Proposed Sale of Summit / Compaq Center to Lakewood Church

1. Proposed Sale of Summit / Compaq Center to Lakewood Church City of Houston Budget & Fiscal Affairs Committee March 29, 2010

2. Lakewood Church Proposal The proposal monetizes the City’s remaining interest in the Compaq Center Total Revenue Received to Date $11.87 million Purchase & Sales Agreement $ 7.50 million Total Amount Received for Property $19.37 million

3. Restrictions • Greenway Developer’s Deed Restrictions • Land can only be used as Sports Arena, or • Offices, Library, Post Office, Retail, Banks/S&L • Crescent Lawsuit Settlement • Crescent agrees not to enforce the Greenway Deed Restrictions against Lakewood Church which do not allow a church (specific to Lakewood and no other potential tenants) • Parking agreement with Lakewood for 60 years, not transferable with the land • Interlocal Agreement between COH and Sport Authority (Section 8 -Rockets Non-Compete) • Arena can never be used for any event which competes with Toyota Center (>5,000 attendees) • Exempts religious, K-12 athletics, Olympics, civic events • There is no time duration associated with this restriction • Restrictions in Lease between COH and Lakewood Church • Permitted Uses: Tenant may only use building for sporting events, productions, conventions, receptions, trade shows, exhibitions, performances, religious services, office, retail, broadcasting, publishing, training, education, fitness, community outreach, child development, counseling, youth activities, visitors center, nursery, child care, wellness care, job training, restaurant, charitable purposes, fund raising, parking, city dates and the Olympics. • Prohibited Uses: “Any use of the leased premises for events which could be in competition with the downtown multi-purpose arena (Toyota Center) to be constructed and leased to Rocket Ball, Ltd.; provided however, that this restriction shall not prohibit the leased premises from being used for religious services and religious activities by religious organizations, K-12 athletic functions, the Olympic Games, the Pan-American Games and for non-revenue generating public or civic ceremonies and forums…” “This restriction shall inure to the benefit of, and be enforceable by Rocket Ball, Ltd. and its successors and assigns”;

4. Background • 1973: Development of the Summit • Land for the Summit was donated to the City of Houston by Greenway Plaza, Ltd. • Use of the land was restricted for 30 years to municipal sports arena only, and then to certain limited commercial uses. • Construction cost of $18MM provided by venue revenues, not by the City. • The City entered into a 30-year management agreement with Arena Operating Co. for operation of the Summit; facility operated at no cost to the City.

5. 2000: Development of Toyota Center • Harris County Houston Sports Authority and Rocketball, Ltd. established structure for development of Toyota Center. • City of Houston and Sports Authority entered into Interlocal Agreement. • Allowed Rockets to play at Compaq Center (f/k/a the Summit) through the 2002/2003 NBA Season. • Included non-compete provisions regarding future use of Compaq Center that will remain after sale.

6. 2001: Lease to Lakewood Church • With venue operating agreement ending and development of Toyota Center, the City issued a Request for Proposals to redevelop Compaq Center. • Following RFP process, on July 3, 2001, the City designated Lakewood Church as the successful proposer, and entered into lease negotiations. • On December 28, 2001, the City entered into a Lease Agreement with Lakewood. • Initial term until 2034. • $11.87MM pre-paid rent, not credited against purchase price. • Renewal option to extend term an additional 30 years, with $753,333 annual rent starting in 2034. • City incurs no operating costs of the property. • Lakewood Church has invested over $90MM of its own money to redevelop the property specifically for its rented use.

7. 2009: Proposed Sale • The City approached Lakewood Church about a sale of the City’s residual interest in the land and improvements that are currently subject to the Lease Agreement. • Idea to generate current FY cash flow for the City through sale (otherwise, no cash flow until 2034). • On October 21, 2009, City Council authorized the appointment of two independent appraisers to determine the value of the City’s interest in the property. • Appraisal determined the net present value of the City’s interest was approximately $7.7MM. • The City and Lakewood negotiated a Purchase Agreement based on that appraised value. • Lakewood pays all closing costs. • Lakewood agreed to a 10-year commitment to continue to operate the facility in the same manner and provide community services.

8. Lakewood Sale Preparations 10 months to date • Internal financial feasibility analysis • Appraisals • Negotiation of Development Agreement • Environmental Documentation Review • Investigation of Non-Compete Limitations • Outside counsel engaged to assist with negotiations regarding restrictions (Aaron Roffwarg of Bracewell & Giuliani)

9. Appraisers • Appointment by City Council Motion 09-761, 10/21/2009 • Lewis Realty Advisors • David Lewis, CRE, MAI, SRA (50+ years) • Kim Kobriger, MAI, MRICS (30+ years) • Integra Realty Resources (review appraiser) • David Dominy, MAI (28+ years) • Keith Gossett, MAI (20+ years

10. Appraisal • Considered the highest and best use of the property. • Analyzed present value of future cash flows that will accrue to the City under the Lease Agreement. • Analyzed net present value of the land to the City, at the end of the lease. • Improvements deemed to have zero value after 90 years (i.e., original 30 years from 1973, plus 60 year Lakewood Lease). • Demolition cost contemplated in future. • Looked at residual land value, based on comps in the area.

11. Factors Considered inHighest & Best Use Analysis • Lease Agreement encumbers the site. • Land use restrictions limit uses of the site. • Interlocal Agreement non-compete restricts use. • Improvements by Lakewood Church affect potential use of facility. • Parking and Other agreements needed for operations (Lakewood’s risk).

12. Appraisal Process • Value the income stream (discounted cash flow) • Value the residual land (comparables) • Value the residual improvements (demo) • Adjust residual values to end of the term (FV) • Determine present value of residual land minus demo (PV) • Present Value of income + residual land = value of asset

13. Appraisal Assumptions • Lakewood has a favorable renewal option and they will take the 30 year extension • Any landlord’s first opportunity to redevelop the site with be after the renewal term (2064) • When the lease is up, building will be 90 years old and require demolition for best use of land. • 3% inflation rate (average 5 year CPI change) • 6% discount rate (time value of money)

14. 4 Part Built Up Discount Rate • Risk Free Rate 4.330% • Average 10 year Treasury Note • Non-liquidity (high) 1.250% • lease encumbrances • multiple restrictions on use • Management (low) 0.250% • little involvement in asset management • Risk (low) 0.250% • prepayment of rent • favorable renewal terms TOTAL 6.080% (rounded) 6.000% *The lower the rate, the higher the value *Vetted by COH financial advisors *Industry standard principle *Appraiser’s expertise

15. Land Sale Comps

16. Land Sale Comps

17. HISD LandHow does our land compare? • 2006 closing • 24.2 acres at Richmond & Weslayan • Available for immediate redevelopment • Unrestricted • $38 Million with $1.5 Million for demo • $37.50 per square foot

18. Appraisal: Residual Land Value • Determine the value of the land if vacant • $75 X 302,524 sqft = $22,689,300 today • Land value would escalate at 3% inflation over the term • $22,689,300 today = $105,525,345 in 2064 dollars • Determine the value/liability of the structure • The building would need to be demolished to realize highest and best use at the end of the lease • $1,250,000 in demolition costs today would escalate to $5,813,607 • Return the Future Value to Present Value • Land and Demo future values are then calculated for present value using an interest rate of 6% over the term. • What is $99,711,738 in 2064 worth today? $4,817,717 LAND VALUE less DEMO (3% inflation) FV calculated in PV (6% discount rate) 2010 2034 2064

19. Cash Flows under Lease

20. Present Value of Cash Flow • NPV = Sum of the Present Values for the out years. • PV= $753,333/1.06^t, where t equals years from now • $753,333 in 2034 dollars = $175,526 in 2010 dollars • $753,333 in 2035 dollars = $165,590 in 2010 dollars • $753,333 in 2036 dollars = $156,217 in 2010 dollars ……through 2064 • Add all these up to get the sum of the remaining terms • Net Present Value of the revenue stream = $2,877,591

21. Market Value Estimate Net Present Value of Future Income $2,877,591 Net Present Value of Land + $4,817,717 $7,695,308 Rounded $7,700,000

22. Limiting Factors • Development Agreement • 10 year requirement to own and operate in the same manner • Lakewood’s Capital Investment • $90 Million of improvements specific to Lakewood’s special use • Ability to resell and recover capital is limited

23. Purchase and Sale Agreement • Contract • Final Purchase Price ($7.5 Million) • Timeline: Close within 45 days • Agreement not to enforce Deed Restrictions on Church use • Deed • Restrictions on use (recites previously documented restrictions) • Easements • Development Agreement • 10 year hold period operating in same fashion • Community Services requirement

24. Summary • Sale would bring $7.5MM into the General Fund in the current Fiscal Year. • With sale, Lakewood will agree to provide community services from the property for 10 years. • Without sale, lease will continue as-is, and City will not receive any revenues from the property until 2034. • The property is affected by the existing lease, other use restrictions, and physical improvements that significantly limit the marketability of the property. • Sale price is based on appraisal of the City’s residual interest in the property. • Lakewood received no credit for $11.87MM pre-paid rent. • The appraisal provided a present cash value based on anticipated future payments.