Castle Village

CASTLE VILLAGE OWNERS CORP.

Gym Expansion Memorandum

October 29, 2008

Background

Our current gym has served us well for over 11 years. During that time, membership has fluctuated considerably. Current membership stands at 230, our highest level ever. Based on conversations with dozens of current gym members, we believe that this spike in membership is due to Castle Village’s changing demographics and today’s health conscious culture and not from the gym’s features, because as membership has increased so have complaints about accessibility to and maintenance of the equipment.

Annual membership fees when the gym opened were set at $180/year. That amount has only been increased once to its present level of $216/year. The gym produces total annual revenue of approximately $50,000. Of that amount, approximately $6,000 goes to support/maintain the current equipment and another $10,000 toward utilities and maintenance.

Around the six year mark, most of the cardio equipment and some of the weight training equipment must be replaced. At present, that is projected to cost around $25,000-$30,000. We are presently at the end of a 6 year cycle and therefore will be reviewing the current state of all the equipment with our supplier over the next few months.

Over the past 6 year cycle, gym members have contributed approximately $300,000, most of which has been used to reduce maintenance.

We are most sensitive to the extraordinary events that have taken place over the past three years and are clearly reluctant to take unnecessary risks or spend unnecessary funds. However, no different than our obligation to be frugal stewards of our finances and at the same time maintain our plant is our responsibility to keep Castle Village attractive to both our current and future shareholders, thereby supporting market values. To the extent that this can be accomplished with minimal or no impact on maintenance, as in this case, we feel the effort is more than justifiable.

Case for updating the gym

Fortunately we currently have a very active membership. Unfortunately, we have an active membership. This is the proverbial good news bad news story. Clearly our demographics have changed. Shareholders and their families are more active than ever before. As with any gym, there are peak and off-peak hours, with early morning and evenings representing peak times, and mid-days the off-peak hours.

• Shareholders who work “normal hours” are limited to using the gym during peak hours and often find that the cardio equipment they wish to use is occupied. This causes frustration and dissatisfaction.

• Because of heavy use, some of the equipment is breaking down requiring frequent repairs, which only serves to exacerbate the problem.

• Some shareholders considering joining the gym have advised us that they are refraining from doing so until the problem can be resolved; some active members have expressed doubt about rejoining due to the very same issues.

The most critical need is for more cardio equipment which the current facility can not provide due to space limitations.

Solution to the problem

We have looked at the alternatives available to us assuming we wish to keep the gym active, growing and contributing to maintenance. The only viable alternative is for the gym to be expanded. Given the configuration of the current space and its proximity to the boiler room and laundry room, short of eliminating one or both of those facilities, the options available to us are limited.

In order to meet present and reasonable future needs we have considered enlarging the gym in two ways: expanding externally toward the water, and/or expanding internally by reconfiguring the 160 laundry room. Both are economical methods of expansion. The external expansion requires the construction of only two walls as the other two are already in place. Likewise, the utilization of the additional space requires that the existing wall separating the gym and laundry room be moved and the space currently allocated to the employee break room be added to the laundry room (the employee break room will be relocated). This reconfiguration also requires relatively minor reconstruction.

External expansion would provide an additional 240 Sq. Ft. (12’ x 20’) of floor space Internal expansion would add another approximately 300 Sq. Ft and is less costly. The present plan is to expand first internally, then allow sufficient time to determine when and if the external expansion is both necessary and economically feasible.

This plan has been developed with the assistance of the engineering department of RBA our landscape architects, a company specializing in gym construction, and a consultant from the Gym Source, our current equipment supplier and maintenance company who have been responsible for the design and development of numerous gyms throughout the city. It is their collective opinion that the proposed gym expansion will adequately provide us with sufficient space for our gym for the foreseeable future. The Gym Source also provided us with statistical data which indicates that a properly designed and equipped gym can support approximately double the number of members that we currently have, a figure they believe achievable given our size and demographics.

This expansion will not only enhance the experience of those who use the gym, based on the advice of real estate brokers and many recent real-estate articles appearing in the NY Times, it will also enhance the attractiveness of Castle Village to prospective purchasers, thereby inuring to the benefit of all shareholders.

Economics of the expansion

The proposed expansion is currently estimated to cost approximately $120,000 and will ultimately be paid for from funds generated by gym memberships, therefore not impacting maintenance or our reserve fund.

Given that gym dues have not been increased in over 5 years, we feel it is time to impose an increase but only when the gym expansion is completed thereby providing appropriate justification.

Based on completing the expansion this year, our plan is to increase the annual fee from $216 to $300 starting at such time as the expansion is complete.

Assuming the membership remains unchanged, that represents an annual increase of approximately $20,000 and would produce annual collections in the neighborhood of $70,000. Even without any significant increase in membership, the gym improvements will pay for themselves in a matter of five years or less, increase revenue to the corporation thereafter, induce greater membership, add to the value of our homes and make the gym experience more pleasurable.

Should the expansion attract additional members, hopefully some of whom use the gym at off-peak times, the economics could improve immeasurably. This would serve to further benefit our maintenance as all dues collected which are not used to maintain the gym facility go toward reducing maintenance.

Your Board of Directors