EX-99.(C)(1) 3 d07267a2exv99wxcyx1y.txt APPRAISAL OF LAKESIDE APARTMENTS LAKESIDE APARTMENTS 4800 LAKE TRAIL DRIVE LISLE, ILLINOIS MARKET VALUE - FEE SIMPLE ESTATE AS OF MAY 28, 2003 PREPARED FOR: APARTMENT INVESTMENT AND MANAGEMENT COMPANY (AIMCO) C/O LINER YANKELEVITZ SUNSHINE & REGENSTREIF LLP & LIEFF CABRASER HEIMANN & BERNSTEIN ON BEHALF OF NUANES, ET. AL. [AMERICAN APPRAISAL ASSOCIATES(R) LOGO] [AMERICAN APPRAISAL ASSOCIATES(R) LOGO] [AMERICAN APPRAISAL ASSOCIATES(R) LETTERHEAD] JUNE 28, 2003 Apartment Investment and Management Company ("AIMCO") c/o Mr. Steven A. Velkei, Esq. Liner Yankelevitz Sunshine & Regenstreif LLP 1100 Glendon Avenue, 14th Floor Los Angeles, California 90024-3503 Nuanes, et al.( "Plaintiffs ") c/o Ms. Joy Kruse Lieff Cabraser Heimann & Bernstein Embarcadero Center West 275 Battery Street, 30th Floor San Francisco, California 94111 RE: LAKESIDE APARTMENTS 4800 LAKE TRAIL DRIVE LISLE, DUPAGE COUNTY, ILLINOIS In accordance with your authorization, we have completed the appraisal of the above-referenced property. This complete appraisal is intended to report our analysis and conclusions in a summary format. The subject property consists of an apartment project having 568 units with a total of 480,184 square feet of rentable area. The improvements were built in 1975. The improvements are situated on 28.28 acres. Overall, the improvements are in average condition. As of the date of this appraisal, the subject property is 86% occupied. It is our understanding the appraisal will be used by the clients to assist the San Mateo Superior Court in the settlement of litigation between the above mentioned clients. The appraisal is intended to conform to the Uniform Standards of Professional Appraisal Practice ("USPAP") as promulgated by the Appraisal Standards Board of the Appraisal Foundation and the Code of Professional Ethics and Standards of Professional Practice of the Appraisal Institute. The appraisal is presented in a summary report, and the Departure Provision of USPAP has not been invoked in this appraisal. It is entirely inappropriate to use this value conclusion or the report for any purpose other than the one stated. AMERICAN APPRAISAL ASSOCIATES, INC. LETTER OF TRANSMITTAL PAGE 2 LAKESIDE APARTMENTS, LISLE, ILLINOIS The opinions expressed in this appraisal cover letter can only be completely understood by reading the narrative report, addenda, and other data, which is attached. The appraisal is subject to the attached general assumptions and limiting conditions and general service conditions. As a result of our investigation, it is our opinion that the fee simple market value of the subject, effective May 28, 2003 is: ($42,800,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. /s/ Kenneth W. Kapecki ------------------------------------ June 28, 2003 Ken Kapecki, MAI #053272 Managing Principal, Real Estate Group Illinois Certified General Real Estate Appraiser #153000331 Report By: Seamus P. King AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 LAKESIDE APARTMENTS, LISLE, ILLINOIS TABLE OF CONTENTS Cover Letter of Transmittal Table of Contents APPRAISAL DATA Executive Summary................................................... 4 Introduction........................................................ 9 Area Analysis....................................................... 11 Market Analysis..................................................... 14 Site Analysis....................................................... 16 Improvement Analysis................................................ 16 Highest and Best Use................................................ 17 VALUATION Valuation Procedure................................................. 18 Sales Comparison Approach........................................... 20 Income Capitalization Approach...................................... 26 Reconciliation and Conclusion....................................... 38 ADDENDA Exhibit A - Photographs of Subject Property Exhibit B - Summary of Rent Comparables and Photograph of Comparables Exhibit C - Assumptions and Limiting Conditions Exhibit D - Certificate of Appraiser Exhibit E - Qualifications General Service Conditions
AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 4 LAKESIDE APARTMENTS, LISLE, ILLINOIS EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Lakeside Apartments LOCATION: 4800 Lake Trail Drive Lisle, Illinois INTENDED USE OF ASSIGNMENT: Court Settlement PURPOSE OF APPRAISAL: "As Is" Market Value of the Fee Simple Estate INTEREST APPRAISED: Fee simple estate DATE OF VALUE: May 28, 2003 DATE OF REPORT: June 28, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 28.28 acres, or 1,231,877 square feet Assessor Parcel No.: 08-09-100-027; 08-09-100-028 Floodplain: Community Panel No. 1701970055B (April 15, 1982) Flood Zone C, an area outside the floodplain. Zoning: R-4 (Resident Multi-Family) BUILDING: No. of Units: 568 Units Total NRA: 480,184 Square Feet Average Unit Size: 845 Square Feet Apartment Density: 20.1 units per acre Year Built: 1975 UNIT MIX AND MARKET RENT: GROSS RENTAL INCOME PROJECTION
Market Rent Square ------------------ Monthly Annual Unit Type Feet Per Unit Per SF Income Income ------------------------------------------------------------------------------------------ 1Br/1Ba - 1A1 723 $ 750 $1.04 $178,500 $2,142,000 1Br/1Ba/Den - 2A2 830 $ 900 $1.08 $ 99,000 $1,188,000 2Br/2Ba - 1B1 945 $1,000 $1.06 $165,000 $1,980,000 2Br/2Ba/Den - 2B2 1,107 $1,050 $0.95 $ 57,750 $ 693,000 ----- -------- ---------- Total $500,250 $6,003,000
OCCUPANCY: 86% ECONOMIC LIFE: 45 Years EFFECTIVE AGE: 25 Years REMAINING ECONOMIC LIFE: 20 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP: AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 LAKESIDE APARTMENTS, LISLE, ILLINOIS SUBJECT PHOTOGRAPHS [MAIN ENTRANCE PICTURE] [LEASING OFFICE PICTURE] AREA MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 LAKESIDE APARTMENTS, LISLE, ILLINOIS [NEIGHBORHOOD MAP] [MAP] HIGHEST AND BEST USE: As Vacant: Hold for future multi-family development As Improved: Continuation as its current use METHOD OF VALUATION: In this instance, the Sales Comparison and Income Approaches to value were utilized. AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 7 LAKESIDE APARTMENTS, LISLE, ILLINOIS PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
DIRECT CAPITALIZATION Amount $/Unit --------------------- ------ ------ Potential Rental Income $6,003,000 $10,569 Effective Gross Income $6,222,358 $10,955 Operating Expenses $2,517,743 $ 4,433 40.5% of EGI Net Operating Income: $3,534,215 $ 6,222 Capitalization Rate 8.25% DIRECT CAPITALIZATION VALUE $42,400,000 * $74,648 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 14% Stabilized Vacancy & Collection Loss: 7% Lease-up / Stabilization Period 17 months Terminal Capitalization Rate 8.75% Discount Rate 11.00% Selling Costs 2.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $43,100,000 * $75,880 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $42,800,000 $75,352 / UNIT SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $64,615 to $90,857 Range of Sales $/Unit (Adjusted) $61,385 to $77,229 VALUE INDICATION - PRICE PER UNIT $42,200,000 * $74,296 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 6.76 to 8.74 Selected EGIM for Subject 7.00 Subject's Projected EGI $6,222,358 EGIM ANALYSIS CONCLUSION $43,100,000 * $75,880 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $42,700,000 * $75,176 / UNIT RECONCILED SALES COMPARISON VALUE $42,700,000 $75,176 / UNIT
--------------- * Value indications are after adjustments for concessions, deferred maintenance, excess land and lease-up costs, if any. AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 8 LAKESIDE APARTMENTS, LISLE, ILLINOIS PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $42,200,000 NOI Per Unit $42,700,000 EGIM Multiplier $43,100,000 INDICATED VALUE BY SALES COMPARISON $42,700,000 $75,176 / UNIT INCOME APPROACH: Direct Capitalization Method: $42,400,000 Discounted Cash Flow Method: $43,100,000 INDICATED VALUE BY THE INCOME APPROACH $42,800,000 $75,352 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $42,800,000 $75,352 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 LAKESIDE APARTMENTS, LISLE, ILLINOIS INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 4800 Lake Trail Drive, Lisle, DuPage County, Illinois. Lisle identifies it as 08-09-100-027; 08-09-100-028. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by Seamus P. King on May 28, 2003. Ken Kapecki, MAI has not made a personal inspection of the subject property. Seamus P. King performed the research, valuation analysis and wrote the report. Ken Kapecki, MAI reviewed the report and concurs with the value. Ken Kapecki, MAI and Seamus P. King have extensive experience in appraising similar properties and meet the USPAP competency provision. The scope of this investigation comprises the inspection of the property and the collection, verification, and analysis of general and specific data pertinent to the subject property. We have researched current improved sales and leases of similar properties, analyzing them as to their comparability, and adjusting them accordingly. We completed the Sales Comparison and Income Capitalization Approaches to value. From these approaches to value, a concluded overall value was made. DATE OF VALUE AND REPORT This appraisal was made to express the opinion of value as of May 28, 2003. The date of the report is June 28, 2003. PURPOSE AND USE OF APPRAISAL The purpose of the appraisal is to estimate the market value of the fee simple interest in the subject property. It is understood that the appraisal is intended to assist the clients in litigation settlement proceedings. The appraisal was not based on a requested minimum valuation, a specific valuation, or the approval of a loan. PROPERTY RIGHTS APPRAISED We have appraised the Fee Simple Estate in the subject property (as applied in the Sales & Income Approaches), subject to the existing short-term leases. A Fee Simple Estate is AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 10 LAKESIDE APARTMENTS, LISLE, ILLINOIS defined in The Dictionary of Real Estate Appraisal, 3rd ed. (Chicago: Appraisal Institute, 1993), as: "Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat." MARKETING/EXPOSURE PERIOD MARKETING PERIOD: 6 to 12 months EXPOSURE PERIOD: 6 to 12 months HISTORY OF THE PROPERTY Ownership in the subject property is currently vested in NPI 3. To the best of our knowledge, no transfers of ownership or offers to purchase the subject are known to have occurred during the past three years. AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 11 LAKESIDE APARTMENTS, LISLE, ILLINOIS AREA / NEIGHBORHOOD ANALYSIS NEIGHBORHOOD ANALYSIS A neighborhood is a group of complementary land uses. The function of the neighborhood analysis is to describe the immediate surrounding environs. The subject is located in the city of Lisle, Illinois. Overall, the neighborhood is characterized as a suburban setting with the predominant land use being residential. The subject's neighborhood is generally defined by the following boundaries. NEIGHBORHOOD BOUNDARIES East - Route 53 West - Mill Street South - Maple Avenue North - Interstate 88 MAJOR EMPLOYERS Major employers in the subject's area include Lucent Technologies, Argonne National Lab, United Parcel Service, Edward Hospital, Indian Prairie School District, Northern Illinois Gas, Hinsdale Hospital, College of DuPage, DuPage County, Central DuPage Hospital, McMaster Carr Supply, Fermi National Lab, Elmhurst Hospital. The overall economic outlook for the area is considered favorable. DEMOGRAPHICS We have reviewed demographic data within the neighborhood. The following table summarizes the key data points. AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 12 LAKESIDE APARTMENTS, LISLE, ILLINOIS
NEIGHBORHOOD DEMOGRAPHICS ------------------------------------------------------------------------------------------- AREA -------------------------------------------- CATEGORY 1-MI. RADIUS 3-MI. RADIUS 5-MI. RADIUS MSA ------------------------------------------------------------------------------------------- POPULATION TRENDS Current Population 9,464 79,191 229,208 8,502,982 5-Year Population 10,054 83,915 244,076 9,110,378 % Change CY-5Y 6.2% 6.0% 6.5% 7.1% Annual Change CY-5Y 1.2% 1.2% 1.3% 1.4% HOUSEHOLDS Current Households 3,828 30,573 85,915 3,054,373 5-Year Projected Households 4,153 32,864 92,484 3,264,990 % Change CY - 5Y 8.5% 7.5% 7.6% 6.9% Annual Change CY-5Y 1.7% 1.5% 1.5% 1.4% INCOME TRENDS Median Household Income $ 81,347 $ 96,515 $ 93,707 $ 60,922 Per Capita Income $ 37,116 $ 39,613 $ 36,495 $ 25,978 Average Household Income $ 93,553 $ 102,663 $ 97,127 $ 72,319
Source: Demographics Now The subject neighborhood's population is expected to show increases below that of the region. The immediate market offers superior income levels as compared to the broader market. The following table illustrates the housing statistics in the subject's immediate area, as well as the MSA region.
HOUSING TRENDS ---------------------------------------------------------------------------------------------- AREA -------------------------------------------- CATEGORY 1-MI. RADIUS 3-MI. RADIUS 5-MI. RADIUS MSA ---------------------------------------------------------------------------------------------- HOUSING TRENDS % of Households Renting 49.90% 30.30% 25.04% 32.62% 5-Year Projected % Renting 50.98% 30.74% 25.05% 31.47% % of Households Owning 43.66% 64.55% 70.69% 61.13% 5-Year Projected % Owning 43.06% 64.39% 70.91% 62.69%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 LAKESIDE APARTMENTS, LISLE, ILLINOIS SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Residential dwellings South - Retail/Commercial businesses East - Residential dwellings/Apartments West - Residential dwellings/Offices CONCLUSIONS The subject is well located within the city of Lisle. The neighborhood is characterized as being mostly suburban in nature and is currently in the growth stage of development. The economic outlook for the neighborhood is judged to be favorable with a good economic base. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 14 LAKESIDE APARTMENTS, LISLE, ILLINOIS MARKET ANALYSIS The subject property is located in the city of Lisle in DuPage County. The overall pace of development in the subject's market is more or less decreasing. The Woodridge/Lisle submarket's inventory grew 1.9% at the end of the 1Q2003. 260 units were built along Route 53 north of the subject property in the Seven Bridges Community. These apartments are superior compared to the subject property. The following table illustrates historical vacancy rates for the subject's market.
HISTORICAL VACANCY RATE ----------------------------------------------------- Period Region Submarket ------ ------ --------- 4Q01 4.0% 5.4% 1Q02 5.1% 5.5% 2Q02 5.2% 6.2% 3Q02 5.5% 7.3% 4Q02 6.0% 8.3% 1Q03 6.4% 8.5%
Source: Reis Occupancy trends in the subject's market are decreasing. Historically speaking, the subject's submarket has underperformed the overall market. Due to decreasing interest rates, single family housing is becoming more affordable, consequently the renter base has been decreasing driving down rents and occupancy. Also, a shift in demographics has changed, as the majority of the property's tenants are blue collar workers whose annual income is generally less than a white collar worker. As a result the marketing strategies have shifted to attract new tenants by offering concessions throughout the market. Market rents in the subject's market have been following a decreasing trend. The following table illustrates historical rental rates for the subject's market.
HISTORICAL AVERAGE RENT ------------------------------------------------------------------------------ Period Region % Change Submarket % Change ------ ------ -------- --------- -------- 4Q01 $902 - $846 - 1Q02 $894 -0.9% $848 0.2% 2Q02 $890 -0.4% $847 -0.1% 3Q02 $896 0.7% $846 -0.1% 4Q02 $890 -0.7% $829 -2.0% 1Q03 $879 -1.2% $836 0.8%
Source: Reis The following table illustrates a summary of the subject's competitive set. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 15 LAKESIDE APARTMENTS, LISLE, ILLINOIS
COMPETITIVE PROPERTIES ------------------------------------------------------------------------------------------------------------- No. Property Name Units Ocpy. Year Built Proximity to subject ------------------------------------------------------------------------------------------------------------- R-1 The Preserve at Cress 474 91% 1982 4 miles north of the subject Creek Apartments R-2 Chesapeake Landing 600 95% 1986 7 miles southwest of the subject R-3 Windscape Village 352 90% 1986 3 miles west of the subject R-4 Country Lakes 640 95% 1984 7 miles west of the subject Subject Lakeside Apartments 568 86% 1975
The apartment sector has been adversely affected by the affordability of single-family homes and poor economic conditions. Owners have lowered rents, which has eliminated any opportunity for rent growth. Typically, apartment managers have been either decreasing rent or offering rent concessions (mostly 1-2 months free rent) to attract new tenants. The market is expected to have an upturn by the end of 2003 and continue to see rents increase thereafter. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 LAKESIDE APARTMENTS, LISLE, ILLINOIS PROPERTY DESCRIPTION SITE ANALYSIS Site Area 28.28 acres, or 1,231,877 square feet Shape Irregular Topography Slightly slope Utilities All necessary utilities are available to the site. Soil Conditions Stable Easements Affecting Site None other than typical utility easements Overall Site Appeal Average Flood Zone: Community Panel 1701970055B, dated April 15, 1982 Flood Zone Zone C Zoning R-4, the subject improvements represent a legal conforming use of the site. REAL ESTATE TAXES
ASSESSED VALUE - 2002 --------------------------------------------- TAX RATE / PROPERTY PARCEL NUMBER LAND BUILDING TOTAL MILL RATE TAXES ------------- ---- -------- ----- ---------- -------- 08-09-100-027; $1,250,270 $8,503,870 $9,754,140 $0.0683 $666,208 08-09-100-028
IMPROVEMENT ANALYSIS Year Built 1975 Number of Units 568 Net Rentable Area 480,184 Square Feet Construction: Foundation Concrete pier and beam Frame Heavy or light wood Exterior Walls Brick or masonry Roof Composition shingle over a wood truss structure Project Amenities Amenities at the subject include a swimming pool, spa/jacuzzi, sand volleyball, tennis court, gym room, laundry room, and parking area. Unit Amenities Individual unit amenities include a balcony, fireplace, cable TV connection, and washer dryer connection. Appliances available in each unit include a refrigerator, stove, dishwasher, water heater, garbage disposal, and oven. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 17 LAKESIDE APARTMENTS, LISLE, ILLINOIS Unit Mix:
Unit Area Unit Type Number of Units (Sq. Ft.) --------- --------------- ---------- 1Br/1Ba - 1A1 238 723 1Br/1Ba/Den - 2A2 110 830 2Br/2Ba - 1B1 165 945 2Br/2Ba/Den - 2B2 55 1,107
Overall Condition Average Effective Age 25 years Economic Life 45 years Remaining Economic Life 20 years Deferred Maintenance None HIGHEST AND BEST USE ANALYSIS In accordance with the definition of highest and best use, an analysis of the site relating to its legal uses, physical possibilities, and financial feasibility is appropriate. The highest and best use as vacant is to hold for future multi-family development. The subject improvements were constructed in 1975 and consist of a 568-unit multifamily project. The highest and best use as improved is for a continued multifamily use. Overall, the highest and best use of the subject property is the continued use of the existing apartment project. AMERICAN APPRAISAL ASSOCIATES, INC. VALUATION PROCEDURE PAGE 18 LAKESIDE APARTMENTS, LISLE, ILLINOIS THE VALUATION PROCEDURE There are three traditional approaches, which can be employed in establishing the market value of the subject property. These approaches and their applicability to the valuation of the subject are summarized as follows: THE COST APPROACH The application of the Cost Approach is based on the principle of substitution. This principle may be stated as follows: no one is justified in paying more for a property than that amount by which he or she can obtain, by purchase of a site and construction of a building, without undue delay, a property of equal desirability and utility. In the case of a new building, no deficiencies in the building should exist. In the case of income-producing real estate, the cost of construction plays a minor and relatively insignificant role in determining market value. The Cost Approach is typically only a reliable indicator of value for: (a) new properties; (b) special use properties; and (c) where the cost of reproducing the improvements is easily and accurately quantified and there is no economic obsolescence. In all instances, the issue of an appropriate entrepreneurial profit - the reward for undertaking the risk of construction, remains a highly subjective factor especially in a market lacking significant speculative development. THE SALES COMPARISON APPROACH The Sales Comparison Approach is an estimate of value based upon a process of comparing recent sales of similar properties in the surrounding or competing areas to the subject property. Inherent in this approach is the principle of substitution. The application of this approach consists of comparing the subject property with similar properties of the same general type, which have been sold recently or currently are available for sale in competing areas. This comparative process involves judgment as to the similarity of the subject property and the comparable sale with respect to many value factors such as location, contract rent levels, quality of construction, reputation and prestige, age and condition, among others. The estimated value through this approach represents the probable price at which a willing seller would sell the subject property to a willing and knowledgeable buyer as of the date of value. AMERICAN APPRAISAL ASSOCIATES, INC. VALUATION PROCEDURE PAGE 19 LAKESIDE APARTMENTS, LISLE, ILLINOIS THE INCOME CAPITALIZATION APPROACH The theory of the Income Capitalization Approach is based on the premise that present value is the value of the cash flow and reversionary value the property will produce over a reasonable holding (ownership) period. The Discounted Cash Flow Analysis will convert equity cash flows (including cash flows and equity reversion) into a present value utilizing an internal rate of return (or discount rate). The Internal Rate of Return (IRR) will be derived from a comparison of alternate investments, a comparative analysis of IRR's used by recent buyers of similar properties, and a review of published industry surveys. The Direct Capitalization Analysis converts one year of income into an overall value using overall capitalization rates from similar sales. The overall rates take into consideration buyers assumptions of the market over the long-term. The results of the Income Capitalization Analysis are usually the primary value indicator for income producing properties. Investors expect a reasonable rate of return on their equity investment based on the ownership risks involved; this approach closely parallels the investment decision process. RECONCILIATION In this instance, we have completed the Sales Comparison and Income Capitalization Approaches to value. As an income producing property, the income approach is a primary approach to value. The Sales Comparison Approach is also considered reliable as investors are buying similar buildings in the market. Our research indicates that market participants are generally not buying, selling, investing, or lending with reliance placed on the methodology of the Cost Approach to establish the value. Therefore, we have decided that the Cost Approach is not a reliable indicator of value for the subject, and this approach has not been utilized. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 20 LAKESIDE APARTMENTS, LISLE, ILLINOIS SALES COMPARISON APPROACH Use of market or comparable sales requires the collection and analysis of comparable sales data. Similar properties recently sold are compared to the subject and adjusted based on any perceived differences. This method is based on the premise that the costs of acquiring a substitute property would tend to establish a value for the subject property. The premise suggests that if a substitute is unavailable in the market, the reliability of the approach may be subordinate to the other approaches. The reliance on substitute properties produces shortcomings in the validity of this approach. Geographic and demographic characteristics from each submarket restrict which sales may be selected. Recent sales with a similar physical characteristics, income levels, and location are usually limited. The sales we have identified, however, do establish general valuation parameters as well as provide support to our conclusion derived through the income approach method. The standard unit of comparison among similar properties is the sales price per unit and price per square foot of net rentable area. To accurately adjust prices to satisfy the requirements of the sales comparison approach, numerous calculations and highly subjective judgments would be required including consideration of numerous income and expense details for which information may be unreliable or unknown. The sales price per unit and square foot are considered relevant to the investment decision, but primarily as a parameter against which value estimates derived through the income approach can be judged and compared. In examining the comparable sales, we have applied a subjective adjustment analysis, which includes specific adjustments derived from our experience and consulting with the market participants. SALES COMPARISON ANALYSIS Detailed on the following pages are sales transactions involving properties located in the subject's competitive investment market. Photographs of the sale transactions are located in the Addenda. Following the summary of sales is an adjustment grid that is used to arrive at a value. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 21 LAKESIDE APARTMENTS, LISLE, ILLINOIS SUMMARY OF COMPARABLE SALES -IMPROVED
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 ----------- ------- ---------- ---------- Property Name Lakeside Greenway Trail Sherry Apartments Apartments Naperville LOCATION: Address 4800 Lake Trail Drive 136 Greenway Trail 1821 Washington Street City, State Lisle, Illinois Carol Stream, IL Naperville, IL County DuPage DuPage DuPage PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 480,184 269,400 156,600 Year Built 1975 1977 1975 Number of Units 568 325 164 Unit Mix: Type Total Type Total Type Total 1Br/1Ba - 1A1 238 Studio/1BH 1 BR/1BH 1281 1Br/1Ba/Den - 2A2 110 1BR/1.5BH 228 2BR/2BH 36 2Br/2Ba - 1B1 165 2BR/1.5BH 96 2Br/2Ba/Den - 2B2 55 Average Unit Size (SF) 845 829 955 Land Area (Acre) 28.2800 14.7500 9.0900 Density (Units/Acre) 20.1 22.0 18.0 Parking Ratio (Spaces/Unit) 1.67 Ample 2.00 Parking Type (Gr., Open, Cov., etc.) Open Open Covered CONDITION: Average Average Average APPEAL: Average Good Good AMENITIES: Pool/Spa Yes/Yes Yes/No Yes/No Gym Room Yes No No Laundry Room Yes Yes Yes Secured Parking No No No Sport Courts No Yes No Washer/Dryer Connection Yes Yes No Fireplace No No No Balconies Yes Yes Yes OCCUPANCY: 86% 95% 93% TRANSACTION DATA: Sale Date January, 2003 December, 2002 Sale Price ($) $21,000,000 $12,600,000 Grantor 582 Redhill (LLC) Protter Enterprises (Ltd) Grantee Greenway Apts. Ltd. Sherry Apartments (LP) Partnership Sale Documentation R03-072490 R02-347205 Verification Confidential Confidential Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $3,268,260 $10,056 $12.13 $1,549,800 $9,450 $9.90 Vacancy/Credit Loss $ 163,413 $ 503 $ 0.61 $ 108,486 $ 662 $0.69 Effective Gross Income $3,104,847 $ 9,553 $11.53 $1,441,314 $8,789 $9.20 Operating Expenses $1,241,939 $ 3,821 $ 4.61 $ 504,456 $3,076 $3.22 Net Operating Income $1,862,908 $ 5,732 $ 6.92 $ 936,858 $5,713 $5.98 NOTES: None Minor repairs reported PRICE PER UNIT $64,615 $76,829 PRICE PER SQUARE FOOT $ 77.95 $ 80.46 EXPENSE RATIO 40.0% 35.0% EGIM 6.76 8.74 OVERALL CAP RATE 8.87% 7.44% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA COMPARABLE COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 I - 5 ----------- ---------- ---------- ---------- Property Name Remington Apartments Hunters Glen Mill Ponds Apartments Apartments LOCATION: Address 525 Fair Meadows Drive 245 North Oakhurst Drive 1331 Modaff Road City, State Romeoville, IL Aurora, IL Naperville, IL County Will DuPage DuPage PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 332,206 299,040 205,931 Year Built 1999 1989 1988 Number of Units 350 320 216 Unit Mix: Type Total Type Total Type Total 1BR/1BH 169 1BR/1BH 128 1BR/1BH 72 2BR/2BH 169 2BR/2BH 192 2BR/2BH 144 3BR/2BH 12 Average Unit Size (SF) 949 935 953 Land Area (Acre) 29.1700 14.8700 13.4200 Density (Units/Acre) 12.0 21.5 16.1 Parking Ratio (Spaces/Unit) 2.00 0.46 2.00 Parking Type (Gr., Open, Covered Open, Covered Open, Covered Cov., etc.) CONDITION: Very Good Good Average APPEAL: Good Good Average AMENITIES: Pool/Spa Yes/Yes Yes/No Yes/No Gym Room Yes Yes No Laundry Room Yes No Yes Secured Parking Yes Yes No Sport Courts Yes Yes No Washer/Dryer Connection Yes Yes No Fireplace Yes Yes No Balconies Yes Yes Yes OCCUPANCY: 93% 90% 96% TRANSACTION DATA: Sale Date June, 2002 February, 2002 May, 2001 Sale Price ($) $31,800,000 $22,800,000 $14,684,000 Grantor Fairfield Romeoville (LP) Realty Associates Fund III State Bank of Countryside Grantee JRC Remington (LLC) R.E. Cedar (LP) Mill Ponds Associates Sale Documentation R0-2109715 R02-040364 R01-079063 Verification Confidential Confidential Confidential Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $4,495,020 $12,843 $13.53 $3,732,300 $11,663 $12.48 $2,087,000 $9,662 $10.13 Vacancy/Credit Loss $ 314,651 $ 899 $ 0.95 $ 373,230 $ 1,166 $ 1.25 $ 0 $ 0 $ 0.00 Effective Gross Income $4,180,369 $11,944 $12.58 $3,359,070 $10,497 $11.23 $2,087,000 $9,662 $10.13 Operating Expenses $1,672,148 $ 4,778 $ 5.03 $1,511,582 $ 4,724 $ 5.05 $ 707,520 $3,276 $ 3.44 Net Operating Income $2,508,221 $ 7,166 $ 7.55 $1,847,488 $ 5,773 $ 6.18 $1,379,480 $6,386 $ 6.70 NOTES: None Estimated $1.8 million worth None of work upgrading the clubhouse. (roof and residing) PRICE PER UNIT $90,857 $71,250 $67,981 PRICE PER SQUARE FOOT $ 95.72 $ 76.24 $ 71.31 EXPENSE RATIO 40.0% 45.0% 33.9% EGIM 7.61 6.79 7.04 OVERALL CAP RATE 7.89% 8.10% 9.39% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA ACTUAL
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 LAKESIDE APARTMENTS, LISLE, ILLINOIS IMPROVED SALES MAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $64,615 to $90,857 per unit. Adjustments have been made to the sales to reflect differences in location, age/condition and quality/appeal. Generally speaking, larger properties typically have a lower price per unit when compared to smaller properties, all else being equal. Similarly, those projects with a higher average unit size will generally have a higher price per unit. After appropriate adjustments are made, the improved sales demonstrate an adjusted range for the subject from $61,385 to $77,229 per unit with a mean or average adjusted price of $69,474 per unit. The median adjusted price is $67,688 per unit. Based on the following analysis, we have concluded to a value of $75,000 per unit, which results in an "as is" value of $42,200,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 LAKESIDE APARTMENTS, LISLE, ILLINOIS SALES ADJUSTMENT GRID
DESCRIPTION SUBJECT COMPARABLE COMPARABLE I - 1 I - 2 --------------------------------------------------------------------------------------------------------------------- Property Name Lakeside Apartments Greenway Trail Apartments Sherry Naperville Address 4800 Lake Trail Drive 136 Greenway Trail 1821 Washington Street City Lisle, Illinois Carol Stream, IL Naperville, IL Sale Date January, 2003 December, 2002 Sale Price ($) $21,000,000 $12,600,000 Net Rentable Area (SF) 480,184 269,400 156,600 Number of Units 568 325 164 Price Per Unit $64,615 $76,829 Year Built 1975 1977 1975 Land Area (Acre) 28.2800 14.7500 9.0900 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 01-2003 0% 12-2002 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $64,615 $76,829 Location Comparable 0% Inferior 5% Number of Units 568 325 0% 164 -10% Quality / Appeal Good Inferior 5% Inferior 5% Age / Condition 1975 1977 / Average 0% 1975 / Average 5% Occupancy at Sale 86% 95% -10% 93% -10% Amenities Good Comparable 0% Comparable 0% Average Unit Size (SF) 845 829 0% 955 5% PHYSICAL ADJUSTMENT -5% 0% FINAL ADJUSTED VALUE ($/UNIT) $61,385 $76,829 DESCRIPTION COMPARABLE COMPARABLE COMPARABLE I - 3 I - 4 I - 5 --------------------------------------------------------------------------------------------------------------------- Property Name Remington Apartments Hunters Glen Apartments Mill Ponds Apartments Address 525 Fair Meadows Drive 245 North Oakhurst Drive 1331 Modaff Road City Romeoville, IL Aurora, IL Naperville, IL Sale Date June, 2002 February, 2002 May, 2001 Sale Price ($) $31,800,000 $22,800,000 $14,684,000 Net Rentable Area (SF) 332,206 299,040 205,931 Number of Units 350 320 216 Price Per Unit $90,857 $71,250 $67,981 Year Built 1999 1989 1988 Land Area (Acre) 29.1700 14.8700 13.4200 VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate 0% Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Arm's Length 0% Date of Sale (Time) 06-2002 0% 02-2002 0% 05-2001 5% VALUE AFTER TRANS. ADJUST. ($/UNIT) $90,857 $71,250 $71,381 Location Comparable 0% Comparable 0% Inferior 5% Number of Units 350 0% 320 0% 216 -10% Quality / Appeal Superior -5% Comparable 0% Comparable 0% Age / Condition 1999 / very good -5% 1989 / Good -5% 1988 / Average 0% Occupancy at Sale 93% -10% 90% -5% 96% -10% Amenities Comparable 0% Comparable 0% Comparable 0% Average Unit Size (SF) 949 5% 935 5% 953 5% PHYSICAL ADJUSTMENT -15% -5% -10% FINAL ADJUSTED VALUE ($/UNIT) $77,229 $67,688 $64,243
SUMMARY VALUE RANGE (PER UNIT) $61,385 TO $77,229 MEAN (PER UNIT) $69,474 MEDIAN (PER UNIT) $67,688 VALUE CONCLUSION (PER UNIT) $75,000
VALUE OF IMPROVEMENT & MAIN SITE $42,600,000 LESS: LEASE-UP COST -$ 341,000 PV OF CONCESSIONS -$ 107,000 VALUE INDICATED BY SALES COMPARISON APPROACH $42,152,000 ROUNDED $42,200,000
NET OPERATING INCOME (NOI) ANALYSIS We have also conducted a net operating income (NOI) comparison analysis. The NOI effectively takes into account the various physical, location, and operating aspects of the sale. When the subject's NOI is compared to the sale NOI, a percent adjustment can be arrived at. The following table illustrates this analysis. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 24 LAKESIDE APARTMENTS, LISLE, ILLINOIS
NOI PER UNIT COMPARISON ----------------------------------------------------------------------------------------------- SALE PRICE NOI/ SUBJECT NOI COMPARABLE NO. OF ---------- ---------- -------------- ADJUSTMENT INDICATED NO. UNITS PRICE/UNIT OAR NOI/UNIT SUBJ. NOI/UNIT FACTOR VALUE/UNIT ----------------------------------------------------------------------------------------------- I-1 325 $21,000,000 8.87% $1,862,908 $3,534,215 1.086 $70,141 ----------- -------------------------- $ 64,615 $ 5,732 $ 6,222 ----------------------------------------------------------------------------------------------- I-2 164 $12,600,000 7.44% $ 936,858 $3,534,215 1.089 $83,684 ----------- -------------------------- $ 76,829 $ 5,713 $ 6,222 ----------------------------------------------------------------------------------------------- I-3 350 $31,800,000 7.89% $2,508,221 $3,534,215 0.868 $78,887 ----------- -------------------------- $ 90,857 $ 7,166 $ 6,222 ----------------------------------------------------------------------------------------------- I-4 320 $22,800,000 8.10% $1,847,488 $3,534,215 1.078 $76,789 ----------- -------------------------- $ 71,250 $ 5,773 $ 6,222 ----------------------------------------------------------------------------------------------- I-5 216 $14,684,000 9.39% $1,379,480 $3,534,215 0.974 $66,233 ----------- -------------------------- $ 67,981 $ 6,386 $ 6,222 ===============================================================================================
PRICE/UNIT VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT ----------------------------------------------------------------------------------------------------- Low High Average Median Estimated Price Per Unit $ 76,000 $66,233 $83,684 $75,147 $76,789 Number of Units 568 VALUE $43,168,000 Less: Lease-Up Cost -$ 341,000 PV of Concessions -$ 107,000 ------------ Value Based on NOI Analysis $42,720,000 Rounded $42,700,000
The adjusted sales indicate a range of value between $66,233 and $83,684 per unit, with an average of $75,147 per unit. Based on the subject's competitive position within the improved sales, a value of $76,000 per unit is estimated. This indicates an "as is" market value of $42,700,000 (rounded after necessary adjustment, if any) for the NOI Per Unit Analysis. EFFECTIVE GROSS INCOME MULTIPLIER (EGIM) ANALYSIS The effective gross income multiplier (EGIM) is derived by dividing the sales price by the total effective gross income. The following table illustrates the EGIMs for the comparable improved sales. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 25 LAKESIDE APARTMENTS, LISLE, ILLINOIS
EFFECTIVE GROSS INCOME MULTIPLIER COMPARISON ----------------------------------------------------------------------------------------- SALE PRICE COMPARABLE NO. OF ----------- EFFECTIVE OPERATING SUBJECT NO. UNITS PRICE/UNIT GROSS INCOME EXPENSE OER PROJECTED OER EGIM ----------------------------------------------------------------------------------------- I-1 325 $21,000,000 $ 3,104,847 $1,241,939 40.00% 6.76 ----------- $ 64,615 -------------------------------------------------------------------- ---- I-2 164 $12,600,000 $ 1,441,314 $ 504,456 35.00% 8.74 ----------- $ 76,829 -------------------------------------------------------------------- ---- I-3 350 $31,800,000 $ 4,180,369 $1,672,148 40.00% 7.61 ----------- $ 90,857 40.46% -------------------------------------------------------------------- ---- I-4 320 $22,800,000 $ 3,359,070 $1,511,582 45.00% 6.79 ----------- $ 71,250 -------------------------------------------------------------------- ---- I-5 216 $14,684,000 $ 2,087,000 $ 707,520 33.90% 7.04 ----------- $ 67,981 =========================================================================================
EGIM VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES ---------------------------------------------------------------------------------------- Low High Average Median Estimate EGIM 7.00 6.76 8.74 7.39 7.04 Subject EGI $ 6,222,358 VALUE $43,556,506 Less: Lease-Up Cost -$ 341,000 PV of Concessions - $107,000 ------------ Value Based on EGIM Analysis $43,108,506 Rounded $43,100,000 Value Per Unit $ 75,880
There is an inverse relationship, which generally holds among EGIMs and operating expenses. Properties, which have higher expense ratios, typically sell for relatively less and therefore produce a lower EGIM. As will be illustrated in the Income Capitalization Approach of this report, the subject's operating expense ratio (OER) is estimated at 40.46% before reserves. The comparable sales indicate a range of expense ratios from 33.90% to 45.00%, while their EGIMs range from 6.76 to 8.74. Overall, we conclude to an EGIM of 7.00, which results in an "as is" value estimate in the EGIM Analysis of $43,100,000. SALES COMPARISON CONCLUSION The three valuation methods in the Sales Comparison Approach are shown below. The overall value via the Sales Comparison Approach is estimated at $42,700,000. Price Per Unit $42,200,000 NOI Per Unit $42,700,000 EGIM Analysis $43,100,000 Sales Comparison Conclusion $42,700,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 LAKESIDE APARTMENTS, LISLE, ILLINOIS INCOME CAPITALIZATION APPROACH The income capitalization approach is based on the premise that value is created by the expectation of future benefits. We estimated the present value of those benefits to derive an indication of the amount that a prudent, informed purchaser-investor would pay for the right to receive them as of the date of value. This approach requires an estimate of the NOI of a property. The estimated NOI is then converted to a value indication by use of either the direct capitalization or the discounted cash flow analysis (yield capitalization). Direct capitalization uses a single year's stabilized NOI as a basis for a value indication by dividing the income by a capitalization rate. The rate chosen accounts for a recapture of the investment by the investor and should reflect all factors that influence the value of the property, such as tenant quality, property condition, neighborhood change, market trends, interest rates, and inflation. The rate may be extracted from local market transactions or, when transaction evidence is lacking, obtained from trade sources. A discounted cash flow analysis focuses on the operating cash flows expected from the property and the proceeds of a hypothetical sale at the end of a holding period (the reversion). The cash flows and reversion are discounted to their present values using a market-derived discount rate and are added together to obtain a value indication. Because benefits to be received in the future are worth less than the same benefits received in the present, this method weights income in the early years more heavily than the income and the sale proceeds to be received later. The strength of the discounted cash flow method is its ability to recognize variations in projected net income, such as those caused by inflation, stepped leases, neighborhood change, or tenant turnover. Its weakness is that it requires many judgments regarding the actions of likely buyers and sellers of the property in the future. In some situations, both methods yield a similar result. The discounted cash flow method is typically more appropriate for the analysis of investment properties with multiple or long-term leases, particularly leases with cancellation clauses or renewal options. It is especially useful for multi-tenant properties in volatile markets. The direct capitalization AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 27 LAKESIDE APARTMENTS, LISLE, ILLINOIS method is normally more appropriate for properties with relatively stable operating histories and expectations. A pro forma analysis for the first year of the investment is made to estimate a reasonable potential net operating income for the Subject Property. Such an analysis entails an estimate of the gross income the property should command in the marketplace. From this total gross income must be deducted an allowance for vacancy/collection loss and operating expenses as dictated by general market conditions and the overall character of the subject's tenancy and leased income to arrive at a projected estimate of net operating income. Conversion of the net operating income to an indication of value is accomplished by the process of capitalization, as derived primarily from market data. MARKET RENT ANALYSIS In order to determine a market rental rate for the subject, a survey of competing apartment communities was performed. This survey was displayed previously in the market analysis section of the report. Detailed information pertaining to each of the comparable rental communities, along with photographs, is presented in the Addenda of this report. The following charts display the subject's current asking and actual rent rates as well as a comparison with the previous referenced comparable rental properties.
SUMMARY OF ACTUAL AVERAGE RENTS ------------------------------------------------------------- Average Unit Area ----------------- Unit Type (Sq. Ft.) Per Unit Per SF %Occupied ------------------------------------------------------------- 1Br/1Ba - 1A1 723 $ 692 $0.96 91.6% 1Br/1Ba/Den - 2A2 830 $ 793 $0.96 93.6% 2Br/2Ba - 1B1 945 $ 900 $0.95 78.2% 2Br/2Ba/Den - 2B2 1107 $1,081 $0.98 72.7%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 LAKESIDE APARTMENTS, LISLE, ILLINOIS RENT ANALYSIS
COMPARABLE RENTS ------------------------------------------- R-1 R-2 R-3 R-4 ------------------------------------------- The Preserve at Chesapeake Windscape Country Cress Creek Landing Village Lakes Apartments ------------------------------------------- COMPARISON TO SUBJECT SUBJECT SUBJECT ------------------------------------------- SUBJECT UNIT ACTUAL ASKING Slightly DESCRIPTION TYPE RENT RENT Superior Similar Similar Similar ------------------------------------------------------------------------------------------------------ Monthly Rent 1Br/1Ba - 1A1 $ 692 $ 684 $ 885 $ 873 $ 819 $ 749 Unit Area (SF) 723 723 747 575 720 769 Monthly Rent Per Sq. Ft. $ 0.96 $ 0.95 $ 1.18 $ 1.52 $ 1.14 $ 0.97 ------------------------------------------------------------------------------------------------------ Monthly Rent 1Br/1Ba/Den - $ 793 $ 739 $ 976 $ 949 $ 789 Unit Area (SF) 2A2 830 830 957 841 850 Monthly Rent Per Sq. Ft. $ 0.96 $ 0.89 $ 1.02 $ 1.13 $ 0.93 ------------------------------------------------------------------------------------------------------ Monthly Rent 2Br/2Ba - 1B1 $ 900 $ 819 $ 1,113 $ 1,017 $ 961 $ 858 Unit Area (SF) 945 945 1,084 965 850 929 Monthly Rent Per Sq. Ft. $ 0.95 $ 0.87 $ 1.03 $ 1.05 $ 1.13 $ 0.92 ------------------------------------------------------------------------------------------------------ Monthly Rent 2Br/2Ba/Den - $ 1,081 $ 999 $ 1,206 $ 1,048 $ 899 Unit Area (SF) 2B2 1,107 1,107 1,170 1,050 1,010 Monthly Rent Per Sq. Ft. $ 0.98 $ 0.90 $ 1.03 $ 1.00 $ 0.89 ------------------------------------------------------------------------------------------------------ DESCRIPTION MIN MAX MEDIAN AVERAGE --------------------------------------------------------- Monthly Rent $ 749 $ 885 $ 846 $ 832 Unit Area (SF) 575 769 734 703 Monthly Rent Per Sq. Ft. $ 0.97 $ 1.52 $ 1.16 $ 1.20 --------------------------------------------------------- Monthly Rent $ 789 $ 976 $ 949 $ 905 Unit Area (SF) 841 957 850 883 Monthly Rent Per Sq. Ft. $ 0.93 $ 1.13 $ 1.02 $ 1.03 --------------------------------------------------------- Monthly Rent $ 858 $1,113 $ 989 $ 987 Unit Area (SF) 850 1,084 947 957 Monthly Rent Per Sq. Ft. $ 0.92 $ 1.13 $ 1.04 $ 1.03 --------------------------------------------------------- Monthly Rent $ 899 $1,206 $1,048 $ 1,051 Unit Area (SF) 1,010 1,170 1,050 1,077 Monthly Rent Per Sq. Ft. $ 0.89 $ 1.03 $ 1.00 $ 0.97 ---------------------------------------------------------
CONCLUDED MARKET RENTAL RATES AND TERMS Based on this analysis above, the subject's concluded market rental rates and gross rental income is calculated as follows:
GROSS RENTAL INCOME PROJECTION ------------------------------------------------------------------------------------- Market Rent Unit Area ---------------- Monthly Annual Unit Type Number of Units (Sq. Ft.) Per Unit Per SF Income Income ------------------------------------------------------------------------------------- 1Br/1Ba - 1A1 238 723 $ 750 $ 1.04 $178,500 $2,142,000 1Br/1Ba/Den - 2A2 110 830 $ 900 $ 1.08 $ 99,000 $1,188,000 2Br/2Ba - 1B1 165 945 $ 1,000 $ 1.06 $165,000 $1,980,000 2Br/2Ba/Den - 2B2 55 1,107 $ 1,050 $ 0.95 $ 57,750 $ 693,000 Total $500,250 $6,003,000 =====================================================================================
PRO FORMA ANALYSIS For purposes of this appraisal, we were provided with income and expense data for the subject property. A summary of this data is presented on the following page. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 29 LAKESIDE APARTMENTS, LISLE, ILLINOIS SUMMARY OF HISTORICAL INCOME & EXPENSES
FISCAL YEAR 2000 FISCAL YEAR 2001 FISCAL YEAR 2002 ------------------------- ------------------------- ------------------------- ACTUAL ACTUAL ACTUAL ------------------------- ------------------------- ------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT ------------------------------------------------------------------------------------------------------------ Revenues Rental Income $ 5,845,612 $ 10,292 $ 6,104,956 $ 10,748 $ 5,899,938 $ 10,387 Vacancy $ 287,345 $ 506 $ 488,009 $ 859 $ 601,303 $ 1,059 Credit Loss/Concessions $ 248,993 $ 438 $ 392,664 $ 691 $ 227,005 $ 400 --------------------------------------------------------------------------------- Subtotal $ 536,338 $ 944 $ 880,673 $ 1,550 $ 828,308 $ 1,458 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 306,776 $ 540 $ 491,176 $ 865 $ 507,369 $ 893 --------------------------------------------------------------------------------- Subtotal Other Income $ 306,776 $ 540 $ 491,176 $ 865 $ 507,369 $ 893 --------------------------------------------------------------------------------- Effective Gross Income $ 5,616,050 $ 9,887 $ 5,715,459 $ 10,062 $ 5,578,999 $ 9,822 Operating Expenses Taxes $ 478,724 $ 843 $ 549,535 $ 967 $ 688,387 $ 1,212 Insurance $ 55,774 $ 98 $ 69,691 $ 123 $ 92,429 $ 163 Utilities $ 480,599 $ 846 $ 661,782 $ 1,165 $ 592,709 $ 1,044 Repair & Maintenance $ 105,348 $ 185 $ 75,056 $ 132 $ 97,104 $ 171 Cleaning $ 35,245 $ 62 $ 21,087 $ 37 $ 32,200 $ 57 Landscaping $ 19,773 $ 35 $ 27,339 $ 48 $ 33,396 $ 59 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 97,436 $ 172 $ 70,149 $ 124 $ 104,080 $ 183 General Administrative $ 461,170 $ 812 $ 468,370 $ 825 $ 519,487 $ 915 Management $ 291,391 $ 513 $ 312,948 $ 551 $ 280,673 $ 494 Miscellaneous $ 369,859 $ 651 $ 76,448 $ 135 $ 251,445 $ 443 --------------------------------------------------------------------------------- Total Operating Expenses $ 2,395,319 $ 4,217 $ 2,332,405 $ 4,106 $ 2,691,910 $ 4,739 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 --------------------------------------------------------------------------------- Net Income $ 3,220,731 $ 5,670 $ 3,383,054 $ 5,956 $ 2,887,089 $ 5,083 ------------------------------------------------------------------------------------------------------------ FISCAL YEAR 2003 ANNUALIZED 2003 ------------------------ ----------------------- ----------------------- ------ MANAGEMENT BUDGET PROJECTION AAA PROJECTION ------------------------ ----------------------- ------------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT % --------------------------------------------------------------------------------------------------------------- Revenues Rental Income $ 5,829,709 $ 10,264 $5,628,788 $ 9,910 $6,003,000 $ 10,569 100.0% Vacancy $ 26,726 $ 47 $ 702,124 $ 1,236 $ 300,150 $ 528 5.0% Credit Loss/Concessions $ 223,936 $ 394 $ 318,084 $ 560 $ 120,060 $ 211 2.0% ------------------------------------------------------------------------------------ Subtotal $ 250,662 $ 441 $1,020,208 $ 1,796 $ 420,210 $ 740 7.0% Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 639,648 $ 1,126 $ 554,132 $ 976 $ 639,568 $ 1,126 10.7% ------------------------------------------------------------------------------------ Subtotal Other Income $ 639,648 $ 1,126 $ 554,132 $ 976 $ 639,568 $ 1,126 10.7% ------------------------------------------------------------------------------------ Effective Gross Income $ 6,218,695 $ 10,948 $5,162,712 $ 9,089 $6,222,358 $ 10,955 100.0% Operating Expenses Taxes $ 638,422 $ 1,124 $ 638,780 $ 1,125 $ 638,432 $ 1,124 10.3% Insurance $ 98,478 $ 173 $ 96,024 $ 169 $ 98,264 $ 173 1.6% Utilities $ 556,307 $ 979 $ 556,232 $ 979 $ 556,072 $ 979 8.9% Repair & Maintenance $ 77,275 $ 136 $ 225,264 $ 397 $ 77,248 $ 136 1.2% Cleaning $ 0 $ 0 $ 21,504 $ 38 $ 0 $ 0 0.0% Landscaping $ 148,540 $ 262 $ 0 $ 0 $ 148,816 $ 262 2.4% Security $ 0 $ 0 $ 15,784 $ 28 $ 0 $ 0 0.0% Marketing & Leasing $ 94,738 $ 167 $ 47,732 $ 84 $ 94,856 $ 167 1.5% General Administrative $ 495,932 $ 873 $ 456,708 $ 804 $ 495,864 $ 873 8.0% Management $ 322,624 $ 568 $ 256,932 $ 452 $ 186,671 $ 329 3.0% Miscellaneous $ 221,308 $ 390 $ 106,468 $ 187 $ 221,520 $ 390 3.6% ------------------------------------------------------------------------------------ Total Operating Expenses $ 2,653,624 $ 4,672 $2,421,428 $ 4,263 $2,517,743 $ 4,433 40.5% Reserves $ 0 $ 0 $ 0 $ 0 $ 170,400 $ 300 6.8% ------------------------------------------------------------------------------------ Net Income $ 3,565,071 $ 6,277 $2,741,284 $ 4,826 $3,534,215 $ 6,222 56.8% ---------------------------------------------------------------------------------------------------------------
REVENUES AND EXPENSES The subject's revenue and expense projections are displayed on the previous chart. Rental income is based on the market analysis previously discussed. Other income consists of forfeited deposits, laundry income, late rent payments, month to month fees,pet fees, vending machine revenue, etc. We forecasted the property's annual operating expenses after reviewing its historical performance at the subject property. We analyzed each item of expense and attempted to forecast amounts a typical informed investor would consider reasonable. VACANCY AND COLLECTION LOSS An investor is primarily interested in the annual revenue an income property is likely to produce over a specified period of time, rather than the income it could produce if it were always 100% occupied and all tenants were paying their rent in full and on time. An investor normally expects some income loss as tenants vacate, fail to pay rent, or pay their rent late. We have projected a stabilized vacancy and collection loss rate of 7% based on the subject's historical performance, as well as the anticipated future market conditions. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 30 LAKESIDE APARTMENTS, LISLE, ILLINOIS RESERVES FOR REPLACEMENT "Reserves for replacements" is a contingency account allocated to the expenses of the property to provide for replacement of short-lived items and for unforeseen necessary capital expenditures. We have utilized the Korpacz Real Estate Investor Survey of the national apartment market, which reports a range of replacement reserves between $150 and $400 per unit. For purposes of this analysis, we have included an allowance of $300 per unit for reserves for replacement. CAPITAL EXPENDITURES Capital expenditures represent expenses for immediate repair or replacement of items that have average to long lives. Based on our inspection of the property as well as discussions with property management personnel, there are no major items remaining in need of repair or replacement that would require an expense beyond our reserves for replacement. Therefore an allowance of $300 per unit should be satisfactory in our reserves for replacement to cover future capital expenditures. DISCOUNTED CASH FLOW ANALYSIS As the subject is a multi-tenant income property, the Discounted Cash Flow Method is considered appropriate. This method is especially meaningful in that it isolates the timing of the annual cash flows and discounts them, along with the expected equity reversion, to a present value. The present value of the cash flow is added to the present value of the reversion, resulting in a total property value. INVESTMENT CRITERIA Appropriate investment criteria will be derived for the subject based upon analysis of comparable sales and a survey of real estate investors. The following table summarizes the findings of Korpacz National Investor Survey for the most recent period. KORPACZ NATIONAL INVESTOR SURVEY 1ST QUARTER 2003 NATIONAL APARTMENT MARKET
CAPITALIZATION RATES ------------------------------------------ GOING-IN TERMINAL ------------------ ------------------ LOW HIGH LOW HIGH --------------------------------------------------------- RANGE 6.00% 10.00% 7.00% 10.00% AVERAGE 8.14% 8.47%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 31 LAKESIDE APARTMENTS, LISLE, ILLINOIS
SUMMARY OF OVERALL CAPITALIZATION RATES ---------------------------------------------------- COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR ---------------------------------------------------- I-1 Jan-03 95% $64,615 8.87% I-2 Dec-02 93% $76,829 7.44% I-3 Jun-02 93% $90,857 7.89% I-4 Feb-02 90% $71,250 8.10% I-5 May-01 96% $67,981 9.39% High 9.39% Low 7.44% Average 8.34%
LOCAL BROKER SURVEY -------------------------------------------------------------------- BROKER COMPANY MARKET CAP RATE -------------------------------------------------------------------- Class B & C Properties Real Capital Analytics 5.5% - 7.8% ====================================================================
Based on this information, we have concluded the subject's overall capitalization rate should be 8.25%. The terminal capitalization rate is applied to the net operating income estimated for the year following the end of the holding period. Based on the concluded overall capitalization rate, the age of the property and the surveyed information, we have concluded the subject's terminal capitalization rate to be 8.75%. Finally, the subject's discount rate or yield rate is estimated based on the previous investor survey and an examination of returns available on alternative investments in the market. Based on this analysis, the subject's discount rate is estimated to be 11.00%. HOLDING PERIOD The survey of investors indicates that most investors are completing either 10-year cash flows or extending the analysis to the end of the lease if it is more than 10-years. A 10-year period has been used in the analysis of the subject with the eleventh year stabilized NOI used to determine the reversion. SELLING COSTS Sales of similar size properties are typically accomplished with the aid of a broker and will also incur legal and other transaction related cost. Based on our survey of brokers and a review of institutional investor projections, an allowance of 2.00% of the sale amount is applied. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 32 LAKESIDE APARTMENTS, LISLE, ILLINOIS DISCOUNTED CASH FLOW CONCLUSION Discounting the annual cash flows and the equity reversion at the selected rate of 11.00% indicates a value of $43,100,000. In this instance, the reversion figure contributes approximately 43% of the total value. Investors surveyed for this assignment indicated they would prefer to have the cash flow contribute anywhere from 50% to 60%. Overall, the blend seems reasonable. The cash flow and pricing matrix are located on the following pages. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 33 LAKESIDE APARTMENTS, LISLE, ILLINOIS DISCOUNTED CASH FLOW ANALYSIS
LAKESIDE APARTMENTS ------------------- YEAR MAY-2004 MAY-2005 MAY-2006 MAY-2007 MAY-2008 MAY-2009 FISCAL YEAR 1 2 3 4 5 6 --------------------------------------------------------------------------------------------------------------- REVENUE Base Rent $6,003,000 $6,183,090 $6,368,583 $6,559,640 $6,756,429 $6,959,122 Vacancy $ 654,760 $ 348,855 $ 318,429 $ 327,982 $ 337,821 $ 347,956 Credit Loss $ 120,060 $ 123,662 $ 127,372 $ 131,193 $ 135,129 $ 139,182 Concessions $ 119,280 $ 0 $ 0 $ 0 $ 0 $ 0 --------------------------------------------------------------------------- Subtotal $ 894,100 $ 472,517 $ 445,801 $ 459,175 $ 472,950 $ 487,139 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 639,568 $ 658,755 $ 678,518 $ 698,873 $ 719,839 $ 741,435 --------------------------------------------------------------------------- Subtotal Other Income $ 639,568 $ 658,755 $ 678,518 $ 698,873 $ 719,839 $ 741,435 --------------------------------------------------------------------------- EFFECTIVE GROSS INCOME $5,748,468 $6,369,328 $6,601,300 $6,799,339 $7,003,319 $7,213,418 OPERATING EXPENSES: Taxes $ 638,432 $ 657,585 $ 677,313 $ 697,632 $ 718,561 $ 740,118 Insurance $ 98,264 $ 101,212 $ 104,248 $ 107,376 $ 110,597 $ 113,915 Utilities $ 556,072 $ 572,754 $ 589,937 $ 607,635 $ 625,864 $ 644,640 Repair & Maintenance $ 77,248 $ 79,565 $ 81,952 $ 84,411 $ 86,943 $ 89,552 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 148,816 $ 153,280 $ 157,879 $ 162,615 $ 167,494 $ 172,519 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 94,856 $ 97,702 $ 100,633 $ 103,652 $ 106,761 $ 109,964 General Administrative $ 495,864 $ 510,740 $ 526,062 $ 541,844 $ 558,099 $ 574,842 Management $ 172,454 $ 191,080 $ 198,039 $ 203,980 $ 210,100 $ 216,403 Miscellaneous $ 221,520 $ 228,166 $ 235,011 $ 242,061 $ 249,323 $ 256,802 --------------------------------------------------------------------------- TOTAL OPERATING EXPENSES $2,503,526 $2,592,084 $2,671,073 $2,751,205 $2,833,742 $2,918,754 Reserves $ 170,400 $ 175,512 $ 180,777 $ 186,201 $ 191,787 $ 197,540 --------------------------------------------------------------------------- NET OPERATING INCOME $3,074,542 $3,601,732 $3,749,449 $3,861,932 $3,977,790 $4,097,124 =============================================================================================================== Operating Expense Ratio (% of EGI) 43.6% 40.7% 40.5% 40.5% 40.5% 40.5% Operating Expense Per Unit $ 4,408 $ 4,564 $ 4,703 $ 4,844 $ 4,989 $ 5,139 =============================================================================================================== LAKESIDE APARTMENTS ------------------- YEAR MAY-2010 MAY-2011 MAY-2012 MAY-2013 MAY-2014 FISCAL YEAR 7 8 9 10 11 -------------------------------------------------------------------------------------------------- REVENUE Base Rent $7,167,896 $7,382,933 $7,604,421 $7,832,553 $8,067,530 Vacancy $ 358,395 $ 369,147 $ 380,221 $ 391,628 $ 403,377 Credit Loss $ 143,358 $ 147,659 $ 152,088 $ 156,651 $ 161,351 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 -------------------------------------------------------------- Subtotal $ 501,753 $ 516,805 $ 532,309 $ 548,279 $ 564,727 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 763,678 $ 786,588 $ 810,186 $ 834,491 $ 859,526 -------------------------------------------------------------- Subtotal Other Income $ 763,678 $ 786,588 $ 810,186 $ 834,491 $ 859,526 -------------------------------------------------------------- EFFECTIVE GROSS INCOME $7,429,821 $7,652,715 $7,882,297 $8,118,766 $8,362,329 OPERATING EXPENSES: Taxes $ 762,321 $ 785,191 $ 808,747 $ 833,009 $ 857,999 Insurance $ 117,332 $ 120,852 $ 124,478 $ 128,212 $ 132,059 Utilities $ 663,979 $ 683,898 $ 704,415 $ 725,548 $ 747,314 Repair & Maintenance $ 92,238 $ 95,005 $ 97,855 $ 100,791 $ 103,815 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 177,694 $ 183,025 $ 188,516 $ 194,171 $ 199,996 Security $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 113,263 $ 116,661 $ 120,161 $ 123,766 $ 127,479 General Administrative $ 592,088 $ 609,850 $ 628,146 $ 646,990 $ 666,400 Management $ 222,895 $ 229,581 $ 236,469 $ 243,563 $ 250,870 Miscellaneous $ 264,506 $ 272,442 $ 280,615 $ 289,033 $ 297,704 -------------------------------------------------------------- TOTAL OPERATING EXPENSES $3,006,317 $3,096,506 $3,189,401 $3,285,083 $3,383,636 Reserves $ 203,467 $ 209,571 $ 215,858 $ 222,333 $ 229,003 -------------------------------------------------------------- NET OPERATING INCOME $4,220,038 $4,346,639 $4,477,038 $4,611,349 $4,749,690 ================================================================================================== Operating Expense Ratio (% of EGI) 40.5% 40.5% 40.5% 40.5% 40.5% Operating Expense Per Unit $ 5,293 $ 5,452 $ 5,615 $ 5,784 $ 5,957 ==================================================================================================
Estimated Stabilized NOI $3,534,215 Sales Expense Rate 2.00% Gross Residual Sale Price $54,282,169 Deferred Maintenance $ 0 Months to Stabilized 17 Discount Rate 11.00% Less: Sales Expense $ 1,085,643 Add: Excess Land $ 0 Stabilized Occupancy 95.0% Terminal Cap Rate 8.75% ----------- Net Residual Sale Price $53,196,525 Other Adjustments $ 0 ----------- PV of Reversion $18,734,991 Value Indicated By "DCF" $43,064,716 Add: NPV of NOI $24,329,725 Rounded $43,100,000 ----------- PV Total $43,064,716
"DCF" VALUE SENSITIVITY TABLE ------------------------------------------------------------------------------------------------ DISCOUNT RATE TOTAL VALUE ----------------------------------------------------------------------------- 10.50% 10.75% 11.00% 11.25% 11.50% ------------------------------------------------------------------------------------------------ 8.25% $45,713,584 $44,948,444 $44,200,170 $43,468,332 $42,752,516 ----------------------------------------------------------------------------- 8.50% $45,102,169 $44,350,692 $43,615,745 $42,896,908 $42,193,776 ----------------------------------------------------------------------------- TERMINAL CAP RATE 8.75% $44,525,693 $43,787,098 $43,064,716 $42,358,137 $41,666,964 ----------------------------------------------------------------------------- 9.00% $43,981,243 $43,254,814 $42,544,299 $41,849,298 $41,169,419 ----------------------------------------------------------------------------- 9.25% $43,466,223 $42,751,302 $42,052,013 $41,367,964 $40,698,769 ------------------------------------------------------------------------------------------------
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 34 LAKESIDE APARTMENTS, LISLE, ILLINOIS INCOME LOSS DURING LEASE-UP The subject is currently 86% occupied, below our stabilized occupancy projection. We have estimated a 17-month lease-up period. An adjustment must be made to bring the subject to a stabilized operating level. To account for this income loss during lease-up, we have compared the current DCF analysis to an "as stabilized" DCF analysis assuming the subject's occupancy were stabilized. The difference in net operating income during the lease-up period is discounted to a present value figure of $341,000 as shown in the following table.
DESCRIPTION YEAR 1 YEAR 2 ----------------------------------------------------------- "As Is" Net Operating Income $3,074,542 $3,601,732 Stabilized Net Operating Income $3,418,514 $3,640,242 ----------------------- Difference $ 343,971 $ 38,510 PV of Income Loss During Lease-Up $ 341,140 ----------------------- Rounded $ 341,000 ----------
CONCESSIONS Due to softness in the market, concessions have been utilized at the subject property and within the market. Based on our discussions with the subject's property manager and those at competing properties, these concessions are expected to continue in the near term until the market returns to a stabilized level. Concessions have been included as a line item deduction within the discounted cash flow analysis. The present value of these concessions equates to $107,000 (rounded). This amount has been deducted from the Direct Capitalization analysis, as well as the Sales Comparison Approach value. DIRECT CAPITALIZATION METHOD After having projected the income and expenses for the property, the next step in the valuation process is to capitalize the net income into an estimate of value. The selected overall capitalization rate ("OAR") covers both return on and return of capital. It is the overall rate of return an investor expects. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 35 LAKESIDE APARTMENTS, LISLE, ILLINOIS After considering the market transactions and the investor surveys, we previously conclude that an overall rate of 8.25% percent is applicable to the subject. The results of our direct capitalization analysis are as follows: AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 36 LAKESIDE APARTMENTS, LISLE, ILLINOIS
LAKESIDE APARTMENTS ------------------- TOTAL PER SQ. FT. PER UNIT %OF EGI ------------------------------------------------------------------------------------------ REVENUE Base Rent $ 6,003,000 $ 12.50 $ 10,569 Less: Vacancy & Collection Loss 7.00% $ 420,210 $ 0.88 $ 740 Plus: Other Income Laundry Income $ 0 $ 0.00 $ 0 0.00% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 639,568 $ 1.33 $ 1,126 10.28% ---------------------------------------------- Subtotal Other Income $ 639,568 $ 1.33 $ 1,126 10.28% EFFECTIVE GROSS INCOME $ 6,222,358 $ 12.96 $ 10,955 OPERATING EXPENSES: Taxes $ 638,432 $ 1.33 $ 1,124 10.26% Insurance $ 98,264 $ 0.20 $ 173 1.58% Utilities $ 556,072 $ 1.16 $ 979 8.94% Repair & Maintenance $ 77,248 $ 0.16 $ 136 1.24% Cleaning $ 0 $ 0.00 $ 0 0.00% Landscaping $ 148,816 $ 0.31 $ 262 2.39% Security $ 0 $ 0.00 $ 0 0.00% Marketing & Leasing $ 94,856 $ 0.20 $ 167 1.52% General Administrative $ 495,864 $ 1.03 $ 873 7.97% Management 3.00% $ 186,671 $ 0.39 $ 329 3.00% Miscellaneous $ 221,520 $ 0.46 $ 390 3.56% TOTAL OPERATING EXPENSES $ 2,517,743 $ 5.24 $ 4,433 40.46% Reserves $ 170,400 $ 0.35 $ 300 2.74% ---------------------------------------------- NET OPERATING INCOME $ 3,534,215 $ 7.36 $ 6,222 56.80% "GOING IN" CAPITALIZATION RATE 8.25% VALUE INDICATION $42,838,973 $ 89.21 $ 75,421 LESS: LEASE-UP COST ($ 341,000) PV OF CONCESSIONS ($ 107,000) "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $42,390,973 ROUNDED $42,400,000 $ 88.30 $ 74,648
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 37 LAKESIDE APARTMENTS, LISLE, ILLINOIS
DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE ----------------------------------------------------- CAP RATE VALUE ROUNDED $/UNIT $/SF ----------------------------------------------------- 7.50% $46,674,870 $46,700,000 $82,218 $97.25 7.75% $45,154,778 $45,200,000 $79,577 $94.13 8.00% $43,729,691 $43,700,000 $76,937 $91.01 8.25% $42,390,973 $42,400,000 $74,648 $88.30 8.50% $41,131,003 $41,100,000 $72,359 $85.59 8.75% $39,943,032 $39,900,000 $70,246 $83.09 9.00% $38,821,058 $38,800,000 $68,310 $80.80
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $42,400,000. CORRELATION AND CONCLUSION BY THE INCOME APPROACH The two methods used to estimate the market value of the subject property by the income approach resulted in the following indications of value: Discounted Cash Flow Analysis $43,100,000 Direct Capitalization Method $42,400,000
Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $42,800,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 38 LAKESIDE APARTMENTS, LISLE, ILLINOIS RECONCILIATION AND CONCLUSION This appraisal was made to express an opinion as of the Market Value of the fee simple estate in the property. AS IS MARKET VALUE OF THE FEE SIMPLE ESTATE Cost Approach Not Utilized Sales Comparison Approach $42,700,000 Income Approach $42,800,000 Reconciled Value $42,800,000
The Direct Capitalization Method is considered a reliable indicator of value. Income and expenses were estimated and projected based on historical operating statements and market oriented expenses. This method is primarily used by investors in their underwriting analysis. Furthermore, there was good support for an overall rate in the Direct Capitalization Method. The Sales Comparison Approach to value supported the value conclusion by the Income Approach and was given secondary consideration. Investment-grade, income-producing properties such as the subject are not typically traded based on cost. Therefore, the Cost Approach has not been considered in our valuation. FINAL VALUE - FEE SIMPLE ESTATE Based on the investigation and premise outlined, it is our opinion that as of May 28, 2003 the market value of the fee simple estate in the property is: $42,800,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA LAKESIDE APARTMENTS, LISLE, ILLINOIS ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A LAKESIDE APARTMENTS, LISLE, ILLINOIS EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A LAKE SIDE APARTMENTS, LISLE, ILLINOIS SUBJECT PHOTOGRAPHS [MAIN ENTRANCE PICTURE] [LEASING OFFICE PICTURE] [SUBJECT APARTMENT BUILDING PICTURE] [SUBJECT PROPERTY MAIN POOL AND CLUB HOUSE PICTURE] [SUBJECT PROPERTY LAKE PICTURE] [SUBJECT PROPERTY BRIDGE CROSSING LAKE PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A LAKESIDE APARTMENTS, LISLE, ILLINOIS SUBJECT PHOTOGRAPHS [BUS STOP AT MAIN ENTRANCE PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B LAKESIDE APARTMENTS, LISLE, ILLINOIS EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B LAKESIDE APARTMENTS, LISLE, ILLINOIS PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 COMPARABLE I-2 COMPARABLE I-3 GREENWAY TRAIL APARTMENTS SHERRY NAPERVILLE REMINGTON APARTMENTS 136 Greenway Trail 1821 Washington Street 525 Fair Meadows Drive Carol Stream, IL Naperville, IL Romeoville, IL [PICTURE] [PICTURE] [PICTURE] COMPARABLE I-4 COMPARABLE I-5 HUNTERS GLEN APARTMENTS MILL PONDS APARTMENTS 245 North Oakhurst Drive 1331 Modaff Road Aurora, IL Naperville, IL [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B LAKESIDE APARTMENTS, LISLE, ILLINOIS SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE DESCRIPTION SUBJECT R - 1 ------------------------------------------------------------------------------------------------------------------ Property Name Lakeside Apartments The Preserve at Cress Creek Apartments Management Company AIMCO Altman Management Company LOCATION: Address 4800 Lakee Trail Drive 701 Royal Saint George City, State Lisle, Illinois Naperville, IL County DuPage DuPage Proximity to Subject 4 miles north of the subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 480,184 449,864 Year Built 1975 1982 Effective Age 25 15 Building Structure Type Brick & wood vinyl siding; shingle roof Brick; asphalt shingle roof Parking Type (Gr., Cov., etc.) Open Open Number of Units 568 474 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1Br/1Ba - 1A1 723 238 $ 692 1 Studio 600 2 $ 750 2 1Br/1Ba/Den - 2A2 830 110 $ 793 2 1BD/1BH 820 82 $ 895 3 2Br/2Ba - 1B1 945 165 $ 900 1 1BD/1BH 750 108 $ 888 4 2Br/2Ba/Den - 2B2 1,107 55 $1,081 2 2BD/1BH 1,068 104 $1,070 3 2BD/1BH 1,000 14 $1,015 3 2BD/1BH 1,068 14 $1,070 2 2BD/1BH 950 40 $ 900 4 2BD/1BH/Den 1,050 8 $1,230 3 2BD/2BH 1,100 74 $1,135 3 2BD/2BH 1,100 16 $1,135 4 2BD/2BH 1,250 12 $1,190 Average Unit Size (SF) 845 Unit Breakdown: Efficiency 0% 2-Bedroom 39% Efficiency 0% 2-Bedroom 59% 1-Bedroom 61% 3-Bedroom 0% 1-Bedroom 40% 3-Bedroom 0% CONDITION: Good Good APPEAL: Good Good AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X Balcony X X Fireplace X Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool X Spa/Jacuzzi Car Wash X Spa/Jacuzzi Car Wash Basketball Court BBQ Equipment Basketball Court BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room X Sand Volley Ball Meeting Hall Sand Volley Ball Meeting Hall X Tennis Court Secured Parking Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track Business Office Jogging Track Business Office X Gym Room X Gym Room OCCUPANCY: 86% 91% LEASING DATA: Available Leasing Terms 12 Months 6 to 12 Months, Variable Concessions $300 off the first month 1 to 2 Months Free Pet Deposit $150 $300 Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas X Water Trash X Water X Trash Confirmation May 28, 2003; Robin Silverman (Property May 28, 2003; Lisa Lang (Property Manager) Telephone Number (630)357-7984 (630)369-1188 NOTES: None COMPARISON TO SUBJECT: Slightly Superior COMPARABLE COMPARABLE DESCRIPTION R - 2 R - 3 ---------------------------------------------------------------------------------------------------------------------- Property Name Chesapeake Landing Windscape Village Management Company AIMCO TGM Associates LOCATION: Address 4101 Chesapeake Drive 896 Benedetti Drive City, State Aurora, IL Naperville, IL County DuPage Dupage Proximity to Subject 7 miles southwest of the subject 3 miles west of the subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 508,124 280,320 Year Built 1986 1986 Effective Age 15 15 Building Structure Type Brick, wood sisding; asphant shingle roof Brick, wood sisding; asphant shingle roof Parking Type (Gr., Cov., etc.) Open, Garages, Car Ports Open Number of Units 310 400 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 Studio 503 40 $ 859 1 1BD/1BH - Plan A 630 64 $ 787 1 1BD/1BH 606 92 $ 879 1 1BD/1BH - Plan B 750 96 $ 829 2 1BD/1BH/Den 841 156 $ 949 1 1BD/1BH - Plan C 750 96 $ 829 3 2BD/1BH 848 72 $ 979 3 2BD/1BH - Plan D 850 24 $ 961 3 2BD/2BH 1,000 240 $1,029 4 2BD/2BH - Plan E 1,050 72 $1,048 Average Unit Size (SF) 847 796 Unit Breakdown: Efficiency 7% 2-Bedroom 52% Efficiency 0% 2-Bedroom 27% 1-Bedroom 41% 3-Bedroom 0% 1-Bedroom 73% 3-Bedroom 0% CONDITION: Good Good APPEAL: Good Good AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage X Vaulted Ceiling X Balcony X X Balcony X X Fireplace X Fireplace X Cable TV Ready X Cable TV Ready Celling Fans Project Amenities X Swimming Pool X Swimming Pool X Spa/Jacuzzi Car Wash X Spa/Jacuzzi Car Wash X Basketball Court BBQ Equipment Basketball Court BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room X Sand Volley Ball Meeting Hall X Sand Volley Ball Meeting Hall X Tennis Court X Secured Parking X Tennis Court Secured Parking X Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track Business Office Jogging Track Business Office X Gym Room X Gym Room OCCUPANCY: 95% 90% LEASING DATA: Available Leasing Terms 6 to 12 Months Variable 6 to 12 Months Variable Concessions $800 off the first month $133 to $200 off first months rent Pet Deposit $300 $400 Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas X Water X Trash X Water Trash Confirmation May 28, 2003 Property Manager May 28, 2003 Property Manager Manager Telephone Number (630)820-0082 (888)831-8599 NOTES: None None COMPARISON TO SUBJECT: Similar Similar ---------------------------------------------------------------------------------------------------------------------- COMPARABLE DESCRIPTION R - 4 ------------------------------------------------------------------------- Property Name Country Lakes Management Company AIMCO LOCATION: Address 1598 Fairway Drive City, State Naperville, IL County DuPage Proximity to Subject 7 miles west of the subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 583,494 Year Built 1984 Effective Age 15 Building Structure Type Brick; asphalt shingle roof Parking Type (Gr., Cov., etc.) Open, Garages Number of Units 640 Unit Mix: Type Unit Qty. Mo. 1 1BD/1BH 714 17 $ 709 1 1BD/1BH 782 72 $ 759 2 1BD/1BH 850 34 $ 789 3 2BD/1BH 920 157 $ 839 3 2BD/2BH 934 288 $ 869 4 2BD/2BH 1,010 72 $ 899 Average Unit Size (SF) 912 Unit Breakdown: Efficiency 0% 2-Bedroom 81% 1-Bedroom 19% 3-Bedroom 0% CONDITION: Good APPEAL: Good AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling X Balcony X Fireplace X X Cable TV Ready Golf Course Views Project Amenities X Swimming Pool Spa/Jacuzzi Car Wash Basketball Court BBQ Equipment Volleyball Court Theater Room Sand Volley Ball Meeting Hall Tennis Court X Secured Parking Racquet Ball Laundry Room Jogging Track Business Office X Gym Room OCCUPANCY: 95% LEASING DATA: Available Leasing Terms 6 to 12 Months, Variable Concessions 1 month free rent Pet Deposit $250 Utilities Paid by Tenant: X Electric X Natural Gas X Water X Trash Confirmation May 28, 2003 Property Manager Telephone Number (630)527-2423 NOTES: COMPARISON TO SUBJECT: Similar
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B LAKESIDE APARTMENTS, LISLE, ILLINOIS PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 COMPARABLE R-3 THE PRESERVE AT CRESS CREEK APARTMENTS CHESAPEAKE LANDING WINDSCAPE VILLAGE 701 Royal Saint George 4101 Chesapeake Drive 896 Benedetti Drive Naperville, IL Aurora, IL Naperville, IL [PICTURE] [PICTURE] [PICTURE] COMPARABLE R-4 COUNTRY LAKES 1598 Fairway Drive Naperville, IL [PICTURE] N/A
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C LAKESIDE APARTMENTS, LISLE, ILLINOIS EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C LAKESIDE APARTMENTS, LISLE, ILLINOIS No responsibility is assumed for matters legal in nature. No investigation has been made of the title to or any liabilities against the property appraised. In this appraisal, it is presumed that, unless otherwise noted, the owner's claim is valid, the property rights are good and marketable, and there are no encumbrances which cannot be cleared through normal processes. To the best of our knowledge, all data set forth in this report are true and accurate. Although gathered from reliable sources, no guarantee is made nor liability assumed for the accuracy of any data, opinions, or estimates identified as being furnished by others which have been used in formulating this analysis. Land areas and descriptions used in this appraisal were obtained from public records and have not been verified by legal counsel or a licensed surveyor. No soil analysis or geological studies were ordered or made in conjunction with this report, nor were any water, oil, gas, or other subsurface mineral and use rights or conditions investigated. Substances such as asbestos, urea-formaldehyde foam insulation, other chemicals, toxic wastes, or other potentially hazardous materials could, if present, adversely affect the value of the property. Unless otherwise stated in this report, the existence of hazardous substance, which may or may not be present on or in the property, was not considered by the appraiser in the development of the conclusion of value. The stated value estimate is predicated on the assumption that there is no material on or in the property that would cause such a loss in value. No responsibility is assumed for any such conditions, and the client has been advised that the appraiser is not qualified to detect such substances, quantify the impact on values, or develop the remedial cost. No environmental impact study has been ordered or made. Full compliance with applicable federal, state, and local environmental regulations and laws is assumed unless otherwise stated, defined, and considered in the report. It is also assumed that all required licenses, consents, or other legislative or administrative authority from any local, state, or national government or private entity organization either have been or can be obtained or renewed for any use which the report covers. AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C LAKESIDE APARTMENTS, LISLE, ILLINOIS It is assumed that all applicable zoning and use regulations and restrictions have been complied with unless a nonconformity has been stated, defined, and considered in the appraisal report. Further, it is assumed that the utilization of the land and improvements is within the boundaries of the property described and that no encroachment or trespass exists unless noted in the report. The Americans with Disabilities Act ("ADA") became effective January 26, 1992. We have not made a specific compliance survey and analysis of this property to determine whether or not it is in conformity with the various detailed requirements of the ADA. It is possible that a compliance survey of the property together with a detailed analysis of the requirements of the ADA could reveal that the property is not in compliance with one or more of the requirements of the act. If so, this fact could have a negative effect on the value of the property. Since we have no direct evidence relating to this issue, we did not consider the possible noncompliance with the or requirements of ADA in estimating the value of the property. We have made a physical inspection of the property and noted visible physical defects, if any, in our report. This inspection was made by individuals generally familiar with real estate and building construction. However, these individuals are not architectural or structural engineers who would have detailed knowledge of building design and structural integrity. Accordingly, we do not opine on, nor are we responsible for, the structural integrity of the property including its conformity to specific governmental code requirements, such as fire, building and safety, earthquake, and occupancy, or any physical defects which were not readily apparent to the appraiser during the inspection. The value or values presented in this report are based upon the premises outlined herein and are valid only for the purpose or purposes stated. The date of value to which the conclusions and opinions expressed apply is set forth in this report. The value opinion herein rendered is based on the status of the national business economy and the purchasing power of the U.S. dollar as of that date. Testimony or attendance in court or at any other hearing is not required by reason of this appraisal unless arrangements are previously made within a reasonable time in advance for AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C LAKESIDE APARTMENTS, LISLE, ILLINOIS such testimony, and then such testimony shall be at American Appraisal Associates, Inc.'s, prevailing per diem for the individuals involved. Possession of this report or any copy thereof does not carry with it the right of publication. No portion of this report (especially any conclusion to use, the identity of the appraiser or the firm with which the appraiser is connected, or any reference to the American Society of Appraisers or the designations awarded by this organization) shall be disseminated to the public through prospectus, advertising, public relations, news, or any other means of communication without the written consent and approval of American Appraisal Associates, Inc. AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT D LAKESIDE APARTMENTS, LISLE, ILLINOIS EXHIBIT D CERTIFICATE OF APPRAISER (1 PAGE) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT D CERTIFICATE OF APPRAISER I certify that, to the best of my knowledge and belief: The statements of fact contained in this report are true and correct. The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and represent the unbiased professional analyses, opinions, and conclusions of American Appraisal Associates, Inc. American Appraisal Associates, Inc. and I personally, have no present or prospective interest in the property that is the subject of this report and have no personal interest or bias with respect to the parties involved. Compensation for American Appraisal Associates, Inc. is not contingent on an action or event resulting from the analyses, opinions, or conclusions in, or the use of, this report. The analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the requirements of the Uniform Standards of Professional Appraisal Practice and the Code of Professional Ethics and the Standards of Professional Practice of the Appraisal Institute. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. I personally did not inspect the subject property. Seamus P. King provided significant real property appraisal assistance in the preparation of this report. I am currently in compliance with the Appraisal Institutes continuing education requirements. -s- Kenneth W. Kapecki ------------------------------------------------ Ken Kapecki, MAI Managing Principal, Real Estate Group Illinois Certified General Real Estate Appraiser #153000331 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E LAKESIDE APARTMENTS, LISLE, ILLINOIS EXHIBIT E QUALIFICATIONS OF APPRAISER (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E LAKESIDE APARTMENTS, LISLE, ILLINOIS KENNETH W. KAPECKI, MAI MANAGING PRINCIPAL, REAL ESTATE GROUP POSITION Kenneth W. Kapecki is the Managing Principal for the Chicago Real Estate Group of American Appraisal Associates, Inc. ("AAA"). EXPERIENCE Valuation Mr. Kapecki has over 17 years of experience in providing valuation services to clients worldwide. He has a diversified background with considerable expertise in the valuation of special-purpose properties, large multilocational holdings, and investment-grade real estate. He has appraised steel mills, chemical plants, food processing facilities, airports, mines, railroad rights-of-way, hotels, and a variety of commercial and manufacturing facilities. Mr. Kapecki's experience further extends to highest and best use studies, feasibility studies, lease valuation analyses, cost segregation analyses, and insurable value analyses. His reports are most frequently prepared for acquisition, ad valorem tax, divestiture, financing, allocation of purchase price, litigation support, and value reporting. Over the years, he has completed appraisals in 50 states representing over $10 billion in value. Mr. Kapecki has developed a core competency in the valuation of hospitality property. He has appraised more than 150 hotels in the last two years alone for financing, acquisition due diligence, cost segregation, and feasibility. These properties consisted of a mixture of limited-service, full-service, and resort hotels located throughout the United States as well as in the Bahamas, Belize, and Guam. AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E LAKESIDE APARTMENTS, LISLE, ILLINOIS Court Mr. Kapecki has testified as an expert witness in state and federal district courts and by deposition statements and interrogatory communications. Business Prior to joining AAA in 2001, Mr. Kapecki was a senior manager in the Chicago Valuation Service Group of Arthur Andersen, where he served as the central regional team leader for real estate staff training, hospitality consulting, and the valuation of real estate. Prior to his employment with Arthur Andersen, Mr. Kapecki served as the manager of real estate valuations for Lloyd-Thomas Coats and Burchard Co. EDUCATION University of Wisconsin - La Crosse Bachelor of Science - Geography STATE CERTIFICATIONS State of Illinois, Certified General Real Estate Appraiser, #153000331 State of Indiana, Certified General Appraiser, #CG49600008 State of Michigan, Certified General Appraiser, #1201003145 State of Wisconsin, Certified General Appraiser and Licensed Appraiser, #641 PROFESSIONAL Appraisal Institute, MAI Designated Member AFFILIATIONS Chicago Chapter, Admissions Committee Member, 1997 - Present AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E LAKESIDE APARTMENTS, LISLE, ILLINOIS VALUATION AND Appraisal Institute SPECIAL COURSES Appraisal Principles Case Studies in Real Estate Valuation Fair Lending and the Appraiser Highest & Best Use and Market Analysis Income Capitalization, Parts A and B Litigation Support: The Appraiser as an Expert Witness Partial Interest Valuation Real Estate Disclosure Report Writing Standards of Professional Practice Valuation of Detrimental Conditions Valuation Theory and Techniques Arthur Andersen, Course Developer Income Capitalization Theory and Techniques Introduction to the Cost Approach Property Inspection and Market Data Collection AMERICAN APPRAISAL ASSOCIATES, INC. LAKESIDE APARTMENTS, LISLE, ILLINOIS GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. LAKESIDE APARTMENTS, LISLE, ILLINOIS GENERAL SERVICE CONDITIONS The services(s) provided by AAA will be performed in accordance with professional appraisal standards. Our compensation is not contingent in any way upon our conclusions of value. We assume, without independent verification, the accuracy of all data provided to us. We will act as an independent contractor and reserve the right to use subcontractors. All files, workpapers or documents developed by us during the course of the engagement will be our property. We will retain this data for at least five years. Our report is to be used only for the specific purpose stated herein; and any other use is invalid. No reliance may be made by any third party without our prior written consent. You may show our report in its entirety to those third parties who need to review the information contained herein. No one should rely on our report as a substitute for their own due diligence. We understand that our reports will be described in public tender offer documents distributed to limited partners. We reserve the right to review the public tender offer documents prior to their issuance to confirm that disclosures of facts from the current appraisals are accurate. No reference to our name or our report, in whole or in part, in any other SEC filing or private placement memorandum you prepare and/or distribute to third parties may be made without our prior written consent. The Tender Offer Partnerships, as that term is defined in the Settlement Agreement, agree to indemnify and hold us harmless against and from any and all losses, claims, actions, damages, expenses or liabilities, including reasonable attorneys' fees, to which we may become subject in connection with this engagement except where such losses, claims, actions, damages, expenses or liabilities, including reasonable attorney's fees, arise or result duct, bad faith or negligence. Co-Clients will not be liable for any of our acts or omissions. AAA is an equal opportunity employer.