

Valuing Machinery & Equipment, Second Edition, p. 97

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INUTILITY PENALTY CALCULATION

When used in calculating obsolescence, the Cost-to Capacity formula is stated as:

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100xityRatedCapacProduction Actual(%)Inutility

x1

48.3% 100 x 1(%)Inutility 0.6

30,000,00010,000,000

Example: Pharmaceutical Plant Actual Production: 10 Million Vials Per YearRated Capacity: 30 Million Vials Per YearScale Factor: 0.6

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INDICATORS OF FUNCTIONAL OBSOLESCENCE

• Assets that operate at higher costs (labor, utilities, raw materials) than modern replacements

• Assets in current use that will require replacement in the near future

• Assets that have recently been rebuilt (or need to be)• Assets that have become technologically obsolete that are

being utilized at reduced capacities• Idled, substantially underutilized or “junked in place” assets• Assets present at the facility that are backup or redundant

systems

MEASURING FUNCTIONAL OBSOLESCENCE

• Most common methods include:– Calculate the present worth of the future excess

operating costs associated with the subject assets – Estimate the present value of the cost to cure the

obsolescence– Identify the difference between reproduction cost and

replacement cost