The SODO Arena MOU: A Shortfall in Fair Value under Initiative 91 Consulting Report As of November 15, 2013 Prepared by Private Valuations, Inc. 1800 - 112th Ave. NE, Suite 302E Bellevue, Washington 98004 Tel (425) 688-1700 Fax (425) 450-9990 November 18, 2013 Mr. Cleveland Stockmeyer Cleveland Stockmeyer PLLC 8056 Sunnyside Avenue North Seattle, Washington 98103 At your request, we investigated the shortfalls in fair value standards for required payments and required security under Seattle’s Initiative 91 (“I-91”) for the proposed SODO sports arena facility (the “Arena”) as provided for in the Memorandum of Understanding (the “MOU”), which was signed by Chris Hansen, the City of Seattle (the “City”), and King County (the “County”), pursuant to Ordinance 124019 of the City of Seattle. Executive Summary In this engagement, you have asked us to examine whether and how the MOU terms may violate the fair value standards established in I-91 for required payments, and for required security. You asked us to examine the fair value standards in I-91 for required payments in terms of three services or facilities provided to ArenaCo in the MOU: A. The $200 million public financing amount or other public financing amount to be provided to ArenaCo at the outset of the transaction and repaid over some 32 years; B. Arena related tax credits over 32 years of the transaction; and, C. Property tax avoidance over 32 years of the transaction. You also asked us to examine the value received by the City after the end of the transaction in terms of land and improvements passing to the City under the MOU. The following is the summary of our findings: First, there is a gross shortfall in the I-91-required payments for fair value return concerning the three elements mentioned above which amounts to $824,130,000 over 32 years. This shortfall includes the following elements: (a) a shortfall in I-91 required return on the $200 million in public financing in the amount of $149.3 million; (b) a shortfall in the I-91 required payments and return on Arena tax credits in the amount of $424.5 million; and (c) a shortfall in the I-91 Mr. Cleveland Stockmeyer November 18, 2013 Page 2 required payments and return on property tax avoided of $250.3 million. These amounts, when combined, produce a total fair value shortfall in I-91 required payments of $824,130,000 as shown below: After subtracting an estimated $92,380,000 for value of the land and improvements to be gained by the City after 32 years, the net shortfall in fair value required payments under I-91 is $731,750,000 as shown below: Mr. Cleveland Stockmeyer November 18, 2013 Page 3 These figures are shortfalls in that ArenaCo is not required to pay these amounts in the MOU but is required to pay these amounts to satisfy the fair value standards of I-91. In the above calculations or estimates, we are simply assuming that ArenaCo pays all such amounts after 32 years. It should be noted that at present there is no provision in the MOU for these amounts ($824,130,000, or the net amount of $731,750,000) to be paid at any time. If not repaid after 32 years, the interest or I-91 required return on the three elements will continue to grow indefinitely until these amounts are paid back. Thus, the assumption implicit in the above numbers is that they are repaid at the conclusion of the Arena Use Agreement in some 32 years—but if not repaid for a longer period, 50 years or more, the amounts of net fair value shortfall could be even greater. Again, the above shortfalls in required payments are payments that are not presently required in the MOU, but which are required to comply with the I-91 fair value provisions. Second, we find that the payments that are required to be made in the MOU are not secured properly by conventional standards. I-91 excludes all unsecured future cash obligations from the fair value calculation. You have also asked us to examine potential cash payment obligations that are required of ArenaCo in the present MOU and any shortfall in I-91-required security for such future cash payments in light of the common usage of the term “security” in commercial real estate transactions in greater Seattle/King County. Although the MOU has provisions referred to as “security” and “guarantees”, these terms, when viewed strictly in the context of a conventional lease or an arm’s length real estate transaction, fail to adequately secure ArenaCo’s future cash payment obligations in the MOU. The maximum potential principal amount of the payment obligations that are presently in the MOU but are unsecured is estimated to be at least $400 million. This includes the $200 million in public finance principal and $200 million for a put option (or at least $218.5 including demolition obligation of $18.5 should a put option not be exercised). Under I-91, future cash revenue that is not secured is simply excluded from the fair value calculation. The interest amount to be paid by the City on the $200 million public finance amount over 32 years is some $208.4 million, which also is unsecured and must be excluded. Thus, a total of $608.4 million in future cash revenues that are potentially required to be paid in the MOU are excluded under I-91 for lack of security. This lack of security under I-91 is in addition to and is distinct from the $731,750,000 shortfall in required payments noted above. Third, since the required payments are not secured conventionally, the payments not yet required in the MOU (the $731.8 million) are also not secured in the MOU terms. We have not analyzed the amount of security necessary to secure the $731.8 million that is not yet even required in the MOU, but it is hundreds of millions of dollars in security. In sum, to satisfy the taxpayer protection provisions of I-91, both shortfalls would have to be cured—the shortfall in required payments and the shortfall in security for all future cash payments. A summary of the valuation analysis is presented in the accompanying report. Mr. Cleveland Stockmeyer November 18, 2013 Page 4 Restrictions and Limitations In performing our analyses, the client has requested that we rely on the City of Seattle Arena related tax revenue projections to establish the basis for Arena related tax credits. We have also assumed Arena related taxes are owned by and belong to the City/County, which is why the MOU has to provide these amounts are credited to ArenaCo. We further assumed that property taxes are avoided by the MOU terms ensuring the City/County owns both the underlying project site and the Arena facilities. Normally, a borrower retains title to the property and would pay the property taxes over the term of the loan. Change in this presumption may alter our opinion as to the value of such credits/subsidies. Respectfully Submitted, PRIVATE VALUATIONS, INC. ADRIEN E. GAMACHE, PH.D., ASA CEO MARGARET BUSHNELL Financial Valuation Analyst BV Report ELENA LEE, CFA Vice President Table of Contents Initiative 91’s Fair Value Standards ................................................................................................6  The SODO Arena Memorandum of Understanding (MOU) ...........................................................6  Project Site .......................................................................................................................................8  I-91 Shortfall Analysis .....................................................................................................................9  A.  I-91 Required Return on Public Finance Amount ...................................................9  B.  Arena Related Tax Credit ......................................................................................10  C.  Property Tax Avoidance ........................................................................................11  D.  Land and Arena Residual Value ............................................................................12  E.  Unsecured Future Cash Obligations ......................................................................13  Summary of Conclusions ...............................................................................................................15  Addenda .........................................................................................................................................17  Exhibit A – Description of Private Valuations, Inc. ......................................................................18  Exhibit B – Qualifications of Valuation Consultants ....................................................................20  Exhibit C – I-91 Shortfall Calculations .........................................................................................24  5 Initiative 91’s Fair Value Standards In 2006, three-fourths of Seattle voters approved Initiative 91 (“I-91”). The voter’s pamphlet statement in favor of the proposed law stated I-91 “stops tax subsidies for pro sports teams” and “makes the Sonics pay their own way.” The initiative states it is enacted “to prohibit the City from providing or leasing facilities or other goods, services, or real property to professional sports organizations at below fair value, and to provide a method to enforce the restriction.” 1 I-91 requires the City to receive “fair value” for any goods, services, real property or facilities provided to for-profit professional sports organizations2. Fair value is defined with several further conditions in I-913. First, payments that come after the provision of services or facilities must include a rate of return—payment in addition to the principal amount—at or above the level of a 30-year U.S. Treasury bond, beginning at the time the services or properties are provided. Second, in this calculation, interest and financing costs are excluded. Third, all intangible, indirect, non-cash items such as goodwill and cultural or general economic benefit to the City, are excluded. Fourth, all unsecured future cash revenues are excluded. The SODO Arena Memorandum of Understanding (MOU) The MOU sets forth the business terms and conditions, including the basic terms for the public financing, of the proposed SODO sports arena facility (the “Arena”) between the City of Seattle (the “City”), King County (the “County”), Chris Hansen, and WSA Properties III, a Delaware limited liability company, and its affiliates (collectively “ArenaCo”). The following is a brief summary of the provisions outlined in the MOU. Assuming that both a basketball team and a hockey team are acquired, the public entities will raise $200 million in public finance and provide this amount to ArenaCo in two installments near the outset of the 32-year transaction. ArenaCo will acquire (or has acquired) the project site for the proposed Arena. ArenaCo will build the arena on the site and total project costs (including site acquisition) are estimated at $500 million. After the necessary permitting and reviews, and the City’s approval of the bid for construction, ArenaCo and City/County will execute a comprehensive agreement (“Umbrella Agreement”) consistent with the terms of the MOU for an Arena Use Agreement to last some 30 years. (The Use Agreement may be extended and last a total of 50 years, but we have not studied the financial impacts of that extension in this report). At the outset of the engagement, the City will purchase the land from ArenaCo. The purchase price paid to ArenaCo for the project site will be the fair market value of the land, permitted for a multipurpose sports and entertainment facility, as determined by an independent appraiser but capped at $100 million. The date the City issues the first installment of public financing to ArenaCo to fund the purchase of the project site from ArenaCo will be the “Closing Date”. 1 I-91 preamble, Ordinance 122357 (effective Nov. 30. 20997). I-91 Section 1. 3 I-91 Section 2. 2 6 Consulting Report On the Closing Date, the parties will enter into a 30-year ground lease for the project site, requiring ArenaCo to make annual base rent payments to the City in the amount of $1 million. Also on the Closing Date, the parties will enter into the “Lease-Purchase Agreement” which specifies the standards ArenaCo must abide by when building the Arena for lease to the City and County, and gives the City and County the right to purchase the Arena at a price equal to the principal component of all remaining lease payments. When the Arena is ready for occupancy (the “Commencement Date”), the rent obligation under the ground lease will terminate, and ArenaCo will enter into a lease or sublease (the “Arena Use Agreement”) for the Arena with the City and County for a term of at least 30 years (effectively to match the maturity of the public financing obligations). Under the Arena Use Agreement, ArenaCo will operate the Arena and receive all revenues associated with the operations and pay the City and County annual base rent of $1 million, plus additional rent in an amount that, when combined with the base rent and Arena tax revenues, will equal the City and County’s annual debt service obligation on the public financing. Arena related tax revenues include taxes generated at the arena including those paid by third parties such as property tax, leasehold excise tax, sales tax, admission tax, and Business & Occupation tax revenue. The date that the City and County exercise their right to purchase the Arena by the terms set forth in the Lease-Purchase Agreement, and the title transfers to the City and County, will be the “Transfer Date.” On the Transfer Date, the City and County will pay ArenaCo an amount equal to the principal component of all lease payments due under the Lease-Purchase Agreement, which constitutes the second debt installment. The amount of the second installment is dependent upon whether an NHL team has been secured and all NHL conditions have been satisfied. If the NHL team is secured and conditions are met: the second installment will be equal to $200 million less the first installment amount. In this study, we assume the NHL team is acquired and the public finance amount will be $200 million4. Thus, the MOU payment obligations only require ArenaCo to repay to the City/County the amount of the principal and interest owing by the public entities to bond purchasers on the public finance amount, that is, the amount the City must pay back on its borrowings from public bond purchasers to raise the $200 million. There is no requirement in the MOU for ArenaCo to pay anything more than that. Thus, while the payments are called rent, they also may be viewed as loan repayments because they are capped at the total amount of public debt service on the $200 million. There is no requirement that ArenaCo pay any profit (amounts greater than principal plus cost of borrowing) for use of the $200 million in public funds over some 32 years. Also, in the MOU, ArenaCo receives a credit equal to the Arena related tax revenues which accrues over the years of the Use Agreement, and ArenaCo thus does not actually pay the total of 4 If the NHL team is not secured and conditions are not met, the second installment will be an amount of debt that could be supported by the base rent established in the Ground Lease and stabilized Arena tax revenues, up to $145 million, less the first installment amount. The exact method of calculating stabilized revenue will be established in the Umbrella Agreement and will be based on economic and tax revenue projections. 7 Consulting Report principal and interest on the public finance amount (every dollar of the credit for arena related tax revenues reduces its obligation to pay rent). Upon the expiration of the term of the Arena Use Agreement, ownership of the Arena will revert to the City and County. Also upon the expiration of the Agreement, the parties will have the following options:  Put option: the City/County have the right to require ArenaCo to purchase the Arena, the project site, and all of the tenant improvements, for a purchase price of $200 million.  Call option: ArenaCo has the right to require the City/County to sell to ArenaCo the Arena, the project site, and all of the tenant improvements for a purchase price equal to the greater of (a) the amount of the first installment, CPI adjusted, or (b) $200 million. Additionally, if ArenaCo exercises the call option, they will be obligated to build a substantially similar new facility on the project site.  Demolition: If neither party exercises their respective put or call option, and if at the expiration of the Umbrella Agreement term neither the NBA team nor the NHL team agrees to continue to play at the Arena, ArenaCo will be obligated to pay for the demolition and removal costs of the Arena facility. Project Site Eleven parcels were identified as owned by various single-member limited liability companies where Mr. Hansen is the sole member presumed to comprise the site of the future Arena. The 11 parcels (22 lots) were purchased over a period of approximately 18 months, beginning in December 2011 and concluding in April 2013. The value of the parcels is assumed to be $59,680,600 based on the stated purchase price. We have not conducted an appraisal of the value of the properties in this study, and to fully assess I-91’s fair value requirement, such an appraisal would have to be made. We are simply assuming for the purposes of this study that the value is the stated purchase price. The parcels, located in the SODO district of Seattle, King County, have a combined area of approximately 6.55 acres (284,620 square feet). The parcels lie directly east of 1st Avenue South and north of South Holgate Street, and are split only by Occidental Avenue South (running north to south) and South Massachusetts Street (running west to east). All 11 parcels are zoned industrial commercial with a maximum structure height of 85 feet (IC-85). The intent of the industrial commercial zone is to promote development of businesses which incorporate a mix of industrial and commercial activities, including light manufacturing and research and development, while accommodating a wide range of other employment activities. Typical land uses include general and light manufacturing, commercial uses, transportation facilities, entertainment (other than adult), utilities, and salvage and recycling uses. The maximum space allowed for retail sales, service, and entertainment uses is currently 75,000 square feet. # Parcel Address Sq. Ft. Acres 1 766620-6285 1750 Occidental Ave S. 133,120 3.06 Purchase Date 12/6/2011 Price 21,632,000 Plat Block 319 Lot 1-11 8 Consulting Report # Parcel 2 3 4 5 6 7 8 9 10 11 766620-6425 766620-6420 766620-6417 766620-6415 766620-6410 766620-6405 766620-6400 766620-6465 766620-6460 766620-6455 Address Sq. Ft. Acres 1760 1st Ave S. 22,500 st 1746 1 Ave S. 11,250 1740 1st Ave S. 11,250 1730 1st Ave S. 9,000 17xx 1st Ave S. 18,000 1714 1st Ave S. 9,000 1700 1st Ave S. 21,000 1556 1st Ave S. 21,261 st 1548 1 Ave S. 10,239 1534 1st Ave S. 18,000 Total 284,620 0.52 0.26 0.26 0.21 0.41 0.21 0.48 0.49 0.24 0.41 6.55 Purchase Date Price 4/16/2013 9,024,600 9/6/2012 1,735,000 7/14/2012 5,589,000 8/28/2012 8,000,000 5/31/2012 9,450,000 4/10/2012 4,250,000 $59,680,600 Plat Block 320 320 320 320 320 320 320 321 321 321 Lot Vac 8 7-8 6 4-5 3 1-2 10-11 9-10 7-8 The combined 2013 assessed value for the eleven parcels was $45,548,100. Total property taxes billed for 2013 were $478,706. According to the MOU, a new multi-purpose sports and entertainment facility (the “Arena”) will have 700,000 square feet of usable space and sufficient improvements to accommodate approximately 19,000 attendees for concerts, 18,500 attendees for NBA games, and 17,500 attendees for NHL games. I-91 Shortfall Analysis A. I-91 Required Return on Public Finance Amount I-91 was signed into law so that the City would realize a fair value return (as defined in I-91) on any service or facility provided to for-profit professional sports organizations. In the MOU, the City/County provides a service or facility by providing a $200 million cash loan to ArenaCo, which is financed through the issuance of public debt. The principal on this debt and interest owing by the City/County will be paid from ArenaCo to the City/County over time with payments made by ArenaCo equaling the public entities’ annual debt service and consisting of approximately 64% in Arena related tax credits and 36% in rent payments assuming a 30-year lease5. I-91 requires exclusion of all costs of borrowing, or interest paid by the City or County, in assessing the fair value received from ArenaCo. Because the payment obligations in the MOU only obligate ArenaCo to repay the cost of borrowing plus principal, and such cost of borrowing is to be excluded from measuring fair value, the MOU does not provide for any return or interest or profit to be earned by the City and County on the public financing. I-91 requires a return 5 The 64%/36% are based on City of Seattle projections for Arena related tax revenue as proportion of total debt repayment, including principal and interest. We accept those as accurate for purposes of this study. We made a few simplifying assumptions when projecting interest and principal payments on public financing. The MOU terms call for semi-annual compounding, and the inclusion of issuance costs, with debt service payments escalating at a 1% annual rate for the first ten years on each installment. Amounts are stated in nominal terms. 9 Consulting Report above the return of principal and cost of borrowing, based on the U.S. 30-year Treasury bond rate. We calculated the amount of such return with the following assumptions:  Successful signage of the NHL team, in which case the total amount of public financing will be approximately $200 million;  The first debt installment will be $100 million (maximum allowed under the MOU) at 5.5% interest rate for a 30-year term;  The second debt installment will occur two years after the first installment in the amount of $80 million at a 5.5% interest rate and in the amount of $20 million at a 4.5% interest rate (both for a 30-year term);  We used the 30 year U.S. treasury rate as of September 6, 2013 for purposes of this study. Exhibit C-1 in the Addenda presents our calculations. As shown therein, the total I-91 required return on the $200 million of public financing is $149.3 million over a 32-year period. This return is not provided for in the MOU and is a substantial shortfall in the I-91 required fair value payments. We emphasize there is no requirement in the MOU for ArenaCo to pay this $149.3 million at any time. We are simply assuming it would pay it at the end of the 32 years. If ArenaCo did not pay it, the total amount required under I-91 would continue to grow as interest would continue to accumulate. B. Arena Related Tax Credit According to the MOU, ArenaCo gets credits for tax payments, including those made by third parties, to be counted as rent payments—not a matter of standard practice in any conventional lease or real estate transaction. Arena related tax credits must then be a dollar for dollar subsidy, a cash benefit transferred from the City and County directly to ArenaCo effectively reducing its tax operating expense to zero. Accepting the legal position that the Arena related taxes belong to the City/County, we analyzed the value of such credits or subsidies as they will be occurring over time. Arena related tax credits include incremental tax streams specified in the MOU including property, sales, admissions, Business & Occupation (B&O), and leasehold excise taxes. As shown in the Addenda, Exhibit C-2, the City projects that the first year of stabilized tax related Arena revenue and the Arena related tax credits will increase at a 1.6% compound annual rate from $7.1 million to $10.9 million over the 27-year projection period. Using the City’s own projections, we assume that the total amount of the Arena related tax credits is approximately $272 million over a 32-year period. These credits are a service or goods or facility provided to ArenaCo in the MOU, but the MOU fails to require the fair value of these amounts be repaid to the City at any time. This is another shortfall in fair value in the MOU to the extent of $272 million over 32 years. 10 Consulting Report Furthermore, as this benefit accumulates over time with credits reducing rent obligations biannually over 32 years, I-91 requires additional return to be paid to represent interest on these credit amounts until they are repaid. The MOU does not provide any date for repayment of these amounts. Assuming that ArenaCo does repay the credits and the date of repayment is after the 32 year period, the total cumulative value of the additional required return on arena related tax credit amounts is approximately $152.5 million. The sum of both elements ($152.5 million plus $272 million) is $424.5 million. Please refer to the Addenda, Exhibit C-2 for details on tax credit calculations. Again, there is no requirement in the MOU for the value of the credits to be paid nor for the additional return on the credits to be paid to the City/County at any time. Thus, this is an additional shortfall in the required payments for fair value as defined under I-91 in the amount of $424.5 million over 32 years. And again, if ArenaCo simply did not pay the amounts back after 32 years, the I-91 required return and shortfall amount would continue to grow. C. Property Tax Avoidance Normally, a lender making a construction loan does not take title to the land. By taking title to the land and the improvements for the Arena, the MOU effectively exempts ArenaCo from all property tax payments during the course of the lease. Property taxes are levied to fund state, county, and city services, including roads, transit, schools, libraries, and hospitals; they are an essential income stream that sustains functions essential to building the infrastructure and providing services that enable projects such as the Arena to be a viable addition to the local economy. From an I-91 perspective, property tax avoidance is a service provided by the public entities because normally a borrower retains title and must pay property taxes. I-91 requires ArenaCo to pay fair value for this service. If there is delay in repayment of this fair value, then ArenaCo also must pay additional returns calculated using the return on a 30-year Treasury note. To estimate the value of this service, we calculated the amount of property taxes that ArenaCo is avoiding because of the service of having the City take title during the term of the Arena Use Agreement. We projected property taxes due under a normal conventional real estate scenario without any tax exemptions or subsidies granted. According to our conversations in October 2013 with Mr. Lloyd Hara, King County’s Assessor, the land is typically assessed “as vacant” and the Arena improvements are assessed based on cost of replacement method, which takes into account current construction costs to replace the improvements and adjusts the number to account for depreciation based on the remaining useful life of the property. We used depreciation tables provided by Marshall & Swift for similar properties, assuming a 30-year useful life for the Arena facilities, which is consistent with historical useful lives of buildings of its kind (Key Arena and Kingdome) as well as Marshall & Swift guidelines for similar properties. For the site land, we relied on the acquisition cost by the Hansen investment group (approximately $60 million) as a “would be assessed” value, which is consistent with the Assessor practices. The estimated total project cost stated in the MOU (including the acquisition cost of the project site) at $500 million provided an indication of total construction costs of $440 million for the Arena ($500 million less $60 million). We also relied on Marshall & Swift’s construction cost index for similar properties in order to derive a 3.98% 11 Consulting Report long-term construction costs’ growth rate. For the long-term growth rate in land value, we used a conservative 2% which is below the long-term rate of inflation at approximately 3%. As presented in the Addenda, Exhibit C-3, the total amount of property taxes avoided by ArenaCo for the duration of the MOU over some 32 years is approximately $154.5 million. ArenaCo is receiving a service, in property taxes avoided every year going forward under the Use Agreement, and this service is worth some $154.5 million to ArenaCo. But ArenaCo does not have to pay for this service in the MOU. This is another shortfall in fair value in the MOU. If ArenaCo were to pay for this service at the end of the 32-year term, the I-91 required additional return on the $154.5 million in accrued tax savings over 32 years is approximately $95.8 million. Please refer to the calculations in the Addenda, Exhibit C-3. It should be noted there is no requirement in the MOU for these amounts to be paid back, either, and if not paid, the I-91 return will continue to grow. The sum of these two elements at the 32year mark is $250.3 million. This is a shortfall in fair value in the MOU. Summary The sum of these three shortfalls in fair value—for profit return on the $200 million, for fair value of Arena related tax credits and return on such credits, and for value of property tax avoided and return on such values—is some $824.1 million over 32 years. This is the cumulative fair value shortfall in required payments over 32 years for these three elements. Again, it should be noted that the MOU simply fails to require that this $824.1 million be paid, and, if not paid, the I-91 required return will continue to grow. D. Land and Arena Residual Value One item of consideration received by the City to be netted against the $824.1 million is the value of the building improvements and land. The City will purchase the land at the beginning of the project and own it throughout. At the termination of the Lease-Purchase agreement, the City and County will have complete ownership of the Arena and the improvements (unless ArenaCo exercises the call option discussed on page 8 of this report). Although the City/County will have an ownership interest in the Arena upon its completion, after 30 or 50 years of the Arena Use agreement, such facilities would become obsolete judging from recent experience with similar sports arenas (Key Arena and Kingdome). Also, based on our conversations with the King County Assessor, a reasonable useful life for the sports Arena would be approximately 30 years, beyond which it has no value. Still, the land will have value after the Use Agreement ends. Estimating that $10 million would be needed today in order to demolish the Arena facilities and assuming a 2% growth rate for both the land value and the Arena demolition costs, we project the land would be worth $92.4 million at the end of the 30-year Arena Use Agreement. 12 Consulting Report The value of the land and improvements to be gained by the City after 32 years being an estimated $92,380,000, the net shortfall in fair value required payments under I-91 is $731,750,000 over 32 years ($824,130,000 less $92,380,000). Again, this is $731,750,000 which is required under I-91’s fair value provisions, but which ArenaCo is not obligated to pay in the MOU. And should ArenaCo not pay this after 32 years, the amount will continue to grow. The City/County also has a put option requiring ArenaCo to purchase the site and the Arena facility from the City/County at the strike price of $200 million. This option would be valuable provided the land rises in value at or above the 4.25% compound annual growth rate6. However, there is no adequate security for this obligation should ArenaCo become a worthless shell company at the time of the option’s exercise. E. Unsecured Future Cash Obligations The shortfall of some $731,750,000 relates to payments not presently required in the MOU. There is also a shortfall in security relating to payments that are required or may be required in the MOU, which is a separate type of shortfall. In contrast to the MOU, a commercially reasonable conventional construction loan or an arm’s length real estate transaction would generally provide for rigorous security or guaranty provisions in order to satisfy various obligations created by such loan or transaction. Collateral under such lending scenario is represented by the property that is held separately from the borrower’s entity. If the borrower stops making the promised payments, the lender can seize the collateral and sell it to satisfy the payment obligations of the borrower. In a typical commercial lending transaction, the loaned amount or amount secured, is only a portion of the collateral’s overall value. The collateral property securing the obligation is worth more than the total amount secured. A loan-to-value ratio typically ranges from 60% to 80% of the collateralized property’s value. To illustrate this concept, at a 60% loan-to-value ratio, a $1.0 million loan will have to be collateralized by assets valued at $1.67 million; at an 80% ratio–by assets valued at $1.25 million. In order to obtain a $200 million loan to fund land purchase and construction costs, a commercial borrower would have to provide adequate security to secure principal payments ($250 to $334 million) as well as any other legally binding obligations created as part of the transaction. As a common matter and prudent risk practice in commercial lending, the collateral must be separate property from the borrowing entity. Such collateral would typically include separately held cash deposits, marketable securities, real estate, equipment or other liquid assets. Unlike security provisions in conventional loans or leases, there is very little, if any security, for the vast obligations created in the MOU. The following is the summary of major MOU present and potential obligations and the unsecured dollar amounts associated with each: 6 Assuming Arena demolition costs are $10 million in today’s dollars and will grow 2% annually for 30 years. 13 Consulting Report Obligation Loan Principal Repayment Put Option Exercise Arena Demolition Nominal Amount $200.0 million $200.0 million $18.5 million We note that security provisions stated in the MOU have little or no effective coverage of the created obligations to the City/County by any commercial lending standards. Mr. Hansen’s personal guarantee does not adequately cover the put option or demolition costs should either option be exercised, and is limited in time as it only secures a few payments of public debt repayment up to a five-year period after he would first pay any amount under his guarantee. Additionally, the liquidation of NBA TeamCo does not provide liquid security or any real security by real estate lending conventions due to NBA ownership and transfer restrictions, volatility in a team’s value over a 30-year plus period and possible erosion of equity value due to senior debt. Both the reserve account and capital improvement fund provided in the MOU are too limited in scope and purpose to be considered as true security under conventional lending standards. In order to properly secure these obligations to pay some $400 million throughout the 32-year period at a conservative 80% loan-to-value ratio, Mr. Hansen would have to set aside collateral property that is held separately from ArenaCo (or TeamCo or HoldCo) valued at $500 million. Examples of proper types of collateral would be a personal stock portfolio or real estate in California. This type and kind of security is not provided for in the MOU. As a result, there is a significant shortfall in security and the related payments which are both the principal amount, and interest, on the $200 million, and amounts of other obligations in the MOU (the put option exercise or demolition obligation) are unsecured future cash revenues which must be excluded from the calculation of fair value under I-91. The total maximum amount of principal payments required under I-91 that is excluded for lack of security is some $400 million noted above plus $208.4 million representing municipal interest on the $200 million, a total of $608.4 million. This amount of $608.4 million represents future cash revenues projected to be made, and which are required to be made, under the MOU, but which are excluded from calculating or assessing fair value under I-91 for lack of security. This amount of $608.4 million is a security shortfall that is distinct from the $731.8 million discussed above, which represents payments required for fair value under I-91 which are not even required to be made at any time under the MOU. 14 Consulting Report Summary of Conclusions The following are the dollar amounts of the estimated I-91 shortfall in required payments listed by source, over 32 years: Value of Shortfall Fair Value Amount Additional I-91 Return Total - $149,270,000 $149,270,000 Arena related tax credits $272,000,000 $152,530,000 $424,530,000 Property tax avoidance $154,530,000 $95,800,000 $250,330,000 - - $824,130,000 ($92,380,000) - ($92,380,000) - - $731,750,000 Shortfall Source $200 million public finance amount Subtotal Less: Return of land value Total shortfall in required payments over 32 years The above number represents the shortfall in required payments in the MOU—amounts which ArenaCo or the Hansen investor group is required to pay to reach the fair value standard in I91—which neither is required to pay in the MOU as presently written. The above calculations are an estimate based on the assumptions and limitations stated in this report. In addition, the deficient security provided in the MOU means that some $608.4 million ($400 million in potential principal amounts plus $208.4 million representing interest to be paid by the City/County on the $200 million of public financing) is excluded from calculating fair value under I-91. This amount of $608.4 million is a shortfall that is distinct from the $731.8 million discussed above, which represents payments required for fair value under I-91 which are not required to be made at any time under the MOU. In sum, to be compliant with I-91, the MOU would have to provide for the $731.8 million to be paid, and also secured; moreover, the MOU would have to provide for real security for all future cash revenues that are either presently required under the MOU or additional payments that are required to fully satisfy I-91 standards. To put these figures in context, one may consider that in a deal like the MOU that requires a large upfront investment, with minimal to no security provisions, a real world investor would likely expect equity participation. In such real world real estate equity transactions, developers who invest hundreds of millions of cash up front when it is not adequately and tightly secured, expect an equity rate of return upon the development of a property. Considering multiple sources when deriving market rates of return from capitalization rates7 such as CBRE’s 2013 Cap Rate Survey and CoStar Comps’ Mid-year 2013 Report, it is reasonable to assume, based on the prevailing market data, that an investor in a commercial mixed use or retail 7 An Over-All-Rate (OAR), or a capitalization rate, reflects the relationship between a single year’s net operating income expectancy and the total property price or value. A 3% long-term growth rate was added to arrive at total rates of return. 15 Consulting Report property in the greater Seattle area would require the rate of return anywhere between 7% and 13% solely based on spot market rates. The long-term expected market returns for U.S. real estate investments is 6.5%8. The discount rate reflects the uncertainty or risk associated with future returns, and the returns available from alternative investments. Higher uncertainty or risk leads to a higher expected rate of return, which produces a lower value for the investment. To illustrate the relationship of values and returns based on a 6.5% required return, an equity investor would expect his or her original investment to double in 11 years, triple in 18 years and quadruple in 22 years. We note that actual real estate investments may be more volatile and carry more risk than historical results may indicate; actual returns may fluctuate more widely providing for larger potential gains or losses in the short term. Using the 6.5% return rate as a fair market rate, the $200 million invested up front should return some $1.4 billion in 32+ years. For example, if the City put the $200 million into a new office tower to be built downtown, under terms making returns largely unsecured, it would expect an equity investment and would expect a return of this scale considering profits and equity after several decades. The MOU does not require ArenaCo to share the equity upside with the public entities, but if they were participating in a traditional or conventional equity investment of this scale, they would justifiably expect returns of this magnitude. We provide this estimate for context only. I-91 does not require this higher level of return, because it requires full security, and returns over time based on the lower 30-year U.S. Treasury bond rate. We simply note this equity calculation to illustrate that a fair market value rate of return for $200 million invested in equity would be far higher than the rate required under I-91, which is limited by the U.S. Treasury bond rate (and which assumes a secured transaction). 8 JP Morgan Global Institutional Asset Management’s Long-term Capital Market Return Assumptions—2013 expected 10-15 year annualized compound return estimates for U.S. directly held real estate investments. 16 Addenda 17 Exhibit A -- Description of Private Valuations, Inc. 18 Exhibit A – Description of Private Valuations, Inc. Private Valuations, Inc. is a full-service valuation firm. We appraise businesses, controlling and non-controlling business interests, intangible business assets, commercial and investment real estate, and fractional interests in real estate. In addition, we provide related services, including value-based strategic planning assistance for businesses and real estate development services. Our clients and their other professional advisors use our valuation services in a wide variety of contexts, including:  Estate planning and valuation - controlling interests and non-controlling interests in family limited partnerships & LLCs; corporations; real estate;  Mergers, Acquisitions, and Divestitures - valuations for determining offering prices and meeting lenders' requirements; fairness opinions; solvency opinions; allocation of acquisition price for financial and tax reporting purposes; due diligence investigations;  Corporate Strategic Planning - identification of productive and non-productive assets; establishment and/or refinement of company goals; and development & implementation of plans to achieve goals;  Employee Stock Ownership Plans - preliminary stock values in feasibility studies; fully documented stock values in support of initial transfers; periodic updates as required;  Real Estate Financing - hotels and motels; commercial; industrial; multi-family residential; proposed developments; raw land;  Ad Valorem Property Tax Appeals – specializing in industrial plants; preliminary analysis to determine potential savings; fully documented appraisals; participation in negotiations with taxing authorities; and testimony before tax appeal bodies at all levels;  Cost Segregation (Component Depreciation) – new properties and property transfers;  Real Estate Development – preliminary and final economic feasibility analyses; market analysis; assistance in securing land use approvals; liaison with city or county planning staff; and  Litigation Support - preliminary consulting on value issues; fully documented appraisals; and experienced, expert testimony, both pre-trial and at trial. We tailor our engagements to meet each client’s needs. Engagements can range from brief consulting assignments to detailed, fully documented written reports or action plans. We carry out engagements with a seasoned professional staff. Our staff members hold undergraduate degrees in economics, business administration, forestry and journalism. In addition, several hold advanced degrees in business administration, finance and economics. All of our staff members have specialized continuing education in business valuation and/or real estate appraisal, and several are state-certified general real estate appraisers. 19 Exhibit -- Qualifications of Valuation Consultants 20 Exhibit B – Qualifications of Valuation Consultants Adrien E. Gamache, Ph.D., ASA Adrien Gamache is the founder and CEO of Private Valuations, Inc. He has over thirty years of experience in business valuation, commercial real estate appraisal, investment analysis and corporate finance. He has served clients ranging from small, local firms to multi-national corporations with operations in Australia, Canada, France, Italy, Germany, Great Britain, Japan, Spain, Switzerland and the United States. Dr. Gamache has managed the valuations of business enterprises and their tangible and intangible assets, including intellectual property, in a broad range of industries. These include resource extraction, manufacturing, services, high technology, and internet-based companies. He has also managed the appraisals of a wide variety of existing and proposed industrial and commercial real estate developments, ranging from hotels, motels and resorts to special purpose properties, such as sawmills and food processing plants. Dr. Gamache has provided expert testimony in a variety of legislative, administrative, quasi-judicial and judicial settings, including superior court, federal district court, county and state ad valorem tax appeal bodies, land use regulatory bodies, and legislative committees. PROFESSIONAL EXPERIENCE 1991 – Present Private Valuations, Inc. CEO Responsible for establishing short- and long-term company goals; technical direction; monitoring operations; and business development. 1987 – 1991 Consilium, Inc. Vice President, Director of Financial Services and Real Estate Valuation Responsible for staffing, technical direction and monitoring of business valuation and real estate appraisal services. 1986 Shorett & Riely Director of Development Services and Appraiser Conducted feasibility analyses and commercial real estate appraisals. 1981 – 1986 University of Washington Associate Professor Taught regular credit courses; developed and taught short courses and workshops for continuing education. 1977 – 1985 Gamache & Associates, Inc. President Conducted feasibility studies and economic analyses for the forest industry and for proposed real estate developments; also assisted in securing land use approvals for major commercial developments. 1974 – 1976 H.C. Mason & Associates, Inc. Project Manager Conducted capital investment evaluations for existing and proposed manufacturing facilities; analyzed proposed acquisitions and divestitures. 21 Exhibit B – Qualifications of Valuation Consultants Black & Company, Inc. Economist and Analyst 1972 – 1973 Analyzed privately held firms for corporate finance purposes; analyzed publicly traded firms and made portfolio recommendations. MacMillan Bloedel Ltd. Senior Operations Research Analyst 1969 – 1972 Designed and directed implementation of computerized models of company operations; conducted workshops in their use for senior executives. Arthur Andersen & Co. Senior Analyst, Administrative Services 1969 Responsible for designing and implementing computerized models of forest industry plants. ACADEMIC BACKGROUND Associate Professor, University of Washington for five years; taught regular upper-division and graduate courses in managerial accounting, financial decision-making and land use economics. Instructor for a variety of short courses and workshops in economics, financial decision-making, valuation theory and statistics for the Appraisal Institute, MacMillan Bloedel Ltd., the University of Washington, the Washington Institute, ITT Rayonier, Louisiana-Pacific Corp., the Northwest Securities Institute of the Washington and Oregon State Bar Associations, Lorman Education Services, the National Business Institute, the Alaska Bar Association, the Estate Planning Council of Northwest Washington and the Turnaround Management Association. Ph.D., Economics and Finance, University of Washington B.S., Forestry and Forest Products, Purdue University AFFILIATIONS Estate Planning Council of Seattle Association for Corporate Growth Risk management Association Appraisal Institute Board President, Freehold Theatre Lab Studio PROFESSIONAL DESIGNATIONS American Society of Appraisers “Accredited Senior Appraiser” (ASA) State of Washington Certified General Real Estate Appraiser #1100900 State of Oregon Certified General Real Estate Appraiser #C000919 State of Washington Licensed Real Estate Broker #49926 22 Exhibit B – Qualifications of Valuation Consultants Elena Lee, CFA Elena Lee has a wide-ranging background in financial and statistical analysis. She provides her expertise in determining discounts for lack of control and lack of marketability for fractional interests in real property and for interests in business entities that hold real property, marketable securities, and other traditional and nontraditional assets. Ms. Lee has performed valuations involving a wide variety of property types and operating businesses for purposes that include estate taxes, gift taxes, income taxes, litigation support, and dispute resolution. Her skills include asset valuation; multiple linear regression and forecasting; budgeting and variance analysis; cash flow modeling; financial statement analysis; and project management. PROFESSIONAL EXPERIENCE 2009 – Present Private Valuations, Inc. Vice President, Financial Valuation Provides closely held company valuations and transaction related financial services for a broad range of purposes, including estate and gift tax, purchase/sale of a business, employee stock ownership plans, Rule 144 and other restricted securities, bankruptcy, litigation and marital dissolution. Valued common stock, preferred stock, debt instruments, intangible assets, and minority and fractional interests in real estate. 2006 – 2008 Arizona State University, Tempe Coordinator of Strategic Initiatives, Master of Real Estate Development Program Developed, planned, and managed program budget; performed variance analyses, coordinated preparation of financial and administrative reports and setting of long- and short-range goals; analyzed and interpreted statistics, financial data and management planning data for predicting resource needs and developing a 5-year budget plan. 2004 – 2006 The Vanguard Group Account Administrator, Business Development Group Performed asset allocation analyses for taxable and tax-exempt portfolios by interpreting investment objectives, liquidity needs and tax constraints and implemented annual portfolio rebalancing; executed asset transfers, 401k rollovers, and purchase and redemption transactions. 1999 – 2000 Aris Ltd., Kiev, Ukraine Market Research Analyst Analyzed market for frozen-fish products for this wholesale distributor of fish products; developed a pricing strategy for imported products; analyzed return on investment for new capital investment projects. ACADEMIC BACKGROUND BS – Northern Arizona University Finance, Magna cum Laude AFFILIATIONS CFA (Chartered Financial Analyst) Institute, Member PROFESSIONAL DESIGNATIONS Chartered Financial Analyst NASD Series 6 & 63 licenses (inactive) 23 Exhibit -- I-91 Shortfall Calculations 24 EXHIBIT C-1 I-91 REQUIRED RETURN ANALYSIS ARENA USE AGREEMENT (YRS) LEASE-PURCHASE AGREEMENT (YRS) 1 Total Debt Outstanding {a} 1 3 2 4 3 5 4 6 5 7 6 8 100,000,000 $ 194,194,156 191,065,312 187,767,807 184,292,520 180,629,833 3,820,000 7,630,000 7,520,000 7,390,000 7,270,000 7,130,000 6,990,000 6,880,539 (5,424,070) (1,456,469) 13,612,801 (10,643,965) (2,968,836) 13,612,801 (10,483,957) (3,128,844) 13,612,801 (10,315,296) (3,297,505) 13,612,801 (10,137,514) (3,475,287) 13,612,801 (9,950,114) (3,662,687) 13,612,801 (9,752,575) (3,860,226) 3,870,000 I-91 Return Shortfall Analysis Summary Future Value of I-91 Return Shortfall (Rnd) 197,162,992 6,880,539 (5,500,000) (1,380,539) Total Annual Debt Service {1} + {2} Interest Payments {1} {a} Principal Payments {2} {a} 98,619,461 3,870,000 I-91 Required Return (Rnd) {b} Nominal I-91 Return 2 3,820,000 7,630,000 7,520,000 7,390,000 7,270,000 7,130,000 6,990,000 149,270,000 {a} Based on assumed debt amortization schedule of $200 million principal issued in two installments: (1) $100 million in year 1 at 5.5%; and (2) $80 million at 5.5% and $20 million at 4.5% in year 3. For simplicity purposes, annual compounding is used. {b} Based on nominal Treasury 30-year constant maturity yield of 3.87% as of September 6, 2013. Private Valuations, Inc. EXHIBIT C-1 (CONTINUED) I-91 REQUIRED RETURN ANALYSIS ARENA USE AGREEMENT (YRS) LEASE-PURCHASE AGREEMENT (YRS) Total Debt Outstanding {a} I-91 Required Return (Rnd) {b} Total Annual Debt Service {1} + {2} Interest Payments {1} {a} Principal Payments {2} {a} I-91 Return Shortfall Analysis Summary Future Value of I-91 Return Shortfall (Rnd) 7 9 8 10 9 11 10 12 11 13 12 14 13 15 14 16 15 17 16 18 17 19 18 20 176,769,607 172,701,154 168,413,206 163,893,882 159,130,657 154,110,327 148,818,970 143,241,908 137,363,667 131,167,933 124,637,505 117,754,248 6,840,000 6,680,000 6,520,000 6,340,000 6,160,000 5,960,000 5,760,000 5,540,000 5,320,000 5,080,000 4,820,000 4,560,000 13,612,801 13,612,801 13,612,801 13,612,801 13,612,801 13,612,801 13,612,801 13,612,801 13,612,801 13,612,801 13,612,801 13,612,801 (9,544,348) (9,324,853) (9,093,477) (8,849,576) (8,592,471) (8,321,444) (8,035,739) (7,734,560) (7,417,067) (7,082,373) (6,729,544) (6,357,595) (4,068,453) (4,287,948) (4,519,324) (4,763,225) (5,020,330) (5,291,357) (5,577,062) (5,878,241) (6,195,734) (6,530,428) (6,883,257) (7,255,206) 6,840,000 6,680,000 6,520,000 6,340,000 6,160,000 5,960,000 5,760,000 5,540,000 5,320,000 5,080,000 4,820,000 {a} Based on assumed debt amortization schedule of $200 million principal issued in two installments: (1) $100 million in year 1 at 5.5%; and (2) $80 million at 5.5% and $20 million at 4.5% in year 3. For simplicity purposes, annual compounding is used. {b} Based on nominal Treasury 30-year constant maturity yield of 3.87% as of September 6, 2013. Private Valuations, Inc. 4,560,000 EXHIBIT C-1 (CONTINUED) I-91 REQUIRED RETURN ANALYSIS ARENA USE AGREEMENT (YRS) LEASE-PURCHASE AGREEMENT (YRS) Total Debt Outstanding {a} I-91 Required Return (Rnd) {b} Total Annual Debt Service {1} + {2} Interest Payments {1} {a} Principal Payments {2} {a} I-91 Return Shortfall Analysis Summary Future Value of I-91 Return Shortfall (Rnd) 19 21 20 22 110,499,041 102,851,727 4,280,000 3,980,000 21 23 22 24 23 25 24 26 25 27 26 28 27 29 28 30 29 31 94,791,050 86,294,602 77,338,756 67,898,600 57,947,870 47,458,872 36,402,407 24,747,690 12,462,259 6,392,428 3,670,000 3,340,000 2,990,000 2,630,000 2,240,000 1,840,000 1,410,000 960,000 480,000 250,000 13,612,801 13,612,801 13,612,801 13,612,801 13,612,801 13,612,801 13,612,801 13,612,801 13,612,801 13,612,801 (5,965,487) (5,552,124) (5,116,353) (4,656,955) (4,172,645) (3,662,071) (3,123,803) (2,556,336) (1,958,084) (1,327,370) (7,647,314) (8,060,677) (8,496,448) (8,955,846) (9,440,156) (9,950,730) (10,488,998) (11,056,465) (11,654,717) (12,285,431) 4,280,000 3,980,000 3,670,000 3,340,000 2,990,000 2,630,000 2,240,000 1,840,000 1,410,000 960,000 6,732,262 (662,431) (6,069,831) 480,000 {a} Based on assumed debt amortization schedule of $200 million principal issued in two installments: (1) $100 million in year 1 at 5.5%; and (2) $80 million at 5.5% and $20 million at 4.5% in year 3. For simplicity purposes, annual compounding is used. {b} Based on nominal Treasury 30-year constant maturity yield of 3.87% as of September 6, 2013. Private Valuations, Inc. 30 32 6,732,262 (339,834) (6,392,428) 250,000 EXHIBIT C-2 ARENA RELATED TAX CREDIT ANALYSIS ARENA USE AGREEMENT (YRS) LEASE-PURCHASE AGREEMENT (YRS) 1 Arena Related Taxes - City {a} Property Tax Sales Tax Admissions Tax B&O Tax Leasehold Excise Tax Total City Arena Related Tax Credits {1} 531,250 531,250 195,000 1,593,750 1,788,750 781,950 177,795 4,543,998 993,878 202,000 6,699,621 789,770 181,351 4,621,629 1,010,749 204,020 6,807,519 797,667 184,978 4,700,591 1,027,908 206,060 6,917,204 805,644 194,272 4,780,909 1,046,774 208,121 7,035,720 813,700 196,877 4,862,604 1,064,227 210,202 7,147,610 821,837 196,300 4,945,702 1,081,159 212,304 7,257,302 93,750 93,750 59,188 281,250 340,438 237,342 31,376 101,000 369,718 239,715 32,003 102,010 373,728 242,112 32,643 103,030 377,785 244,533 34,283 104,061 382,877 246,979 34,743 105,101 386,823 249,448 34,641 106,152 390,242 630,000 630,000 24,381 2,130,000 2,760,000 106,812 7,070,000 9,830,000 380,421 7,180,000 17,010,000 658,287 7,290,000 24,300,000 940,410 7,420,000 31,720,000 1,227,564 7,530,000 39,250,000 1,518,975 7,650,000 46,900,000 1,815,030 Arena Related Taxes - County {a} Property Tax Sales Tax Leasehold Excise Tax Total County Arena Related Tax Credits {2} Arena Related Tax Credit Analysis Future Value of Arena Related Tax Credits (Rnd) {1} + {2} Accumulated Arena Related Tax Credits I-91 Return Requirement on Arena Related Tax Credits {b} Nominal Arena Related Tax Credits Total I-91 Return on Arena Related Tax Credits (Rnd) Fair Value Shortfall 2 1 3 $ 272,000,000 152,530,000 $ 424,530,000 {a} Based on the City of Seattle financial projections in relation to the Arena deal. {b} Based on nominal Treasury 30-year constant maturity yield of 3.87% as of September 6, 2013. Private Valuations, Inc. 2 4 3 5 4 6 5 7 6 8 EXHIBIT C-2 (CONTINUED) ARENA RELATED TAX CREDIT ANALYSIS ARENA USE AGREEMENT (YRS) LEASE-PURCHASE AGREEMENT (YRS) Arena Related Taxes - City {a} Property Tax Sales Tax Admissions Tax B&O Tax Leasehold Excise Tax Total City Arena Related Tax Credits {1} Arena Related Taxes - County {a} Property Tax Sales Tax Leasehold Excise Tax Total County Arena Related Tax Credits {2} Arena Related Tax Credit Analysis Future Value of Arena Related Tax Credits (Rnd) {1} + {2} Accumulated Arena Related Tax Credits I-91 Return Requirement on Arena Related Tax Credits {b} 7 9 8 10 9 11 10 12 11 13 12 14 13 15 14 16 15 17 16 18 17 19 18 20 830,056 200,226 5,030,220 1,099,517 214,427 7,374,446 838,356 210,286 5,116,183 1,119,720 216,572 7,501,116 846,740 213,106 5,203,614 1,138,389 218,737 7,620,586 855,207 212,481 5,292,540 1,156,501 220,925 7,737,653 863,759 216,731 5,382,985 1,176,138 223,134 7,862,747 872,397 227,620 5,474,976 1,197,749 225,365 7,998,107 881,121 230,673 5,568,539 1,217,719 227,619 8,125,671 889,932 229,997 5,663,700 1,237,093 229,895 8,250,618 898,831 234,597 5,760,489 1,258,099 232,194 8,384,209 907,820 246,384 5,858,931 1,281,216 234,516 8,528,866 916,898 249,688 5,959,055 1,302,577 236,861 8,665,079 926,067 248,956 6,060,891 1,323,302 239,230 8,798,445 251,943 35,334 107,214 394,491 254,462 37,109 108,286 399,857 257,007 37,607 109,369 403,982 259,577 37,497 110,462 407,536 262,173 38,247 111,567 411,986 264,794 40,168 112,683 417,645 267,442 40,707 113,809 421,959 270,117 40,588 114,948 425,652 272,818 41,399 116,097 430,314 275,546 43,479 117,258 436,284 278,302 44,063 118,431 440,795 281,085 43,933 119,615 444,633 7,770,000 54,670,000 2,115,729 7,900,000 62,570,000 2,421,459 8,020,000 70,590,000 2,731,833 8,150,000 78,740,000 3,047,238 8,270,000 87,010,000 3,367,287 8,420,000 95,430,000 3,693,141 8,550,000 103,980,000 4,024,026 8,680,000 112,660,000 4,359,942 8,810,000 121,470,000 4,700,889 8,970,000 130,440,000 5,048,028 9,110,000 139,550,000 5,400,585 9,240,000 148,790,000 5,758,173 {a} Based on the City of Seattle financial projections in relation to the Arena deal. {b} Based on nominal Treasury 30-year constant maturity yield of 3.87% as of September 6, 2013. Private Valuations, Inc. EXHIBIT C-2 (CONTINUED) ARENA RELATED TAX CREDIT ANALYSIS ARENA USE AGREEMENT (YRS) LEASE-PURCHASE AGREEMENT (YRS) Arena Related Taxes - City {a} Property Tax Sales Tax Admissions Tax B&O Tax Leasehold Excise Tax Total City Arena Related Tax Credits {1} 19 21 20 22 21 23 22 24 23 25 24 26 25 27 26 28 27 29 28 30 29 31 30 32 935,328 253,935 6,164,466 1,345,771 241,622 8,941,123 944,681 266,694 6,269,812 1,370,499 244,038 9,095,724 954,128 270,270 6,376,958 1,393,349 246,479 9,241,184 963,669 269,478 6,485,935 1,415,517 248,943 9,383,543 973,306 274,868 6,596,775 1,439,553 251,433 9,535,934 983,039 288,678 6,709,508 1,466,004 253,947 9,701,176 992,869 292,549 6,824,168 1,490,446 256,487 9,856,520 1,002,798 291,692 6,940,788 1,514,160 259,052 10,008,489 1,012,826 297,526 7,059,400 1,539,870 261,642 10,171,264 1,022,954 312,474 7,180,040 1,568,164 264,258 10,347,891 1,033,183 316,665 7,302,741 1,594,310 266,901 10,513,800 1,043,515 315,737 7,427,539 1,619,676 269,570 10,676,036 283,896 44,812 120,811 449,519 286,734 47,064 122,019 455,817 289,602 47,695 123,239 460,536 292,498 47,555 124,472 464,525 295,423 48,506 125,716 469,645 298,377 50,943 126,974 476,294 301,361 51,626 128,243 481,230 304,374 51,475 129,526 485,375 307,418 52,505 130,821 490,744 310,492 55,143 132,129 497,764 310,492 55,882 133,451 499,825 310,492 55,718 134,785 500,996 Arena Related Tax Credit Analysis Future Value of Arena Related Tax Credits (Rnd) {1} + {2} 9,390,000 Accumulated Arena Related Tax Credits 158,180,000 I-91 Return Requirement on Arena Related Tax Credits {b} 6,121,566 9,550,000 167,730,000 6,491,151 9,700,000 177,430,000 6,866,541 9,850,000 187,280,000 7,247,736 10,010,000 197,290,000 7,635,123 10,180,000 207,470,000 8,029,089 10,340,000 217,810,000 8,429,247 10,490,000 228,300,000 8,835,210 10,660,000 238,960,000 9,247,752 10,850,000 249,810,000 9,667,647 11,010,000 260,820,000 10,093,734 11,180,000 272,000,000 10,526,400 Arena Related Taxes - County {a} Property Tax Sales Tax Leasehold Excise Tax Total County Arena Related Tax Credits {2} {a} Based on the City of Seattle financial projections in relation to the Arena deal. {b} Based on nominal Treasury 30-year constant maturity yield of 3.87% as of September 6, 2013. Private Valuations, Inc. EXHIBIT C-3 PROPERTY TAX AVOIDANCE ANALYSIS ARENA USE AGREEMENT (YRS) LEASE-PURCHASE AGREEMENT (YRS) 1 2 1 3 2 4 3 5 4 6 5 7 6 8 Levy Rate Growth Rate Adjusted Levy Rate {a} 0.000% 1.050991% -1.000% 1.040481% -2.000% 1.019671% -2.000% 0.999278% -1.000% 0.989285% -1.000% 0.979392% -1.000% 0.969598% -1.000% 0.959902% Assessed Value - Land {1} {b} Replacement Cost - Improvements {c} Depreciation Rate {d} Depreciated Cost - Improvements {2} Assessed Value - Land & Improvements {1} + {2} Property Taxes Property Taxes Growth Rate 60,000,000 60,000,000 630,595 NA 61,200,000 61,200,000 636,774 1.0% 62,424,000 440,000,000 2.00% 431,200,000 493,624,000 5,033,343 690.4% 63,672,480 457,512,000 3.00% 443,786,640 507,459,120 5,070,928 0.7% 64,945,930 475,720,978 5.00% 451,934,929 516,880,858 5,113,426 0.8% 66,244,848 494,654,673 7.00% 460,028,845 526,273,694 5,154,285 0.8% 67,569,745 514,341,928 9.00% 468,051,155 535,620,900 5,193,372 0.8% 68,921,140 534,812,737 11.00% 475,983,336 544,904,476 5,230,552 0.7% 5,070,000 11,370,000 440,000 5,110,000 16,480,000 640,000 5,150,000 21,630,000 840,000 5,190,000 26,820,000 1,040,000 5,230,000 32,050,000 1,240,000 Property Tax Avoidance Analysis Future Value of Property Tax Avoidance (Rnd) Accumulated Property Tax Avoidance I-91 Return Requirement (Rnd) {e} Nominal Property Tax Avoidance Total I-91 Return on Property Tax Avoidance Fair Value Shortfall 630,000 630,000 20,000 640,000 1,270,000 50,000 5,030,000 6,300,000 240,000 $ 154,530,000 95,800,000 $ 250,330,000 {a} Based on the current 2013 King County Levy Rate ($10.5099 per $1,000 of assessed value) assuming it will fluctuate between $9.3139 and $10.5960 over the term of the Use Agreement. {b} Based on land acquisition cost ($60 million) and 2% annual growth rate. {c} Based on stated total project costs in the MOU ($500 million) and an annual 3.98% construction cost growth rate derived from Marshall & Swift for similar properties. {d} Based on Marshall & Swift's depreciation schedule for similar properties assuming a 30-year useful life. {e} Based on nominal Treasury 30-year constant maturity yield of 3.87% as of September 6, 2013. Private Valuations, Inc. EXHIBIT C-3 (CONTINUED) PROPERTY TAX AVOIDANCE ANALYSIS ARENA USE AGREEMENT (YRS) LEASE-PURCHASE AGREEMENT (YRS) Levy Rate Growth Rate Adjusted Levy Rate {a} 7 9 0.000% 0.959902% 8 10 -1.000% 0.950303% 9 11 -1.000% 0.940800% 10 12 0.000% 0.940800% 11 13 0.000% 0.940800% 12 14 -1.000% 0.931392% 13 15 0.000% 0.931392% 14 16 1.000% 0.940706% 15 17 1.000% 0.950113% 16 18 2.000% 0.969116% 17 19 1.000% 0.978807% 18 20 2.000% 0.998383% Assessed Value - Land {1} {b} 70,299,563 71,705,554 73,139,665 74,602,459 76,094,508 77,616,398 79,168,726 80,752,100 82,367,142 84,014,485 85,694,775 87,408,670 Replacement Cost - Improvements {c} 556,098,284 578,230,996 601,244,590 625,174,124 650,056,054 675,928,285 702,830,231 730,802,874 759,888,829 790,132,404 821,579,674 854,278,545 Depreciation Rate {d} 14.00% 16.00% 18.00% 21.00% 24.00% 26.00% 29.00% 32.00% 35.00% 39.00% 42.00% 46.00% Depreciated Cost - Improvements {2} 478,244,524 485,714,037 493,020,563 493,887,558 494,042,601 500,186,931 499,009,464 496,945,954 493,927,739 481,980,766 476,516,211 461,310,414 Assessed Value - Land & Improvements {1} + {2} 548,544,087 557,419,591 566,160,229 568,490,017 570,137,109 577,803,329 578,178,190 577,698,055 576,294,881 565,995,252 562,210,986 548,719,084 Property Taxes 5,265,488 5,297,178 5,326,438 5,348,357 5,363,852 5,381,616 5,385,108 5,434,442 5,475,455 5,485,149 5,502,960 5,478,318 Property Taxes Growth Rate 0.7% 0.6% 0.6% 0.4% 0.3% 0.3% 0.1% 0.9% 0.8% 0.2% 0.3% -0.4% Property Tax Avoidance Analysis Future Value of Property Tax Avoidance (Rnd) Accumulated Property Tax Avoidance I-91 Return Requirement (Rnd) {e} 5,270,000 37,320,000 1,440,000 5,300,000 42,620,000 1,650,000 5,330,000 47,950,000 1,860,000 5,350,000 53,300,000 2,060,000 5,360,000 58,660,000 2,270,000 5,380,000 64,040,000 2,480,000 5,390,000 69,430,000 2,690,000 5,430,000 74,860,000 2,900,000 {a} Based on the current 2013 King County Levy Rate ($10.5099 per $1,000 of assessed value) assuming it will fluctuate between $9.3139 and $10.5960 over the term of the Use Agreement. {b} Based on land acquisition cost ($60 million) and 2% annual growth rate. {c} Based on stated total project costs in the MOU ($500 million) and an annual 3.98% construction cost growth rate derived from Marshall & Swift for similar properties. {d} Based on Marshall & Swift's depreciation schedule for similar properties assuming a 30-year useful life. {e} Based on nominal Treasury 30-year constant maturity yield of 3.87% as of September 6, 2013. Private Valuations, Inc. 5,480,000 80,340,000 3,110,000 5,490,000 85,830,000 3,320,000 5,500,000 91,330,000 3,530,000 5,480,000 96,810,000 3,750,000 EXHIBIT C-3 (CONTINUED) PROPERTY TAX AVOIDANCE ANALYSIS ARENA USE AGREEMENT (YRS) LEASE-PURCHASE AGREEMENT (YRS) Levy Rate Growth Rate Adjusted Levy Rate {a} 19 21 23 25 24 26 25 27 26 28 27 29 28 30 29 31 30 32 0.000% 1.059596% 0.000% 1.059596% 0.000% 1.059596% 0.000% 1.059596% 0.000% 1.059596% 0.000% 1.059596% 0.000% 1.059596% Assessed Value - Land {1} {b} 89,156,844 90,939,981 92,758,780 94,613,956 Replacement Cost - Improvements {c} 888,278,831 923,632,328 960,392,895 998,616,532 Depreciation Rate {d} 49.00% 53.00% 57.00% 60.00% Depreciated Cost - Improvements {2} 453,022,204 434,107,194 412,968,945 399,446,613 Assessed Value - Land & Improvements {1} + {2} 542,179,047 525,047,175 505,727,725 494,060,569 Property Taxes 5,521,284 5,453,758 5,305,614 5,183,213 Property Taxes Growth Rate 0.8% -1.2% -2.7% -2.3% 96,506,235 1,038,361,470 63.00% 384,193,744 480,699,979 5,093,477 -1.7% 98,436,360 1,079,688,257 66.00% 367,094,007 465,530,367 4,932,741 -3.2% 100,405,087 1,122,659,849 69.00% 348,024,553 448,429,640 4,751,542 -3.7% 102,413,189 1,167,341,711 72.00% 326,855,679 429,268,868 4,548,515 -4.3% 104,461,452 1,213,801,911 75.00% 303,450,478 407,911,930 4,322,218 -5.0% 106,550,681 1,262,111,227 77.00% 290,285,582 396,836,264 4,204,861 -2.7% 108,681,695 1,312,343,254 78.00% 288,715,516 397,397,211 4,210,804 0.1% 110,855,329 1,364,574,516 79.00% 286,560,648 397,415,977 4,211,003 0.0% 5,090,000 123,360,000 4,770,000 4,930,000 128,290,000 4,960,000 4,750,000 133,040,000 5,150,000 4,550,000 137,590,000 5,320,000 4,320,000 141,910,000 5,490,000 4,200,000 146,110,000 5,650,000 4,210,000 150,320,000 5,820,000 4,210,000 154,530,000 5,980,000 5,450,000 107,780,000 4,170,000 1.000% 1.049105% 22 24 1.000% 1.059596% 5,520,000 102,330,000 3,960,000 2.000% 1.038718% 21 23 0.000% 1.049105% Property Tax Avoidance Analysis Future Value of Property Tax Avoidance (Rnd) Accumulated Property Tax Avoidance I-91 Return Requirement (Rnd) {e} 2.000% 1.018351% 20 22 5,310,000 113,090,000 4,380,000 5,180,000 118,270,000 4,580,000 {a} Based on the current 2013 King County Levy Rate ($10.5099 per $1,000 of assessed value) assuming it will fluctuate between $9.3139 and $10.5960 over the term of the Use Agreement. {b} Based on land acquisition cost ($60 million) and 2% annual growth rate. {c} Based on stated total project costs in the MOU ($500 million) and an annual 3.98% construction cost growth rate derived from Marshall & Swift for similar properties. {d} Based on Marshall & Swift's depreciation schedule for similar properties assuming a 30-year useful life. {e} Based on nominal Treasury 30-year constant maturity yield of 3.87% as of September 6, 2013. Private Valuations, Inc. EXHIBIT C-4 RETURN OF LAND ANALYSIS ARENA USE AGREEMENT (YRS) LEASE-PURCHASE AGREEMENT (YRS) 1 2 1 3 2 4 3 5 4 6 5 7 6 8 Land Value {a} Demolition Costs {a} 60,000,000 10,000,000 61,200,000 10,200,000 62,424,000 10,404,000 63,672,480 10,612,080 64,945,930 10,824,322 66,244,848 11,040,808 67,569,745 11,261,624 68,921,140 11,486,857 Return of Land Analysis Summary Land Value Net of Demolition Obligation (Rnd) 50,000,000 51,000,000 52,020,000 53,060,000 54,120,000 55,200,000 56,310,000 57,430,000 Land Value Net of Demolition Obligation $ 92,380,000 {a} Presumed to grow at a 2% annual rate. Private Valuations, Inc. EXHIBIT C-4 (CONTINUED) RETURN OF LAND ANALYSIS ARENA USE AGREEMENT (YRS) LEASE-PURCHASE AGREEMENT (YRS) 7 9 8 10 9 11 10 12 11 13 12 14 13 15 14 16 15 17 16 18 Land Value {a} Demolition Costs {a} 70,299,563 11,716,594 71,705,554 11,950,926 73,139,665 12,189,944 74,602,459 12,433,743 76,094,508 12,682,418 77,616,398 12,936,066 79,168,726 13,194,788 80,752,100 13,458,683 82,367,142 13,727,857 84,014,485 14,002,414 85,694,775 14,282,462 87,408,670 14,568,112 Return of Land Analysis Summary Land Value Net of Demolition Obligation (Rnd) 58,580,000 59,750,000 60,950,000 62,170,000 63,410,000 64,680,000 65,970,000 67,290,000 68,640,000 70,010,000 71,410,000 72,840,000 {a} Presumed to grow at a 2% annual rate. Private Valuations, Inc. 17 19 18 20 EXHIBIT C-4 (CONTINUED) RETURN OF LAND ANALYSIS ARENA USE AGREEMENT (YRS) LEASE-PURCHASE AGREEMENT (YRS) 19 21 20 22 21 23 22 24 23 25 24 26 25 27 26 28 27 29 28 30 29 31 30 32 Land Value {a} Demolition Costs {a} 89,156,844 14,859,474 90,939,981 15,156,663 92,758,780 15,459,797 94,613,956 15,768,993 96,506,235 16,084,372 98,436,360 16,406,060 100,405,087 16,734,181 102,413,189 17,068,865 104,461,452 17,410,242 106,550,681 17,758,447 108,681,695 18,113,616 110,855,329 18,475,888 Return of Land Analysis Summary Land Value Net of Demolition Obligation (Rnd) 74,300,000 75,780,000 77,300,000 78,840,000 80,420,000 82,030,000 83,670,000 85,340,000 87,050,000 88,790,000 90,570,000 92,380,000 {a} Presumed to grow at a 2% annual rate. Private Valuations, Inc.