EX-99.(C)(9) 14 d07253exv99wxcyx9y.txt APPRAISAL OF STERLING APARTMENT HOMES STERLING APARTMENT HOMES & STERLING COMMERCE CENTER 1815 JOHN F. KENNEDY BOULEVARD PHILADELPHIA, PENNSYLVANIA 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 21, 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: STERLING APARTMENT HOMES & STERLING COMMERCE CENTER 1815 JOHN F. KENNEDY BOULEVARD PHILADELPHIA, PHILADELPHIA COUNTY, PENNSYLVANIA 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 536 units with a total of 486,553 square feet of rentable area. The attached commerce center contains 109,992 square feet of retail and office space. The improvements were built in 1960. The improvements are situated on 0.89091 acres. Overall, the improvements are in good condition. As of the date of this appraisal, the subject property is 91% occupied and the commerce center is approximately 54% 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. AMERICAN APPRAISAL ASSOCIATES, INC. LETTER OF TRANSMITTAL PAGE 2 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA 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. 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: ($68,700,000) This value is allocated between the two uses as follows: Sterling Apartment Homes: $65,500,000 Sterling Commerce Center: $ 3,200,000 Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. -s- Frank Fehribach ------------------- July 21, 2003 Frank Fehribach, MAI #053272 Managing Principal, Real Estate Group State of Pennsylvania Certified General Appraiser #GA003334 Report By: Richard Mupo AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA TABLE OF CONTENTS Cover Letter of Transmittal Table of Contents APPRAISAL DATA Executive Summary ......................................................... 4 Introduction .............................................................. 11 Area Analysis ............................................................. 13 Market Analysis ........................................................... 16 Site Analysis ............................................................. 18 Improvement Analysis ...................................................... 18 Highest and Best Use ...................................................... 19 VALUATION Valuation Procedure ....................................................... 20 Sales Comparison Approach ................................................. 22 Income Capitalization Approach ............................................ 28 Reconciliation and Conclusion ............................................. 48 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 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Sterling Apartment Homes&Sterling Commerce Center LOCATION: 1815 John F. Kennedy Boulevard Philadelphia, Pennsylvania 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 21, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 0.89091 acres, or 38,808 square feet Assessor Parcel No.: 881035000 Floodplain: Community Panel No. #420757-183F (August 2, 1996) Flood Zone X, an area outside the floodplain. Zoning: C5 (Multi-Story Office District) BUILDING: Apartments: No. of Units: 536 Units Total NRA: 486,553 Square Feet Average Unit Size: 908 Square Feet Apartment Density: 601.6 units per acre Year Built: 1960 Commerce Center: Office Area: 85,970 Square Feet Retail Area: 24,022 Square Feet Total Area: 109,992 Square Feet AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA UNIT MIX AND MARKET RENT: GROSS RENTAL INCOME PROJECTION
Market Rent Square ---------------- Monthly Annual Unit Type Feet Per Unit Per SF Income Income --------- ------ -------- ------ -------- ---------- EA10 412 $ 899 $ 2.18 $ 28,768 $ 345,216 EB10 495 $ 949 $ 1.92 $130,013 $1,560,156 1A10 550 $ 1,149 $ 2.09 $ 55,152 $ 661,824 1B10 803 $ 1,379 $ 1.72 $140,658 $1,687,896 1C10 920 $ 1,509 $ 1.64 $ 31,689 $ 380,268 2A20 1,315 $ 1,759 $ 1.34 $218,116 $2,617,392 2B20 1,425 $ 2,109 $ 1.48 $ 67,488 $ 809,856 2C20 1,794 $ 2,449 $ 1.37 $ 12,245 $ 146,940 3A20 1,631 $ 2,229 $ 1.37 $ 53,496 $ 641,952 3B20 1,778 $ 2,359 $ 1.33 $ 18,872 $ 226,464 3C20 2,215 $ 2,499 $ 1.13 $ 4,998 $ 59,976 4A30 2,500 $ 2,459 $ 0.98 $ 2,459 $ 29,508 -------- ---------- Total $763,954 $9,167,448
OCCUPANCY: APARTMENTS: 91% COMMERCE CENTER: 69% (44.4% Office, 88.8% Retail) ECONOMIC LIFE: 45 Years EFFECTIVE AGE: 7 Years REMAINING ECONOMIC LIFE: 38 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - FRONT OF BUILDING EXTERIOR - REAR OF BUILDING AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA AREA MAP [MAP] NEIGHBORHOOD MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 7 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA 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 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
Amount $/Unit ---------- --------------- DIRECT CAPITALIZATION - APARTMENTS Potential Rental Income $9,167,448 $ 17,103 Effective Gross Income $8,939,001 $ 16,677 Operating Expenses $3,617,390 $ 6,749 40.5% of EGI Net Operating Income: $5,214,411 $ 9,728 Capitalization Rate 8.00% DIRECT CAPITALIZATION VALUE $64,900,000 * $121,082 / UNIT DISCOUNTED CASH FLOW ANALYSIS - APARTMENTS: Holding Period 10 years 2002 Economic Vacancy 10% Stabilized Vacancy & Collection Loss: 6% Lease-up / Stabilization Period 24 months Terminal Capitalization Rate 8.50% Discount Rate 10.50% Selling Costs 2.00% Growth Rates: Income: 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $63,900,000 * $119,216 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $64,500,000 $120,336 / UNIT DISCOUNTED CASH FLOW ANALYSIS - COMMERCE CENTER: Holding Period 10 years 2002 Economic Vacancy 31% Stabilized Vacancy & Collection Loss: 12% Lease-up / Stabilization Period 24 months Terminal Capitalization Rate 9.00% Discount Rate 11.50% Selling Costs 2.00% Growth Rates: Income: 0% in Yr. 2, 3.00% thereafter Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $3,200,000 * $29.09 / SF RECONCILED INCOME APPROACH VALUE $3,200,000 $29.09 / SF
AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 9 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $81,984 to $116,175 Range of Sales $/Unit (Adjusted) $116,175 to $125,071 VALUE INDICATION - PRICE PER UNIT $64,000,000 * $119,403 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 5.65 to 9.27 Selected EGIM for Subject 7.50 Subject's Projected EGI $8,939,001 EGIM ANALYSIS CONCLUSION $66,800,000 * $124,627 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $66,700,000 * $124,440 / UNIT RECONCILED SALES COMPARISON VALUE $66,000,000 $123,134 / 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 10 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA PART THREE - SUMMARY OF VALUE CONCLUSIONS STERLING APARTMENT HOMES: SALES COMPARISON APPROACH: Price Per Unit $64,000,000 NOI Per Unit $66,700,000 EGIM Multiplier $66,800,000 INDICATED VALUE BY SALES COMPARISON $66,000,000 $123,134 / UNIT INCOME APPROACH: Direct Capitalization Method: $64,900,000 Discounted Cash Flow Method: $63,900,000 INDICATED VALUE BY INCOME APPROACH $64,500,000 $120,336 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $65,500,000 $122,201 / UNIT STERLING COMMERCE CENTER: INCOME APPROACH: Discounted Cash Flow Method: $ 3,200,000 INDICATED VALUE BY INCOME APPROACH $ 3,200,000 $ 29.09 / SF RECONCILED OVERALL VALUE CONCLUSION: $ 3,200,000 $ 29.09 / SF COMBINED SUBJECT VALUE: $68,700,000
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 11 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 1815 John F. Kennedy Boulevard, Philadelphia, Philadelphia County, Pennsylvania. Philadelphia identifies it as 881035000. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by Richard Mupo on May 13, 2003. Frank Fehribach, MAI has not made a personal inspection of the subject property. Richard Mupo performed the research, valuation analysis and wrote the report. Frank Fehribach, MAI reviewed the report and concurs with the value. Frank Fehribach, MAI and Richard Mupo 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 21, 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 12 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA 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 CCIP. 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 13 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA 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 Philadelphia, Pennsylvania. Overall, the neighborhood is characterized as an urban setting with the predominant land use being office. The subject's neighborhood is generally defined by the following boundaries. NEIGHBORHOOD BOUNDARIES East - Juniper Street West - Scuykill River South - Walnut Street North - I-676 MAJOR EMPLOYERS Major employers in the subject's area include City of Philadelphia, University of Pennsylvania, Mellon Financial to name a few. The overall economic outlook for the area is considered favorable. DEMOGRAPHICS We have reviewed demographic data within the neighborhood. The following table summarizes the key data points. AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 14 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA NEIGHBORHOOD DEMOGRAPHICS
AREA ---------------------------------------- CATEGORY 1-MI. RADIUS 3-MI. RADIUS 5-MI. RADIUS MSA --------------------------- ------------ ------------ ------------ ---------- POPULATION TRENDS Current Population 62,254 443,430 902,902 5,117,235 5-Year Population 64,020 428,220 869,767 5,176,062 % Change CY-5Y 2.8% -3.4% -3.7% 1.1% Annual Change CY-5Y 0.6% -0.7% -0.7% 0.2% HOUSEHOLDS Current Households 36,383 183,977 349,056 1,932,596 5-Year Projected Households 37,874 181,697 342,081 1,983,369 % Change CY - 5Y 4.1% -1.2% -2.0% 2.6% Annual Change CY-5Y 0.8% -0.2% -0.4% 0.5% INCOME TRENDS Median Household Income $ 30,555 $ 23,464 $ 23,910 $ 52,124 Per Capita Income $ 32,346 $ 16,628 $ 14,731 $ 24,601 Average Household Income $ 55,407 $ 40,091 $ 38,085 $ 65,140
Source: Demographics Now The subject neighborhood's population is expected to show increases above that of the region. The immediate market offers inferior 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 60.85% 44.10% 40.08% 27.89% 5-Year Projected % Renting 59.92% 44.74% 41.19% 27.84% % of Households Owning 23.06% 37.82% 44.08% 64.86% 5-Year Projected % Owning 24.76% 37.31% 43.04% 65.19%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 15 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Municipal Parking Lot South - Office Building East - Municipal Parking Lot West - Residential Apartment Building CONCLUSIONS The subject is well located within the city of Philadelphia. The neighborhood is characterized as being mostly urban in nature and is currently in the stable stage of development. The economic outlook for the neighborhood is judged to be favorable with a good economic base. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 16 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA MARKET ANALYSIS The subject property is located in the city of Philadelphia in Philadelphia County. The overall pace of development in the subject's market is more or less decreasing. There are no new significant projects recently completed within Center City. Over 790 units were delivered to the market in 2002. The greater Philadelphia area delivered 280 units during the first quarter of 2003. This figure is down significantly from the prior year. Overall, delivery of new units has slowed over the past year. The following table illustrates historical vacancy rates for the subject's apartment market. HISTORICAL VACANCY RATE
Period Region Submarket ---------------------------------------- 1Q03 3.8% 5.6% 4Q02 3.3% 5.8% 1-Year Annualized 2.9% 4.4% 3-Year annualized 2.5% 2.9%
Source: REIS Occupancy trends in the subject's market are stable. Historically speaking, the subject's submarket has underperformed the overall market. Occupancy has been on a general decline since 2000 due to weakening economic conditions. As Downtown Philadelphia's office market and economy improves, demand for local residential units will likely increase. As noted above, Center City's occupancy rate slightly underperforms as compared to the Greater Philadelphia market. Market rents in the subject's market have been following a stable trend. The following table illustrates historical rental rates for the subject's market. HISTORICAL AVERAGE RENT
Period Region % Change Submarket % Change -------------------------------------------------------- 3Q02 N/A - $1,308 - 4Q02 N/A N/A $1,317 0.7% 1Q03 N/A N/A $1,325 0.6%
Source: Reis The following table illustrates a summary of the subject's competitive set. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 17 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA COMPETITIVE PROPERTIES
No. Property Name Units Ocpy. Year Built Proximity to subject ------------------------------------------------------------------------------------ R-1 The Lofts at 1835 Arch 192 98% 2001 1 Block to the North R-2 Park Towne Place 980 95% 1959 3/4 Mile to the NE R-3 1500 Locust 610 92% Appr. 1990 1/4 Mile to the SE R-4 Locust on The Park 152 95% Appr. 1990 1/2 Mile to the SW Subject Sterling Apartment Homes 536 91% 1960
Effective rents have remained relatively stable since mid-2002 and are projected to remain stagnant for the foreseeable future. According to Reis, rent growth over the next five years will be light, estimated at roughly 2.8% growth per annum. Concerning the downtown office and retail market, NAI Geis Realty Group, Inc. reports that the Class A occupancy rate within the Philadelphia central business district is 87%, while the occupancy rate for Class B space is 85%. The average Class A rental rate is $27.00 per square foot and the average Class B rental rate is $19.00 per square foot. The downtown retail market reports an occupancy rate of 93% with an average rental rate of $25.00 per square foot. Growth rates over the next five years should be similar to those of the apartment market, or generally in the 2.0% to 4.0% range. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 18 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA PROPERTY DESCRIPTION SITE ANALYSIS Site Area 0.89091 acres, or 38,808 square feet Shape Rectangular 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 #420757-183F, dated August 2, 1996 Flood Zone Zone X Zoning C5, 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 ---------------------------------------------------------------------- 881035000 $2,500,000 $5,894,304 $8,394,304 0.08264 $693,705
IMPROVEMENT ANALYSIS Year Built 1960 Number of Units 536 Net Rentable Area 486,553 Square Feet - Apartment Space 109,992 Square Feet - Office & Retail Space 596,545 Square feet - Total Construction: Foundation Steel or concrete piles Frame Composite concrete or brick and steel Exterior Walls Brick or masonry Roof Built-up asphalt with or without gravel over a steel beams structure Project Amenities Amenities at the subject include a swimming pool, gym room, business office, security, and parking area. Unit Amenities Individual unit amenities include a cable TV connection, and washer dryer connection. Appliances available in each AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 19 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA unit include a refrigerator, stove, microwave dishwasher, garbage disposal, washer/dryer, and oven. Unit Mix:
Unit Area Unit Type Number of Units (Sq. Ft.) ------------------------------------- EA10 32 412 EB10 137 495 1A10 48 550 1B10 102 803 1C10 21 920 2A20 124 1,315 2B20 32 1,425 2C20 5 1,794 3A20 24 1,631 3B20 8 1,778 3C20 2 2,215 4A30 1 2,500
Overall Condition Good Effective Age 7 years Economic Life 45 years Remaining Economic Life 38 years Deferred Maintenance None HIGHEST AND BEST USE ANALYSIS In accordance with the definition of highest and best use, an analysis of the site relating to its legal uses, physical possibilities, and financial feasibility is appropriate. The highest and best use as vacant is to hold for future multi-family development. The subject improvements were constructed in 1960 and consist of a 536-unit multifamily with office and retail project. The highest and best use as improved is for a continued multifamily with office and retail 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 20 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA 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 21 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA 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 22 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA 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 23 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA SUMMARY OF COMPARABLE SALES -IMPROVED
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 ------------------------------ -------------------------- ------------------------------ --------------------------------- Property Name Sterling Apartment Homes Presidential City Apts Cedarbrook Hill LOCATION: Address 1815 John F. Kennedy 3900 City Line Avenue 8460 Limekiln Pike Boulevard City, State Philadelphia, Pennsylvania Philadelphia, Pennsylvania Wyncote, Pennsylvania County Philadelphia Philadelphia Montgomery PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 486,553 1,044,824 1,187,200 Year Built 1960 1951 1963 Number of Units 536 988 896 Unit Mix: Type Total Type Total Type Total EA10 32 Studio 200 1Br/1Ba 323 EB10 137 1Br/1Ba 300 2Br/2Ba 527 1A10 48 2Br/2Ba 300 3Br/2Ba 46 1B10 102 3Br/2Ba 188 1C10 21 2A20 124 2B20 32 2C20 5 3A20 24 3B20 8 3C20 2 4A30 1 Average Unit Size (SF) 908 1,058 1,325 Land Area (Acre) 0.8909 2.6500 41.0000 Density (Units/Acre) 601.6 372.8 21.9 Parking Ratio (Spaces/Unit) 0.37 1.0+ 1.0+ Parking Type (Gr., Cov., etc.) Garage Open, Covered Open, Covered CONDITION: Good Average Average APPEAL: Good Average Good AMENITIES: Pool/Spa Yes/No Yes/No Yes/No Gym Room Yes Yes Yes Laundry Room No No Yes Secured Parking No No Yes Sport Courts No No Yes Washer/Dryer Connection Yes Yes No Gated Security Yes Business Center OCCUPANCY: 91% 95% 88% TRANSACTION DATA: Sale Date May, 2002 May, 2001 Sale Price ($) $81,000,000 $88,100,000 Grantor Ira Lubert & Dean Adler Cedarbrook Holdings LLC Grantee L.A.D. Presidential LP Ceebraid-Signal Corp / Transwestern Sale Documentation N/A N/A Verification Buyer Buyer Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $0 $0 $0.00 $17,711,500 $19,767 $14.92 Vacancy/Credit Loss $0 $0 $0.00 $ 2,125,380 $ 2,372 $ 1.79 ------------------------------------------------------------------ Effective Gross Income $0 $0 $0.00 $15,586,120 $17,395 $13.13 Operating Expenses $0 $0 $0.00 $ 8,394,000 $ 9,368 $ 7.07 ------------------------------------------------------------------ Net Operating Income $0 $0 $0.00 $ 7,192,120 $ 8,027 $ 6.06 ------------------------------------------------------------------ NOTES: No financial data was made The buyer intends to rehab available for this sale. portions of the property for a cost of $16 million. PRICE PER UNIT $81,984 $98,326 PRICE PER SQUARE FOOT $ 77.53 $ 74.21 EXPENSE RATIO N/A 53.9% EGIM N/A 5.65 OVERALL CAP RATE N/A 8.16% Cap Rate based on Pro Forma or Actual Income? PRO FORMA
COMPARABLE DESCRIPTION I - 3 ------------------------------ ------------------------------ Property Name Berkshire Towers LOCATION: Address 11215 Oak Leaf Drive City, State Silver Spring, Maryland County Montgomery PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 1,375,638 Year Built 1965 Number of Units 1,119 Unit Mix: Type Total 1Br/1Ba 495 2Br/2Ba 396 3Br/2Ba 228 Average Unit Size (SF) 1,229 Land Area (Acre) 17.1900 Density (Units/Acre) 65.1 Parking Ratio (Spaces/Unit) 1.0+ Parking Type (Gr., Cov., etc.) Open, Covered CONDITION: Good APPEAL: Good AMENITIES: Pool/Spa Yes/Yes Gym Room Yes Laundry Room Yes Secured Parking No Sport Courts Yes Washer/Dryer Connection No Gated Security Clubhouse Business Center Yes OCCUPANCY: 95% TRANSACTION DATA: Sale Date May, 2003 Sale Price ($) $130,000,000 Grantor Berkshire Realty Holdings Grantee Stellar Management Sale Documentation MGA-47781 Verification Buyer Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Potential Gross Income $14,761,620 $13,192 $10.73 Vacancy/Credit Loss $ 738,081 $ 660 $ 0.54 ------------------------------ Effective Gross Income $14,023,539 $12,532 $10.19 Operating Expenses $ 4,908,239 $ 4,386 $ 3.57 ------------------------------ Net Operating Income $ 9,115,300 $ 8,146 $ 6.63 ------------------------------ NOTES: Property was completely remodeled in 1997. PRICE PER UNIT $116,175 PRICE PER SQUARE FOOT $ 94.50 EXPENSE RATIO 35.0% EGIM 9.27 OVERALL CAP RATE 7.01% Cap Rate based on Pro Forma or Actual Income? PRO FORMA
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 24 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA IMPROVED SALES MAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $81,984 to $116,175 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 $116,175 to $125,071 per unit with a mean or average adjusted price of $121,230 per unit. The median adjusted price is $122,443 per unit. Based on the following analysis, we have concluded to a value of $120,000 per unit, which results in an "as is" value of $64,000,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 25 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA SALES ADJUSTMENT GRID
COMPARABLE DESCRIPTION SUBJECT I - 1 ----------------------------------- -------------------------- -------------------------- Property Name Sterling Apartment Homes Presidential City Apts Address 1815 John F. Kennedy 3900 City Line Avenue Boulevard City Philadelphia, Pennsylvania Philadelphia, Pennsylvania Sale Date May, 2002 Sale Price ($) $81,000,000 Net Rentable Area (SF) 486,553 1,044,824 Number of Units 536 988 Price Per Unit $81,984 Year Built 1960 1951 Land Area (Acre) 0.8909 2.6500 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0% Financing Cash To Seller 0% Conditions of Sale Arm's Length 0% Date of Sale (Time) 05-2002 3% VALUE AFTER TRANS. ADJUST. ($/UNIT) $ 84,443 Location Inferior 10% Number of Units 536 988 5% Quality / Appeal Good Inferior 10% Age / Condition 1960 1951 / Average 20% Occupancy at Sale 91% 95% -5% Amenities Good Inferior 5% Average Unit Size (SF) 908 1,058 0% Commercial Units Yes Comparable 0% PHYSICAL ADJUSTMENT 45% FINAL ADJUSTED VALUE ($/UNIT) $ 122,443 COMPARABLE COMPARABLE DESCRIPTION I - 2 I - 3 ----------------------------------- ------------------------------ -------------------------- Property Name Cedarbrook Hill Berkshire Towers Address 8460 Limekiln Pike 11215 Oak Leaf Drive City Wyncote, Pennsylvania Silver Spring, Maryland Sale Date May, 2001 May, 2003 Sale Price ($) $88,100,000 $130,000,000 Net Rentable Area (SF) 1,187,200 1,375,638 Number of Units 896 1,119 Price Per Unit $98,326 $116,175 Year Built 1963 1965 Land Area (Acre) 41.0000 17.1900 VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 05-2001 6% 05-2003 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $ 104,225 $ 116,175 Location Comparable 0% Comparable 0% Number of Units 896 5% 1,119 5% Quality / Appeal Comparable 0% Comparable 0% Age / Condition 1963 / Average 20% 1965 / Good 0% Occupancy at Sale 88% 0% 95% -5% Amenities Comparable 0% Superior -5% Average Unit Size (SF) 1,325 -5% 1,229 -5% Commercial Units Comparable 0% Inferior 10% PHYSICAL ADJUSTMENT 20% 0% FINAL ADJUSTED VALUE ($/UNIT) $ 125,071 $ 116,175
SUMMARY VALUE RANGE (PER UNIT) $116,175 TO $125,071 MEAN (PER UNIT) $121,230 MEDIAN (PER UNIT) $122,443 VALUE CONCLUSION (PER UNIT) $120,000
VALUE OF IMPROVEMENT & MAIN SITE $64,320,000 LESS: LEASE-UP COST -$ 291,000 VALUE INDICATED BY SALES COMPARISON APPROACH $64,029,000 ROUNDED $64,000,000
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 26 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA SALES COMPARISON APPROACH (NOI PER UNIT ANALYSIS) 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-1 988 $ 81,000,000 N/A N/A $ 5,214,411 $ 81,984 $ 9,728 I-2 896 $ 88,100,000 8.16% $ 7,192,120 $ 5,214,411 1.212 $ 119,168 $ 98,326 $ 8,027 $ 9,728 I-3 1119 $130,000,000 7.01% $ 9,115,300 $ 5,214,411 1.194 $ 138,744 $ 116,175 $ 8,146 $ 9,728
PRICE/UNIT
Low High Average Median -------- -------- -------- -------- $119,168 $138,744 $128,956 $128,956
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT Estimated Price Per Unit $ 125,000 Number of Units 536 Value $67,000,000 Less: Lease-Up Cost -$ 291,000 ------------ Value Based on NOI Analysis $66,709,000 Rounded $66,700,000
The adjusted sales indicate a range of value between $119,168 and $138,744 per unit, with an average of $128,956 per unit. Based on the subject's competitive position within the improved sales, a value of $125,000 per unit is estimated. This indicates an "as is" market value of $66,700,000 (rounded after necessary adjustment, if any) for the NOI Per Unit Analysis. EFFECTIVE GROSS INCOME MULTIPLIER (EGIM) ANALYSIS The effective gross income multiplier (EGIM) is derived by dividing the sales price by the total effective gross income. The following table illustrates the EGIMs for the comparable improved sales. 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-1 988 $ 81,000,000 N/A N/A $ 81,984 I-2 896 $ 88,100,000 $ 15,586,120 $ 8,394,000 53.86% 40.47% 5.65 $ 98,326 I-3 1119 $130,000,000 $ 14,023,539 $ 4,908,239 35.00% 9.27 $ 116,175
EGIM
Low High Average Median ---- ---- ------- ------ 5.65 9.27 7.46 7.46
VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES Estimate EGIM 7.50 Subject EGI $ 8,939,001 Value $67,042,508 Less: Lease-Up Cost -$ 291,000 ------------ Value Based on EGIM Analysis $66,751,508 Rounded $66,800,000 Value Per Unit $ 124,627
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 27 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA There is an inverse relationship, which generally holds among EGIMs and operating expenses. Properties, which have higher expense ratios, typically sell for relatively less and therefore produce a lower EGIM. As will be illustrated in the Income Capitalization Approach of this report, the subject's operating expense ratio (OER) is estimated at 40.47% before reserves. The comparable sales indicate a range of expense ratios from 35.00% to 53.86%, while their EGIMs range from 5.65 to 9.27. Overall, we conclude to an EGIM of 7.50, which results in an "as is" value estimate in the EGIM Analysis of $66,800,000. 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 $66,000,000. Price Per Unit $64,000,000 NOI Per Unit $66,700,000 EGIM Analysis $66,800,000 Sales Comparison Conclusion $66,000,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA 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 29 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA method is normally more appropriate for properties with relatively stable operating histories and expectations. A pro forma analysis for the first year of the investment is made to estimate a reasonable potential net operating income for the Subject Property. Such an analysis entails an estimate of the gross income the property should command in the marketplace. From this total gross income must be deducted an allowance for vacancy/collection loss and operating expenses as dictated by general market conditions and the overall character of the subject's tenancy and leased income to arrive at a projected estimate of net operating income. Conversion of the net operating income to an indication of value is accomplished by the process of capitalization, as derived primarily from market data. MARKET RENT ANALYSIS In order to determine a market rental rate for the subject, a survey of competing apartment communities was performed. This survey was displayed previously in the market analysis section of the report. Detailed information pertaining to each of the comparable rental communities, along with photographs, is presented in the Addenda of this report. The following charts display the subject's current asking and actual rent rates as well as a comparison with the previous referenced comparable rental properties. SUMMARY OF ACTUAL AVERAGE RENTS
Average Unit Area ----------------------- Unit Type (Sq. Ft.) Per Unit Per SF %Occupied -------------------------------------------------------------------- EA10 412 $ 896 $ 2.17 81.3% EB10 495 $ 941 $ 1.90 89.1% 1A10 550 $1,184 $ 2.15 95.6% 1B10 803 $1,302 $ 1.62 92.4% 1C10 920 $1,509 $ 1.64 100.0% 2A20 1315 $1,772 $ 1.35 90.9% 2B20 1425 $2,189 $ 1.54 96.8% 2C20 1794 $2,569 $ 1.43 100.0% 3A20 1631 $2,251 $ 1.38 90.9% 3B20 1778 $2,509 $ 1.41 100.0% 3C20 2215 $2,794 $ 1.26 100.0% 4A30 2500 $2,459 $ 0.98 0.0%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 30 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA RENT ANALYSIS
COMPARABLE RENTS ------------------------------------------------ R-1 R-2 R-3 R-4 ------------------------------------------------ The Lofts at Park Towne 1500 Locust on 1835 Arch Place Locust The Park ------------------------------------------------ SUBJECT SUBJECT COMPARISON TO SUBJECT SUBJECT UNIT ACTUAL ASKING ------------------------------------------------ DESCRIPTION TYPE RENT RENT Similar Inferior Superior Similar -------------------------------------------------------------------------------------------------------------- Monthly Rent EA10 $ 896 $ 909 $ 819 Unit Area (SF) 412 412 460 Monthly Rent Per Sq. Ft. $ 2.17 $ 2.21 $ 1.78 Monthly Rent EB10 $ 941 $ 949 $1,100 $1,125 Unit Area (SF) 495 495 497 528 Monthly Rent Per Sq. Ft. $ 1.90 $ 1.92 $ 2.21 $ 2.13 Monthly Rent 1A10 $1,184 $1,199 Unit Area (SF) 550 550 Monthly Rent Per Sq. Ft. $ 2.15 $ 2.18 Monthly Rent 1B10 $1,302 $1,399 $1,400 $1,024 $1,505 $1,395 Unit Area (SF) 803 803 815 715 795 809 Monthly Rent Per Sq. Ft. $ 1.62 $ 1.74 $ 1.72 $ 1.43 $ 1.89 $ 1.72 Monthly Rent 1C10 $1,509 $1,489 $1,750 $1,700 Unit Area (SF) 920 920 950 898 Monthly Rent Per Sq. Ft. $ 1.64 $ 1.62 $ 1.84 $ 1.89 Monthly Rent 2A20 $1,772 $1,749 $2,200 $1,629 $2,183 $1,950 Unit Area (SF) 1,315 1,315 1,275 1,043 1,113 1,211 Monthly Rent Per Sq. Ft. $ 1.35 $ 1.33 $ 1.73 $ 1.56 $ 1.96 $ 1.61 Monthly Rent 2B20 $2,189 $1,899 $2,335 Unit Area (SF) 1,425 1,425 1,264 Monthly Rent Per Sq. Ft. $ 1.54 $ 1.33 $ 1.85 Monthly Rent 2C20 $2,569 $2,339 Unit Area (SF) 1,794 1,794 Monthly Rent Per Sq. Ft. $ 1.43 $ 1.30 Monthly Rent 3A20 $2,251 $2,209 $1,839 Unit Area (SF) 1,631 1,631 1,223 Monthly Rent Per Sq. Ft. $ 1.38 $ 1.35 $ 1.50 Monthly Rent 3B20 $2,509 $2,299 Unit Area (SF) 1,778 1,778 Monthly Rent Per Sq. Ft. $ 1.41 $ 1.29 Monthly Rent 3C20 $2,794 $2,509 Unit Area (SF) 2,215 2,215 Monthly Rent Per Sq. Ft. $ 1.26 $ 1.13 Monthly Rent 4A30 $2,459 $2,459 $2,074 Unit Area (SF) 2,500 2,500 1,465 Monthly Rent Per Sq. Ft. $ 0.98 $ 0.98 $ 1.42 SUBJECT UNIT DESCRIPTION TYPE MIN MAX MEDIAN AVERAGE ------------------------------------------------------------------------------- Monthly Rent EA10 $ 819 $ 819 $ 819 $ 819 Unit Area (SF) 460 460 460 460 Monthly Rent Per Sq. Ft. $ 1.78 $ 1.78 $ 1.78 $ 1.78 Monthly Rent EB10 $1,100 $1,125 $1,113 $1,113 Unit Area (SF) 497 528 513 513 Monthly Rent Per Sq. Ft. $ 2.13 $ 2.21 $ 2.17 $ 2.17 Monthly Rent 1A10 Unit Area (SF) Monthly Rent Per Sq. Ft. Monthly Rent 1B10 $1,024 $1,505 $1,398 $1,331 Unit Area (SF) 715 815 802 784 Monthly Rent Per Sq. Ft. $ 1.43 $ 1.89 $ 1.72 $ 1.69 Monthly Rent 1C10 $1,700 $1,750 $1,725 $1,725 Unit Area (SF) 898 950 924 924 Monthly Rent Per Sq. Ft. $ 1.84 $ 1.89 $ 1.87 $ 1.87 Monthly Rent 2A20 $1,629 $2,200 $2,067 $1,991 Unit Area (SF) 1,043 1,275 1,162 1,161 Monthly Rent Per Sq. Ft. $ 1.56 $ 1.96 $ 1.67 $ 1.71 Monthly Rent 2B20 $2,335 $2,335 $2,335 $2,335 Unit Area (SF) 1,264 1,264 1,264 1,264 Monthly Rent Per Sq. Ft. $ 1.85 $ 1.85 $ 1.85 $ 1.85 Monthly Rent 2C20 Unit Area (SF) Monthly Rent Per Sq. Ft. Monthly Rent 3A20 $1,839 $1,839 $1,839 $1,839 Unit Area (SF) 1,223 1,223 1,223 1,223 Monthly Rent Per Sq. Ft. $ 1.50 $ 1.50 $ 1.50 $ 1.50 Monthly Rent 3B20 Unit Area (SF) Monthly Rent Per Sq. Ft. Monthly Rent 3C20 Unit Area (SF) Monthly Rent Per Sq. Ft. Monthly Rent 4A30 $2,074 $2,074 $2,074 $2,074 Unit Area (SF) 1,465 1,465 1,465 1,465 Monthly Rent Per Sq. Ft. $ 1.42 $ 1.42 $ 1.42 $ 1.42
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 31 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA GROSS RENTAL INCOME PROJECTION
Market Rent Unit Area ------------------- Monthly Annual Unit Type Number of Units (Sq. Ft.) Per Unit Per SF Income Income ---------------------------------------------------------------------------------------- EA10 32 412 $ 899 $2.18 $ 28,768 $ 345,216 EB10 137 495 $ 949 $1.92 $ 130,013 $1,560,156 1A10 48 550 $ 1,149 $2.09 $ 55,152 $ 661,824 1B10 102 803 $ 1,379 $1.72 $ 140,658 $1,687,896 1C10 21 920 $ 1,509 $1.64 $ 31,689 $ 380,268 2A20 124 1,315 $ 1,759 $1.34 $ 218,116 $2,617,392 2B20 32 1,425 $ 2,109 $1.48 $ 67,488 $ 809,856 2C20 5 1,794 $ 2,449 $1.37 $ 12,245 $ 146,940 3A20 24 1,631 $ 2,229 $1.37 $ 53,496 $ 641,952 3B20 8 1,778 $ 2,359 $1.33 $ 18,872 $ 226,464 3C20 2 2,215 $ 2,499 $1.13 $ 4,998 $ 59,976 4A30 1 2,500 $ 2,459 $0.98 $ 2,459 $ 29,508 --------------------------------- Total $ 763,954 $9,167,448
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 32 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA 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 $8,342,210 $ 15,564 $8,855,683 $ 16,522 $9,139,066 $ 17,050 Vacancy $ 502,931 $ 938 $ 478,155 $ 892 $ 844,922 $ 1,576 Credit Loss/Concessions $ 18,839 $ 35 $ 28,274 $ 53 $ 79,026 $ 147 -------------------------------------------------------------------------------- Subtotal $ 521,770 $ 973 $ 506,429 $ 945 $ 923,948 $ 1,724 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 358,833 $ 669 $ 366,006 $ 683 $ 458,161 $ 855 -------------------------------------------------------------------------------- Subtotal Other Income $ 358,833 $ 669 $ 366,006 $ 683 $ 458,161 $ 855 -------------------------------------------------------------------------------- Effective Gross Income $8,179,273 $ 15,260 $8,715,260 $ 16,260 $8,673,279 $ 16,181 Operating Expenses Taxes $ 454,883 $ 849 $ 639,413 $ 1,193 $ 641,270 $ 1,196 Insurance $ 62,262 $ 116 $ 128,240 $ 239 $ 122,284 $ 228 Utilities $1,052,106 $ 1,963 $1,142,411 $ 2,131 $1,016,569 $ 1,897 Repair & Maintenance $ 64,655 $ 121 $ 55,249 $ 103 $ 45,412 $ 85 Cleaning $ 522,451 $ 975 $ 506,709 $ 945 $ 496,132 $ 926 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 38,977 $ 73 $ 38,468 $ 72 $ 37,528 $ 70 General Administrative $ 61,275 $ 114 $ 91,888 $ 171 $ 91,216 $ 170 Management $ 412,405 $ 769 $ 457,317 $ 853 $ 432,824 $ 808 Miscellaneous $ 587,943 $ 1,097 $ 667,060 $ 1,245 $ 545,058 $ 1,017 -------------------------------------------------------------------------------- Total Operating Expenses $3,256,957 $ 6,076 $3,726,755 $ 6,953 $3,428,293 $ 6,396 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 -------------------------------------------------------------------------------- Net Income $4,922,316 $ 9,183 $4,988,505 $ 9,307 $5,244,986 $ 9,785 FISCAL YEAR 2003 ANNUALIZED 2003 ------------------------------------------------------ MANAGEMENT BUDGET PROJECTION AAA PROJECTION ------------------------------------------------------------------------------------------ DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT % ----------------------------------------------------------------------------------------------------------------------- Revenues Rental Income $9,343,212 $ 17,431 $9,117,800 $ 17,011 $9,167,448 $ 17,103 100.0% Vacancy $ 615,000 $ 1,147 $ 822,888 $ 1,535 $ 458,372 $ 855 5.0% Credit Loss/Concessions $ 12,000 $ 22 $ 215,400 $ 402 $ 91,674 $ 171 1.0% ------------------------------------------------------------------------------------------ Subtotal $ 627,000 $ 1,170 $1,038,288 $ 1,937 $ 550,047 $ 1,026 6.0% Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 296,831 $ 554 $ 342,992 $ 640 $ 321,600 $ 600 3.5% ------------------------------------------------------------------------------------------ Subtotal Other Income $ 296,831 $ 554 $ 342,992 $ 640 $ 321,600 $ 600 3.5% ------------------------------------------------------------------------------------------ Effective Gross Income $9,013,043 $ 16,815 $8,422,504 $ 15,714 $8,939,001 $ 16,677 100.0% Operating Expenses Taxes $ 781,506 $ 1,458 $ 684,124 $ 1,276 $ 696,800 $ 1,300 7.8% Insurance $ 147,716 $ 276 $ 131,764 $ 246 $ 147,400 $ 275 1.6% Utilities $1,103,000 $ 2,058 $1,713,536 $ 3,197 $1,072,000 $ 2,000 12.0% Repair & Maintenance $ 64,100 $ 120 $ 21,764 $ 41 $ 64,320 $ 120 0.7% Cleaning $ 514,800 $ 960 $ 573,604 $ 1,070 $ 522,600 $ 975 5.8% Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Marketing & Leasing $ 36,000 $ 67 $ 77,884 $ 145 $ 37,520 $ 70 0.4% General Administrative $ 100,500 $ 188 $ 128,980 $ 241 $ 93,800 $ 175 1.0% Management $ 456,547 $ 852 $ 431,128 $ 804 $ 446,950 $ 834 5.0% Miscellaneous $ 522,538 $ 975 $ 468,612 $ 874 $ 536,000 $ 1,000 6.0% ------------------------------------------------------------------------------------------ Total Operating Expenses $3,726,707 $ 6,953 $4,231,396 $ 7,894 $3,617,390 $ 6,749 40.5% Reserves $ 0 $ 0 $ 0 $ 0 $ 107,200 $ 200 3.0% ------------------------------------------------------------------------------------------ Net Income $5,286,336 $ 9,863 $4,191,108 $ 7,819 $5,214,411 $ 9,728 58.3%
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 6% based on the subject's historical performance, as well as the anticipated future market conditions. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 33 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA 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 $200 per unit for reserves for replacement. CAPITAL EXPENDITURES Capital expenditures represent expenses for immediate repair or replacement of items that have average to long lives. Based on our inspection of the property as well as discussions with property management personnel, there are no major items remaining in need of repair or replacement that would require an expense beyond our reserves for replacement. Therefore an allowance of $200 per unit should be satisfactory in our reserves for replacement to cover future capital expenditures. DISCOUNTED CASH FLOW ANALYSIS As the subject is a multi-tenant income property, the Discounted Cash Flow Method is considered appropriate. This method is especially meaningful in that it isolates the timing of the annual cash flows and discounts them, along with the expected equity reversion, to a present value. The present value of the cash flow is added to the present value of the reversion, resulting in a total property value. INVESTMENT CRITERIA Appropriate investment criteria will be derived for the subject based upon analysis of comparable sales and a survey of real estate investors. The following table summarizes the findings of Korpacz National Investor Survey for the most recent period. KORPACZ NATIONAL INVESTOR SURVEY 1ST QUARTER 2003 NATIONAL APARTMENT MARKET
CAPITALIZATION RATES --------------------------------------------- GOING-IN TERMINAL --------------------------------------------- LOW HIGH LOW HIGH ---------------------------------------------------------- RANGE 6.00% 10.00% 7.00% 10.00% AVERAGE 8.14% 8.47%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 34 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA SUMMARY OF OVERALL CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR ------------------------------------------------------ I-1 May-02 95% $ 81,984 N/A I-2 May-01 88% $ 98,326 8.16% I-3 May-03 95% $116,175 7.01% I-4 N/A N/A N/A I-5 N/A N/A N/A High 8.16% Low 7.01% Average 7.59%
Based on this information, we have concluded the subject's overall capitalization rate should be 8.00%. 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 8.50%. 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 10.50%. 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 2.00% of the sale amount is applied. DISCOUNTED CASH FLOW CONCLUSION Discounting the annual cash flows and the equity reversion at the selected rate of 10.50% indicates a value of $63,900,000. In this instance, the reversion figure contributes AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 35 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA approximately 44% of the total value. Investors surveyed for this assignment indicated they would prefer to have the cash flow contribute anywhere from 50% to 60%. Overall, the blend seems reasonable. The cash flow and pricing matrix are located on the following pages. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 36 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA STERLING APARTMENT HOMES
YEAR APR-2004 APR-2005 APR-2006 APR-2007 APR-2008 APR-2009 FISCAL YEAR 1 2 3 4 5 6 ----------------------------------------------------------------------------------------------------------------------------- REVENUE Base Rent $ 9,167,448 $ 9,167,448 $ 9,442,471 $ 9,725,746 $10,017,518 $10,318,043 Vacancy $ 715,103 $ 548,575 $ 472,124 $ 486,287 $ 500,876 $ 515,902 Credit Loss $ 91,674 $ 91,674 $ 94,425 $ 97,257 $ 100,175 $ 103,180 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 -------------------------------------------------------------------------------------- Subtotal $ 806,777 $ 640,249 $ 566,548 $ 583,545 $ 601,051 $ 619,083 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 321,600 $ 321,600 $ 331,248 $ 341,185 $ 351,421 $ 361,964 -------------------------------------------------------------------------------------- Subtotal Other Income $ 321,600 $ 321,600 $ 331,248 $ 341,185 $ 351,421 $ 361,964 -------------------------------------------------------------------------------------- EFFECTIVE GROSS INCOME $ 8,682,271 $ 8,848,799 $ 9,207,171 $ 9,483,386 $ 9,767,888 $10,060,925 OPERATING EXPENSES: Taxes $ 696,800 $ 717,704 $ 739,235 $ 761,412 $ 784,255 $ 807,782 Insurance $ 147,400 $ 151,822 $ 156,377 $ 161,068 $ 165,900 $ 170,877 Utilities $ 1,072,000 $ 1,104,160 $ 1,137,285 $ 1,171,403 $ 1,206,545 $ 1,242,742 Repair & Maintenance $ 64,320 $ 66,250 $ 68,237 $ 70,284 $ 72,393 $ 74,565 Cleaning $ 522,600 $ 538,278 $ 554,426 $ 571,059 $ 588,191 $ 605,837 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 37,520 $ 38,646 $ 39,805 $ 40,999 $ 42,229 $ 43,496 General Administrative $ 93,800 $ 96,614 $ 99,512 $ 102,498 $ 105,573 $ 108,740 Management $ 434,114 $ 442,440 $ 460,359 $ 474,169 $ 488,394 $ 503,046 Miscellaneous $ 536,000 $ 552,080 $ 568,642 $ 585,702 $ 603,273 $ 621,371 -------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES $ 3,604,554 $ 3,707,993 $ 3,823,878 $ 3,938,595 $ 4,056,753 $ 4,178,455 Reserves $ 107,200 $ 110,416 $ 113,728 $ 117,140 $ 120,655 $ 124,274 -------------------------------------------------------------------------------------- NET OPERATING INCOME $ 4,970,517 $ 5,030,389 $ 5,269,564 $ 5,427,651 $ 5,590,481 $ 5,758,195 ============================================================================================================================= Operating Expense Ratio (% of EGI) 41.5% 41.9% 41.5% 41.5% 41.5% 41.5% Operating Expense Per Unit $ 6,725 $ 6,918 $ 7,134 $ 7,348 $ 7,569 $ 7,796 YEAR APR-2010 APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 7 8 9 10 11 -------------------------------------------------------------------------------------------------------------- REVENUE Base Rent $10,627,585 $10,946,412 $11,274,805 $11,613,049 $11,961,440 Vacancy $ 531,379 $ 547,321 $ 563,740 $ 580,652 $ 598,072 Credit Loss $ 106,276 $ 109,464 $ 112,748 $ 116,130 $ 119,614 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 ----------------------------------------------------------------------- Subtotal $ 637,655 $ 656,785 $ 676,488 $ 696,783 $ 717,686 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 372,823 $ 384,007 $ 395,527 $ 407,393 $ 419,615 ----------------------------------------------------------------------- Subtotal Other Income $ 372,823 $ 384,007 $ 395,527 $ 407,393 $ 419,615 ----------------------------------------------------------------------- EFFECTIVE GROSS INCOME $10,362,752 $10,673,635 $10,993,844 $11,323,659 $11,663,369 OPERATING EXPENSES: Taxes $ 832,016 $ 856,976 $ 882,685 $ 909,166 $ 936,441 Insurance $ 176,003 $ 181,283 $ 186,722 $ 192,324 $ 198,093 Utilities $ 1,280,024 $ 1,318,425 $ 1,357,978 $ 1,398,717 $ 1,440,678 Repair & Maintenance $ 76,801 $ 79,105 $ 81,479 $ 83,923 $ 86,441 Cleaning $ 624,012 $ 642,732 $ 662,014 $ 681,874 $ 702,331 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 44,801 $ 46,145 $ 47,529 $ 48,955 $ 50,424 General Administrative $ 112,002 $ 115,362 $ 118,823 $ 122,388 $ 126,059 Management $ 518,138 $ 533,682 $ 549,692 $ 566,183 $ 583,168 Miscellaneous $ 640,012 $ 659,212 $ 678,989 $ 699,358 $ 720,339 ----------------------------------------------------------------------- TOTAL OPERATING EXPENSES $ 4,303,809 $ 4,432,923 $ 4,565,911 $ 4,702,888 $ 4,843,975 Reserves $ 128,002 $ 131,842 $ 135,798 $ 139,872 $ 144,068 ----------------------------------------------------------------------- NET OPERATING INCOME $ 5,930,941 $ 6,108,869 $ 6,292,135 $ 6,480,899 $ 6,675,326 ============================================================================================================== Operating Expense Ratio (% of EGI) 41.5% 41.5% 41.5% 41.5% 41.5% Operating Expense Per Unit $ 8,029 $ 8,270 $ 8,518 $ 8,774 $ 9,037
Estimated Stabilized NOI $ 5,214,411 Sales Expense Rate 2.00% Months to Stabilized 24 Discount Rate 10.50% Stabilized Occupancy 95.0% Terminal Cap Rate 8.50%
"DCF" VALUE ANALYSIS Gross Residual Sale Price $78,533,252 Deferred Maintenance $ 0 Less: Sales Expense $ 1,570,665 Add: Excess Land $ 0 ----------- Net Residual Sale Price $76,962,587 Other Adjustments $ 0 PV of Reversion $28,356,778 ----------- Add: NPV of NOI $35,592,791 Value Indicated By "DCF" $63,949,568 ----------- Rounded $63,900,000 PV Total $63,949,568
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE ------------------------------------------------------------------ TOTAL VALUE 10.00% 10.25% 10.50% 10.75% 11.00% ----------------------------------------------------------------------------------------------- 8.00% $67,990,945 $66,843,662 $65,721,867 $64,624,911 $63,552,161 8.25% $67,035,583 $65,909,744 $64,808,865 $63,732,310 $62,679,462 TERMINAL CAP RATE 8.50% $66,136,419 $65,030,762 $63,949,568 $62,892,215 $61,858,097 8.75% $65,288,636 $64,202,008 $63,139,375 $62,100,125 $61,083,668 9.00% $64,487,952 $63,419,296 $62,374,192 $61,352,041 $60,352,262
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 37 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA INCOME LOSS DURING LEASE-UP The subject is currently 91% occupied, below our stabilized occupancy projection. We have estimated a 24-month lease-up period. An adjustment must be made to bring the subject to a stabilized operating level. To account for this income loss during lease-up, we have compared the current DCF analysis to an "as stabilized" DCF analysis assuming the subject's occupancy were stabilized. The difference in net operating income during the lease-up period is discounted to a present value figure of $291,000 as shown in the following table. INCOME LOSS DURING LEASE-UP
DESCRIPTION YEAR 1 YEAR 2 ---------------------------------------------------------------- "As Is" Net Operating Income $4,970,517 $5,030,389 Stabilized Net Operating Income $5,214,411 $5,116,082 ---------- ---------- Difference $ 243,894 $ 85,692 PV of Income Loss During Lease-Up $ 290,899 ---------- Rounded $ 291,000 ----------
CONCESSIONS Concessions have historically not been utilized at the subject property or in the subject's market. Therefore, no adjustment was included for concessions. 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 8.00% percent is applicable to the subject. The results of our direct capitalization analysis are as follows: AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 38 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA STERLING APARTMENT HOMES
TOTAL PER SQ. FT. PER UNIT %OF EGI ----------------------------------------------------------------------------------------------------------- REVENUE Base Rent $ 9,167,448 $ 18.84 $ 17,103 Less: Vacancy & Collection Loss 6.00% $ 550,047 $ 1.13 $ 1,026 Plus: Other Income Laundry Income $ 0 $ 0.00 $ 0 0.00% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 321,600 $ 0.66 $ 600 3.60% ------------------------------------------------------- Subtotal Other Income $ 321,600 $ 0.66 $ 600 3.60% EFFECTIVE GROSS INCOME $ 8,939,001 $ 18.37 $ 16,677 OPERATING EXPENSES: Taxes $ 696,800 $ 1.43 $ 1,300 7.80% Insurance $ 147,400 $ 0.30 $ 275 1.65% Utilities $ 1,072,000 $ 2.20 $ 2,000 11.99% Repair & Maintenance $ 64,320 $ 0.13 $ 120 0.72% Cleaning $ 522,600 $ 1.07 $ 975 5.85% Landscaping $ 0 $ 0.00 $ 0 0.00% Security $ 0 $ 0.00 $ 0 0.00% Marketing & Leasing $ 37,520 $ 0.08 $ 70 0.42% General Administrative $ 93,800 $ 0.19 $ 175 1.05% Management 5.00% $ 446,950 $ 0.92 $ 834 5.00% Miscellaneous $ 536,000 $ 1.10 $ 1,000 6.00% TOTAL OPERATING EXPENSES $ 3,617,390 $ 7.43 $ 6,749 40.47% Reserves $ 107,200 $ 0.22 $ 200 1.20% ------------------------------------------------------- NET OPERATING INCOME $ 5,214,411 $ 10.72 $ 9,728 58.33% ======================================================= "GOING IN" CAPITALIZATION RATE 8.00% VALUE INDICATION $ 65,180,138 $ 133.96 $ 121,605 LESS: LEASE-UP COST ($ 291,000) "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $ 64,889,138 ROUNDED $ 64,900,000 $ 133.39 $ 121,082
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 39 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF --------------------------------------------------------- 7.25% $ 71,631,911 $71,600,000 $133,582 $147.16 7.50% $ 69,234,481 $69,200,000 $129,104 $142.22 7.75% $ 66,991,723 $67,000,000 $125,000 $137.70 8.00% $ 64,889,138 $64,900,000 $121,082 $133.39 8.25% $ 62,913,983 $62,900,000 $117,351 $129.28 8.50% $ 61,055,013 $61,100,000 $113,993 $125.58 8.75% $ 59,302,269 $59,300,000 $110,634 $121.88
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $64,900,000. 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 $63,900,000 Direct Capitalization Method $64,900,000
Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $64,500,000. DISCOUNTED CASH FLOW ANALYSIS - STERLING COMMERCE CENTER Following is a summary of the subject's discounted cash flow analysis. Because the commercial space is only 54.1% occupied and is not projected to reach a stabilized level of occupancy until the third year, only a discounted cash flow analysis was performed. A direct capitalization analysis is not considered applicable. MARKET RENT ANALYSIS In order to determine a market rental rate for the subject, a review of current office and retail leases was performed. A summary of actual leases signed over the last 12 months is shown on the following table. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 40 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA SUMMARY OF ACTUAL RECENT OFFICE LEASES
LEASE LEASE RENTAL COMPOUNDED SUITE SIZE START TERM RATE/SF ANNUAL RENT TENANT NO. (SF) DATE (MONTHS) ($) GROWTH RATE EXPENSES ------------------------------------------------------------------------------------------------------------------ Dr. Parrish 465 1,418 7-02 12 15.75 - Full Service Eagles for Leukaemia 452 1,340 10-02 36 16.00 3.1% $8.18 Stop Michael Kleeman 350 2,904 1-03 24 15.50 6.5% $8.20 Stop United Equity 301 1,800 3-03 12 15.00 - $8.18 Stop Windows Corp. 303 2,002 4-03 84 8.55 2.5% Full Service Contemporary Staffing 307 2,424 4-03 48 11.14 2.4% $8.18 Stop Equitrac 340 2,943 5-03 12 17.88 - $1.00 * McCann & Gerschke 309 6,093 6-03 36 14.00 3.5% BY Stop Wainstein et al 400 3,190 6-03 36 15.50 3.2% $0.84 * Averages - 2,679 - 33 14.37 2.4% - All office tenants - 2,386 - - 15.16 - -
* Tenant's specific expense pass through amount As shown above, recent office leases range from $8.55 to $17.88 per square foot with an average of $14.37 per square foot. The average rental rate for all of the office tenants is $15.16 per square foot. Also, this average amount is the weighted amount for the entire tenants and takes into account the sizes of the various spaces and is not the simple average of each tenant's rental rate. Concerning the retail tenants, there have only been two recent leases signed within the last 12 months. They are Suite 1823 - City Nails, a 1,097 square foot space with a beginning lease rate of $18.00 per square foot. The lease term is 84 months (7 years) and there are annual rent increases of $1.00 per square foot. The compounded annual rental growth rate is 4.9%. The expenses are full service with the tenant paying no expense pass through amounts. This lease was signed in April 2003. The second lease was Suite 1833 - Southland, a 3,420 square foot space with a rental rate of $15.30 per square foot. The lease term is 42 months (3.5 years) and the rental rate is fixed throughout the term. This is also a full service lease with the tenant paying no expense pass through amount. There was no improvement allowance given by the landlord and both spaces were taken in an "as-is" condition. The average rental rate from the existing 10 retail tenants is $23.14 per square foot. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 41 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA CONCLUDED MARKET RENTAL RATES AND TERMS Based on this analysis above as well as interviews with the subject's property management, rental rates and terms are shown as follows: OFFICE TENANTS Large tenants (Suite 200): $14.00 per square foot market rent All other tenants: $16.00 per square foot market rent Rent Abatement: Currently 4 months of free rent for all leases signed in the 1st year, changing to 3 months for all leases signed in the 2nd year, and 2 months for all leases signed in the 3rd through 11th year Average lease term: 60 months (5 years) Rent increases: None, flat Expenses: Gross lease with no expense recovery Tenant improvement allowance: $15.00 / SF for new tenants, $0 for renewals Leasing commissions: Sliding scale based on 6% of the 1st year's rent, 5% of the 2nd year's rent, 4% of the 3rd year's rent, 3.5% of the 4th year's rent, 3% of the 5th year's rent, and 2.5% of any remaining year's rent if needed; no commission upon renewal. RETAIL TENANTS Market rent: $20.00 per square foot Average lease term: 84 months (7 years) Rent Abatement: Currently 4 months of free rent for all leases signed in the 1st year, changing to 3 months for all leases signed in the 2nd year, and 2 months for all leases signed in the 3rd through 11th year Rent increases: None, flat rate Expenses: Gross lease with no expense recovery Tenant improvement allowance: None Leasing commissions: Sliding scale based on 6% of the 1st year's rent, 5% of the 2nd year's rent, 4% of the 3rd year's rent, 3.5% of the 4th year's rent, 3% of the 5th year's rent, and 2.5% of any remaining year's rent if needed; no commission upon renewal. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 42 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA 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 43 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA OPERATING EXPENSES - HISTORICAL & PROJECTED STERLING COMMERCE CENTER
2000 ACTUAL 2001 ACTUAL 2002 ACTUAL ------------------------------------------------------------------------------------------------------- Base Rental Revenue $ 1,678,969 $ 15.26 $ 1,743,488 $ 15.85 $ 1,913,014 $ 17.39 Reimbursement Income 0 0.00 0 0.00 0 0.00 Misc Income 109,058 0.99 138,950 1.26 31,481 0.29 ---------------------- ----------------------- ----------------------- GROSS POTENTIAL INCOME $ 1,788,027 $ 16.26 $ 1,882,438 $ 17.11 $ 1,944,495 $ 17.68 Less General Vacancy -$ 87,268 ($ 0.79) -$ 154,562 ($ 1.41) -$ 794,364 ($ 7.22) Less Credit Loss -120,614 (1.10) -3,738 (0.03) -7,609 (0.07) ---------------------- ----------------------- ----------------------- EFFECTIVE GROSS INCOME $ 1,580,145 $ 14.37 $ 1,724,138 $ 15.68 $ 1,142,522 $ 10.39 Real Estate Taxes $ 76,409 $ 0.69 $ 111,160 $ 1.01 $ 111,046 $ 1.01 Insurance 8,584 0.08 21,066 0.19 21,580 0.20 Utilities 306,167 2.78 388,437 3.53 355,503 3.23 Repairs & Maintenance 16,598 0.15 16,408 0.15 13,894 0.13 Cleaning 285,066 2.59 275,389 2.50 355,367 3.23 Marketing/Leasing 6,943 0.06 7,668 0.07 6,654 0.06 Gen. & Admin. 22,789 0.21 28,207 0.26 26,118 0.24 Management Fee 88,812 0.81 101,147 0.92 59,868 0.54 Miscellaneous 50,406 0.46 84,597 0.77 82,090 0.75 ---------------------- ----------------------- ----------------------- TOTAL EXPENSES $ 861,774 $ 7.83 $ 1,034,079 $ 9.40 $ 1,032,120 $ 9.38 NET OPERATING INCOME $ 718,371 6.53 $ 690,059 6.27 $ 110,402 1.00 Leasing & Capital Costs Tenant Improvements $ 0 0.00 $ 0 0.00 $ 0 0.00 Leasing Commissions 0 0.00 0 0.00 0 0.00 Structural Reserve 0 0.00 0 0.00 0 0.00 ---------------------- ----------------------- ----------------------- NET CASH FLOW $ 718,371 $ 14.37 $ 690,059 $ 15.68 $ 110,402 $ 10.39 AAA 2003 BUDGET 2003/2004 PROJECTED ----------------------------------------------------------------------------- Base Rental Revenue $ 1,727,952 $ 15.71 $ 1,124,357 $ 10.22 Reimbursement Income 0 0.00 94,945 0.86 Misc Income -34,260 (0.31) 5,000 0.05 ----------------------- ----------------------- GROSS POTENTIAL INCOME $ 1,693,692 $ 15.40 $ 1,224,302 $ 11.13 Less General Vacancy -$ 555,000 ($ 5.05) -$ 112,436 ($ 1.02) Less Credit Loss 0 0.00 -24,115 (0.22) ----------------------- ----------------------- EFFECTIVE GROSS INCOME $ 1,138,692 $ 10.35 $ 1,087,751 $ 9.89 Real Estate Taxes $ 111,048 $ 1.01 $ 111,000 $ 1.01 Insurance 21,648 0.20 22,000 0.20 Utilities 320,600 2.91 281,143 2.56 Repairs & Maintenance 37,150 0.34 15,328 0.14 Cleaning 354,060 3.22 315,572 2.87 Marketing/Leasing 6,600 0.06 6,600 0.06 Gen. & Admin. 21,800 0.20 22,000 0.20 Management Fee 64,135 0.58 60,000 0.55 Miscellaneous 66,580 0.61 75,000 0.68 ----------------------- ----------------------- TOTAL EXPENSES $ 1,003,621 $ 9.12 $ 908,643 $ 8.26 NET OPERATING INCOME $ 135,071 1.23 $ 179,108 1.63 Leasing & Capital Costs Tenant Improvements $ 0 0.00 $ 51,121 0.46 Leasing Commissions 0 0.00 5,770 0.05 Structural Reserve 0 0.00 21,998 0.20 ----------------------- ----------------------- NET CASH FLOW $ 135,071 $ 10.35 $ 100,219 $ 10.61
Net Rentable Area (SF): 109,992 REVENUES AND EXPENSES The subject's revenue and expense projections are displayed on the previous chart. Rental income is based on both actual lease rates and terms and market rates previously discussed. Miscellaneous income consists of late rent 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 AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 44 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA 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 rate of 10% plus a collection loss rate of 2% for a total of 12%, based on the subject's historical performance, as well as the anticipated future market conditions. 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 CBD office market, which reports a range of replacement reserves of from $0.10 to $0.50 per square foot. For purposes of this analysis, we have included an allowance of $0.20 per square foot for reserves for replacement. CAPITAL EXPENDITURES Capital expenditures represent expenses for immediate repair or replacement of items that have average to long lives. Based on our inspection of the property as well as discussions with property management personnel, there are no major items remaining in need of repair or replacement that would require an expense beyond our reserves for replacement. Therefore an allowance of $0.20 per square foot should be satisfactory in our reserves for replacement to cover future capital expenditures. DISCOUNTED CASH FLOW ANALYSIS As the subject is a multi-tenant income property, the Discounted Cash Flow Method is considered appropriate. This method is especially meaningful in that it isolates the timing of the annual cash flows and discounts them, along with the expected equity reversion, to a present value. The present value of the cash flow is added to the present value of the reversion, resulting in a total property value. VACANT SPACE ABSORPTION ANALYSIS The subject's office space is 44.4% occupied and has 47,802 square feet of vacant space. The property has signed 21,356 square feet of new or renewing leases in the first six months of 2003. Based on this data, the subject's vacant office space was leased up over a two-year period. The subject's retail portion is 88.8% occupied and has only one vacant space AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 45 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA available. This space was leased up in January 2004 or the ninth month of the first year of operations. TENANT RENEWAL PROBABILITY Because the majority of the subject's tenants are small size companies, with most leasing between 2,000 to 4,000 square feet per suite, a 50% renewal probability was applied. INFLATION RATES Market rent was held flat for the first two years and then grown at a rate of 3% per year thereafter. Operating expenses were inflated at a rate of 3% per year throughout the holding period. 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. 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 the Korpacz National Investor Survey for the most recent period. KORPACZ NATIONAL INVESTOR SURVEY NATIONAL CBD OFFICE MARKET - DISCOUNT RATE (IRR)
RANGE AVERAGE --------------------------------------------------------- 1st Quarter 2003 9.00% to 12.50% 10.92%
Because of the subject's age and small size of commercial space, the discount rate should be above the average for the market. Based on this analysis, the subject's discount rate is estimated to be 11.50%. TERMINAL CAPITALIZATION RATE A terminal capitalization rate of 9.0% is concluded for the subject and applied to the AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 46 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA subject's 11th year cash flow projection. SELLING COSTS Sales of similar size properties are typically accomplished with the aid of a broker and will also incur legal and other transaction related cost. Based on our survey of brokers and a review of institutional investor projections, an allowance of 2.00% of the sale amount is applied. DISCOUNTED CASH FLOW CONCLUSION Discounting the annual cash flows and the equity reversion at the selected rate of 11.50% indicates a value of $3,200,000. 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 47 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA AIMCO STERLING COMMERCE CENTER PRESENT VALUE TABLE AS OF MAY 1, 2003
Discount PV of Yr FYE Cash Flow Factor @ 11.50% Cash Flow ----------------------------------------------------------------- 1 2004 $100,219 0.89686 $ 89,883 2 2005 $193,756 0.80436 $ 155,850 3 2006 $417,818 0.72140 $ 301,413 4 2007 $272,500 0.64699 $ 176,306 5 2008 $431,070 0.58026 $ 250,134 6 2009 $350,126 0.52042 $ 182,211 7 2010 $210,480 0.46674 $ 98,240 8 2011 $180,088 0.41860 $ 75,385 9 2012 ($ 24,917) 0.37543 -$ 9,355 10 2013 $356,903 0.33671 $ 120,172 Present Value of Cash Flow $1,440,239 Year 11 Net Income $ 491,671 Residual Value Capped @ 9% $5,463,011 Cost of Sales @ 2% ($ 109,260) ---------- Net Proceeds $5,353,751 Present Value of Residual $1,802,642 Total Present Value of Cash Flows $1,440,239 ---------- Indicated Value $3,242,881 Rounded $3,200,000
AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 48 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA 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 Sterling Apartment Homes: Cost Approach Not Utilized Sales Comparison Approach $ 66,000,000 Income Approach $ 64,500,000 Reconciled Value $ 65,500,000 Sterling Commerce Center: Cost Approach Not Utilized Sales Comparison Approach Not Utilized Income Approach $ 3,200,000 Reconciled Value $ 3,200,000 Combined Value: $ 68,700,000
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: $68,700,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - FRONT OF BUILDING EXTERIOR - REAR OF BUILDING [PICTURE] [PICTURE] J.F.K. BOULEVARD WESTBOUND INTERIOR - LOBBY LEVEL [PICTURE] [PICTURE] INTERIOR - TYPICAL RESIDENTIAL CORRIDOR INTERIOR - TYPICAL KITCHEN AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] INTERIOR - TYPICAL BATH INTERIOR - TYPICAL LIVING ROOM [PICTURE] [PICTURE] ROOFTOP POOL INTERIOR - 2ND FLOOR OFFICE SPACE (VACANT) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE I-1 COMPARABLE I-2 COMPARABLE I-3 PRESIDENTIAL CITY APTS CEDARBROOK HILL BERKSHIRE TOWERS 3900 City Line Avenue 8460 Limekiln Pike 11215 Oak Leaf Drive Philadelphia, Pennsylvania Wyncote, Pennsylvania Silver Spring, Maryland [PICTURE] N/A [PICTURE] N/A N/A AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE DESCRIPTION SUBJECT R - 1 ------------------------------- ---------------------------------------------- -------------------------------------------------- Property Name Sterling Apartment Homes The Lofts at 1835 Arch Management Company Aimco Forest City Residential LOCATION: Address 1815 John F. Kennedy Boulevard 1835 Arch Street City, State Philadelphia, Pennsylvania Philadelphia, PA County Philadelphia Philadelphia Proximity to Subject 1 Block to the North PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 486,553 197,170 Year Built 1960 2001 Effective Age 7 2 Building Structure Type Brick/Granite Hi-Rise Building Brick Hi-Rise Building Parking Type (Gr., Cov., etc.) Limited Garage Space Limited Spaces Number of Units 536 192 Unit Mix: Type Unit Qty. Mo. Rent Type Unit Qty. Mo. 1 EA10 412 32 $ 896 4 1Br/1Ba 815 104 $1,400 2 EB10 495 137 $ 941 5 1Br/1Ba w/Den 950 28 $1,750 3 1A10 550 48 $1,184 6 2Br/2Ba 1,275 46 $2,200 4 1B10 803 102 $1,302 Penthouse Units 1,940 13 $3,000 5 1C10 920 21 $1,509 6 2A20 1,315 124 $1,772 7 2B20 1,425 32 $2,189 8 2C20 1,794 5 $2,569 9 3A20 1,631 24 $2,251 10 3B20 1,778 8 $2,509 11 3C20 2,215 2 $2,794 12 4A30 2,500 1 $2,459 Average Unit Size (SF) 908 1,022 Unit Breakdown: Efficiency 32% 2-Bedroom 30% Efficiency 0% 2-Bedroom 28% 1-Bedroom 32% 3-Bedroom 6% 1-Bedroom 72% 3-Bedroom 0% CONDITION: Good Very Good APPEAL: Good Good AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling Balcony X W/D Connect. Balcony X W/D Connect. Fireplace Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool Swimming Pool Spa/Jacuzzi Car Wash Spa/Jacuzzi Car Wash Basketball Court BBQ Equipment Basketball Court BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room Sand Volley Ball Meeting Hall Sand Volley Ball X Meeting Hall Tennis Court Secured Parking Tennis Court Secured Parking Racquet Ball Laundry Room Racquet Ball Laundry Room Jogging Track X Business Office Jogging Track X Business Office X Gym Room X Security X Gym Room X Security OCCUPANCY: 91% 98% LEASING DATA: Available Leasing Terms 6 to 15 Months 6 to 15 Months Concessions None None Pet Deposit $200 - $300 $150 Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas X Water X Trash X Water X Trash Confirmation May 13, 2002, John Ditko May 13, 2003, Forest City Telephone Number (215) 563-3401 (215) 568-1835 NOTES: The building is loft conversion COMPARISON TO SUBJECT: Similar COMPARABLE COMPARABLE DESCRIPTION R - 2 R - 3 ------------------------------- ------------------------------------------------- ------------------------------------------------ Property Name Park Towne Place 1500 Locust Management Company Aimco Scully Company LOCATION: Address 2200 Ben Franklin Parkway 1500 Locust Street City, State Philadelphia, PA Philadelphia, PA County Philadelphia Philadelphia Proximity to Subject 3/4 Mile to the NE 1/4 Mile to the SE PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 964,040 563,420 Year Built 1959 Appr. 1990 Effective Age 15 5 Building Structure Type Four Brick Mid-Rise Buildings Masonry Hi-Rise Building Parking Type (Gr., Cov., etc.) Open, Garage Limited Garage Space Number of Units 980 610 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 Studio 460 160 $ 819 2 Studio 497 110 $1,100 4 1Br/1Ba 715 165 $1,024 4 1Br/1Ba 795 125 $1,505 2Br/1Ba 995 165 $1,429 5 1Br/1Ba 898 125 $1,700 6 2Br/2Ba 1,043 165 $1,629 6 2Br/2Ba 1,113 125 $2,183 9 3Br/2Ba 1,223 165 $1,839 7 2Br/2Ba 1,264 125 $2,335 12 4Br/2Ba 1,465 160 $2,074 Average Unit Size (SF) 984 924 Unit Breakdown: Efficiency 16% 2-Bedroom 35% Efficiency 18% 2-Bedroom 41% 1-Bedroom 17% 3-Bedroom 17% 1-Bedroom 41% 3-Bedroom CONDITION: Good Good APPEAL: Average Very Good AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling Balcony W/D Connect. Balcony X W/D Connect. 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 BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room Sand Volley Ball X Meeting Hall Sand Volley Ball X Meeting Hall X Tennis Court Secured Parking Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball Laundry Room Jogging Track X Business Office Jogging Track X Business Office X Gym Room X Security X Gym Room X Security OCCUPANCY: 95% 92% LEASING DATA: Available Leasing Terms 6 to 15 Months 6 to 15 Months Concessions None None Pet Deposit $200 - $300 $200 - $300 Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas X Water X Trash X Water X Trash Confirmation May 13, 2003, Leasing Office May 13, 2003, Leasing Office Telephone Number (215) 568-2200 (215) 893-0800 NOTES: Additional amenities include a free shuttle to Amenities include a year-round indoor pool, Center City (Downtown). sundeck, concierge and banquet facilities. COMPARISON TO SUBJECT: Inferior Superior COMPARABLE DESCRIPTION R - 4 ------------------------------- --------------------------------------------------- Property Name Locust on The Park Management Company Dranoff Properties LOCATION: Address 201 South 25th Street City, State Philadelphia, PA County Philadelphia Proximity to Subject 1/2 Mile to the SW PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 143,599 Year Built Appr. 1990 Effective Age Building Structure Type Renovated Mid-Rise Loft Building Parking Type (Gr., Cov., etc.) Open Number of Units 152 Unit Mix: Type Unit Qty. Mo. 2 Studio 528 21 $1,125 4 1Br/1Ba 809 65 $1,395 6 2Br/2Ba 1,211 66 $1,950 Average Unit Size (SF) 945 Unit Breakdown: Efficiency 14% 2-Bedroom 43% 1-Bedroom 43% 3-Bedroom CONDITION: Slightly Superior APPEAL: Good AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Balcony X W/D Connect. Fireplace X Cable TV Ready Project Amenities Swimming Pool Spa/Jacuzzi Car Wash Basketball Court BBQ Equipment Volleyball Court Theater Room Sand Volley Ball X Meeting Hall Tennis Court Secured Parking Racquet Ball Laundry Room Jogging Track X Business Office X Gym Room X Security OCCUPANCY: 95% LEASING DATA: Available Leasing Terms 6 to 15 Months Concessions None Pet Deposit $300 Utilities Paid by Tenant: X Electric X Natural Gas X Water X Trash Confirmation May 13, 2003, Leasing Office Telephone Number (215) 735-1810 NOTES: Amenities include concierge, storage, internet services and drycleaning deliveries. The building is a loft conversion COMPARISON TO SUBJECT: Similar
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 COMPARABLE R-3 THE LOFTS AT 1835 ARCH PARK TOWNE PLACE 1500 LOCUST 1835 Arch Street 2200 Ben Franklin Parkway 1500 Locust Street Philadelphia, PA Philadelphia, PA Philadelphia, PA [PICTURE] [PICTURE] [PICTURE] COMPARABLE R-4 LOCUST ON THE PARK 201 South 25th Street Philadelphia, PA [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA 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 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA 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 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA 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 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA EXHIBIT D CERTIFICATES OF APPRAISERS (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. Richard Mupo 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 State of Pennsylvania Certified General Appraiser #GA003334 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA EXHIBIT E QUALIFICATIONS OF APPRAISERS (2 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA 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 STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA PROFESSIONAL Appraisal Institute, MAI Designated Member AFFILIATIONS Candidate Member of the CCIM Institute pursuing Certified Commercial Investment Member (CCIM) designation PUBLICATIONS "An Analysis of the Determinants of Industrial Property -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. STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. STERLING APARTMENT HOMES, PHILADELPHIA, PENNSYLVANIA 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.