Case 8:09-bk-21712-TA Doc 217-4 Filed 03/26/10 Entered 03/26/10 18:41:32 Desc

PROPERTY AND AREA DESCRIPTION Exhibit B - Part 3 Page 1 of 20 38

S UBJECT P HOTOGRAPHS

SUBJECT PROPERTY: LOOKING NORTH TOWARD MODELS

SUBJECT PROPERTY: LOOKING SOUTH TOWARD MODELS

DISTEFANO COMPANY
 Case 8:09-bk-21712-TA Doc 217-4 Filed 03/26/10 Entered 03/26/10 18:41:32 Desc
PROPERTY AND AREA DESCRIPTION Exhibit B - Part 3 Page 2 of 20 39

SUBJECT PROPERTY: STREET SCENE LOOKING EAST ON WARNER AVE

The subject property is at the right.

SUBJECT PROPERTY: LOOKING SOUTHEAST ON BRIGHTWATER DR OFF WARNER AVE

DISTEFANO COMPANY
 Case 8:09-bk-21712-TA Doc 217-4 Filed 03/26/10 Entered 03/26/10 18:41:32 Desc
PROPERTY AND AREA DESCRIPTION Exhibit B - Part 3 Page 3 of 20 40

SUBJECT PROPERTY: LOOKING EAST TOWARD THE TRAILS MODELS

SUBJECT PROPERTY: LOOKING SOUTHWEST TOWARD THE SANDS MODELS

DISTEFANO COMPANY
 Case 8:09-bk-21712-TA Doc 217-4 Filed 03/26/10 Entered 03/26/10 18:41:32 Desc
PROPERTY AND AREA DESCRIPTION Exhibit B - Part 3 Page 4 of 20 41

SUBJECT PROPERTY: LOOKING WEST TOWARD THE CLIFFS MODELS

SUBJECT PROPERTY: LOOKING SOUTHWEST TOWARD THE BREAKERS MODELS

DISTEFANO COMPANY
 Case 8:09-bk-21712-TA Doc 217-4 Filed 03/26/10 Entered 03/26/10 18:41:32 Desc
PROPERTY AND AREA DESCRIPTION Exhibit B - Part 3 Page 5 of 20 42

SUBJECT PROPERTY: THE TRAILS PRODUCTION UNITS

SUBJECT PROPERTY: THE SANDS PRODUCTION UNITS

DISTEFANO COMPANY
 Case 8:09-bk-21712-TA Doc 217-4 Filed 03/26/10 Entered 03/26/10 18:41:32 Desc
PROPERTY AND AREA DESCRIPTION Exhibit B - Part 3 Page 6 of 20 43

SUBJECT PROPERTY: THE CLIFFS PRODUCTION UNITS

SUBJECT PROPERTY: THE BREAKERS PRODUCTION UNITS

DISTEFANO COMPANY
 Case 8:09-bk-21712-TA Doc 217-4 Filed 03/26/10 Entered 03/26/10 18:41:32 Desc
PROPERTY AND AREA DESCRIPTION Exhibit B - Part 3 Page 7 of 20 44

SUBJECT PROPERTY: PROJECT ENTRANCE ON BOLSA CHICA ST

SUBJECT PROPERTY: COMMON AREA PARK ON BRIGHTWATER DR

DISTEFANO COMPANY
 Case 8:09-bk-21712-TA Doc 217-4 Filed 03/26/10 Entered 03/26/10 18:41:32 Desc
PROPERTY AND AREA DESCRIPTION Exhibit B - Part 3 Page 8 of 20 45

SUBJECT PROPERTY: THE TRAILS KITCHEN

SUBJECT PROPERTY: THE TRAILS LOFT-LOOKOUT

DISTEFANO COMPANY
 Case 8:09-bk-21712-TA Doc 217-4 Filed 03/26/10 Entered 03/26/10 18:41:32 Desc
PROPERTY AND AREA DESCRIPTION Exhibit B - Part 3 Page 9 of 20 46

SUBJECT PROPERTY: THE SANDS KITCHEN

SUBJECT PROPERTY: THE SANDS LIVING ROOM

DISTEFANO COMPANY
 Case 8:09-bk-21712-TA Doc 217-4 Filed 03/26/10 Entered 03/26/10 18:41:32 Desc
PROPERTY AND AREA DESCRIPTION Exhibit B - Part 3 Page 10 of 20 47

SUBJECT PROPERTY: THE CLIFFS OUTDOOR LIVING ROOM

SUBJECT PROPERTY: THE CLIFFS CASITA

DISTEFANO COMPANY
 Case 8:09-bk-21712-TA Doc 217-4 Filed 03/26/10 Entered 03/26/10 18:41:32 Desc
PROPERTY AND AREA DESCRIPTION Exhibit B - Part 3 Page 11 of 20 48

SUBJECT PROPERTY: THE BREAKERS KITCHEN (PREPARATION KITCHEN, RIGHT)

SUBJECT PROPERTY: THE BREAKERS LIMESTONE STAIRCASE

DISTEFANO COMPANY
 Case 8:09-bk-21712-TA Doc 217-4 Filed 03/26/10 Entered 03/26/10 18:41:32 Desc
PROPERTY AND AREA DESCRIPTION Exhibit B - Part 3 Page 12 of 20 49

SUBJECT PROPERTY: THE BREAKERS BATHROOM

SUBJECT PROPERTY: THE BREAKERS MEDIA ROOM

DISTEFANO COMPANY
 Case 8:09-bk-21712-TA Doc 217-4 Filed 03/26/10 Entered 03/26/10 18:41:32 Desc
PROPERTY AND AREA DESCRIPTION Exhibit B - Part 3 Page 13 of 20 50

SUBJECT PROPERTY: THE BREAKERS FIRST-FLOOR OCEAN VIEW

SUBJECT PROPERTY: THE BREAKERS SECOND-FLOOR OCEAN VIEW

DISTEFANO COMPANY
 Case 8:09-bk-21712-TA Doc 217-4 Filed 03/26/10 Entered 03/26/10 18:41:32 Desc
PROPERTY AND AREA DESCRIPTION Exhibit B - Part 3 Page 14 of 20 51

SUBJECT PROPERTY: LOOKING EAST ON THE BOLSA CHICA NATURE TRAIL

Subject units are at the left.

SUBJECT PROPERTY: LOOKING WEST ON THE NATURE TRAIL

Breakers models are at the right.

DISTEFANO COMPANY
 Case 8:09-bk-21712-TA Doc 217-4 Filed 03/26/10 Entered 03/26/10 18:41:32 Desc
PROPERTY AND AREA DESCRIPTION Exhibit B - Part 3 Page 15 of 20 52

SUBJECT PROPERTY: LOOKING NORTH ACROSS PACIFIC COAST HWY FROM BOLSA CHICA STATE BEACH
The subject property is on the ridge on the horizon.

SUBJECT PROPERTY: LOOKING WEST ON LOS PATOS AVE

The subject property is at the left.

DISTEFANO COMPANY
 Case 8:09-bk-21712-TA Doc 217-4 Filed 03/26/10 Entered 03/26/10 18:41:32 Desc
HIGHEST AND BEST USE Exhibit B - Part 3 Page 16 of 20 53

HIGHEST AND BEST USE

The term highest and best use is defined as follows:

The reasonably probable and legal use of vacant land or an

improved property, which is physically possible, appropriately
supported, financially feasible, and that results in the highest value.
The four criteria the highest and best use must meet are legal
permissibility, physical possibility, financial feasibility, and
maximum profitability.1

The highest and best use analysis applies the four tests—legally permissible,
physically possible, financially feasible, and most profitable—sequentially to
arrive at the highest and best use.

Highest and Best Use of the Property “As Is”

Legally Permissible Use

The legally permissible use refers to governmental or private use restrictions
for the site. The zoning and coastal commission entitlements limit the use to
single-family detached residences. Considering the long and arduous
entitlement process for the subject property, it appears extremely unlikely that
any potential bulk buyer would consider re-planning the project.

Physically Possible Use

Factors that affect the physically possible use of the site include topography,
size, shape, access, and exposure. The topography and other physical
characteristics do not impose any limitations on the use of the subject site in
addition to the legally permissible uses. The elevated mesa location provides
the opportunity for additional revenue from view lot premiums along the west
and south periphery of the site.

1 The Dictionary of Real Estate Appraisal, 171.

DISTEFANO COMPANY
 Case 8:09-bk-21712-TA Doc 217-4 Filed 03/26/10 Entered 03/26/10 18:41:32 Desc
DESCRIPTION OF THE A P P R A I S A L P R O C E Exhibit
SS
B - Part 3 Page 17 of 20 54

Financially Feasible Use and Most Profitable Use

Financial feasibility refers to value in excess of cost. Uses that pass the legal and
physical tests must also be profitable.
Residential values have fallen dramatically in the recession. However the
appraisal analysis demonstrates that the property retains considerable value
under any reasonable forecast of future revenues.

Summary - Highest and Best Use as if Vacant

The highest and best use of the site is continued development of the single-
family residential subdivision as already planned and entitled.

DESCRIPTION OF THE APPRAISAL PROCESS

The appraisal process includes three recognized approaches for estimating the
value of income-producing property: the cost approach, the income
capitalization approach, and the sales comparison approach, defined as
follows:

Cost Approach
A set of procedures through which a value indication is derived for the fee
simple interest in a property by estimating the current cost to construct a
reproduction of, or replacement for, the existing structure; by deducting
accrued depreciation from the reproduction or replacement costs; and by
adding the estimated land value plus an entrepreneurial profit. Adjustments
may then be made to the indicated fee simple value of the subject property to
reflect the value of the property interest being appraised.1

1 The Dictionary of Real Estate Appraisal, 81.

DISTEFANO COMPANY
 Case 8:09-bk-21712-TA Doc 217-4 Filed 03/26/10 Entered 03/26/10 18:41:32 Desc
DESCRIPTION OF THE A P P R A I S A L P R O C E Exhibit
SS
B - Part 3 Page 18 of 20 55

Income Capitalization Approach (Development Method)

An analysis that simulates a residential developer’s procedure for arriving at a
price to be paid by discounting expected revenues and costs over a projected
construction and marketing period.1

Sales Comparison Approach

A set of procedures in which a value indication is derived by comparing the
property being appraised to similar properties that have been sold recently,
applying appropriate units of comparison, and making adjustment to the sale
prices of the comparables based on the elements of comparison.2

Reconciliation and Final Value Estimate

Each approach addresses the appraisal problem from a different perspective,
and each approach produces a separate value indication. A final value estimate
results from a reconciliation of the value indications from each approach. In
the reconciliation, the appraiser: (1) weighs the relative reliability of each
approach in view of the quality and quantity of available data, and (2)
considers the relative applicability of each approach in view of the specific
appraisal problem. The appraiser bases the final value estimate on the most
reliable and applicable value indication.

1 Paraphrased from Appraising Residential Properties (Chicago: The Appraisal Institute),

294, and Subdivision Analysis (Chicago: The Appraisal Institute), 52.
2 The Dictionary of Real Estate Appraisal , 318.

DISTEFANO COMPANY
 Case 8:09-bk-21712-TA Doc 217-4 Filed 03/26/10 Entered 03/26/10 18:41:32 Desc
VALUATION – BULK VALUE “AS IS” Exhibit B - Part 3 Page 19 of 20 56

VALUATION – BULK VALUE “AS IS”

The concept of bulk value is based on federal regulations which indicate that

“The sum of retail sales for a proposed development is not the market value of the
development. For proposed developments that involve the sale of individual houses,
units, or lots, the appraiser must analyze and report appropriate reductions and discounts
for holding costs, marketing costs, and entrepreneurial profit.”1

The bulk value is the value to a single buyer intending to resell the individual
units, taking into consideration appropriate reductions and discounts from
retail value. This appraisal values the subject property using the discounted
cash flow method (in the case of residential subdivisions, sometimes called the
development method) under the income capitalization approach.
The income capitalization approach involves the application of methods
that convert (capitalize) income into a value indication. Two methods are
commonly used: direct capitalization and yield capitalization (discounted cash
flow). The discounted cash flow method produces a value indication by
calculating the present value, using a market-derived discount rate, of forecast
periodic sales proceeds less costs during a holding period.
Appendix E contains the discounted cash flow spreadsheet showing the
forecast of revenue and expenses through sell-out of the entire subject project.
In general the model assumes that the worst of the recession is over and that
conditions will improve over time.

Forecast Revenue

Revenue for the discounted cash flow analysis in generated primarily by the
periodic sale of the individual homes to retail buyers plus a smaller increment
from sale of the models.

1 12 CFR 564.4(a)(9).

DISTEFANO COMPANY
 Case 8:09-bk-21712-TA Doc 217-4 Filed 03/26/10 Entered 03/26/10 18:41:32 Desc
VALUATION – BULK VALUE “AS IS” Exhibit B - Part 3 Page 20 of 20 57

Retail Value of Completed Houses

The retail value of the completed houses is estimated using the sales
comparison approach. The sales comparison approach produces a value
indication by comparing and contrasting the subject property with sales of
similar properties.

Comparable Improved Data

The subject property is a uniquely large subdivision currently selling upscale
and luxury single-family homes in coastal Orange County. There are relatively
few upscale subdivisions currently selling in coastal areas of either Orange or
Los Angeles County. To supplement the subdivision data, I have searched the
market for spot sales of new upscale single-family homes as indicators of
current prices. The following data appear to be the best indicators of value for
the subject individual homes.

DISTEFANO COMPANY