EX-99.(C)(1) 3 d07244a2exv99wxcyx1y.txt APPRAISAL OF LAKESIDE PLACE LAKESIDE PLACE 201 & 301 WILCREST HOUSTON, TEXAS MARKET VALUE - FEE SIMPLE ESTATE AS OF MAY 13, 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] JULY 14,2003 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 PLACE 201 & 301 WILCREST HOUSTON, HARRIS COUNTY, TEXAS 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 734 units with a total of 780,229 square feet of rentable area. The improvements were built in 1977. The improvements are situated on 32.372 acres. Overall, the improvements are in average condition. As of the date of this appraisal, the subject property is 90% 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 PLACE, HOUSTON, TEXAS 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 13, 2003 is: ($35,000,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. -s- Frank Fehribach --------------------------- July 14, 2003 Frank Fehribach, MAI #053272 Managing Principal, Real Estate Group Texas State Certified General Real Estate Appraiser #TX-1323954-G Report By: Tiffany B. Roberts Texas Appraiser Trainee #TX-1329671-T AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 LAKESIDE PLACE, HOUSTON, TEXAS TABLE OF CONTENTS Cover Letter of Transmittal Table of Contents APPRAISAL DATA Executive Summary ............................................... 4 Introduction .................................................... 10 Area Analysis ................................................... 12 Market Analysis ................................................. 15 Site Analysis ................................................... 17 Improvement Analysis ............................................ 17 Highest and Best Use ............................................ 18 VALUATION Valuation Procedure ............................................. 19 Sales Comparison Approach ....................................... 21 Income Capitalization Approach .................................. 27 Reconciliation and Conclusion ................................... 39
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 PLACE, HOUSTON, TEXAS EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Lakeside Place LOCATION: 201 & 301 Wilcrest Houston, Texas 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 13, 2003 DATE OF REPORT: July 14, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 32.372 acres, or 1,410,124 square feet Assessor Parcel No.: 045-138-001-0045; 045-138-001-0057; 045-138-001-0056 Floodplain: Community Panel No. 48201C0640J (November 6, 1996) Flood Zone AE, X, an area inside the floodplain. Zoning: None BUILDING: No. of Units: 734 Units Total NRA: 780,229 Square Feet Average Unit Size: 1,063 Square Feet Apartment Density: 22.7 units per acre Year Built: 1977 UNIT MIX AND MARKET RENT: AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 LAKESIDE PLACE, HOUSTON, TEXAS GROSS RENTAL INCOME PROJECTION
MARKET RENT ------------------- UNIT TYPE NUMBER OF UNITS SQUARE FEET PER UNIT PER SF MONTHLY INCOME ANNUAL INCOME ------------------ --------------- ----------- -------- --------- -------------- ------------- 1A10 - Dogwood 21 545 $ 537 $0.99 $ 11,277 $ 135,324 1B10 - Boxwood 64 724 $ 600 $0.83 $ 38,400 $ 460,800 1C10 - Pinewood II 32 796 $ 610 $0.77 $ 19,520 $ 234,240 1D10 - Pinewood 84 813 $ 589 $0.72 $ 49,476 $ 593,712 1E10 - Elmwood 84 891 $ 645 $0.72 $ 54,180 $ 650,160 1F10 - Teakwood 60 981 $ 714 $0.73 $ 42,840 $ 514,080 1G10 - Tallowood 84 992 $ 725 $0.73 $ 60,900 $ 730,800 2A20 - Maplewood 101 1,224 $ 872 $0.71 $ 88,072 $1,056,864 2A25 - Hazelwood 28 1,530 $1,036 $0.68 $ 29,008 $ 348,096 2B20 - Briarwood 104 1,253 $ 894 $0.71 $ 92,976 $1,115,712 3A20 - Cypresswood 36 1,400 $1,020 $0.73 $ 36,720 $ 440,640 3A25 - Redwood 36 1,791 $1,150 $0.64 $ 41,400 $ 496,800 -------------------------- Totals $564,769 $6,777,228 --------------------------
OCCUPANCY: 90% ECONOMIC LIFE: 45 Years EFFECTIVE AGE: 26 Years REMAINING ECONOMIC LIFE: 19 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] SUBJECT SIGNAGE EXTERIOR - APARTMENT BUILDING AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 LAKESIDE PLACE, HOUSTON, TEXAS AREA MAP [MAP] NEIGHBORHOOD MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 7 LAKESIDE PLACE, HOUSTON, TEXAS 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 8 LAKESIDE PLACE, HOUSTON, TEXAS PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
DIRECT CAPITALIZATION Amount $/Unit --------------------- ------ ------ Potential Rental Income $ 6,777,228 $9,233 Effective Gross Income $ 6,633,367 $9,037 Operating Expenses $ 2,775,615 $3,781 41.8% of EGI Net Operating Income: $ 3,600,853 $4,906 Capitalization Rate 10.00% DIRECT CAPITALIZATION VALUE $35,200,000 * $47,956 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 9% Stabilized Vacancy & Collection Loss: 9% Lease-up / Stabilization Period N/A Terminal Capitalization Rate 11.00% Discount Rate 12.50% Selling Costs 3.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $35,900,000 * $48,910 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $35,500,000 $48,365 / UNIT
SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $37,076 to $49,134 Range of Sales $/Unit (Adjusted) $47,690 to $56,504 VALUE INDICATION - PRICE PER UNIT $35,200,000 * $47,956 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 5.07 to 6.46 Selected EGIM for Subject 5.25 Subject's Projected EGI $6,633,367 EGIM ANALYSIS CONCLUSION $34,100,000 * $46,458 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $34,500,000 * $47,003 / UNIT RECONCILED SALES COMPARISON VALUE $34,500,000 $47,003 / 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 9 LAKESIDE PLACE, HOUSTON, TEXAS PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $ 35,200,000 NOI Per Unit $ 34,500,000 EGIM Multiplier $ 34,100,000 INDICATED VALUE BY SALES COMPARISON $ 34,500,000 $47,003 / UNIT INCOME APPROACH: Direct Capitalization Method: $ 35,200,000 Discounted Cash Flow Method: $ 35,900,000 INDICATED VALUE BY THE INCOME APPROACH $ 35,500,000 $48,365 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $ 35,000,000 $47,684 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 10 LAKESIDE PLACE, HOUSTON, TEXAS INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 201 & 301 Wilcrest, Houston, Harris County, Texas. Houston identifies it as 045-138-001-0045; 045-138-001-0057; 045-138-001-0056. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by Tiffany B. Roberts on May 13, 2003. Frank Fehribach, MAI has not made a personal inspection of the subject property. Tiffany B. Roberts performed the research, valuation analysis and wrote the report. Frank Fehribach, MAI reviewed the report and concurs with the value. Frank Fehribach, MAI and Tiffany B. Roberts 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 13, 2003. The date of the report is July 14, 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 11 LAKESIDE PLACE, HOUSTON, TEXAS 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 CPF XV. 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 12 LAKESIDE PLACE, HOUSTON, TEXAS 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 Houston, Texas. Overall, the neighborhood is characterized as a suburban setting with the predominant land use being office/commercial. The subject's neighborhood is generally defined by the following boundaries. NEIGHBORHOOD BOUNDARIES East - Beltway 8 West - South Dairy Ashford South - Westheimer North - Interstate Highway 10 MAJOR EMPLOYERS Major employers in the subject's area include Chevron Texaco, the Houston Community College System, Harris County, and Houston Independent Schools. The overall economic outlook for the area is considered very 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 13 LAKESIDE PLACE, HOUSTON, TEXAS NEIGHBORHOOD DEMOGRAPHICS
AREA ---------------------------------------------- CATEGORY 1-Mi. RADIUS 3-Mi. RADIUS 5-Mi. RADIUS MSA --------------------------- ------------ ------------ ------------ --------- POPULATION TRENDS Current Population 15,633 136,421 350,651 4,331,861 5-Year Population 16,694 144,560 375,893 4,734,261 % Change CY-5Y 6.8% 6.0% 7.2% 9.3% Annual Change CY-5Y 1.4% 1.2% 1.4% 1.9% HOUSEHOLDS Current Households 6,878 61,182 143,924 1,511,658 5-Year Projected Households 7,327 64,761 152,557 1,636,192 % Change CY - 5Y 6.5% 5.8% 6.0% 8.2% Annual Change CY-5Y 1.3% 1.2% 1.2% 1.6% INCOME TRENDS Median Household Income $69,565 $54,694 $41,677 $44,047 Per Capita Income $41,789 $35,175 $28,714 $22,629 Average Household Income $95,769 $78,413 $70,072 $64,844
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 40.29% 51.08% 52.06% 35.39% 5-Year Projected % Renting 42.88% 52.31% 52.17% 34.24% % of Households Owning 47.76% 38.67% 36.45% 53.61% 5-Year Projected % Owning 46.01% 37.88% 36.82% 55.41%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 14 LAKESIDE PLACE, HOUSTON, TEXAS SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Single family South - Residential, townhomes East - Residential West - Lakewood Country Club, townhomes CONCLUSIONS The subject is well located within the city of Houston. The neighborhood is characterized as being mostly suburban in nature and is currently in the stable stage of development. The economic outlook for the neighborhood is judged to be very favorable with a good economic base. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 15 LAKESIDE PLACE, HOUSTON, TEXAS MARKET ANALYSIS The subject property is located in the city of Houston in Harris County. The overall pace of development in the subject's market is more or less stable. Any new construction added to the subject's market will not compete directly with the subject. A new class A community has been constructed south of the subject property along Hayes Road however due to the quality, this property is not expected to compete with the subject property. The following table illustrates historical vacancy rates for the subject's market. HISTORICAL VACANCY RATE
Period Region Submarket ------ ------ ---------- 4Q01 N/A 3.8% 1Q02 N/A 4.4% 2Q02 N/A 4.7% 3Q02 N/A 4.3% 4Q02 7.1% 5.8% 1Q03 8.1% 7.2%
Source: REIS Houston, Apartment: Briar Forest / Ashford - 1st Quarter 2003 SubTrend Futures Occupancy trends in the subject's market are decreasing. Historically speaking, the subject's submarket has outperformed the overall market. Historically, the subject's submarket, when compared to the Houston Metro area, has usually enjoyed a lower vacancy rate. The subject was constructed in 1977. The communities constructed between 1970 and 1979 have an average vacancy rate of 7.1% within the 1st Quarter 2003. The overall vacancy of the submarket is not expected to improve significantly until 2007. Market rents in the subject's market have been following an increasing trend. The following table illustrates historical rental rates for the subject's market. HISTORICAL AVERAGE RENT
Period Region % Change Submarket % Change ------ ------ -------- --------- -------- 4Q01 N/A - $709 - 1Q02 N/A N/A $714 0.7% 2Q02 N/A N/A $723 1.3% 3Q02 N/A N/A $733 1.4% 4Q02 N/A N/A $735 0.3% 1Q03 N/A N/A $743 1.1%
Source: REIS Houston, Apartment: Briar Forest / Ashford - 1st Quarter 2003 SubTrend Futures The following table illustrates a summary of the subject's competitive set. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 16 LAKESIDE PLACE, HOUSTON, TEXAS COMPETITIVE PROPERTIES
No. Property Name Units Ocpy. Year Built Proximity to subject ------ -------------------- ----- ------- ---------- -------------------- R-1 Westchase Ranch 296 93-94% 1979 1 mile south R-2 La Mirage Resort 312 89% 1968 1 mile south R-3 The Park at Lakeside 256 0% 1986, 2001 1 mile south R-4 Waters at Kirkwood 256 95% 1980 1 mile south Subject Lakeside Place 734 90% 1977
According to information obtained by REIS, the current average asking rent within the subject's submarket is $743. The submarket's average effective rent is currently $698 and is expected to continually improve through 2007. The subject's 1970 - 1979 category has an average asking rental rate of $685. This is $58 less than the average for the submarket. In terms of annual rental growth rates, the Briar Forest / Ashford submarket has had similar growth when compared to the Houston Metro area. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 17 LAKESIDE PLACE, HOUSTON, TEXAS PROPERTY DESCRIPTION SITE ANALYSIS Site Area 32.372 acres, or 1,410,124 square feet Shape Irregular Topography Level Utilities All necessary utilities are available to the site. Soil Conditions Stable Easements Affecting Site None other than typical utility easements Overall Site Appeal Good Flood Zone: Community Panel 48201C0640J, dated November 6, 1996 Flood Zone Zone AE, X Zoning Not available, 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 ----------------- ---------- ----------- ----------- --------- --------- 045-138-001- 0045; 045-138- 001-0057; 045- $4,935,470 $18,919,530 $23,855,000 0.02963 $706,729 138-001-0056
IMPROVEMENT ANALYSIS Year Built 1977 Number of Units 734 Net Rentable Area 780,229 Square Feet Construction: Foundation Reinforced concrete slab 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, sand volleyball, barbeque equipment, laundry room, business office, trash valet, playground, and secured parking. Unit Amenities Individual unit amenities include a balcony, fireplace, cable TV connection, vaulted ceiling, and washer dryer AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 18 LAKESIDE PLACE, HOUSTON, TEXAS connection. Appliances available in each unit include a refrigerator, stove, dishwasher, garbage disposal, washer/dryer, and oven. Unit Mix:
UNIT TYPE NUMBER OF UNITS SQUARE FEET ------------------ --------------- ----------- 1A10 - Dogwood 21 545 1B10 - Boxwood 64 724 1C10 - Pinewood II 32 796 1D10 - Pinewood 84 813 1E10 - Elmwood 84 891 1F10 - Teakwood 60 981 1G10 - Tallowood 84 992 2A20 - Maplewood 101 1,224 2A25 - Hazelwood 28 1,530 2B20 - Briarwood 104 1,253 3A20 - Cypresswood 36 1,400 3A25 - Redwood 36 1,791
Overall Condition Average Effective Age 26 years Economic Life 45 years Remaining Economic Life 19 years Deferred Maintenance The deferred maintenance at the subject property was estimated for a total amount of $190,000. 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 1977 and consist of a 734-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 19 LAKESIDE PLACE, HOUSTON, TEXAS 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 20 LAKESIDE PLACE, HOUSTON, TEXAS 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 21 LAKESIDE PLACE, HOUSTON, TEXAS 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 22 LAKESIDE PLACE, HOUSTON, TEXAS SUMMARY OF COMPARABLE SALES -IMPROVED
COMPARABLE DESCRIPTION SUBJECT I - 1 --------------------------------- --------------------------------- ---------------------------- Property Name Lakeside Place The Wallingford LOCATION: Address 201 & 301 Wilcrest 2750 Wallingford City, State Houston, Texas Houston, Texas County Harris Harris PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 780,229 363,748 Year Built 1977 1980 Number of Units 734 462 Unit Mix: Type Total Type Total 1A10 - Dogwood 21 Efficiency 48 1B10 - Boxwood 64 1 BR 246 1C10 - Pinewood II 32 2 BR 148 1D10 - Pinewood 84 3 BR 20 1E10 - Elmwood 84 1F10 - Teakwood 60 1G10 - Tallowood 84 2A20 - Maplewood 101 2A25 - Hazelwood 28 2B20 - Briarwood 104 3A20 - Cypresswood 36 3A25 - Redwood 36 Average Unit Size (SF) 1,063 787 Land Area (Acre) 32.3720 14.8200 Density (Units/Acre) 22.7 31.2 Parking Ratio (Spaces/Unit) 1.47 N/A Parking Type (Gr., Cov., etc.) Garage, Open, Covered Open CONDITION: Average Average APPEAL: Average Average AMENITIES: Pool/Spa Yes/No Yes/No Gym Room No Yes Laundry Room Yes Yes Secured Parking Yes Yes Sport Courts No Yes Washer/Dryer Connection Yes Yes BBQ Equipment Yes No Business Center Yes Yes OCCUPANCY: 90% 95% TRANSACTION DATA: Sale Date December, 2002 Sale Price ($) $22,700,000 Grantor Camden Property Trust Grantee Alliance FQ Ltd. Sale Documentation ###-##-#### Verification REVAC Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Potential Gross Income $ 0 $ 0 $0.00 Vacancy/Credit Loss $ 0 $ 0 $0.00 Effective Gross Income $3,515,816 $7,610 $9.67 Operating Expenses $1,735,650 $3,757 $4.77 Net Operating Income $1,780,166 $3,853 $4.89 NOTES: The income information is the pro-forma provided by Revac. PRICE PER UNIT $49,134 PRICE PER SQUARE FOOT $ 62.41 EXPENSE RATIO 49.4% EGIM 6.46 OVERALL CAP RATE 7.84% Cap Rate based on Pro Forma or Actual Income? PRO FORMA COMPARABLE DESCRIPTION I - 2 --------------------------------- --------------------------------- Property Name The Mills Apartments LOCATION: Address 10225 Bissonnet City, State Houston, Texas County Harris PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 613,680 Near Built 1979 Number of Units 708 Unit Mix: Type Total 1Br/1Ba 420 2Br/2Ba 288 Average Unit Size (SF) 867 Land Area (Acre) 24.1230 Density (Units/Acre) 29.3 Parking Ratio (Spaces/Unit) 1.24 Parking Type (Gr., Cov., etc.) Open CONDITION: Average APPEAL: Good AMENITIES: Pool/Spa Yes/Yes Gym Room Yes Laundry Room Yes Secured Parking Yes Sport Courts No Washer/Dryer Connection Yes BBQ Equipment No Business Center Yes OCCUPANCY: 93% TRANSACTION DATA: Sale Date February, 2003 Sale Price ($) $26,250,000 Grantor Winston Capital Grantee Lynch Investments Sale Documentation W426196 Verification Cliff Mc Daniel Telephone Number 713.599.1800 ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Potential Gross Income $5,262,141 $7,432 $8.57 Vacancy/Credit Loss $ 666,713 $ 942 $1.09 Effective Gross Income $4,595,428 $6,491 $7.49 Operating Expenses $2,174,358 $3,071 $3.54 Net Operating Income $2,421,070 $3,420 $3.95 NOTES: This property was under contract for awhile before the final sale. PRICE PER UNIT $37,076 PRICE PER SQUARE FOOT $ 42.77 EXPENSE RATIO 47.3% EGIM 5.71 OVERALL CAP RATE 9.22% Cap Rate based on Pro Forma or Actual Income? PRO FORM COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 --------------------------------- --------------------------- ---------------------------- Property Name Madison at Westchase Celebration at Westchase LOCATION: Address 9801 Meadowglen Lane 10936-10940 Meadowglen Lane City, State Houston, Texas Houston, Texas County Harris Harris PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 483,848 305,609 Year Built 1978 1980 Number of Units 576 367 Unit Mix: Type Total Type Total 1Br/1Ba N/A 1Br/1Ba 271 2Br/2Ba N/A 2Br/2Ba 96 3Br/2Ba N/A Average Unit Size (SF) 840 833 Land Area (Acre) 23.6000 12.6500 Density (Units/Acre) 24.4 29.0 Parking Ratio (Spaces/Unit) N/A N/A Parking Type (Gr., Cov., etc.) Open, Covered Open CONDITION: Average Average APPEAL: Average Average AMENITIES: Pool/Spa Yes/Yes Yes/Yes Gym Room Yes Yes Laundry Room Yes Yes Secured Parking Yes Yes Sport Courts Yes No Washer/Dryer Connection Yes Yes BBQ Equipment No No Business Center No No OCCUPANCY: Unavailable 89% TRANSACTION DATA: Sale Date January, 2001 July, 2002 Sale Price ($) $23,500,000 $16,150,000 Grantor SSR Apartment Value Fund LP EQR-SWN Line Vistas, Inc. Grantee Cypress Club Investors LP Celebration at Westchase Apartments LP Sale Documentation U853160 V971933 Verification CompsInc. CompsInc. Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $ 0 $ 0 $0.00 $ 0 $ 0 $0.00 Vacancy/Credit Loss $ 0 $ 0 $0.00 $ 0 $ 0 $0.00 Effective Gross Income $4,631,040 $8,040 $9.57 $ 0 $ 0 $0.00 Operating Expenses $1,935,392 $3,360 $4.00 $ 0 $ 0 $0.00 Net Operating Income $2,695,648 $4,680 $5.57 $1,295,230 $3,529 $4.24 NOTES: PRICE PER UNIT $40,799 $44,005 PRICE PER SQUARE FOOT $ 48.57 $ 52.85 EXPENSE RATIO 41.8% N/A EGIM 5.07 N/A OVERALL CAP RATE 11.47% 8.02% Cap Rate based on Pro Forma or Actual Income? PRO FORMA ACTUAL COMPARABLE DESCRIPTION I - 5 --------------------------------- ------------------------------- Property Name Water Song Apartments LOCATION: Address 11770 Westheimer Road City, State Houston, Texas County Harris PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 206,916 Year Built 1978 Number of Units 272 Unit Mix: Type Total 1Br/1Ba 52 2Br/2Ba 158 3Br/2Ba 62 Average Unit Size (SF) 761 Land Area (Acre) 8.7900 Density (Units/Acre) 30.9 Parking Ratio (Spaces/Unit) N/A Parking Type (Gr., Cov., etc.) Open, Covered CONDITION: Average APPEAL: Average AMENITIES: Pool/Spa Yes/Yes Gym Room No Laundry Room No Secured Parking Yes Sport Courts No Washer/Dryer Connection Yes BBQ Equipment No Business Center No OCCUPANCY: 94% TRANSACTION DATA: Sale Date January, 2003 Sale Price ($) $10,295,000 Grantor Treehouse Equities LP Grantee Waso Apartments Ltd. Sale Documentation W364854 Verification CompsInc. Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Potential Gross Income $1,986,120 $ 7,302 $9.60 Vacancy/Credit Loss $ 119,167 $ 438 $0.58 Effective Gross Income $1,866,953 $ 6,864 $9.02 Operating Expenses $ 940,304 $ 3,457 $4.54 Net Operating Income $ 926,649 $ 3,407 $4.48 NOTES: According to CompsInc., the buyer was to spend $1,875,000 for remodel/ reab cost. PRICE PER UNIT $37,849 PRICE PER SQUARE FOOT $ 49.75 EXPENSE RATIO 50.4% EGIM 5.51 OVERALL CAP RATE 9.00% Cap Rate based on Pro Forma or Actual Income? ACTUAL
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 LAKESIDE PLACE, HOUSTON, TEXAS IMPROVED SALES MAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $37,076 to $49,134 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 $47,690 to $56,504 per unit with a mean or average adjusted price of $50,392 per unit. The median adjusted price is $48,958 per unit. Based on the following analysis, we have concluded to a value of $49,000 per unit, which results in an "as is" value of $35,200,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 24 LAKESIDE PLACE, HOUSTON, TEXAS SALES ADJUSTMENT GRID
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 ---------------------------------- ------------------ ------------------------------ --------------------------- Property Name Lakeside Place The Wallingford The Mills Apartments Address 201 & 301 Wilcrest 2750 Wallingford 10225 Bissonnet City Houston, Texas Houston, Texas Houston, Texas Sale Date December, 2002 February, 2003 Sale Price ($) $22,700,000 $26,250,000 Net Rentable Area (SF) 780,229 363,748 613,680 Number of Units 734 462 708 Price Per Unit $49,134 $37,076 Year Built 1977 1980 1979 Land Area (Acre) 32.3720 14.8200 24.1230 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 12-2002 0% 02-2003 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $49,134 $37,076 Location Comparable 0% Inferior 5% Number of Units 734 462 -5% 708 0% Quality / Appeal Average Inferior 5% Inferior 10% Age / Condition 1977 1980 / Average 0% 1979 / Average 5% Occupancy at Sale 90% 95% -5% 93% -5% Amenities Good Comparable 0% Comparable 0% Average Unit Size (SF) 1,063 787 20% 867 15% PHYSICAL ADJUSTMENT 15% 30% FINAL ADJUSTED VALUE ($/UNIT) $56,504 $48,199 COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 ---------------------------------- --------------------------- ---------------------------- Property Name Madison at Westchase Celebration at Westchase Address 9801 Meadowglen Lane 10936-10940 Meadowglen Lane City Houston, Texas Houston, Texas Sale Date January, 2001 July, 2002 Sale Price ($) $23,500,000 $16,150,000 Net Rentable Area (SF) 483,848 305,609 Number of Units 576 367 Price Per Unit $40,799 $44,005 Year Built 1978 1980 Land Area (Acre) 23.6000 12.6500 VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 01-2001 0% 07-2002 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $40,799 $44,005 Location Inferior 5% Inferior 5% Number of Units 576 -5% 367 -10% Quality / Appeal Inferior 10% Inferior 5% Age / Condition 1978 / Average 0% 1980 / Average 0% Occupancy at Sale Unavailable 0% 89% 0% Amenities Superior -5% Comparable 0% Average Unit Size (SF) 840 15% 833 15% PHYSICAL ADJUSTMENT 20% 15% FINAL ADJUSTED VALUE ($/UNIT) $48,958 $50,606 COMPARABLE DESCRIPTION I - 5 ---------------------------------- ----------------------------- Property Name Water Song Apartments Address 11770 Westheimer Road City Houston, Texas Sale Date January, 2003 Sale Price ($) $10,295,000 Net Rentable Area (SF) 206,916 Number of Units 272 Price Per Unit $37,849 Year Built 1978 Land Area (Acre) 8.7900 VALUE ADJUSTMENTS DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate 0% Financing Cash To Seller 0% Conditions of Sale Deferred Maintenance 20% Date of Sale (Time) 01-2003 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $45,419 Location Comparable 0% Number of Units 272 -10% Quality / Appeal Comparable 0% Age / Condition 1978 / Average 0% Occupancy at Sale 94% -5% Amenities Comparable 0% Average Unit Size (SF) 761 20% PHYSICAL ADJUSTMENT 5% FINAL ADJUSTED VALUE ($/UNIT) $47,690
SUMMARY VALUE RANGE (PER UNIT) $ 47,690 TO $ 56,504 MEAN (PER UNIT) $ 50,392 MEDIAN (PER UNIT) $ 48,958 VALUE CONCLUSION (PER UNIT) $ 49,000
VALUE OF IMPROVEMENT & MAIN SITE $35,966,000 DEFERRED MAINTENANCE -$ 190,000 PV OF CONCESSIONS -$ 584,000 VALUE INDICATED BY SALES COMPARISON APPROACH $35,192,000 ROUNDED $35,200,000
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 25 LAKESIDE PLACE, HOUSTON, TEXAS 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-1 462 $22,700,000 7.84% $1,780,166 $3,600,853 1.273 $62,557 $ 49,134 $ 3,853 $ 4,906 I-2 708 $26,250,000 9.22% $2,421,070 $3,600,853 1.435 $53,190 $ 37,076 $ 3,420 $ 4,906 I-3 576 $23,500,000 11.47% $2,695,648 $3,600,853 1.048 $42,768 $ 40,799 $ 4,680 $ 4,906 I-4 367 $16,150,000 8.02% $1,295,230 $3,600,853 1.390 $61,170 $ 44,005 $ 3,529 $ 4,906 I-5 272 $10,295,000 9.00% $ 926,649 $3,600,853 1.440 $54,503 $ 37,849 $ 3,407 $ 4,906
PRICE/UNIT
Low High Average Median $42,768 $62,557 $54,837 $54,503
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT
Estimated Price Per Unit $ 48,000 Number of Units 734 Value $35,232,000 Deferred Maintenance -$ 190,000 PV of Concessions -$ 584,000 ----------- Value Based on NOI Analysis $34,458,000 Rounded $34,500,000
The adjusted sales indicate a range of value between $42,768 and $62,557 per unit, with an average of $54,837 per unit. Based on the subject's competitive position within the improved sales, a value of $48,000 per unit is estimated. This indicates an "as is" market value of $34,500,000 (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 26 LAKESIDE PLACE, HOUSTON, TEXAS 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-1 462 $22,700,000 $3,515,816 $1,735,650 49.37% 6.46 $ 49,134 I-2 708 $26,250,000 $4,595,428 $2,174,358 47.32% 5.71 $ 37,076 I-3 576 $23,500,000 $4,631,040 $1,935,392 41.79% 5.07 $ 40,799 41.84% I-4 367 $16,150,000 $ 44,005 I-5 272 $10,295,000 $1,866,953 $ 940,304 50.37% 5.51 $ 37,849
EGIM
Low High Average Median 5.07 6.46 5.69 5.61
VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES Estimate EGIM 5.25 Subject EGI $ 6,633,367 Value $34,825,179 Deferred Maintenance -$ 190,000 PV of Concessions -$ 584,000 ----------- Value Based on EGIM Analysis $34,051,179 Rounded $34,100,000 Value Per Unit $ 46,458
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 41.84% before reserves. The comparable sales indicate a range of expense ratios from 41.79% to 50.37%, while their EGIMs range from 5.07 to 6.46. Overall, we conclude to an EGIM of 5.25, which results in an "as is" value estimate in the EGIM Analysis of $34,100,000. 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 $34,500,000. Price Per Unit $35,200,000 NOI Per Unit $34,500,000 EGIM Analysis $34,100,000 Sales Comparison Conclusion $34,500,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 27 LAKESIDE PLACE, HOUSTON, TEXAS 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 28 LAKESIDE PLACE, HOUSTON, TEXAS 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 TYPE SQUARE FEET PER UNIT PER SF % OCCUPIED ------------------ ----------- -------- -------- ------------- 1A10 - Dogwood 545 $ 544 $1.00 95.2% 1B10 - Boxwood 724 $ 595 $0.82 85.9% 1C10 - Pinewood II 796 $ 610 $0.77 90.6% 1D10 - Pinewood 813 $ 604 $0.74 90.5% 1E10 - Elmwood 891 $ 641 $0.72 90.5% 1F10 - Teakwood 981 $ 661 $0.67 91.7% 1G10 - Tallowood 992 $ 695 $0.70 91.7% 2A20 - Maplewood 1,224 $ 832 $0.68 83.2% 2A25 - Hazelwood 1,530 $1,013 $0.66 89.3% 2B20 - Briarwood 1,253 $ 846 $0.68 92.3% 3A20 - Cypresswood 1,400 $1,007 $0.72 97.2% 3A25 - Redwood 1,791 $1,148 $0.64 86.1%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 29 LAKESIDE PLACE, HOUSTON, TEXAS RENT ANALYSIS
COMPARABLE RENTS --------------------------------------------- R-1 R-2 R-3 R-4 --------------------------------------------- Westchase La Mirage The Park at Waters at Ranch Resort Lakeside Kirkwood --------------------------------------------- COMPARISON TO SUBJECT SUBJECT SUBJECT --------------------------------------------- SUBJECT UNIT ACTUAL ASKING Slightly DESCRIPTION TYPE RENT RENT Superior Superior Superior Superior ------------------------ ----------------- ------- -------- --------- --------- ----------- --------- Monthly Rent 1A10 - DOGWOOD $ 544 $ 544 $ 445 $ 510 $ 485 Unit Area (SF) 545 545 475 584 509 Monthly Rent Per Sq. Ft. $ 1.00 $ 1.00 $ 0.94 $ 0.87 $ 0.95 Monthly Rent 1B10 - BOXWOOD $ 595 $ 639 $ 505 $ 555 $ 569 $ 550 Unit Area (SF) 724 724 690 639 660 684 Monthly Rent Per Sq. Ft. $ 0.82 $ 0.88 $ 0.73 $ 0.87 $ 0.86 $ 0.80 Monthly Rent 1C10 - PINEWOOD $ 610 $ 669 $ 635 Unit Area (SF) II 796 796 782 Monthly Rent Per Sq. Ft. $ 0.77 $ 0.84 $ 0.81 Monthly Rent 1D10 - PINEWOOD $ 604 $ 594 $ 525 $ 635 Unit Area (SF) 813 813 730 758 Monthly Rent Per Sq. Ft. $ 0.74 $ 0.73 $ 0.72 $ 0.84 Monthly Rent 1E10 - ELMWOOD $ 641 $ 699 $ 625 Unit Area (SF) 891 891 900 Monthly Rent Per Sq. Ft. $ 0.72 $ 0.78 $ 0.69 Monthly Rent 1F10 - $ 661 $ 724 $ 705 $ 744 Unit Area (SF) TEAKWOOD 981 981 890 1,025 Monthly Rent Per Sq. Ft. $ 0.67 $ 0.74 $ 0.79 $ 0.73 Monthly Rent 1G10 - $ 695 $ 739 $ 702 Unit Area (SF) TALLOWOOD 992 992 845 Monthly Rent Per Sq. Ft. $ 0.70 $ 0.74 $ 0.83 Monthly Rent 2A20 - $ 832 $ 904 $ 775 $ 655 Unit Area (SF) MAPLEWOOD 1,224 1,224 994 880 Monthly Rent Per Sq. Ft. $ 0.68 $ 0.74 $ 0.78 $ 0.74 Monthly Rent 2A25 - $ 1,013 $ 1,054 Unit Area (SF) HAZELWOOD 1,530 1,530 Monthly Rent Per Sq. Ft. $ 0.66 $ 0.69 Monthly Rent 2B20 - $ 846 $ 924 $ 765 $ 768 Unit Area (SF) BRIARWOOD 1,253 1,253 1,040 1,026 Monthly Rent Per Sq. Ft. $ 0.68 $ 0.74 $ 0.74 $ 0.75 Monthly Rent 3A20 - $ 1,007 $ 1,074 $ 830 $ 910 $ 830 Unit Area (SF) CYPRESSWOOD 1,400 1,400 1,150 1,250 1,025 Monthly Rent Per Sq. Ft. $ 0.72 4 0.77 $ 0.72 $ 0.73 $ 0.81 Monthly Rent 3A25 - REDWOOD $ 1,148 $ 1,339 $ 914 Unit Area (SF) 1,791 1,791 1,308 Monthly Rent Per Sq. Ft. $ 0.64 $ 0.75 $ 0.70 DESCRIPTION MIN MAX MEDIAN AVERAGE ------------------------ ------ ------ ------- --------- Monthly Rent $ 445 $ 510 $ 485 $ 480 Unit Area (SF) 475 584 509 523 Monthly Rent Per Sq. Ft. $ 0.87 $ 0.95 $ 0.94 $ 0.92 Monthly Rent $ 505 $ 569 $ 553 $ 545 Unit Area (SF) 639 690 672 668 Monthly Rent Per Sq. Ft. $ 0.73 $ 0.87 $ 0.83 $ 0.82 Monthly Rent $ 635 $ 635 $ 635 $ 635 Unit Area (SF) 782 782 782 782 Monthly Rent Per Sq. Ft. $ 0.81 $ 0.81 $ 0.81 $ 0.81 Monthly Rent $ 525 $ 635 $ 580 $ 580 Unit Area (SF) 730 758 744 744 Monthly Rent Per Sq. Ft. $ 0.72 $ 0.84 $ 0.78 $ 0.78 Monthly Rent $ 625 $ 625 $ 625 $ 625 Unit Area (SF) 900 900 900 900 Monthly Rent Per Sq. Ft. $ 0.69 $ 0.69 $ 0.69 $ 0.69 Monthly Rent $ 705 $ 744 $ 725 $ 725 Unit Area (SF) 890 1,025 957 957 Monthly Rent Per Sq. Ft. $ 0.73 $ 0.79 $ 0.76 $ 0.76 Monthly Rent $ 702 $ 702 $ 702 $ 702 Unit Area (SF) 845 845 845 845 Monthly Rent Per Sq. Ft. $ 0.83 $ 0.83 $ 0.83 $ 0.83 Monthly Rent $ 655 $ 775 $ 715 $ 715 Unit Area (SF) 880 994 937 937 Monthly Rent Per Sq. Ft. $ 0.74 $ 0.78 $ 0.76 $ 0.76 Monthly Rent Unit Area (SF) Monthly Rent Per Sq. Ft. Monthly Rent $ 765 $ 768 $ 767 $ 767 Unit Area (SF) 1,026 1,040 1,033 1,033 Monthly Rent Per Sq. Ft. $ 0.74 $ 0.75 $ 0.74 $ 0.74 Monthly Rent $ 830 $ 910 $ 830 $ 857 Unit Area (SF) 1,025 1,250 1,150 1,142 Monthly Rent Per Sq. Ft. $ 0.72 $ 0.81 $ 0.73 $ 0.75 Monthly Rent $ 914 $ 914 $ 914 $ 914 Unit Area (SF) 1,308 1,308 1,308 1,308 Monthly Rent Per Sq. Ft. $ 0.70 $ 0.70 $ 0.70 $ 0.70
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: AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 30 LAKESIDE PLACE, HOUSTON, TEXAS GROSS RENTAL INCOME PROJECTION
MARKET RENT ------------------- UNIT TYPE NUMBER OF UNITS SQUARE FEET PER UNIT PER SF MONTHLY INCOME ANNUAL INCOME ------------------ --------------- ----------- -------- ------- -------------- -------------- 1A10 - Dogwood 21 545 $ 537 $0.99 $ 11,277 $ 135,324 1B10 - Boxwood 64 724 $ 600 $0.83 $ 38,400 $ 460,800 1C10 - Pinewood II 32 796 $ 610 $0.77 $ 19,520 $ 234,240 1D10 - Pinewood 84 813 $ 589 $0.72 $ 49,476 $ 593,712 1E10 - Elmwood 84 891 $ 645 $0.72 $ 54,180 $ 650,160 1F10 - Teakwood 60 981 $ 714 $0.73 $ 42,840 $ 514,080 1G10 - Tallowood 84 992 $ 725 $0.73 $ 60,900 $ 730,800 2A20 - Maplewood 101 1,224 $ 872 $0.71 $ 88,072 $1,056,864 2A25 - Hazelwood 28 1,530 $1,036 $0.68 $ 29,008 $ 348,096 2B20 - Briarwood 104 1,253 $ 894 $0.71 $ 92,976 $1,115,712 3A20 - Cypresswood 36 1,400 $1,020 $0.73 $ 36,720 $ 440,640 3A25 - Redwood 36 1,791 $1,150 $0.64 $ 41,400 $ 496,800 ---------- ---------- Totals $ 564,769 $6,777,228 ---------- ----------
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 31 LAKESIDE PLACE, HOUSTON, TEXAS 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 $ 6,441,577 $ 8,776 $ 6,561,251 $ 8,939 $ 6,670,002 $ 9,087 Vacancy $ 511,322 $ 697 $ 429,932 $ 586 $ 429,001 $ 584 Credit Loss/Concessions $ 153,564 $ 209 $ 103,802 $ 141 $ 171,081 $ 233 --------------------------------------------------------------------------------------- Subtotal $ 664,886 $ 906 $ 533,734 $ 727 $ 600,082 $ 818 Laundry Income $ 13,573 $ 18 $ 10,965 $ 15 $ 12,312 $ 17 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 231,925 $ 316 $ 346,474 $ 472 $ 468,156 $ 638 --------------------------------------------------------------------------------------- Subtotal Other Income $ 245,498 $ 334 $ 357,439 $ 487 $ 480,468 $ 655 --------------------------------------------------------------------------------------- Effective Gross Income $ 6,022,189 $ 8,205 $ 6,384,956 $ 8,699 $ 6,550,388 $ 8,924 Operating Expenses Taxes $ 683,946 $ 932 $ 693,726 $ 945 $ 719,920 $ 981 Insurance $ 86,604 $ 118 $ 142,099 $ 194 $ 218,350 $ 297 Utilities $ 463,694 $ 632 $ 511,369 $ 697 $ 415,880 $ 567 Repair & Maintenance $ 269,983 $ 368 $ 239,254 $ 326 $ 190,663 $ 260 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 92,241 $ 126 $ 105,422 $ 144 $ 102,330 $ 139 Security $ 9,780 $ 13 $ 10,406 $ 14 $ 9,730 $ 13 Marketing & Leasing $ 156,702 $ 213 $ 122,580 $ 167 $ 91,703 $ 125 General Administrative $ 538,112 $ 733 $ 581,939 $ 793 $ 596,636 $ 813 Management $ 306,022 $ 417 $ 318,406 $ 434 $ 324,865 $ 443 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 --------------------------------------------------------------------------------------- Total Operating Expenses $ 2,607,084 $ 3,552 $ 2,725,201 $ 3,713 $ 2,670,077 $ 3,638 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 --------------------------------------------------------------------------------------- Net Income $ 3,415,105 $ 4,653 $ 3,659,755 $ 4,986 $ 3,880,311 $ 5,287 ---------------------------------------------------------------------------------------
FISCAL YEAR 2003 ANNUALIZED 2003 --------------------------------------------------------- MANAGEMENT BUDGET PROJECTION --------------------------------------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT ------------------------------------------------------------------------------------------------- Revenues Rental Income $ 6,819,898 $ 9,291 $ 6,681,132 $ 9,102 Vacancy $ 386,520 $ 527 $ 817,640 $ 1,114 Credit Loss/Concessions $ 140,400 $ 191 $ 164,468 $ 224 --------------------------------------------------------- Subtotal $ 526,920 $ 718 $ 982,108 $ 1,338 Laundry Income $ 35,724 $ 49 $ 16,892 $ 23 Garage Revenue $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 445,344 $ 607 $ 361,552 $ 493 --------------------------------------------------------- Subtotal Other Income $ 481,068 $ 655 $ 378,444 $ 516 --------------------------------------------------------- Effective Gross Income $ 6,774,046 $ 9,229 $ 6,077,468 $ 8,280 Operating Expenses Taxes $ 731,927 $ 997 $ 733,704 $ 1,000 Insurance $ 247,645 $ 337 $ 245,332 $ 334 Utilities $ 408,000 $ 556 $ 371,760 $ 506 Repair & Maintenance $ 216,120 $ 294 $ 172,312 $ 235 Cleaning $ 0 $ 0 $ 0 $ 0 Landscaping $ 168,000 $ 229 $ 118,636 $ 162 Security $ 0 $ 0 $ 10,988 $ 15 Marketing & Leasing $ 101,340 $ 138 $ 73,504 $ 100 General Administrative $ 594,991 $ 811 $ 620,768 $ 846 Management $ 342,911 $ 467 $ 310,000 $ 422 Miscellaneous $ 0 $ 0 $ 0 $ 0 --------------------------------------------------------- Total Operating Expenses $ 2,810,934 $ 3,830 $ 2,657,004 $ 3,620 Reserves $ 0 $ 0 $ 0 $ 0 --------------------------------------------------------- Net Income $ 3,963,112 $ 5,399 $ 3,420,464 $ 4,660 --------------------------------------------------------- AAA PROJECTION ----------------------------------------- DESCRIPTION TOTAL PER UNIT % --------------------------------------------------------------------------------- Revenues Rental Income $ 6,681,132 $ 9,233 100.0% Vacancy $ 474,406 $ 646 7.0% Credit Loss/Concessions $ 131,545 $ 185 2.0% ----------------------------------------- Subtotal $ 609,951 $ 831 9.0% Laundry Income $ 18,350 $ 25 0.3% Garage Revenue $ 0 $ 0 0.0% Other Misc. Revenue $ 447,740 $ 610 6.6% ----------------------------------------- Subtotal Other Income $ 466,090 $ 635 6.9% ----------------------------------------- Effective Gross Income $ 6,633,367 $ 9,037 100.0% Operating Expenses Taxes $ 789,050 $ 1,075 11.9% Insurance $ 249,560 $ 340 3.8% Utilities $ 411,040 $ 560 6.2% Repair & Maintenance $ 220,200 $ 300 3.3% Cleaning $ 0 $ 0 0.0% Landscaping $ 128,450 $ 175 1.9% Security $ 11,010 $ 15 0.2% Marketing & Leasing $ 102,760 $ 140 1.5% General Administrative $ 598,210 $ 815 9.0% Management $ 265,335 $ 361 4.0% Miscellaneous $ 0 $ 0 0.0% ----------------------------------------- Total Operating Expenses $ 2,775,615 $ 3,781 41.8% Reserves $ 256,900 $ 350 9.3% ----------------------------------------- Net Income $ 3,600,853 $ 4,906 54.3% -----------------------------------------
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 9% based on the subject's historical performance, as well as the anticipated future market conditions. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 32 LAKESIDE PLACE, HOUSTON, TEXAS 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 $350 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 some major items remaining in need of repair or replacement that would require an expense beyond our reserves for replacement. Therefore an additional $190,000 has been deducted. 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 33 LAKESIDE PLACE, HOUSTON, TEXAS SUMMARY OF OVERALL CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR --------- --------- ----------- ---------- ------- I-1 Dec-02 95% $49,134 7.84% I-2 Feb-03 93% $37,076 9.22% I-3 Jan-01 Unavailable $40,799 11.47% I-4 Jul-02 89% $44,005 8.02% I-5 Jan-03 94% $37,849 9.00% High 11.47% Low 7.84% Average 9.11%
Based on this information, we have concluded the subject's overall capitalization rate should be 10.00%. 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 11.00%. 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 12.50%. 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 3.00% of the sale amount is applied. DISCOUNTED CASH FLOW CONCLUSION Discounting the annual cash flows and the equity reversion at the selected rate of 12.50% indicates a value of $35,900,000. In this instance, the reversion figure contributes approximately 37% of the total value. Investors surveyed for this assignment indicated they AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 34 LAKESIDE PLACE, HOUSTON, TEXAS 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 CAPITALIZATION APPROACH PAGE 35 LAKESIDE PLACE, HOUSTON, TEXAS DISCOUNTED CASH FLOW ANALYSIS LAKESIDE PLACE
YEAR APR-2004 APR-2005 APR-2006 APR-2007 FISCAL YEAR 1 2 3 4 ----------------------------------------------------------------------------------------------------------------- REVENUE Base Rent $ 6,777,228 $ 6,980,545 $ 7,189,961 $ 7,405,660 Vacancy $ 474,406 $ 488,638 $ 503,297 $ 518,396 Credit Loss $ 135,545 $ 139,611 $ 143,799 $ 148,113 Concessions $ 367,100 $ 139,611 $ 143,799 $ 74,057 ------------------------------------------------------------ Subtotal $ 977,050 $ 767,860 $ 790,896 $ 740,566 Laundry Income $ 18,350 $ 18,901 $ 19,468 $ 20,052 Garage Revenue $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 447,740 $ 461,172 $ 475,007 $ 489,258 ------------------------------------------------------------ Subtotal Other Income $ 466,090 $ 480,073 $ 494,475 $ 509,309 ------------------------------------------------------------ EFFECTIVE GROSS INCOME $ 6,266,268 $ 6,692,758 $ 6,893,540 $ 7,174,403 OPERATING EXPENSES: Taxes $ 789,050 $ 812,722 $ 837,103 $ 862,216 Insurance $ 249,560 $ 257,047 $ 264,758 $ 272,701 Utilities $ 411,040 $ 423,371 $ 436,072 $ 449,155 Repair & Maintenance $ 220,200 $ 226,806 $ 233,610 $ 240,618 Cleaning $ 0 $ 0 $ 0 $ 0 Landscaping $ 128,450 $ 132,304 $ 136,273 $ 140,361 Security $ 11,010 $ 11,340 $ 11,681 $ 12,031 Marketing & Leasing $ 102,760 $ 105,843 $ 109,018 $ 112,289 General Administrative $ 598,210 $ 616,156 $ 634,641 $ 653,680 Management $ 250,651 $ 267,710 $ 275,742 $ 286,976 Miscellaneous $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------ TOTAL OPERATING EXPENSES $ 2,760,931 $ 2,853,299 $ 2,938,898 $ 3,030,027 Reserves $ 256,900 $ 264,607 $ 272,545 $ 280,722 ------------------------------------------------------------ NET OPERATING INCOME $ 3,248,437 $ 3,574,852 $ 3,682,097 $ 3,863,655 Operating Expense Ratio (% of EGI) 44.1% 42.6% 42.6% 42.2% Operating Expense Per Unit $ 3,761 $ 3,887 $ 4,004 $ 4,128
YEAR APR-2008 APR-2009 APR-2010 APR-2011 APR-2012 FISCAL YEAR 5 6 7 8 9 --------------------------------------------------------------------------------------------------------------------------------- REVENUE Base Rent $ 7,627,830 $ 7,856,665 $ 8,092,365 $ 8,335,136 $ 8,585,190 Vacancy $ 533,948 $ 549,967 $ 566,466 $ 583,459 $ 600,963 Credit Loss $ 152,557 $ 157,133 $ 161,847 $ 166,703 $ 171,704 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 ---------------------------------------------------------------------------- Subtotal $ 686,505 $ 707,100 $ 728,313 $ 750,162 $ 772,667 Laundry Income $ 20,653 $ 21,273 $ 21,911 $ 22,568 $ 23,245 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 503,935 $ 519,053 $ 534,625 $ 550,664 $ 567,184 ---------------------------------------------------------------------------- Subtotal Other Income $ 524,588 $ 540,326 $ 556,536 $ 573,232 $ 590,429 ---------------------------------------------------------------------------- EFFECTIVE GROSS INCOME $ 7,465,914 $ 7,689,891 $ 7,920,588 $ 8,158,205 $ 8,402,951 OPERATING EXPENSES: Taxes $ 888,083 $ 914,725 $ 942,167 $ 970,432 $ 999,545 Insurance $ 280,882 $ 289,308 $ 297,988 $ 306,927 $ 316,135 Utilities $ 462,629 $ 476,508 $ 490,803 $ 505,527 $ 520,693 Repair & Maintenance $ 247,837 $ 255,272 $ 262,930 $ 270,818 $ 278,943 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 144,572 $ 148,909 $ 153,376 $ 157,977 $ 162,717 Security $ 12,392 $ 12,764 $ 13,147 $ 13,541 $ 13,947 Marketing & Leasing $ 115,657 $ 119,127 $ 122,701 $ 126,382 $ 130,173 General Administrative $ 673,291 $ 693,489 $ 714,294 $ 735,723 $ 757,795 Management $ 298,637 $ 307,596 $ 316,824 $ 326,328 $ 336,118 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 ---------------------------------------------------------------------------- TOTAL OPERATING EXPENSES $ 3,123,979 $ 3,217,698 $ 3,314,229 $ 3,413,656 $ 3,516,066 Reserves $ 289,143 $ 297,818 $ 306,752 $ 315,955 $ 325,433 ---------------------------------------------------------------------------- NET OPERATING INCOME $ 4,052,792 $ 4,174,375 $ 4,299,607 $ 4,428,595 $ 4,561,453 Operating Expense Ratio (% of EGI) 41.8% 41.8% 41.8% 41.8% 41.8% Operating Expense Per Unit $ 4,256 $ 4,384 $ 4,515 $ 4,651 $ 4,790
YEAR APR-2013 APR-2014 FISCAL YEAR 10 11 --------------------------------------------------------------------------------- REVENUE Base Rent $ 8,842,745 $ 9,108,028 Vacancy $ 618,992 $ 637,562 Credit Loss $ 176,855 $ 182,161 Concessions $ 0 $ 0 ---------------------------- Subtotal $ 795,847 $ 819,722 Laundry Income $ 23,943 $ 24,661 Garage Revenue $ 0 $ 0 Other Misc. Revenue $ 584,199 $ 601,725 ---------------------------- Subtotal Other Income $ 608,142 $ 626,386 ---------------------------- EFFECTIVE GROSS INCOME $ 8,655,040 $ 8,914,691 OPERATING EXPENSES: Taxes $ 1,029,531 $ 1,060,417 Insurance $ 325,619 $ 335,388 Utilities $ 536,314 $ 552,403 Repair & Maintenance $ 287,311 $ 295,930 Cleaning $ 0 $ 0 Landscaping $ 167,598 $ 172,626 Security $ 14,366 $ 14,797 Marketing & Leasing $ 134,078 $ 138,101 General Administrative $ 780,528 $ 803,944 Management $ 346,202 $ 356,588 Miscellaneous $ 0 $ 0 ---------------------------- TOTAL OPERATING EXPENSES $ 3,621,548 $ 3,730,194 Reserves $ 335,196 $ 345,252 ---------------------------- NET OPERATING INCOME $ 4,698,296 $ 4,839,245 Operating Expense Ratio (% of EGI) 41.8% 41.8% Operating Expense Per Unit $ 4,934 $ 5,082
Estimated Stabilized NOI $3,600,853 Sales Expense Rate 3.00% Months to Stabilized 1 Discount Rate 12.50% Stabilized Occupancy 93.0% Terminal Cap Rate 11.00%
Gross Residual Sale Price $43,993,137 Deferred Maintenance -$ 190,000 Less: Sales Expense $ 1,319,794 Add: Excess Land $ 0 ----------- Net Residual Sale Price $42,673,343 Other Adjustments $ 0 ------------ PV of Reversion $13,141,091 Value Indicated By "DCF" $ 35,932,358 Add: NPV of NOI $22,981,266 Rounded $ 35,900,000 ----------- PV Total $36,122,358
"DCF" VALUE SENSITIVITY TABLE
TOTAL VALUE DISCOUNT RATE --------------- ------------------------------------------------------------------- 12.00% 12.25% 12.50% 12.75% 13.00% 10.50% $37,917,340 $37,326,462 $36,748,124 $36,182,015 $35,627,836 TERMINAL 10.75% $37,582,597 $36,999,100 $36,427,964 $35,868,884 $35,321,564 CAP RATE 11.00% $37,263,069 $36,686,619 $36,122,358 $35,569,987 $35,029,213 11.25% $36,957,743 $36,388,025 $35,830,333 $35,284,373 $34,749,856 11.50% $36,665,692 $36,102,413 $35,551,006 $35,011,178 $34,482,645
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 36 LAKESIDE PLACE, HOUSTON, TEXAS INCOME LOSS DURING LEASE-UP The subject is currently near or at a stabilized condition. Therefore, there is no income loss during lease-up at the subject property. 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 $584,000 (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. After considering the market transactions and the investor surveys, we previously conclude that an overall rate of 10.00% percent is applicable to the subject. The results of our direct capitalization analysis are as follows: AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 37 LAKESIDE PLACE, HOUSTON, TEXAS LAKESIDE PLACE
TOTAL PER SQ. FT. PER UNIT %OF EGI ----------- ----------- -------- ------- REVENUE Base Rent $ 6,777,228 $ 8.69 $ 9,233 Less: Vacancy & Collection Loss 9.00% $ 609,951 $ 0.78 $ 831 Plus: Other Income Laundry Income $ 18,350 $ 0.02 $ 25 0.28% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 447,740 $ 0.57 $ 610 6.75% ----------- ----------- -------- ------- Subtotal Other Income $ 466,090 $ 0.60 $ 635 7.03% EFFECTIVE GROSS INCOME $ 6,633,367 $ 8.50 $ 9,037 OPERATING EXPENSES: Taxes $ 789,050 $ 1.01 $ 1,075 11.90% Insurance $ 249,560 $ 0.32 $ 340 3.76% Utilities $ 411,040 $ 0.53 $ 560 6.20% Repair & Maintenance $ 220,200 $ 0.28 $ 300 3.32% Cleaning $ 0 $ 0.00 $ 0 0.00% Landscaping $ 128,450 $ 0.16 $ 175 1.94% Security $ 11,010 $ 0.01 $ 15 0.17% Marketing & Leasing $ 102,760 $ 0.13 $ 140 1.55% General Administrative $ 598,210 $ 0.77 $ 815 9.02% Management 4.00% $ 265,335 $ 0.34 $ 361 4.00% Miscellaneous $ 0 $ 0.00 $ 0 0.00% TOTAL OPERATING EXPENSES $ 2,775,615 $ 3.56 $ 3,781 41.84% Reserves $ 256,900 $ 0.33 $ 350 3.87% ----------- ----------- -------- ------- NET OPERATING INCOME $ 3,600,853 $ 4.62 $ 4,906 54.28% "GOING IN" CAPITALIZATION RATE 10.00% VALUE INDICATION $36,008,528 $ 46.15 $ 49,058 DEFERRED MAINTENANCE ($ 190,000) PV OF CONCESSIONS ($ 584,000) "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $35,234,528 ROUNDED $35,200,000 $ 45.11 $ 47,956
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 38 LAKESIDE PLACE, HOUSTON, TEXAS DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF -------- ----------- ----------- ------- --------- 9.25% $38,154,138 $38,200,000 $52,044 $48.96 9.50% $37,129,713 $37,100,000 $50,545 $47.55 9.75% $36,157,823 $36,200,000 $49,319 $46.40 10.00% $35,234,528 $35,200,000 $47,956 $45.11 10.25% $34,356,271 $34,400,000 $46,866 $44.09 10.50% $33,519,836 $33,500,000 $45,640 $42.94 10.75% $32,722,305 $32,700,000 $44,550 $41.91
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $35,200,000. 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 $35,900,000 Direct Capitalization Method $35,200,000
Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $35,500,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 39 LAKESIDE PLACE, HOUSTON, TEXAS 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 $34,500,000 Income Approach $35,500,000 Reconciled Value $35,000,000
The Income 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 13, 2003 the market value of the fee simple estate in the property is: $35,000,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA LAKESIDE PLACE, HOUSTON, TEXAS ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A LAKESIDE PLACE, HOUSTON, TEXAS EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A LAKESIDE PLACE, HOUSTON, TEXAS SUBJECT PHOTOGRAPHS [SUBJECT SIGNAGE PICTURE] [EXTERIOR - APARTMENT BUILDING PICTURE] [EXTERIOR - APARTMENT BUILDING PICTURE] [EXTERIOR - APARTMENT BUILDING PICTURE] [SUBJECT PROPERTY POOL PICTURE] [TYPICAL LAUNDRY BUILDING PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A LAKESIDE PLACE, HOUSTON, TEXAS SUBJECT PHOTOGRAPHS [LAUNDRY ROOM PICTURE] [TYPICAL UNIT BREAKFAST AREA PICTURE] [TYPICAL UNIT BEDROOM FINISH PICTURE] [TYPICAL UNIT LIVING ROOM PICTURE] [TYPICAL UNIT KITCHEN PICTURE] [EXTERIOR BUILDING PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B LAKESIDE PLACE, HOUSTON, TEXAS EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B LAKESIDE PLACE, HOUSTON, TEXAS PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 COMPARABLE I-2 COMPARABLE I-3 THE WALLINGFORD THE MILLS APARTMENTS MADISON AT WESTCHASE 2750 Wallingford 10225 Bissonnet 9801 Meadowglen Lane Houston, Texas Houston, Texas Houston, Texas [PICTURE] [PICTURE] [PICTURE] COMPARABLE I-4 COMPARABLE I-5 CELEBRATION AT WESTCHASE WATER SONG APARTMENTS 10936-10940 Meadowglen Lane 11770 Westheimer Road Houston, Texas Houston, Texas [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B LAKESIDE PLACE, HOUSTON, TEXAS SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE DESCRIPTION SUBJECT R - 1 ---------------------------------- --------------------------------------------- --------------------------------------------- Property Name Lakeside Place Westchase Ranch Management Company AIMCO Alliance Management LOCATION: Address 201 & 301 Wilcrest 2101 Hayes Road City, State Houston, Texas Houston, Texas County Harris Harris Proximity to Subject 1 mile south PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 780,229 226,312 Year Built 1977 1979 Effective Age 26 24 Building Structure Type Brick, siding Brick, siding Parking Type (Gr., Cov., etc.) Open, Covered, Garage Open Number of Units 734 296 Unit Mix: Type Unit Qty. Mo. Rent Type Unit Qty. Mo. 1 1A10 - Dogwood 545 21 $ 544 A 380 $435 2 1B10 - Boxwood 724 64 $ 595 1 B 475 $445 3 1C10 - Pinewood II 796 32 $ 610 2 C 690 $505 4 1D10 - Pinewood 813 84 $ 604 4 D 730 $525 5 1E10 - Elmwood 891 84 $ 641 5 E 900 $625 6 1F10 - Teakwood 981 60 $ 661 10 F 1,040 $765 7 1G10 - Tallowood 992 84 $ 695 11 G 1,150 $830 8 2A20 - Maplewood 1,224 101 $ 832 9 2A25 - Hazelwood 1,530 28 $1,013 10 2B20 - Briarwood 1,253 104 $ 846 11 3A20 - Cypresswood 1,400 36 $1,007 12 3A25 - Redwood 1,791 36 $1,148 Average Unit Size (SF) 1,063 Unit Breakdown: Efficiency 3% 2-Bedroom 32% Efficiency UNK 2-Bedroom UNK 1-Bedroom 55% 3-Bedroom 10% 1-Bedroom UNK 3-Bedroom UNK CONDITION: Average Average APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage X Vaulted Ceiling Attach. Garage X Vaulted Ceiling X Balcony X W/D Connect. X Balcony X W/D Connect. X Fireplace X Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool Spa/Jacuzzi Car Wash X Spa/Jacuzzi Car Wash Basketball Court X 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 Tennis Court X Secured Parking X Tennis Court X Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track X Business Office Jogging Track Business Office Gym Room X Trash valet X Gym Room Trash valet X Playground Playground OCCUPANCY: 90% 93-94% LEASING DATA: Available Leasing Terms 6 through 12 7, 13 month Concessions One month free on select floor plans, $99 1 month free on 13 month lease, 2 weeks free deposit, $25 7 Pet Deposit $300 with $150 non-refundable $300 with $150 non-refundable Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas X Water X Trash X Water X Trash Confirmation Michelle Dennis Telephone Number 713.780.7040 713.977.6081 NOTES: COMPARISON TO SUBJECT: Slightly Superior
COMPARABLE COMPARABLE DESCRIPTION R - 2 R - 3 ---------------------------------- --------------------------------------------- ------------------------------------------ Property Name La Mirage Resort The Park at Lakeside Management Company SR Management Pinnacle Management Company LOCATION: Address 10925 Briar Forest Drive 10950 Briar Forest Drive City, State Houston, Texas Houston, Texas County Harris Harris Proximity to Subject 1 mile south 1 mile south PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 241,896 267,776 Year Built 1968 1986, 2001 Effective Age 35 17 Building Structure Type Brick, siding Brick, siding Parking Type (Gr., Cov., etc.) Open, covered Open, covered Number of Units 312 256 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 A 584 80 $510 2 A 660 $569 2 B 639 64 $555 6 B 951 $699 4 C 758 20 $635 6 B-1 1,098 $789 3 D 782 24 $635 12 C 1,237 $889 7 E 845 32 $702 12 C-1 1,378 $939 6 F 890 24 $705 D 1,357 $975 8 G 994 24 $775 10 H 1,026 20 $768 11 J 1,250 24 $910 Average Unit Size (SF) 783 Unit Breakdown: Efficiency 0% 2-Bedroom 32% Efficiency UNK 2-Bedroom UNK 1-Bedroom 60% 3-Bedroom 8% 1-Bedroom UNK 3-Bedroom UNK CONDITION: Average Slightly Superior APPEAL: Average Slightly Superior AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony W/D Connect. X Balcony X W/D Connect. X Fireplace Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool Spa/Jacuzzi Car Wash X Spa/Jacuzzi Car Wash Basketball Court BBQ Equipment Basketball Court X BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room Sand Volley Ball Meeting Hall Sand Volley Ball Meeting Hall Tennis Court X Secured Parking Tennis Court X Secured Parking Racquet Ball X Laundry Room X Racquet Ball X Laundry Room X Jogging Track Business Office Jogging Track Business Office X Gym Room X Trash valet X Gym Room Trash valet Playground Playground OCCUPANCY: 89% LEASING DATA: Available Leasing Terms 6, 12 month 6 through 13 months Concessions 1 month free on 13 month lease on 1 bedrooms $99.00 move in special which includes 1st month Pet Deposit $400 with $200 non-refundable $400 with $200 non-refundable Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas X Water Trash X Water Trash Confirmation On site leasing agent On site leasing agent Telephone Number 713.783.9273 713.784.6391 NOTES: COMPARISON TO SUBJECT: Superior Superior
COMPARABLE DESCRIPTION R - 4 ---------------------------------- ---------------------------------------------- Property Name Waters at Kirkwood Management Company RCA Management Company LOCATION: Address 11710 Briar Forest Drive City, State Houston, Texas County Harris Proximity to Subject 1 mile south PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 168,768 Year Built 1980 Effective Age 23 Building Structure Type Brick, siding Parking Type (Gr., Cov., etc.) Open Number of Units 256 Unit Mix: Type Unit Qty. Mo. 1 A 456 40 $455 1 B 554 48 $510 2 C 684 64 $550 8 D 880 88 $655 11 E 1,025 16 $830 Average Unit Size (SF) 713 Unit Breakdown: Efficiency 0% 2-Bedroom 39% 1-Bedroom 54% 3-Bedroom 7% CONDITION: Slightly Superior APPEAL: Good AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Balcony X W/D Connect. Fireplace X Cable TV Ready Project Amenities X Swimming Pool X Spa/Jacuzzi Car Wash Basketball Court X BBQ Equipment Volleyball Court Theater Room Sand Volley Ball Meeting Hall Tennis Court X Secured Parking Racquet Ball X Laundry Room Jogging Track Business Office X Gym Room X Trash valet Playground OCCUPANCY: 95% LEASING DATA: Available Leasing Terms 6 and 12 months Concessions 2 months free Pet Deposit $350 with $150 non-refundable Utilities Paid by Tenant: X Electric Natural Gas X Water Trash Confirmation On site leasing agent Telephone Number 281.496.2283 NOTES: COMPARISON TO SUBJECT: Superior
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B LAKESIDE PLACE, HOUSTON, TEXAS PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 COMPARABLE R-3 WESTCHASE RANCH LA MIRAGE RESORT THE PARK AT LAKESIDE 2101 Hayes Road 10925 Briar Forest Drive 10950 Briar Forest Drive Houston, Texas Houston, Texas Houston, Texas [PICTURE] [PICTURE] [PICTURE] COMPARABLE R-4 WATERS AT KIRKWOOD 11710 Briar Forest Drive Houston, Texas [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C LAKESIDE PLACE, HOUSTON, TEXAS EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C LAKESIDE PLACE, HOUSTON, TEXAS 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 PLACE, HOUSTON, TEXAS 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 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 PLACE, HOUSTON, TEXAS 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 Appraisal Institute 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 PLACE, HOUSTON, TEXAS 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. Tiffany B. Roberts provided significant real property appraisal assistance in the preparation of this report. I am currently in compliance with the Appraisal Institute's continuing education requirements. -s- Frank Fehribach -------------------- Frank Fehribach, MAI Managing Principal, Real Estate Group Texas State Certified General Real Estate Appraiser #1323954-G AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E LAKESIDE PLACE, HOUSTON, TEXAS EXHIBIT E QUALIFICATIONS OF APPRAISER (2 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E LAKESIDE PLACE, HOUSTON, TEXAS FRANK A. FEHRIBACH, MAI MANAGING PRINCIPAL, REAL ESTATE GROUP POSITION Frank A. Fehribach is a Managing Principal for the Dallas Real Estate Group of American Appraisal Associates, Inc. ("AAA"). EXPERIENCE Valuation Mr. Fehribach has experience in valuations for resort hotels; Class A office buildings; Class A multifamily complexes; industrial buildings and distribution warehousing; multitract mixed-use vacant land; regional malls; residential subdivision development; and special-purpose properties such as athletic clubs, golf courses, manufacturing facilities, nursing homes, and medical buildings. Consulting assignments include development and feasibility studies, economic model creation and maintenance, and market studies. Mr. Fehribach also has been involved in overseeing appraisal and consulting assignments in Mexico and South America. Business Mr. Fehribach joined AAA as an engagement director in 1998. He was promoted to his current position in 1999. Prior to that, he was a manager at Arthur Andersen LLP. Mr. Fehribach has been in the business of real estate appraisal for over ten years. EDUCATION University of Texas - Arlington Master of Science - Real Estate University of Dallas Master of Business Administration - Industrial Management Bachelor of Arts - Economics STATE State of Arizona CERTIFICATIONS Certified General Real Estate Appraiser, #30828 State of Arkansas State Certified General Appraiser, #CG1387N State of Colorado Certified General Appraiser, #CG40000445 State of Georgia Certified General Real Property Appraiser, #218487 State of Michigan Certified General Appraiser, #1201008081 State of Texas Real Estate Salesman License, #407158 (Inactive) State of Texas State Certified General Real Estate Appraiser, #TX-1323954-G AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E LAKESIDE PLACE, HOUSTON, TEXAS PROFESSIONAL Appraisal Institute, MAI Designated Member Candidate AFFILIATIONS Member of the CCIM Institute pursuing Certified Commercial Investment Member (CCIM) designation PUBLICATIONS "An Analysis of the Determinants of Industrial Property Co-authored with Dr. Ronald C. Rutherford and Dr. Mark Eakin, The Journal of Real Estate Research, Vol. 8, No. 3, Summer 1993, p. 365. AMERICAN APPRAISAL ASSOCIATES, INC. LAKESIDE PLACE, HOUSTON, TEXAS GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. LAKESIDE PLACE, HOUSTON, TEXAS 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 from AAA's misconduct, bad faith or negligence. Co-Clients will not be liable for any of our acts or omissions. AAA is an equal opportunity employer.