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«OFFICIAL STATEMENT DATED JUNE 20, 2013 NEW ISSUE NOT RATED In the opinion of Bond Counsel, interest on the Bonds will be excludable from gross income ...»

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In the next chart, the relationship of permit activity between the Austin MSA (numbers in the left axis) and the state of Texas (numbers in the right axis) is compared. The Austin market experienced a drop in the 2000 to 2001 period because of the tech bust, which did not affect the entire state. From that time forward, the trend or direction is very similar.

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14,000 120,000

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The 2011 sales volume shows a reversal of the declining direction that began in 2007, and volume continued to increase in 2012. In 2007, the sales volume in the MLS area decreased for only the second time in the

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The average price rose in the 2010, 2011, and 2012 after dropping slightly in 2008 and 2009, but the median price only dropped in 2009. The 2012 average price increases of 5.7% and the median price increase of 6.4% reflect complete recovery from the subprime years. Supply, as shown in the column labeled Months Inventory, increased in 2007, but only to a normal level compared to most years since 1998. It jumped in 2009 and 2010 to the highest inventory level since 2003, the end of the tech bust. In 2012, it dropped back to the lowest levels exceeded only in 1999, 2000, and 2006, all periods of significant activity. The multi-year average of 5.2 months inventory is well below the critical point of nine months that private mortgage insurers perceive as a market in transitioning to higher risk.

Mortgage interest rates continued to hover at historical lows. Employment in the Austin area is increasing, and residential subdivision development is gaining traction. The lack of activity in the mid-2000s created a supply shortage that has turned into an appreciating market while the national markets are also beginning to see a turn from previous declines. The data indicates that the local housing market is strong, and the impact on sales in the subject project will be positive.

The Austin residential market has been noticeably superior to national markets, and its strength is not recent or sporadic. The continuation of residential market stability can be expected based on Austin’s long history of steady and consistent development. The subject is in its beginning stages, and although competition exists, homebuilders are finding lot inventories to be short of demand. Austin publications are touting a robust residential market as evidenced by the following recently published comments.

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Housing Starts on the Rise Throughout City Community Impact Austin (2-14-2013) "We're seeing a definite shift [in the market]," said Vaike O'Grady, marketing director for Newland Communities in Teravista, a master planned community in Round Rock. "The amount of inventory that's on the ground and available for people to purchase is at a low that we haven't seen in years."

Austin-area home sales up 26% in February Austin American Statesman (3-20-2013) “All our listings are disappearing before they even have a chance to hit the market,” said Christina Gulla, an agent with JB Goodwin Realtors. “Due largely to an increase in job opportunities in Austin, people are moving here at a quick rate; the housing inventory is just striving to keep up with the increasing demand.” Market data indicates that there is good demand for new lots. The limited development activity during the down-cycle has resulted in pent-up demand that is now being satisfied by several new projects, but demand persists as the Austin market continues to grow. Recent activity is depicted in the statistics published in the Austin newspaper showing residential sales activity through February 2013.

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The subject is well located between two recent growth areas, the north Hays County submarket and the south Austin/Southpark Meadows area. A huge section of land in this area is undeveloped because it was owned by one family until the early to mid-2000s, and when it was sold, the economic downturn of 2007 to 2010 prevented its development until now. This is a popular and growing area with a history of absorption of both residential and commercial properties, and additional residential development is supported by market activity.

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MULTIFAMILY MARKET ANALYSIS

Eventually, Estancia Hill Country will have nearly 1,700 high density residential units including townhouses and garden style apartments in projects containing 112 to 436 units. Phase I will contain 568 of those units in 300-unit and 268-unit projects. The following table summarizes the Austin metropolitan multifamily market based on REIS data.

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The current vacancy rate is extremely low. Austin continued to grow and create jobs during the economic downturn while construction slowed after the 2009 peak. Demand persisted and no supply was available, resulting in falling vacancy and rapidly rising rental rates. While the current vacancy rate is unsustainable with

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According to a 2013 report by MPF Research, Austin’s apartment construction rate leads the nation. MPF reported that Austin had 12,470 units under construction at the end of 2012, more than delivered in any year according to the table of REIS data on the previous page. The new units will expand the current inventory by 6.7% according to the study, well above the next closest contender as shown in the MPF table to the right. They report that double digit expansion will be attained in three submarket hotspots, Cedar Park at 28.1%, South Austin at 18.0% (the subject’s submarket), and Downtown/University at 11.3%. The only two submarkets with no multifamily construction at the end of 2012 were the Arboretum and Far West Austin areas, both of which have had significant growth in previous expansion cyles.





The average effective rental rate increased for the last three years. Rents are expected to continue to increase in the near future as the multifamily market has been resilient and the supply and demand imbalance continues.

In summary, the multifamily goal of 1,700 units is long term with developer estimates of units in Phase I being completed by 2016, Phase II by 2018, and Phase III by 2020. Historical development and absorption data supports this time frame, but near-term, there is significant immediate demand for additional units.

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OFFICE MARKET ANALYSIS

The need for office properties in outlying locations transitions as the city expands. Besides the Austin CBD, there are only a few submarkets where substantial office demand exists. One is the south and southwest submarkets south of downtown, along Mopac Expressway, and along Southwest Parkway. The other is the central, north and northwest submarkets along IH-35, Mopac Expressway, US-183, and Loop 360. These areas, along with the CBD, account for 83% of the Austin office space. The common thread in these submarkets is access - all on and near the main Austin arterials. The subject is in the IH-35 corridor, but outside the dense population areas. However, the cities of Kyle and Buda to the immediate south of the subject are growing, and office demand in the area will follow residential growth in both south Travis and north Hays Counties. Based on data published by real estate research firm REIS, the 10 year statistics of the Austin metro office market is as follows.

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The relationship between completions, net absorption, and vacancy is depicted in the next chart.

Paul Hornsby and Company 32

ESTANCIA HILL COUNTRY PHASE I OFFICE MARKET ANALYSIS

CB Richard Ellis Research (CBRE) reports a similar upswing in recent absorption. Their data includes sublet space in its absorption estimates, which is not included in REIS data, and they report higher absorption levels accordingly. CBRE also provides statistics based on dissected submarkets and building classes. The subject is the South submarket, which contains mostly Class B product, the most likely Class to be built in Estancia. The vacancy for this product type and Class is 20.9%, up from 15.9% the previous quarter, which often indicates movement of one major tenant. Last quarter’s vacancy in the South submarket is more similar to a 14.2% vacancy in the overall suburban market reported in the 4th quarter of 2012 by CBRE.

Offices in outlying locations are usually limited to medical services and neighborhood services such as insurance. As subdivided by CBRE data, the subject’s South submarket contains 4.3% of the Austin office space. However, it is very near the dividing line of the Southwest submarket where another 21.2% of the office inventory is located. New developments cause shifts in trends, and the two submarkets can compete.

New construction had been nearly non-existent over the past few years while awaiting absorption of the excess space delivered coincident with the downturn of the mid-2000s. The CoStar Group chart below shows the history of inventory delivered in the Austin office market. Unlike most market reports that include only larger buildings, CoStar includes all properties in its database, which results in a larger dataset. The economic cycles of the past 20 years are evident in this data; the end of the S&L crisis in the early 1990s, the tech boom and bust in the late 1990s and early 2000s, and the discovery of the subprime debacle in 2007 resulting in the financial collapse in late 2008. Based on current economic indicators, the next trend for new construction is upward.

Paul Hornsby and Company 33

ESTANCIA HILL COUNTRY PHASE I RETAIL MARKET ANALYSIS

There are four tracts totaling 71.30 acres in Estancia Phase I that are scheduled to be developed with office space. The current plan indicates that the offices will contain approximately 289,000 square feet of rentable space. One will be a garden-variety office area, one with surface parking, and two with structured parking garages. However, these tracts are likely to contain a mixture of office and retail space as is common to new developments in the Austin market. The ground floors of office buildings are often either retail storefronts or offices that welcome customer traffic such as dentists, insurance offices, etc., a hybrid office/retail operation that can be found in either. Consequently, the retail market is also studied.

RETAIL MARKET ANALYSIS

Retail components are projected later in the Estancia development plan with 43 acres dedicated to shopping facilities beginning in Phase II. As noted in the previously section, retail development might also be a small part of Phase I within the development of office properties. A snapshot of the retail market is presented accordingly. REIS data summarizes the 2012 year-end Austin retail picture in the table and chart below.

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Paul Hornsby and Company 34

ESTANCIA HILL COUNTRY PHASE I RETAIL MARKET ANALYSIS

The retail market has been the steadiest of the commercial real estate groups with high occupancy in spite of continuous new inventory. Rental rates increased every year since 2002 before falling slightly from 2009 to 2011, but then turning upward in 2012. The steady rate of 300,000 to 500,000 square feet of new inventory every year fell in 2009 with only 49,000 square feet of new space followed by only 20,000 square feet of new completions in 2010. The 2011 and 2012 periods also saw reduced construction, although absorption continued, causing vacancy to fall steadily during the downturn period beginning in 2007. This kept rental rates steady while other property groups were struggling.

REIS, the source of the metropolitan data in the table and chart on the previous page, divides the Austin retail market into three submarkets, the central and downtown area, Round Rock and Williamson County, and the south Austin submarket. It includes retail properties in complexes with 5,000 or more square feet in community or neighborhood shopping centers. Excluded are free-standing, mixed use, outlet center, power center, and regional properties. Also excluded is most of the area east of IH-35 from about SR-71 on the south to Round Rock on the north because there is little or no investment grade retail development in this area other than directly adjacent to IH-35. As development in the east and south Austin markets progress, this should change.

The outlook for retail space continues to be optimistic for the Austin market as population growth persists and well planned projects lease in a short time. The CoStar inventory and development chart below shows a trend similar to the office trend whereby new construction has slowed considerably and fallen below the average delivered space over the periods.

The Capitol Market Research December 2012 report is referenced for a broader geographic view of the market, although it only includes properties in excess of 10,000 square feet. Like the REIS report, CMR excludes free standing properties, but it includes the east Austin market as well as far-south Austin including parts of north Hays County, two areas not found in the REIS data. In the CMR report, the total size of their defined Austin market is 40,839,470 square feet. The December 2012 vacancy for these properties is 8.2% compared to the 7.1% vacancy reported for the properties in REIS data. The average effective rent was $20.17 compared to the REIS effective rent of $18.34. The discrepancies are insignificant, and the trends in the two sources are parallel.

The relevant statistic for the purpose of estimating absorption is the same in the two sources as REIS reports 2012 net absorption to be 157,000 square feet and Capitol Market Research reports 137,424 square feet taken in the same period. Historic absorption in the 10-year period summarized in the REIS table shows an average annual absorption of just over 250,000 square feet.

Paul Hornsby and Company 35

ESTANCIA HILL COUNTRY PHASE I RETAIL MARKET ANALYSIS

Capitol Market Research reports that five centers are currently under construction in the Austin market. Two are located in the Northwest submarket, one in the Northeast, and two in the CBD and Central submarkets.



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