George,

I am back in the office and ready to focus on the project.  I still have the 
concerns that I had last week.  Specifically that the costs of our project 
are too high.  I have gathered more information that support my concerns.  
Based on my research, I believe the project should cost around $10.5 
million.  The components are as follows:

 Unit Cost, Site work, &
 builders profit($52/sf)   $7.6 million

 Land      1.15

 Interim Financing     .85

 Common Areas       .80

 Total     $10.4

Since Reagan's last 12 units are selling for around $190,000, I am unable to 
get comfortable building a larger project at over $95,000/unit in costs.  

Also, the comps used in the appraisal from Austin appear to be class A 
properties.  It seems unlikely that student housing in San Marcos can produce 
the same rent or sales price.  There should adjustments for location and the 
seasonal nature of student rental property.  I recognize that Sagewood is 
currently performing at occupancy and $/foot rental rates that are closer to 
the appraisal and your pro formas, however, we do not believe that the market 
will sustain these levels on a permanent basis.  Supply will inevitablely 
increase to drive this market more in balance.

After the real estate expert from Houston reviewed the proforma and cost 
estimates, his comments were that the appraisal is overly optimistic.  He 
feels that the permanent financing would potentially be around $9.8 million.  
We would not even be able to cover the interim financing.

Keith and I have reviewed the project thoroughly and are in agreement that we 
cannot proceed with total cost estimates significantly above $10.5 million.   
We would like to have a conference call tomorrow to discuss alternatives.

Phillip