Schwabe, Williamson & Wyatt’s

Real Estate and Business Seminar Series

Risk Management Strategies For Multi-Family And Mixed Use Development May 10, 2006 Seattle, WA

Dennis Dunphy Shareholder Schwabe, Williamson & Wyatt David MacGregor Senior Vice President W.G. Clark Construction Co.

Dwight Jarvis Vice President Parker Smith & Feek

Schwabe, Williamson & Wyatt

| Seattle, WA | Vancouver, WA | Portland, OR | Bend, OR | Salem, OR | Washington, DC

Risk Management Strategies For Multi-Family And Mixed Use Development

Agenda

Common Risks, Project Team Structure and Selection

(MacGregor)

Key Risks Addressed Through Contract Terms/Associated Legal Principles

(Dunphy)

Insurance and Related Risk Management Issues

(Jarvis)

Panel Discussion re Hypothetical Multi-Family Project, with Q&A

(Dunphy, MacGregor & Jarvis)

Schwabe, Williamson & Wyatt

| Seattle, WA | Vancouver, WA | Portland, OR | Bend, OR | Salem, OR | Washington, DC

Project Team: Structure and Selection

1.Owner

2.Design Team 3.Contractor

Key Risks Addressed Through Contract Terms and Associated Legal Principles

Dennis Dunphy

Schwabe, Williamson & Wyatt

| Seattle, WA | Vancouver, WA | Portland, OR | Bend, OR | Salem, OR | Washington, DC

Condominium Act

Express Warranties: 1.Written affirmations of fact or promises must be kept 2.Models/examples must be met 3.Specified uses are lawful

Schwabe, Williamson & Wyatt

| Seattle, WA | Vancouver, WA | Portland, OR | Bend, OR | Salem, OR | Washington, DC

Condominium Act

Implied Warranties: 1.Unit in as good a condition as when conveyed 2.Unit and common elements a.Free from defects b.Meet sound engineering and construction standards c.Workmanlike construction d.Compliance with law 3.Appropriate for residential use

Schwabe, Williamson & Wyatt

| Seattle, WA | Vancouver, WA | Portland, OR | Bend, OR | Salem, OR | Washington, DC

Condominium Act

New Permitting Required: 1.Building enclosure design review 2.Inspection and testing a.Water resistance test b.Periodic review/inspection of construction 3.Certification prior to issuance of C.O.

Schwabe, Williamson & Wyatt

| Seattle, WA | Vancouver, WA | Portland, OR | Bend, OR | Salem, OR | Washington, DC

Condominium Act

Conversions: 1.Inspection of envelope with intrusive testing 2.Report with recommendations 3.Inclusion in offering statement

Schwabe, Williamson & Wyatt

| Seattle, WA | Vancouver, WA | Portland, OR | Bend, OR | Salem, OR | Washington, DC

Other Contract and Common Law Warranties

A.Owner warranty to construction contractor B.Liability of design professional C.AIA repair warranty

Schwabe, Williamson & Wyatt

| Seattle, WA | Vancouver, WA | Portland, OR | Bend, OR | Salem, OR | Washington, DC

Residential Warranties

A. Implied Warranty of Habitability B. CPA Claims

Schwabe, Williamson & Wyatt

| Seattle, WA | Vancouver, WA | Portland, OR | Bend, OR | Salem, OR | Washington, DC

Indemnity

1.Alignment of obligations to third parties 2.Use to transfer risk 3.Limitations on risk-shifting 4.Workers’ Compensation issue

Schwabe, Williamson & Wyatt

| Seattle, WA | Vancouver, WA | Portland, OR | Bend, OR | Salem, OR | Washington, DC

Statutes of Limitation

1.Breach of written contract – 6 years 2.Warranty claims under Condominium Act – 4 years 3.Statute of Repose – 6 years 4.Claims against a dissolved LLC – 3 years

Schwabe, Williamson & Wyatt

| Seattle, WA | Vancouver, WA | Portland, OR | Bend, OR | Salem, OR | Washington, DC

“Sans Surprises Domaines”

1. Developer owns a ¾ block which is currently leased to a self-park operator. Site is located in the City of Seattle.

2. Developer sees it as a very good site for either apartments or condominiums. Hasn’t decided which makes sense. 3. Developer has authorized some preliminary design work based on apartments, but is concerned that he is missing the boat on what s/he has heard are much better profit margins in condominium versus apartment development.

4. Architect thinks the site, with a 65 foot height limit, will accommodate 5 floors and about 150 units.

5. Developer doesn’t like surprises, just as the concept name suggests.

6. Condos vs. Apartments: How will the choice affect risk and the concepts already discussed?

Schwabe, Williamson & Wyatt

| Seattle, WA | Vancouver, WA | Portland, OR | Bend, OR | Salem, OR | Washington, DC

Issue Prompts: “Sans Surprises Domaines”

1. How does the choice between Condominiums and Apartments affect: a. Team Selection b. Project Delivery Method/Team Functions c. Insurance d. Contract Documents and Terms e. Budget f. Risk g. Reward 2. What impact will adding street level retail (i.e. mixed use elements) have?

3. How do these issues play out in a scenario where apartments are converted to condominiums?

Schwabe, Williamson & Wyatt

| Seattle, WA | Vancouver, WA | Portland, OR | Bend, OR | Salem, OR | Washington, DC

Insurance and Related Risk Management Issues

Dwight Jarvis Parker, Smith & Feek

Overview

• Why are condominium projects so challenging to insure for liability?

• What to do about it?

• What to watch out for?

Why are Condominiums Challenging?

• Poor construction in the 1990s • Homeowner’s Association Lawsuits • Insurance carrier exclusions

What is a “Wrap–up” Policy?

• Types – OCIP, CCIP, Rolling Wrap, Conversions • Project specific rather than annual • Covers Owner, General Contractor and Subcontractors of every tier • General Liability coverage only • Premises/Build-out coverage, Completed Operations coverage • One insurer, one set of Limits

Wrap-up Policy Pros/Cons

• Pros – Control of claims – Control of policy placement – Uniformity in coverage – Less administration • Cons – High cost – Limited coverage – Large deductibles

What to Watch Out For

• Deductible “pass through” • Warranty work • Defense costs within the limit • Site designation • Subsidence exclusion • Final premium may increase

Cost of Risk

• “Wrap-up” Insurance Premium • Fees & Taxes • Builder’s Risk Insurance Premium • Quality Assurance Specialist • Mold Coverage • Home Builders Warranty • Professional/Pollution Liability • Deductibles/SIRs