City of Hayward Spanish Ranch I Proposed Rent Increase:

Meet and Confer Meeting #3 Notes

Wednesday, November 5, 2008
Hayward City Attorney’s Office
Hayward, CA

Call to order
Mr. Hexter called Meeting #3 to order. The HOA negotiation committee
requested an immediate caucus with the facilitation team prior to proceeding with
the meeting’s agenda.

Approval of the Agenda

Mr. Hexter briefly reviewed the evening’s agenda. The Ownership Negotiation
Committee requested that the agenda accommodate discussion of potential
changes to the rent increase proposal resulting from:

1) The new bill received from the tax assessor, which includes
information different than what has been presented to residents.

2) A miscalculation related to the number of months over which the

pass-through of the previous year’s tax would be repayable.

Review/Approval of Meeting #2 Notes and Revised Groundrules

In reviewing Meeting #2 notes, the Facilitation Team reminded all parties that this
is not a legal proceeding, and that the intent of the meeting notes is to maintain a
level of detail that captures the main points of discussion and conclusions.

The Ownership group confirmed that they feel meeting notes to date capture the
appropriate level of detail. The HOA group expressed that they do not believe
that their comments are adequately recorded in the meeting notes.

Mr. Hexter made note of the fact that the HOA Committee has not yet had the
opportunity to review the most recent draft. The HOA group will work to review,
correct and approve Meeting #2 notes possibly by Friday, November 7.
Ownership will distribute final notes from meet and confer sessions #1 and #2 to
the 205 affected residents on Monday, November 10.

Spanish Ranch I Meet and Confer Meeting #3 Wednesday, November 5, 2008

FINAL Meeting Notes – rev 11/18/08 Page 1
Statement by SRI HOA Negotiation Committee
The following summary captures key points made by the HOA Negotiation
Committee:

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 the rate less than the tax paid on the operating
profit.

2) Based on a financial projection using a more realistic annual rental

increase of 4%, the value of the mobile home park should only be $21
million. 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 interests.

3) The HOA Team called into question the decision to purchase the mobile
home park with $11.5M in cash and a loan of $28M because the loan
service cost would have drastically reduced the operating profit of the
mobile home park.

4) The park owner knows that many residents are elderly or disabled and
that there was the real possibility that many would not be able to afford the
proposed increase. The HOA Committee feels that low income people
who cannot defend themselves are being victimized.

Following these statements, the HOA Negotiation Committee made the following
proposal:

1) Re-calculate the property value using a four-step process that begins with
valuation of the property at $21M (per the HOA’s calculations) then
crediting reimbursement with the tax paid on the operating profit, that
would result in a tax pass-through rent increase of $20.08 per space per
month.

2) Eliminate the 4-year $15.75 surcharge.

3) Segregate the tax increase payment from existing monthly rent as a

separate line-item.

Statement by SRI Ownership Group Negotiation Committee

The Ownership Team expressed a need to caucus without participation by the
Facilitation Team. Following the caucus, the Ownership Team expressed

Spanish Ranch I Meet and Confer Meeting #3 Wednesday, November 5, 2008

FINAL Meeting Notes – rev 11/18/08 Page 2
concern about the adversarial relationship that exists between the HOA and
management its impact on this process and other issues.

The Ownership Team then shared that they received last week a new full
statement of taxes for 08-09, which indicates a higher amount than previously
known. In addition, they have discovered that the proposed time table for
recovering the cost of the 07-08 assessed tax was “one month heavy” in
calculations. The proposed surcharge to recover this cost would be either a dollar
less per month for 48 months or would be payable in 44 months instead of 48.

The Ownership Negotiation Committee then posed a procedural question to Mr.

Lawson. In light of the recent increase in the tax bill, and what they see as their
“good faith” offer to spread out the past tax paid from November 2007 forward,
what is the process to pull the existing offer and resubmit a new rent increase
proposal to capture that amount in one year’s time?

Ownership pointed out that they decided to spread out the recovery portion of the
pass-through because of the present value of money, and over time the present
value of money gets devalued. Ownership clarified that they do not receive 100%
return on taxes being paid, and estimated that they recover approximately 85 to
90%. Ownership then expressed interest in increasing the base monthly increase
proposed from $63 to $68 per month rather than spreading out the $15.75 over
four years.

At that point, Mr. Lawson clarified the following:

Based upon recent information from the Assessor, Ownership expressed interest
in starting over with a new proposal that would change the proposed tax pass-
through rent increase from the originally proposed $64 monthly and 4-year
$15.75 surcharge to one amount of $68 beginning later in the year. This new
proposal would include a straight monthly amount to capture all tax liability.

In addition, for a one-year period, Ownership would charge residents an

additional $63. Rather than spread re-capture of the 2007-08 tax payment
increase over four years, Ownership would seek recovery over the course of one
year.

According to Mr. Lawson, procedurally, Ownership would need to prepare a new

notice and would be obligated to meet the 90-day notice period. Residents would
be able to challenge and petition a new notice.

Mr. Lawson stated that, in his opinion, everyone would benefit from continuing
this process, as opposed to suspending it and reconvening over the next 90
days. He then requested a caucus with the Ownership Committee.

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Discussion/Clarification of Statements and Exploration of
Options
As the meeting reconvened, the HOA inquired whether legal advice had been
rendered during the Ownership caucus; Mr. Lawson responded no. Next, the
Ownership Negotiation Committee requested clarification of the HOA Negotiation
Committee’s statement:

First, was the HOA group suggesting that Ownership should have paid $21M for
the property, instead of $39.5 million, and therefore feel that the tax increase and
subsequent pass-through amount should be based on their valuation of the
property at approximately $21M?

The HOA group confirmed that this is what they suggested and stated that this
calculation is based on the present value calculation of 4% growth. While it may
not matter to Ownership that they paid $39.5M for the property rather than the
suggested amount, it very much affects the residents.

Second, is the HOA Negotiation Committee suggesting that Ownership absorb

the $350,000 in recovery taxes owed for 2007-8 by eliminating the proposed
surcharge of $15.75?

The HOA group responded yes.

Another member of the HOA commented that Ownership cannot legally pass a
surcharge to capture taxes accrued prior to the meet and confer process. They
stated that the ordinance only allows for a surcharge that covers taxes assessed
for the time period following a proposed rent increase and through the meet and
confer process, or from November 1, 2007 through the time residents received
notice in October 2008.

Ownership reiterated the distinction between the previous 12 months and the
next 12 months with respect to the County tax assessment. The Assessor’s office
always sends tax bills following the period in which taxes accrue, requiring that
property owners make up for this expense after the fact.

Third, the Ownership group requested clarification related to HOA’s request that
they separate the proposed tax pass-through rent increase from the base rent
and asked what they hoped to accomplish through this approach. The HOA
Negotiation Committee confirmed that in doing so, the tax pass-through amount
would not be added to residents’ yearly rent increase. This amount would be
separated from the CPI, and so further rent increases over the years would not
be based on a rental price that includes this pass-through.

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One member of the HOA Negotiating Committee requested clarification
regarding the error in calculations that the Ownership Team had referred to. Was
this an error on the part of Ownership or on the part of the County Assessor?

The Ownership Team confirmed that the management company made the first
error on the tax recovery amount, and that the surcharge should have been
proposed for an 11-month period instead of a 12-month period. The tax began
accruing on October 31, but the proposed rent increase began on October 1.
They would need to eliminate the extra month from the proposed payment period
because there was a “double-dipping” during the first month.

The second statement made by the Ownership Team related to a tax rate
increase that took place in September and that the Assessor’s office just made
Ownership aware of. This increase represents a jump well in excess of the CPI
that is happening now. This increase came from the state and was a different
amount than what both the County and Ownership was expecting.

In response to a question from the HOA Negotiation Committee, Ownership

clarified that there are three parts to the assessor’s bill:

1) The original bill that property owners continue to receive well into their
ownership. On average this is sent every 12 to 18 months. In some
counties receiving this bill can take longer, at times up to four years.

2) The supplemental tax bill. In this case, the supplemental bill included the
approximately $350,000 in accrued taxes owed while Ownership was
paying the existing, underlying bill.

3) The full bill, which includes the amounts from the original bill and
supplemental bill. Ownership received this bill two months after receipt of
the supplemental bill and is typically sent 30 days to 12 months following
the supplemental bill.

HOA commented that Ownership should have accounted for the lateness of the
tax bill due to their experiences at their other parks.

In addition, Ownership received a fourth bill reflecting a transfer of ownership of

.01 percent. They chose not to include this as part of the pass-through amount.

The HOA pointed out that the changes in ownership that generated new tax bills
were due to the Ownership group transferring the property between entities –
originally as tenants in common, then collapsing into one entity.

The HOA Negotiation Committee re-affirmed that Ownership can apply for a
Proposition 8 re-assessment because of their status under Proposition 13.

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Ownership replied that they brought all documentation needed to do so, as they
said they would. They affirmed that if the parties can come to a reasonable
agreement through the meet and confer process, they are willing to come
together with the HOA to apply for a re-assessment.

The group briefly returned to the issue of applying for re-assessment and the
need for supporting evidence. The Ownership Negotiation Committee stated that
their chances of success will improve if they wait until April to apply, presuming
that at that point local comparables will have sold.

One HOA Team member asked Ownership to confirm whether they are currently
in the process of purchasing a mobile home park property in northern California.
The Ownership Committee confirmed that this is true, but expressed that they
believe that this sale is not comparable and wouldn’t help their case here.

The group then revisited conversation related to the purchase price of the park.
The Ownership group shared that 11 bids were submitted on this property – the
lowest offer was $37M and the highest offer was $43M. Ownership stated that if
they had offered $20M, the HOA Board would still be negotiating on this same
issue, only with a different owner.

The HOA Team asked, would you have paid $39M if you didn’t know you could
pass the cost of the tax increase on to the home owners? Ownership responded
in the affirmative, and stated that any other buyer would have done the same.

Summary/Next Steps
Mr. Hexter reiterated the two statements made by the parties

Ownership stated that he would be willing to stay after the meeting adjourns to
walk through the HOA’s calculations of the income they believe the property is
generating, which were shared with both the Facilitation Team and the
Ownership Team. The HOA group requested that Ownership review the
spreadsheet provided by the HOA Negotiation Team reflecting income stream
projections before our next meeting. The next meeting will take place on
Wednesday, November 12, 2008 from 7pm to 9pm at the Hayward City
Attorney’s office. An additional meeting, if needed, will be held on Wednesday,
November 19, 2008 from 7pm to 9pm.

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

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