City of Hayward Spanish Ranch I Proposed Rent Increase:

Meet and Confer Meeting #4 Notes

Wednesday, November 12, 2008
Hayward City Attorney’s Office
Hayward, CA

Call to Order and Approval of the Agenda

Mr. Hexter called Meeting #4 to order and briefly reviewed the evening’s agenda.
He informed the HOA Team that the Facilitation Team held a caucus with the
Ownership group immediately prior to the evening’s session. All parties approved
the agenda for Meeting #4.

Review/Approval of Meeting #2 Notes

The Facilitation Team distributed hard copies of draft Meeting #2 and Meeting #3
notes with all changes based on the parties’ requests tracked in the document.
The Facilitation Team agreed to strike reference to the RAP in Meeting #2 notes.
Following agreement related to this change, both groups approved Meeting #2
notes.

Review/Approval of Meeting #3 Notes

Meeting participants discussed the content of Meeting #3 notes. Both parties
agreed that one point of discussion captured in the minutes was not accurate and
should be omitted from the record. HOA Group requested additional time to
review Meeting #3 notes.

Summary of Current Status

Mr. Hexter provided a summary of the relative interests of both parties in this
process. Based on information that the Facilitation Team has distilled through
meeting conversation to date, the HOA Negotiation Committee is concerned with
minimizing the impact of the proposed rent increase to residents. The Ownership
Negotiation Committee wishes to make a reasonable return on investment.
Interests shared by both parties include avoiding litigation, maximizing the quality
of life of SRI residents, and ensuring that the mobile home property tax reflects
the fair assessed value. Both parties affirmed that Mr. Hexter’s presentation
reflected their respective interests as outlined here.

In reviewing the proposals made by both committees, one HOA group member
provided clarification related to the HOA’s counter-proposal as presented during
session #3. First and foremost, the HOA representatives favor a method that

Spanish Ranch I Meet and Confer Meeting #4 Wednesday, November 12, 2008
FINAL Meeting Notes – revised 2/2/09 Page 1
indexes the property tax pass-through amount using calculations showing the
impact of net profit income tax on the tax increase beinig reimbursed, as well as
realistic expectation of income streams and rate of return on investment. The
group reiterated their two key requests: 1) Residents should be credited the
income tax percent rate on the net profit when they reimburse the tax increase;
and 2) the pass-through amount should be based on what HOA believes to be a
closer approximation of the real valuation, rather than the actual park purchase
price.

Park Ownership Presentation

The Ownership group provided the following statements in response to the
HOA’s arguments and counter-proposal. (Asterisks indicate assertions for which
no documentation was provided during the meeting.)

SRI HOA Issue 1: Real estate taxes are an operating expense. By passing this
expense on to homeowners, Ownership is being reimbursed for this expense at a
rate of 100% rather than at a tax rate paid on the operating profit.

The Ownership representative stated that they believed that, in many cases, the
HOA is relying on flawed assumptions related to these issues. He continued,
affirming that real estate taxes are indeed treated as an operating expense. The
HOA’s argument assumes that there is a taxable income on this property and
that Ownership pays taxes. In fact, there is no taxable income on this property
and so there is no savings.* He pointed out that Ownership has fronted
essentially two years of increased taxes in the amount of $350,000 a year. By
volunteering to spread out repayment over time, Ownership is recapturing only
approximately 85% of the expense.*

SRI HOA Issue 2:

At the time that the park owners decided to purchase the park, they had already
decided to pass on this increase in the real estate tax to the mobile home
owners. This is a case in which owners have sacrificed home owners’ interest to
further their own interest.

The Ownership representative posed a rhetorical question to the HOA Board:

Why would anyone expect Ownership to act in anything but its own, long-term
best interest? Prior to making a purchase offer, any potential buyer would
research the local ordinance and determine that the pass-through of property
taxes was permitted. Ownership believes that residents of SRI have benefited for
an extended period of time from the fact that ownership has not transferred and
property taxes have not increased. Ownership asserts that virtually all parks
throughout California receive rent increases that reflect ownership’s need to pass
through property tax increases resulting from the transfer of ownership and
Proposition 13. The Ownership contends that it receives no benefit from the pass
through of a property tax increase. The increase merely offsets the expense.

Spanish Ranch I Meet and Confer Meeting #4 Wednesday, November 12, 2008
FINAL Meeting Notes – revised 2/2/09 Page 2
The Homeowner Negotiating Team disagreed with this last assertion, stating that
the tax increase the residents pay will be used as a tax write off for the park
owners and the owners will be benefit and be reimbursed the expense the
residents pay.

SRI HOA Issue 3:

The HOA Team called into question the decision to purchase the mobile home
park with $11.55M in cash and a loan of $28M – they pointed out that this
business decision resulted in substantial debt service costs that have
substantially reduced net profit.

The Ownership representative assured the group that they paid as little as
possible for the property, pointing out that there were 11 offers. The committee
representative also responded to the HOA’s use of income-stream calculations
as a basis for valuating the property and hence establishing the property tax
amount. They stated that in today’s market a realistic rate of return on mobile
home property is 4%, 5% maximum.* According to the HOA’s own calculations
this would have resulted in a $38M purchase price. The reality is that the park
was purchased for the price it was purchased for, the Assessor’s office assessed
the property based on this price, and the Hayward rent control ordinance allows
for a tax pass-through.

SRI HOA Issue 4

Many park residents are elderly or disabled and Ownership knew that there was
the real possibility that many would not be able to afford the proposed increase.
The HOA Committee feels that poor people who cannot defend themselves are
being victimized.

The Ownership group does not believe that Spanish Ranch I is made up
predominantly of poor, elderly or disabled residents.* Without some form of
financial means testing there is no method to ascertain the facts. Further,
Ownership rejects the belief that they should assume responsibility for the poor,
elderly, and disabled, and believes that this responsibility belongs to the
government or society as a whole.

The Ownership Team then proceeded to provide direct response to the HOA’s
counter-proposal and the assumptions that the HOA Committee has shared and
upon which they have based their proposal. According to Ownership, the HOA’s
own numbers show that the property valuation is closer to $40M than the $21M
they have argued.

First, the park ownership negotiation team member stated that they do not intend
to negotiate the $63 per month increase, nor do they intend to add the additional
$5 per month to recover the additional taxes assessed in the most recent tax bill.

Spanish Ranch I Meet and Confer Meeting #4 Wednesday, November 12, 2008
FINAL Meeting Notes – revised 2/2/09 Page 3
Second, they would consider lengthening recovery of the $15.75 per month,
which they have now corrected to $14.75 per month, from four to five years
($11.80 per month for 60 months).

Third, in response to HOA’s request to separate the tax pass-through from the
base rent, Ownership stated that they would separate the pass-through amount
only if this $63 is annually adjusted up or down as a result of the property tax
changes, whether routine or resulting from tax protest.

One member of the HOA Committee responded to Ownership’s statement,

defending the group’s assumptions and arguments about Ownership’s income
stream projections and taxable income. He also clarified that the HOA views the
$21M valuation as a starting point for negotiation, especially as it relates to the
application for reassessment with the Assessor’s office.

Citing an article from the Sacramento Bee that showed a 30% drop in real estate
values, another HOA team member requested that Ownership apply for a
reassessment for 30% less than what was paid.

Caucuses
The Facilitation Team requested a caucus with the HOA Negotiation Team,
which lasted approximately 30 minutes. Following this discussion, HOA Board
members requested a brief caucus among themselves.

Exploration of Options
The Facilitation Team invited both parties back to the table. Mr. Hexter requested
that, for the remainder of the process, all parties focus on issues and interests
and do their best to set emotions aside. Trust is a very important element in a
process such as this, and continuing to remain preoccupied with personality
issues and emotions is not productive. Mr. Hexter noted that he would enforce
the groundrules of focusing on issues and avoiding personal attacks.

Next, Mr. Hexter reiterated what has been accomplished to date. The HOA has
presented a proposal and received a response from Ownership. The next step is
to explore these proposals to a greater degree.

The Ownership group requested a chance to respond to the comments made by

the HOA team before both sides went into caucus. In this statement, the
Ownership group asked that the HOA team refrain from reiterating their
arguments and underlying assumptions related to Ownership’s business
decisions, many of which Ownership believes to be either inaccurate or
unjustified.

Spanish Ranch I Meet and Confer Meeting #4 Wednesday, November 12, 2008
FINAL Meeting Notes – revised 2/2/09 Page 4
Tentative agreement was reached to pursue a reassessment – this possibility will
remain on the table. Ownership provided a copy of the assessor’s application for
reassessment form to the Facilitation Team and the HOA Team, and repeated
their assertion that the chances of achieving anything close to a positive result
will be greater closer to April. They stated that while they are engaged in
purchasing two other parks, these will not help make the case to the County
assessor to reduce the assessed value. These two parks are not located in
Alameda County.

One member of the HOA Team suggested the possibility of hiring an

independent appraiser. According to the Ownership group, the mobile home
park was appraised considerably above the amount of the $28M loan they used
to purchase the property, and noted that this amount was determined by an
independent appraiser.*

Mr. Lawson noted that, aside from the re-assessment process, it may be useful
to bring in expert opinion regarding the methodology for establishing a purchase
price. He proposed to contact an economist and a mobile home park expert who
works for the City of Berkeley and who is independent of this process and all
parties to this process. Mr. Lawson also agreed to seek information about the re-
assessment process directly from a professional contact at the County
Assessor’s office.

Summary/Next Steps
The Facilitation Team requested a subsequent meeting next Wednesday,
November 19th and confirmed that this date, which was tentatively held, still
works for everyone. The Facilitation group also asked both parties to entertain
the suggestion of meeting for an extended block of time in order to maintain
momentum during upcoming sessions. Members of the HOA and Ownership
groups agreed to check their schedules and, if possible, make arrangements in
an effort to meet this request.

NOTE: Audiotapes of the meetings, except caucuses, are available.

Spanish Ranch I Meet and Confer Meeting #4 Wednesday, November 12, 2008
FINAL Meeting Notes – revised 2/2/09 Page 5