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2008-04-17 Art Cobb's Expert ReportI IVERSON REWERS ~~, ATTORNEYS AT LA W `~' ~ ~ r JASON J. KUBOUSHEK DIRECT 952.548.7206 JKUBOUSHEKC~NERSONLAW.COM JON K.IVERSON -``~^-_ -~ PAUL D. REUVERS _ ~ ._ --~ ~ )EFF M. ZALASKY p April 17, 2000 ~~5 F~y~~f'~` 4', JASON J. KUBOUSHEK ~(i'^?~~ ~ PAMELA J.F. WHITMORE -,. -"._..-- -. JASON M.HIVELEY r.....~. ~.-. ~. Mark Rossow, ASSt. Program CIa1mS Manager SUSAN M. TINDAL LMCIT JEFFREY A.EGGE 1~5 University Avenue West St. Paul, MN 55103 Re: Trust Member: City of Albertville Claimants: Gold Key Development, Inc. /TC Homes Claim Nos. 11056480/11057039 Our File Nos. 100.526/100.535 Dear Mr. Rossow: Since our last report, we have received Art Cobb's expert report. I have enclosed a copy for your file. We had provided Mr. Cobb with extensive documentation regarding Gold Key's damage claims and the builder's damage claims. Mr. Cobb used this information in addition to Ms. Bujold's report to make an opinion regarding Gold Key's damages. He determined most of Gold Key's damages are overstated and speculative. After hearing Gold Key's more detailed basis for their claims at trial, Mr. Cobb will be able to provide a more specific opinion regarding those claims. Since our last report, I have also had an opportunity to talk with SEH's attorney. He is evaluating whether or not to bring a pretrial motion on the indemnity claims or if they will wait until trial. He indicated he would be getting back to me soon. He also again reiterated an option of attempting to settle the claims with the City. However, their settlement value of the case is in the range of $25,000. I indicated this amount was insufficient and we would, if anything, be looking at a percentage of the final verdict. He indicated his client would not accept this, but they were going to be meeting with their insurance provider to further evaluate the claims. As soon as I hear anything from them, I will forward it on to you. Lastly, I have enclosed a copy of Mr. Cobb's bill. Please submit payment directly to him. If you have any questions, please feel free to contact me. IVERSON REUVERS, LLC 19321 ENSIGN AVENUE SOUTH I BLOOMINGTON, MN 55438 ~ 952.548.7200 ~ FAX: 952.548.7210 WWW.IVERSONLAW.COM April 17, 2008 Page 2 Best regards, IVERSQ~i REUVERS F ~ ~ J on J uboushek JJK: e Enclosure cc: Larry Kruse, City Administrator Mike Couri, City Attorney HIGHLY CONFIDENTIAL STATE OF MINNESOTA DISTRICT COURT COUNTY OF WRIGHT TENTH JUDICIAL DISTRICT TIC Homes, Inc., Court File No. 86-CV-06-4997 Plaintiff/Cross Claimant, vs. Gold Key Development, Inc., Defendant/Third Party Plaintiff, vs. Hedlund Engineering, Third Party Defendant, and City of Albertville, Defendant/Third Party Plaintiff, vs. Short-Elliott-Hendrickson, Incorporated, Third Party Defendant/Cross Defendant. Gold Key Development, Inc. Court File No. 86-CV-06-2998 Plaintiff/Cross Claimant, vs. City of Albertville, Defendant/Third Party Plaintiff, vs. Short-Elliott-Hendrickson, Incorporated, Third Party Defendant. Report of Cobb & Associates, Ltd. Cobb & Associates, Ltd. has been retained by Iverson Reuvers, LLC to assist representation of City of Albertville in the above matter. Arthur H. Cobb has had primary responsibility for the engagement. Arthur H. Cobb is expected to render expert testimony related to this matter. HIGHLY CONFIDENTIAL OPINIONS TO BE EXPRESSED AND THE BA IS AND REASONS THEREFOR INTRODUCTION On or about July lb, 2004, Gold Key Development, Inc. (Gold Key) and City of Albertville (Albertville) entered into a planned unit development agreement (the Development Agreement) for the Prairie Run Subdivision (the Property). The Development Agreement set forth, among other factors, certain elevation requirements based on high water levels. After a significant rain event in or about September 2005, Albertville required a revised grading plan. In a letter dated November 29, 2005, the attorney for Albertville declared Gold Key to be in default of the Development Agreement, and that the Grading Plan for the Prairie Run plat did not account for the 100-year flood elevation. Albertville temporarily suspended development of the Property in late 2005 and "shut down development in the Property in approximately February or March of 2006." Gold Key has set forth a claim for damages totaling $2,236,346.05 and including, among others, holding costs; attorney fees, expert witness costs, and legal expenses; and lost profits, allegedly related to the "shut down." We have conducted a preliminary analysis of financial and other information to evaluate Gold Key's claim for damages. Gold Key has not indicated complete or appropriate consideration of construction schedules, seasonality, flood prospects or market conditions and has not demonstrated that proposed or planned closing dates would have been achieved or complete or appropriate information to support estimation of damages. The claims for damages are overstated and speculative. Our analysis is ongoing and may be supplemented after consideration of additional documents and information. 2 HIGHLY CONFIDENTIAL BACKGROUND PARTIES City of Albertville City of Albertville (Albertville) is a municipality located in Wright County, Minnesota. The population of Albertville was estimated to total 3,703 as of July 1, 2000, 5,724 as of July 1, 200 and 6,001 as of July 1, 2006. (U.S. Census Bureau, Minnesota.hometownlocator.com) The Property Albertvil e approved the Plat of Prairie Run Subdivision (the Property,) described as "Lots 1-1~, Block 1, Lots 1-38, Block 2, Outlot A, Prairie Run, Wright County, Minnesota" on or about June 7, 2004. Albertville and Gold Key entered into a planned unit development agreement for the Prairie Run Subdivision (the Development Agreement) on or about July 16, 2004. The Development Agreement set forth, among other factors, certain elevation requirements based on high water levels. Albertville adopted a Grading Plan for the Property and graded the Property in approximately August 2004. The Grading Plan was revised and approved, and certain lots in the Property were graded to higher elevations. The Property was planned to include development of single family homes and detached single-family townhomes to be constructed by home builders. The Property is immediately north of Highway 18 and includes 53 lots (1 lot is encumbered with a pond) along ~ 1 S` Street and on four cul-de-sacs, Kalenda Court, Kali Court, Kalland Court and Sls` Street. Gold Key entered option agreements to sell certain lots within the Property. to T/C I-lomes, Inc., 17 lots, and Legacy Homes Incorporated, 28 lots. Gold Key also planned to sell 8 lots to Majestic Builders, Inc. 3 HIGHLY CONFIDENTIAL In or about September 200, Albertville experienced a significant rain event. Albertville suspended a building permit on a home under construction on Lot 7, Block 2, pending a revised grading plan. (A single-family home has since been constructed on Lot 7, Block. 2.) A revised grading plan was prepared in October 200, raising the elevations of Lots 7, 8, 9, 10, 11, 12 and 13, Block 2. There has been no construction on the 15 single-family townhome lots on Block 1. Single-family homes have been constructed on 4 of the 8 lots on Kalland Court, 8 of the 8 lots on Kali Court (1 home is currently under construction), 8 of the 9 lots of Kalenda Court and 2 of the 13 lots on the 51'` Street cul-de-sac. Five homes and one lot (Lot 4, Block 2 offered by Legacy Homes) are individually signed as for sale. Gold Kev Development Inc Gold Key Development, Inc. (Gold Key) is a real estate development company located in Medina, Minnesota. Gold Key's officers include William Dolan, President, and Dean Johnson, Secretary. T/C Homes. Inc. T/C Homes, Inc. (T/C Homes) is a custom home builder located in Dayton, Minnesota. On or about December 30, 2004, T/C Homes and Gold Key entered an Option Agreement which provided that T/C Homes would purchase 17 single-family lots in the Project. T/C Homes purchased lots and constructed single family homes in the Prairie Run Subdivision. 4 HIGHL~i' CONFIDENTIAL Hedlund En6ineerin Hedlund Engineering (Hedlund) is an engineering services company .located in Saint Paul, Minnesota. Hedlund provided engineering services to Gold Key and prepared grading plans for the Property. Short-Elliott-Hendrickson, Incorporated Short-Elliott-Hendrickson, Incorporated (SEH) is a multidisciplined, single-service consulting firm of engineers, architects, planners and scientists located in St. Paul, Minnesota. SEH provided engineering services to Albertville, including review of grading and drainage plans. Legacy Homes Incorporated Legacy Homes Incorporated (Legacy) is a home builder. Legacy purchased lots in the Property for development and. sale. 5 HIGHLY CONFIDENTIAL DEFAULT Ina .letter dated November 29, 2005, the attorney for Albertville declared Gold Kev to be in default of the Development Agreement, and that the Grading Plan for the Prairie Run plat did not account for the 100-year flood elevation. Albertville temporarily suspended development in late 2005 and refused to issue certificates of occupancy and new building permits for the Prairie Run Subdivision. Albertville "shut down development in the Property in approximately February or March of 2006." Gold Key alleges Albertville is in default of the Development Agreement "by refusing to issue certificates of occupancy or building permits for lots with elevations less than 953.9 feet." (Complaint, page 10) MARKET CONDITIONS The housing market in Minnesota, the Minneapolis-Saint Paul metropolitan area, Wright County and Albertville moderated and declined in 2005, 2006 and 2007. "In 2006, the booming housing market cooled with excess inventories, slowing demand, a rise in mortgage interest rates and initial rumblings of problems in the subprime mortgage market. This cooling has continued into 2007...." (Maxfield Research, Inc.) Residential construction permits issued by Albertville for the years 2002 through 2006 are summarized as follows: Single Single Family 3 & 4 Multi- Total Year Famih~ Attached Unit Family Units 2002 181 2 20 18 221 2003 135 - 22 - 157 2004 8b 37 _ _ 123 2005 112 22 - - 134 2006 68 22 - - 90 Sources: Census Bureau and Maxfield Research, Inc. The .median price and number of home sales per quarter in Wright County and Albertville generally declined in 2006 and 2007. 6 HIGHLY CONFIDENTIAL PRELIMINARY ANALYSIS We have conducted a preliminary analysis of financial and other information regarding Gold Key's claim for damages totaling $2,236,346.05, summarized as follows: Holding Costs $ 370,S3S.96 Attorney Fees, Expert Witness Costs and Legal Expenses 230,027.41 Future Lost Profits 1,635,782.68 Total $ 2,236,346.OS Gold Key's claim for damages includes, among others, holding costs; attorney fees, expert witness costs, and legal expenses; and lost profits. We understand that Gold Kev is no longer claiming damages for Builder Losses. Gold Key has not indicated complete or appropriate consideration of construction schedules, seasonality, flood prospects or market conditions and has not demonstrated that proposed or planned closing dates would have been achieved or complete or appropriate information to support estimation of damages. The claims for damages are overstated and speculative. Our analysis is ongoing and may be supplemented after consideration of additional documents and information. Closings Certain of Gold Key's damage claims are based on Gold Key's proposed closing dates and reported closing dates for28 lots (9 T/C Homes Lots (Lots 17 and 31-38, Block 2) and 19 Legacy Lots (Lots 1-15, Block 1 and Lots 10-13, Block 2.)) Proposed closing dates indicate that Gold Key simply proposed closing on one lot to each of T/C Homes and Legacy per month, or two lots per month, from November 2005 through July 2006 and one lot per month to Legacy from August 2006 through May 2007. 7 HIGHLY CONFIDENTIAL Closing dates for the 281ots are summarized as follows: Legacv Reported Proposed BIocIJ or Planned Closing Lot Closing 11 /O l /2005 2/ 12 06/26/2006 12/01 /2005 13 06/26/2006 Oi/O1/2006 10 /0/01/2007 02/01/2006 11 12/01/2007 03/01/2006 V01 02/01/2008 .04/01/2006 2 04/01/2008 05/01/2(}06 3 06/01/2008 06!01 /2406 4 08/0!/2008 07/01/2006 5 10/0l/2008 08/01 /2006 b 02/01/2009 09/01!2006 7 04/01/2009 10/01/2006 8 06/01/2009 11/01/2006 9 08/01/2009 12/01/2006 14 /0/0]/2009 01 /01 /2007 1 l 02/0 //2010 02/01/2007 12 04/01/20/0 03/01(2007 13 06/01/2010 04/01/2007 14 08/01/2010 05/01 /2007 15 10/01/2010 T/C Homes Block' Reported Lot Closing 2/38 07.`18/2006 31 07i 18/2006 32 09/07/2006 33 11 /21 /2006 36 11 /21 /2006 34 1) 35 - 37 - 17 I) Note: 1) Homes have been constructed. Source: 001769 Homes have been constructed on Block 2 lots, including Lots 38, 31, 32, 34 and 17. Proposed closing dates indicate that Gold Key expected the 9 T/C Homes lots to be closed on or before July 1, 2006 and the 19 Legacy lots to be closed on or before May 1, 2007. Gold Key has sold or constructed on, at least, 23 lots, including 5 lots on which damage claims are based. Planned closing dates indicate that Gold Key simply planned closing on one lot to Legacy every second month. Gold Key has not indicated complete or appropriate consideration of construction schedules, seasonality, flood prospects or market conditions and has not demonstrated that proposed or planned closing dates would have been achieved. 8 HIGHLY C©NFIDENTIAL Holding Costs Gold Keys 1Joiding Costs damage claim, totaling $370,535.96, is as follows: Property Taxes $ 25,738.81 Assessrnents 124,920.19 Lost Price Increases ~5°,'o per Year) 80,213.50 Association Fees 8,$3.00 Association Bills 2,463.65 Additional Gold Key Bills (Mowing) 4,200.00 Additional Dev Loan Interest 80,313.44 Additional Letter of Credit Fees 43,851..37 Total Holding Costs $ 370,535.96 Property Taxes Gold Key's claim for property taxes of $25,738.81 is based on Gold Key's reported closing dates for 7 lots; planned or estimated closing dates for 21 lots to be sold through October 1, 2010; and "Taxes Gold Key did or will pay" of $33,615.05, minus "Taxes Gold Key should have paid" of $7,876.24. "Taxes Gold Key did or will pay" include estimated taxes on lots planned or estimated to close in 2008, 2009 and 2010 of approximately $13,000.00. Gold Key's claim for property taxes of $25,738.81 includes $23,846.74 for taxes that have not been paid by Gold Key on lots that have not been sold. Gold Key paid property taxes of $2,708.48 on the 7 lots that were sold through August 2007. Gold Key set forth that property taxes have not been paid on the remaining 21 lots that were not sold as of August 2007. Gold Key's claim for property taxes assumes that Gold Key would have achieved 28 lot closings at a rate of two lots per month from November 2005 through July 2006 and one lot per month from August 2006 through May 2007, but for the actions of Albertville. Gold Key has not indicated complete or appropriate consideration of construction schedules, seasonality, flood prospects or market conditions and has not demonstrated that proposed or planned closing dates would have been achieved. Gold Key's damage claim for property taxes is overstated and speculative. 9 HIGHLY CGNFIDENTIAL Assessments Gold Key's damage claim for assessments of $124.920.19 is summarized as follows: Assessments Assessment Interest $ 4.i,849.b2 Penalty Interest 3 1,214.12 Penalty 49,86.45 Total $ 124,920.19 Gold Key's damage claim is based on Gold Key's reported closing dates for 7 lots; planned or estimated closing dates for 21 lots to be sold; and amounts "Gold Key did or will pay' of $181.,740.85, minus amounts "Gold Key should have paid" of $56,820.66. Amounts "Gold Key did or will pay" include estimated assessment interest, penalty interest and penalties totaling approximately $59,000.00 to be paid on lots estimated to close in 2008, 2009 and 2010, which would not be incurred if the lots were sold prior to planned closing dates. Gold Key paid assessments of $19,488.43 on 7 lots that were sold through August 2007 and Lots 34/2 and 35/2. Gold Key set forth that assessments have not been paid on the remaining lots that were not sold as of August 2007. Gold Key's claim for assessments of $124,920.19 includes damages of $111,970.27 for assessments that have not been paid by Gold Key on lots that have not been sold. Gold Key's claim for assessments assumes that Gold Key would have achieved 28 lot closings at a rate of two lots per month from November 2005 through July 2006 and one lot per month from August 2006 through May 2007, but for the actions of Albertville. Gold Key has not indicated complete or appropriate consideration of construction schedules, seasonality, flood prospects or market conditions and has not demonstrated that proposed or planned closing dates would have been achieved. Gold Key's damage claim for assessments is overstated and speculative. 10 HIGHLY CONFIDENTI AI, Lost Price Increases Gold Key's damage claim for lost price increases totals $80,213.50. Goid Key estimates lost price increases based on annual lot price increases of 5 percent for lots proposed to be sold to T1C Homes in 2006 and Legacy in 2006 and 2007. Gold Key has not set forth actual lot prices paid by TIC Homes and Legacy in 2006 or 2007. T/C Homes closed 5 lots and Legacy closed 2 lots in 2006, after November 29, 2005, as follows: Reported Proposed Lot _ Closing Lot Price T%C Homes 38/2 07/18/06 $ 62,900 31/2 07/18/6 62,900 32/2 09/07/06 62.900 33/2 11 /21 /06 3 6/2 11 /21 /06 Reported Lot Price Increase Percent 62,900 0 0 62;900 0 0 63,844 944 1.5% Legacy 12/2 06/26/06 50,295 13/2 06/26/06 50,295 Lot sales to Legacy, in addition to the 19 lots included in the damage claim (for example: as of March 2008, Legacy offered Lot 4, Block 2 for sale), have not been available. T/C Homes did not pay 5 percent price increases on Lots 38/2, 31/2 or 32/2. The Amendment to Option Agreement between Gold Key and TC Homes Inc., dated July 18, 2006, set forth that ``After the conclusion of the Litigation, GOLD KEY and TC HOMES agree to assess whether an additional portion of the 5% purchase price premium originally set forth in the Option Agreement shall be paid by TC HOMES to GOLD KEY on each of the Single Family Lots purchased after June 15, 2006.... Said assessment shall be based upon the amount of damages .actually incurred by TC HOMES as a result of the issues involved in the Litigation (and any related litigation commenced by or against TC HOMES or GOLD KEY as a result of the grading issues raised by the City)." (Emphasis in the original) HIGHLY CONFIDENTI:~L Gold Key's proposed lot closings assume .that Legacy would close five lots in 2007. Gold Key's claim includes price increases for six lots in 2007. Gold Key's damage claim is overstated by one lot and at least $4,909.75. Gold Key's claim for assessments assumes that Gold Key would have achieved 28 lot closings at a rate of two lots per month from November 2005 through July 2006 and one lot per month from August 2006 through May 2007 but for the actions of Albertville. Gold Key has not indicated complete or appropriate consideration of construction schedules, seasonality, flood prospects or market conditions and has not demonstrated that proposed or planned closing dates would have been achieved. Gold Key's damage claim for lost price increases is overstated and speculative. Association Fees Gold Key's damage claim for association fees for the period of approximately June 2007 through October 2010 totals $8,835.00. Gold Key implicitly assumes that all lots would have been sold by August 2007 but for the actions of Albertville. Prospective .expenditures related to association fees have not been identified or available. Gold Key has not indicated complete or appropriate consideration of construction schedules, seasonality, flood prospects or market conditions and has not demonstrated that proposed or planned closing dates would have been achieved. Gold Key's damage claim for association fees is overstated and speculative. 12 HIGHLY CONFIDEi\iTIAL Association and Gold Key Bills Gold Key's damage claim includes past a) association bills of $2,463.65 related to insurance premiums and snow removal charges for Prairie Run in 2006 and 2007 and b) Gold Key bills of $4,200.00 for mowing the Property for the months of June, July and August 2007. Association bills of $2,463.65 for insurance premiums and snow removal would have been incurred, in whole or in part, during the development of the Property and sale of lots. Gold Key assumes that all lots would have been sold by July 2007 but for the actions of Albertville. Gold Key has not indicated complete or appropriate consideration of construction schedules, seasonality, flood prospects or market conditions and has not demonstrated that proposed or planned closing dates would have been achieved. Gold Key's damage claim for association and Gold Key bills is overstated. Loan Interest and Letter of Credit Fees Gold Key's damages include claims for loan interest of $80,313.44 and letter of credit fees of $43,851.37. Gold Key's claim for loan interest includes loan interest charged to Gold Key from August 6, 2004 through August 16, 2007 of $108,152.88, less "Total Interest" of $49,837.43 for the period of August 6, 2004 through December 1, 2005, plus "Total Interest" of $21,997.99 for the period of September 1, 2007 through March 1, 2009. "Total Interest" amounts of $49,837.43 and $21,997.99 were calculated by Gold Key based on reported and estimated closing dates of lot sales. 13 HIGHLY CONFIDENTIAL "Total Interest" for the period of August 6, 2004 through December 1, 2005 is calculated based upon~the receipt of sales proceeds from the sale of 18 large family lots and 10 small single family lots prior to the significant rain event in or about September 2005. Gold Key had sold approximately 13 lots prior to September 2005. Gold Key's claim for letter of credit fees includes letter of credit fees incurred from February 24, 200b through Febniary 6, 2007 of $23,746.11 and "Estimated future LOC fees" of $20,105?6, a total of $43,851.37. Gold Key has not set forth documentation or calculations to support the claim for "Estimated future LOC fees" of $20,105.26. Gold Key expected that the loan against the Property would be paid "in March 2006, but for the City's actions in shutting down development on the Property, and which loans will instead be paid off in approximately October or November 2006," indicating that interest damages, if any, would be limited to the period of April 2006 to October or November 2006. (Plaintiff's Answers to Defendant's Interrogatories) Gold Key has not indicated complete or appropriate consideration of construction schedules, seasonality, flood prospects or market conditions and has not demonstrated that proposed or planned closing dates would have been achieved. Gold Key's damage claims for loan interest and letter of credit fees is overstated and speculative. 14 HIGHL4' CONFIDENTIAL Attorney Fees, Expert Witness Costs and Legal Expenses Gold Key's damage claim for Attorney Fees, Expert Witness Costs and Legal Expenses is summarized as follows: Attorney Fees John Brennan $ 7,812.01 Cindi Matt (through 8/17107) 136,171.25 Biersdorf & Associates 2,450.00 Expert Witness Costs 72,207.65 Miscellaneous Legal Expenses Mediator 988.25 Coping 257.25 Court Reporter 6,835.32 Miscellaneous Legal Expense 3,305.68 Total $ 230,027.41 Attorney Fees, Expert Witness Costs, and Legal Expenses are costs incurred by Gold Key related to this matter. Attorney Fees, Expert Witness Costs and Legal Expenses may be awarded at the discretion of the Court. Future Lost Pro>~ts Gold Key's damage claims for future lost profits include "Loss of Value on Unsold Lots", "Loss of Hotel Ownership and Profits" and "Loss of Use of Profits on Unsold Lots (5 sales / yr)" summarized as follows: Loss of Value on Unsold Lots Large Lot Single Family Small Lot Single Family Subtotal $ 10,800.00 171,700.00 182,500.00 Loss of Hotel Ownership and Profits Loss of Use of Profits on Unsold Lots Subtotal Total 1,229,165.00 224,117.68 1,453,282.68 $ 1,635,782.68 15 HIGHLY CONFIDENTIAL Loss of V"aloe on unsold Lots Gold Key's damage claims for the estimated loss of value on 2 unidentified large unsold lots of $10,800.00 and 17 unidentified) small unsold lots of $171,100.00. The loss of value is based on large lot homes "row selling for $230,000" and small lot homes ``now selling for about $180,000." Gold Key does not set forth the time period of ``now," or source or documentation to support selling prices of $230,000 for 2 large lots or $180,000 for 17 small lots. Gold Key implicitly assumes that all lots would have been sold by May 2007, but for the actions of Albertville. Gold Key implicitly assumes that all decreases in market value were caused by Albertville. Gold Key has not indicated complete or appropriate consideration of construction schedules, seasonality, flood prospects or market conditions and has not demonstrated that proposed or planned closing dates would have been achieved. Gold Key's damage claim for loss of value on unsold lots is speculative. Loss of Hotel Owners and PYOfits Gold Key's claim on behalf of Dean Johnson for the loss of hotel ownership and estimated profits for twenty years totals $1,229,165.00. Gold Key did not solicit a "Hotel Market Overview" and was not an investor in the proposed Cambria Suites Hotel in Maple Grove, Minnesota. The hotel claim is based on a claimed plan for Dean Johnson to own 60 percent of the Cambria Suites Hotel. "I own 50.1% of Hotel" and needed to invest an additional $338,298.74 to own 60 percent of the proposed project. (Gold Key does not identify whether Mr. Johnson had or could arrange alternative financing or indicate appropriate consideration of mitigation.) Gold Key's claim of $1,229,165.00 is for Dean Johnson's alleged loss of 9.9 percent (60.0 - 50.1) of ownership and profits. 1 Gold Key's damage claims for holding costs are based on 15 cottage home lots. 16 HIGHLY CONFIDENTI_aL The hotel claim is based on a ``Hotel Market Overview Prepared For Dean Johnson'' and a "5-Year Proforma Estimated Operating Income & Expenses" (regarding "Chaska Hospitality Holding Co. -Dean Johnson," "The Grove Hospitality Company, LLC" and "Dean Johnson") for a proposed 129 unit Cambria Suites Hotel in Maple Grove, Minnesota (the Study). The Cambria Suites Hotel is under construction. Additional investment of $338,298.74 is calculated based on ``Sources & Uses Template for Developers" "Developer Equity" of $3,417,159 included in the Study. The actual Sources and Uses and developer equity for the Cambria Suites Hotel have not been available. Gold Key set forth estimates of Hotel Net Income (Loss) from the "~-Year Proforma Estimated Operating Income & Expenses" through 2012 included in the Study and set forth a Gold Key calculation for an additional 15 years, a total of 20 years, summarized as follows: Study Gold Ke Net Net y Net Net Income/ Income/ Income/ Income/ Year Loss Year Loss Year Loss Year Loss l $ (103,980) 6 ,786,451 11 786,451 16 786,451 2 236,776 7 786,451 12 786,451 17 786,451 3 380,030 8 786,451 13 786,451 18 786,451 4 733,708 9 786,451 14 786,451 19 786,451 5 786,451 10 786,451 15 786,451 20 786,451 Total $ 13,829,750 The Gold Key calculation for each of the years 6 through 20 of $786,451 is equal to the year 5 amount of $786,451 included in the Study. Gold Key's calculations are speculative. Gold Key has not identified and does not appropriately consider conditions or factors including, among others: on-site management, which may or will occur 5 years or 20 years into the future. Estimates and calculations of hotel estimated "profits" do not indicate appropriate consideration of present value for claims over a 20 year period. 17 HIGHLY CONFIDENTIAL The Study is based on `'estimates and assumptions that are subject to uncertainty and variation depending on evolving events, they are not represented as results that will actually be achieved." "Investments in hotels, like other real estate investments, are subject to risks of adverse changes in general economic and local conditions. Factors such as increased competition, changes in neighborhood composition, changes in federal or .state laws and regulations, and changes in the economy could all affect the underlying operating variables and impact the profitability of the proposed hotel." "The quality of a hotel's on-site management and the organization that markets the facility has a direct impact on the hotel's economic viability." Gold Key's estimate of ``Total Profit after tax" does not appropriately consider principal payments on senior loans. Gold Key's estimates of Net Income are dependent upon an estimated $12,037,000 of senior loan financing with interest at 9 percent for 3 years, adjusting downward to 7 percent interest thereafter or refinancing in 2010 for approximately 50 years at 7 percent interest (or a senior loan which requires a balloon payment or an additional refinancing.) The financing, debt and equity, of the Cambria Suites Hotel have not been available. Gold Key's claim for the loss of hotel ownership and estimated lost profits may effectively be a claim for. prejudgment interest. Prejudgment interest would be calculated based on statutory rates at the discretion of the court. Gold Key's claim on behalf of Dean Johnson for the loss of hotel ownership and estimated profits is not genuine and is speculative. 18 HIGHLY CONFIDENTIAL Loss of Z~se of Profits on Unsold Lots Gold Key's damage claim for the loss of use of profits on unsold lots totals $224,117.68. The claim is based on the estimated profit from sales of lots of $88,258.90 (including lot price increases of 5 percent per year of $80,213.50), less $300,000 for "investment in hotel project". Gold Key assumed an interest rate of 11.75 percent for 41 months (through October 2010) Gold Key sets forth that "Developer has lost business opportunities ... that Developer had commitments for with the intent of using the cash that Developer should have had from the sales of the lots...." (Plaintiff's Answers to Defendant's Interrogatories) Gold Key's damage claim excludes $300,000.00 to be used for "investment in hotel project" and does not identify any other "lost business opportunities." Gold Key assumes the loss of use of profits on all lots through October 2010. Gold Key does not set forth appropriate consideration of mitigation for lots sold before October 2010. Gold Key's claim for loss of use of profits may effectively be a claim for prejudgment interest. Prejudgment interest would be calculated based on statutory rates at the discretion of the court. Gold Key's damage claim for loss of use of profits on unsold lots is speculative. 19 HIGHLY CONFIDENTIAL DATA Al~'D OTHER INFORMATION CONSIDERED The data or other information considered by Mr. Cobb are his education and professional experience, tours of Albertville and the Prairie Run development and of Maple Grove and the Cambria Suites Hotel site and reading and analysis of certain documents and information including, but not limited to: • Gold Key's Complaint and Amended Cross Claim Against Short-Elliot-Hendrickson, Inc.; • T/C Homes, Inc.'s Complaint and Amended Cross Claim Against Short-Elliott- Hendrickson Incorporated; • Plaintiff s Answers to Defendant's Interrogatories; • Gold Key Development, Inc.'s Answers to Short-Elliott-Hendrickson, Inc.'s Interrogatories; • T/C Homes Responses to City of Albertville's Request for Production of Documents; • T/C Homes Supplemental Answers to Interrogatories of City of Albertville and Exhibit A thereto; • T/C Homes Answers to Interrogatories (First Set) of Short-Elliott-Hendrickson, Inc.; • T/C Homes Responses to Short-Elliott-Hendrickson, Inc.'s Request for Production of Documents; • Transcript of Deposition of Dean R. Johnson, dated February 2, 2007; • Transcript of Deposition of Brian Tutt, dated January 17, 2007; • An analysis of Market Conditions for Owned Multifamily Housing in Albertville, Minnesota, prepared by Maxfield Research Inc., March 2008; • Documents Bates numbered 000208; 000222 through 00022E 000305 through 000349; 000575 through 000576; 000590 through 000589; 000592 through 000605; 000607 through 000740; 000754 through 000756; 000741 through 000753; 001594; 001591 through 001593; 001595 through 001767; 001892 through 002041; 000298 through 000299; through 000591; 000577 000608; 000711 through 00158 through 001590; 001769 through 001890; 20 HIGHLY CONFIDENTIAL • Letter from Johnson, Larson, Peterson & Matt, P.A. to Iverson Reuvers, dated September i 1, 2007; • Beacon Bank Loan Analysis Presentation for Gold Key Development, Inc., dated January 18, 2001; • Gold Key Development Inc. monthly bank statements for January through December 2001, 2002, 2003, 2004, 2005 and 2006 and January through May 2007; • Alpine Capital, LLC Loan Approval Summary for T/C Homes, Inc., dated January 12, 2005; • Option Agreement between Gold Key Development, Inc. and T/C Homes, Inc., dated December 30, 2004; • TCL Loan Input documents; • Alpine Capital, LLC Pay Order documents; • Gold Key / T/C Homes Partial Release of Mortgage documents; • Gold Key Development, Inc. Letter of Credit Fee Requests; • Mortgage documents for Alpine Capital, LLC and Gold Key Development, Inc. • Gold Key Development, Inc. Insurance documents; • Warranty Deed documents for Gold Key Development, Inc. and T/C Homes, Inc.; • Gold Key Development, Inc. Pay Orders; • T/C Homes, Inc. Partial Release documents; • 2°d Mortgage documents for Alpine Capital, LLC and T/C Homes Inc.; • T/C Homes Insurance documents; • www.city-data.com; and • Certain other documents. 21 HIGHLY CONFIDENTIAL QtiALIFICATIONS Arthur H. Cobb Arthur H. Cobb is a certified public accountant and president of Cobb & Associates, Ltd. Mr. Cobb was a partner in KPMG, formerly Peat, Marwick, Mitchell & Co., and was a member of the professional staffs of other international firms of certified public accountants and management consultants. Mr. Cobb was aLecturer-Assistant Professor in the Department of Accounting at the University of Minnesota and a Teaching Assistant and Research Assistant at the University of Iowa. Mr. Cobb received graduate and undergraduate degrees from the University of Iowa. Since 1974, Mr. Cobb has completed an average of forty hours of formal continuing education per year. (A copy of Mr. Cobb's resume is attached.) Since 1974, Mr. Cobb had been engaged in providing professional services in financial matters, with emphasis in the areas of litigation support and capital finance. In the area of litigation support, Mr. Cobb has been retained to assist representation of plaintiffs and defendants, and has offered testimony in state and federal courts. Mr. Cobb has conducted engagements regarding development of residential and commercial real estate projects and estimation and evaluation of lost profits and economic damages. ~, Arthur H. Cobb April 15, 2008 22 HIGHLY CONFIDENTIAL ARTHUR H. COBB 3710 IDS Center Minneapolis, Minnesota j~402 (612) 337-5454 PRESENT POSITION: Cobb & Associates, Ltd. PREVIOUS POSITIONS: Cobb, Ludington & Associates, Ltd. 1987 to 1994 Churchill Advisors, Inc. 1985 to 1987 KPMG, formerly Peat, Marwick, Mitchell & Co. -Partner 1980 to 1985 Deloitte &Touche, formerly Touche Ross & Co. 1977 to 1980 PricewaterhouseCoopers, formerly Price Waterhouse & Co. 1974 to 1977 ACADEMIC EXPERIENCE: University of Minnesota, Lecturer -Assistant Professor Department of Accounting - 1975 to 1980 University of Iowa, Teaching Assistant - 1972 to 1974 EDUCATION: University of Iowa - MA, 1974 University of Iowa - BBA, 1972 PROFESSIONAL: Certified Public Accountant American Institute of Certified Public Accountants Minnesota Society of Certified Public Accountants, Past Chairperson -Committee for Cooperation with the Bar, Past Member - Professional Ethics Committee National Association of Securities Dealers Board of Arbitrators SEMINARS: Presented and attended seminars on calculation of lost profits in business litigation, financial forecasting, financial analysis and statistical analysis, due diligence, accountant's legal liability and valuation of businesses. Participated in panel discussions regarding tax-exempt bonds, real estate financing and health care financing. 23