EX-99.(C)(2) 4 d07256a1exv99wxcyx2y.txt APPRAISAL OF ARBOURS OF HERMITAGE ARBOURS OF HERMITAGE 6001 OLD HICKORY ROAD HERMITAGE, TENNESSEE MARKET VALUE - FEE SIMPLE ESTATE AS OF MAY 5, 2003 PREPARED FOR: APARTMENT INVESTMENT AND MANAGEMENT COMPANY (AIMCO) C/O LINER YANKELEVITZ SUNSHINE & REGENSTREIF LLP & LIEFF CABRASER HEIMANN & BERNSTEIN ON BEHALF OF NUANES, ET. AL. [AMERICAN APPRAISAL ASSOCIATES(R) LOGO] [AMERICAN APPRAISAL ASSOCIATES(R) LOGO] [AMERICAN APPRAISAL ASSOCIATES(R) LETTERHEAD] JUNE 30, 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: ARBOURS OF HERMITAGE 6001 OLD HICKORY ROAD HERMITAGE, DAVIDSON COUNTY, TENNESSEE 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 350 units with a total of 386,100 square feet of rentable area. The improvements were built in 1972. The improvements are situated on 28.01 acres. Overall, the improvements are in average condition. As of the date of this appraisal, the subject property is 96% occupied. It is our understanding the appraisal will be used by the clients to assist the San Mateo Superior Court in the settlement of litigation between the above mentioned clients. The appraisal is intended to conform to the Uniform Standards of Professional Appraisal Practice ("USPAP") as promulgated by the Appraisal Standards Board of the Appraisal Foundation and the Code of Professional Ethics and Standards of Professional Practice of the Appraisal Institute. The appraisal is presented in a summary report, and the Departure Provision of USPAP has not been invoked in this appraisal. It is entirely inappropriate to use this value conclusion or the report for any purpose other than the one stated. AMERICAN APPRAISAL ASSOCIATES, INC. LETTER OF TRANSMITTAL PAGE 2 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE 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 5, 2003 is: ($15,000,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. -s- Frank Fehribach #053272 Managing Principal, Real Estate Group Tennessee Temporary Practice Permit #00053573 Report By: Daniel Salcedo Tennessee Temporary Practice Permit #00053558 AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE TABLE OF CONTENTS Cover Letter of Transmittal Table of Contents APPRAISAL DATA Executive Summary ....................................................... 4 Introduction ............................................................ 9 Area Analysis ........................................................... 11 Market Analysis ......................................................... 14 Site Analysis ........................................................... 16 Improvement Analysis .................................................... 16 Highest and Best Use .................................................... 17 VALUATION Valuation Procedure ..................................................... 18 Sales Comparison Approach ............................................... 20 Income Capitalization Approach .......................................... 26 Reconciliation and Conclusion ........................................... 38 ADDENDA Exhibit A - Photographs of Subject Property Exhibit B - Summary of Rent Comparables and Photograph of Comparables Exhibit C - Assumptions and Limiting Conditions Exhibit D - Certificate of Appraiser Exhibit E - Qualifications General Service Conditions
AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 4 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Arbours of Hermitage LOCATION: 6001 Old Hickory Road Hermitage, Tennessee 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 5, 2003 DATE OF REPORT: June 30, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 28.01 acres, or 1,220,116 square feet Assessor Parcel No.: 128-00-0-099 Floodplain: Community Panel No. 47037C0308F (April 20, 2001) Flood Zone X, an area outside the floodplain. Zoning: RM-15 (Medium to High Density Apartment District) BUILDING: No. of Units: 350 Units Total NRA: 386,100 Square Feet Average Unit Size: 1,103 Square Feet Apartment Density: 12.5 units per acre Year Built: 1972 UNIT MIX AND MARKET RENT: GROSS RENTAL INCOME PROJECTION
Market Rent Square ----------------------- Monthly Annual Unit Type Feet Per Unit Per SF Income Income --------------------------------------------------------------------------------- 1Br/1Ba -1A10 770 $ 530 $ 0.69 $ 38,160 $ 457,920 1Br/1.5Ba -1B15 750 $ 530 $ 0.71 $ 20,140 $ 241,680 2Br/1.5Ba - 2A15 1,110 $ 600 $ 0.54 $ 48,000 $ 576,000 2Br/2Ba - 2A20 1,270 $ 675 $ 0.53 $ 32,400 $ 388,800 2Br/2Ba -2B20 1,325 $ 700 $ 0.53 $ 44,800 $ 537,600 3Br/2Ba - 3A20 1,325 $ 720 $ 0.54 $ 11,520 $ 138,240 3Br/2.5Ba -3A25 1,450 $ 750 $ 0.52 $ 24,000 $ 288,000 --------------------------------------------------------------------------------- Total $ 219,020 $2,628,240 =================================================================================
OCCUPANCY: 96% AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE ECONOMIC LIFE: 45 Years EFFECTIVE AGE: 20 Years REMAINING ECONOMIC LIFE: 25 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [UNIT TYPE FACADE PICTURE] [UNIT TYPE PICTURE] [AREA MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE [NEIGHBORHOOD MAP] HIGHEST AND BEST USE: As Vacant: Hold for future multi-family development As Improved: Continuation as its current use METHOD OF VALUATION: In this instance, the Sales Comparison and Income Approaches to value were utilized. AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 7 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
Amount $/Unit ------ ------ DIRECT CAPITALIZATION Potential Rental Income $2,628,240 $7,509 Effective Gross Income $2,782,078 $7,949 Operating Expenses $1,232,854 $3,522 44.3% of EGI Net Operating Income: $1,461,724 $4,176 Capitalization Rate 9.75% DIRECT CAPITALIZATION VALUE $15,000,000 * $42,857 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 7% Stabilized Vacancy & Collection Loss: 5% Lease-up / Stabilization Period N/A Terminal Capitalization Rate 10.75% Discount Rate 12.50% Selling Costs 2.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $15,100,000 * $43,143 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $15,000,000 $42,857 / UNIT SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $17,808 to $78,415 Range of Sales $/Unit (Adjusted) $36,507 to $47,049 VALUE INDICATION - PRICE PER UNIT $15,400,000 * $44,000 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 4.64 to 6.66 Selected EGIM for Subject 5.50 Subject's Projected EGI $2,782,078 EGIM ANALYSIS CONCLUSION $15,300,000 * $43,714 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $15,800,000 * $45,143 / UNIT RECONCILED SALES COMPARISON VALUE $15,400,000 $44,000 / UNIT
------------------------ * Value indications are after adjustments for concessions, deferred maintenance, excess land and lease-up costs, if any. AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 8 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $15,400,000 NOI Per Unit $15,800,000 EGIM Multiplier $15,300,000 INDICATED VALUE BY SALES COMPARISON $15,400,000 $44,000 / UNIT INCOME APPROACH: Direct Capitalization Method: $15,000,000 Discounted Cash Flow Method: $15,100,000 INDICATED VALUE BY THE INCOME APPROACH $15,000,000 $42,857 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $15,000,000 $42,857 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 6001 Old Hickory Road, Hermitage, Davidson County, Tennessee. Hermitage identifies it as 128-00-0-099. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by Daniel Salcedo on May 5, 2003. Frank Fehribach, MAI has not made a personal inspection of the subject property. Daniel Salcedo performed the research, valuation analysis and wrote the report. Frank Fehribach, MAI reviewed the report and concurs with the value. Frank Fehribach, MAI and Daniel Salcedo 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 5, 2003. The date of the report is June 30, 2003. PURPOSE AND USE OF APPRAISAL The purpose of the appraisal is to estimate the market value of the fee simple interest in the subject property. It is understood that the appraisal is intended to assist the clients in litigation settlement proceedings. The appraisal was not based on a requested minimum valuation, a specific valuation, or the approval of a loan. PROPERTY RIGHTS APPRAISED We have appraised the Fee Simple Estate in the subject property (as applied in the Sales & Income Approaches), subject to the existing short-term leases. A Fee Simple Estate is AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 10 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE 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 CCP 4. To the best of our knowledge, no transfers of ownership or offers to purchase the subject are known to have occurred during the past three years. AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 11 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE 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 Hermitage, Tennessee. Overall, the neighborhood is characterized as an urban setting with the predominant land use being residential. The subject's neighborhood is generally defined by the following boundaries. NEIGHBORHOOD BOUNDARIES East - Old Hickory Road West - SR-70 South - SR-70 North - I-40 MAJOR EMPLOYERS Major employers in the subject's area include ComPlus, Concentra, Staurn Corporation, Gaylord Entertainment, Nissan Motor Manufacturing Corporation, Kroger Company, Reemay Inc., United Parcel Service, First American National Bank, Shoney's Inc., BellSouth, Inter City Pro Corporation, NationsBank, and Bridgestone/Firestone. The overall economic outlook for the area is considered favorable. DEMOGRAPHICS We have reviewed demographic data within the neighborhood. The following table summarizes the key data points. AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 12 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE NEIGHBORHOOD DEMOGRAPHICS
AREA ------------------------------------------ CATEGORY 1-Mi. RADIUS 3-Mi. RADIUS 5-Mi. RADIUS MSA -------------------------------------------------------------------------------------- POPULATION TRENDS Current Population 6,828 35,076 71,257 1,275,686 5-Year Population 7,808 38,807 77,356 1,391,452 % Change CY-5Y 14.4% 10.6% 8.6% 9.1% Annual Change CY-5Y 2.9% 2.1% 1.7% 1.8% HOUSEHOLDS Current Households 3,604 15,284 29,882 499,284 5-Year Projected Households 4,237 17,214 33,018 550,820 % Change CY - 5Y 17.6% 12.6% 10.5% 10.3% Annual Change CY-5Y 3.5% 2.5% 2.1% 2.1% INCOME TRENDS Median Household Income $ 44,485 $ 47,447 $ 51,976 $ 45,328 Per Capita Income $ 27,824 $ 23,883 $ 24,245 $ 23,901 Average Household Income $ 55,361 $ 54,829 $ 57,734 $ 61,067
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 65.40% 41.82% 32.49% 31.23% 5-Year Projected % Renting 65.53% 41.00% 31.78% 30.53% % of Households Owning 27.13% 50.50% 61.09% 61.72% 5-Year Projected % Owning 27.66% 51.83% 62.19% 62.91%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Sawyer Brown Road South - Single family residence East - Cross Timbers Road West - Hicks Road CONCLUSIONS The subject is well located within the city of Hermitage. 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 14 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE MARKET ANALYSIS The subject property is located in the city of Hermitage in Davidson County. The overall pace of development in the subject's market is more or less decreasing. Based on our site inspection of the market area, there was no evidence of additional development for multifamily use. The following table illustrates historical vacancy rates for the subject's market. HISTORICAL VACANCY RATE
Period Region Submarket -------------------------------------------------------------------------------- 1997 5.5% 5.0% 1998 6.7% 6.0% 1999 5.9% 7.0% 2000 5.9% 7.9% 2001 8.3% 8.6% 2002 8.0% 8.0%
Source: Greater Nashville Apartment Association Occupancy trends in the subject's market are stable. Historically speaking, the subject's submarket has equated the overall market. Occupancy in the subject's market area is expected to be around 94.0% in average. Any expected changes are caused by the short time fluctuations derived from the current economic situation affecting the local, regional and national markets. Market rents in the subject's market have been following an increasing trend. The following table illustrates historical rental rates for the subject's market. HISTORICAL AVERAGE RENT
Period Region % Change Submarket % Change -------------------------------------------------------------------------------- 1996 $583 - $735 - 1997 $604 3.6% $760 3.4% 1998 $634 5.0% $769 1.2% 1999 $647 2.1% $784 2.0% 2000 $667 3.1% $796 1.5% 2001 $677 1.5% $814 2.3% 2002 $685 1.2% $820 0.7%
Source: Greater Nashville Apartment Association The following table illustrates a summary of the subject's competitive set. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 15 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE COMPETITIVE PROPERTIES
No. Property Name Units Ocpy. Year Built Proximity to subject ------------------------------------------------------------------------------------------------------------- R-1 Creekstone 316 93% 1986 Approx. 3.5 miles west of subject R-2 Spinnaker Cove 278 94% 1986 Approx. 0.2 miles northwest of subject R-3 Burning Tree 280 95% 1978 Approx. 0.8 miles north of subject R-4 Lincoya Bay 180 94% 1974 Approx. 2.9 miles southwest of subject R-5 Park at Hermitage 440 94% 1986 Approx. 0.2 miles north of subject ============================================================================================================= Subject Arbours of Hermitage 350 96% 1972 =============================================================================================================
Rental rates are expected to stabilize. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE PROPERTY DESCRIPTION SITE ANALYSIS Site Area 28.01 acres, or 1,220,116 square feet Shape Irregular Topography Slightly slope Utilities All necessary utilities are available to the site. Soil Conditions Stable Easements Affecting Site None other than typical utility easements Overall Site Appeal Average Flood Zone: Community Panel 47037C0308F, dated April 20, 2001 Flood Zone Zone X Zoning RM-15, 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 ------------------------------------------------------------------------------ 128-00-0-099 $560,000 $4,446,920 $5,006,920 0.03840 $192,266 ==============================================================================
IMPROVEMENT ANALYSIS Year Built 1972 Number of Units 350 Net Rentable Area 386,100 Square Feet Construction: Foundation Concrete block wall Frame Heavy or light wood Exterior Walls Brick or masonry Roof Composition shingle over a wood truss structure Project Amenities Amenities at the subject include a swimming pool, tennis court, gym room, meeting hall, laundry room, business office, boat storage, and parking area. Unit Amenities Individual unit amenities include a balcony, fireplace, cable TV connection, and washer dryer connection. Appliances available in each unit include a refrigerator, stove, microwave dishwasher, water heater, garbage disposal, and oven. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 17 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE Unit Mix: Unit Area Unit Type Number of Units (Sq. Ft.) ------------------------------------------------ 1Br/1Ba -1A10 72 770 1Br/1.5Ba -1B15 38 750 2Br/1.5Ba - 2A15 80 1,110 2Br/2Ba - 2A20 48 1,270 2Br/2Ba -2B20 64 1,325 3Br/2Ba - 3A20 16 1,325 3Br/2.5Ba -3A25 32 1,450
Overall Condition Average Effective Age 20 years Economic Life 45 years Remaining Economic Life 25 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 1972 and consist of a 350-unit multifamily project. The highest and best use as improved is for a continued multifamily use. Overall, the highest and best use of the subject property is the continued use of the existing apartment project. AMERICAN APPRAISAL ASSOCIATES, INC. VALUATION PROCEDURE PAGE 18 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE THE VALUATION PROCEDURE There are three traditional approaches, which can be employed in establishing the market value of the subject property. These approaches and their applicability to the valuation of the subject are summarized as follows: THE COST APPROACH The application of the Cost Approach is based on the principle of substitution. This principle may be stated as follows: no one is justified in paying more for a property than that amount by which he or she can obtain, by purchase of a site and construction of a building, without undue delay, a property of equal desirability and utility. In the case of a new building, no deficiencies in the building should exist. In the case of income-producing real estate, the cost of construction plays a minor and relatively insignificant role in determining market value. The Cost Approach is typically only a reliable indicator of value for: (a) new properties; (b) special use properties; and (c) where the cost of reproducing the improvements is easily and accurately quantified and there is no economic obsolescence. In all instances, the issue of an appropriate entrepreneurial profit - the reward for undertaking the risk of construction, remains a highly subjective factor especially in a market lacking significant speculative development. THE SALES COMPARISON APPROACH The Sales Comparison Approach is an estimate of value based upon a process of comparing recent sales of similar properties in the surrounding or competing areas to the subject property. Inherent in this approach is the principle of substitution. The application of this approach consists of comparing the subject property with similar properties of the same general type, which have been sold recently or currently are available for sale in competing areas. This comparative process involves judgment as to the similarity of the subject property and the comparable sale with respect to many value factors such as location, contract rent levels, quality of construction, reputation and prestige, age and condition, among others. The estimated value through this approach represents the probable price at which a willing seller would sell the subject property to a willing and knowledgeable buyer as of the date of value. AMERICAN APPRAISAL ASSOCIATES, INC. VALUATION PROCEDURE PAGE 19 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE THE INCOME CAPITALIZATION APPROACH The theory of the Income Capitalization Approach is based on the premise that present value is the value of the cash flow and reversionary value the property will produce over a reasonable holding (ownership) period. The Discounted Cash Flow Analysis will convert equity cash flows (including cash flows and equity reversion) into a present value utilizing an internal rate of return (or discount rate). The Internal Rate of Return (IRR) will be derived from a comparison of alternate investments, a comparative analysis of IRR's used by recent buyers of similar properties, and a review of published industry surveys. The Direct Capitalization Analysis converts one year of income into an overall value using overall capitalization rates from similar sales. The overall rates take into consideration buyers assumptions of the market over the long-term. The results of the Income Capitalization Analysis are usually the primary value indicator for income producing properties. Investors expect a reasonable rate of return on their equity investment based on the ownership risks involved; this approach closely parallels the investment decision process. RECONCILIATION In this instance, we have completed the Sales Comparison and Income Capitalization Approaches to value. As an income producing property, the income approach is a primary approach to value. The Sales Comparison Approach is also considered reliable as investors are buying similar buildings in the market. Our research indicates that market participants are generally not buying, selling, investing, or lending with reliance placed on the methodology of the Cost Approach to establish the value. Therefore, we have decided that the Cost Approach is not a reliable indicator of value for the subject, and this approach has not been utilized. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 20 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE SALES COMPARISON APPROACH Use of market or comparable sales requires the collection and analysis of comparable sales data. Similar properties recently sold are compared to the subject and adjusted based on any perceived differences. This method is based on the premise that the costs of acquiring a substitute property would tend to establish a value for the subject property. The premise suggests that if a substitute is unavailable in the market, the reliability of the approach may be subordinate to the other approaches. The reliance on substitute properties produces shortcomings in the validity of this approach. Geographic and demographic characteristics from each submarket restrict which sales may be selected. Recent sales with a similar physical characteristics, income levels, and location are usually limited. The sales we have identified, however, do establish general valuation parameters as well as provide support to our conclusion derived through the income approach method. The standard unit of comparison among similar properties is the sales price per unit and price per square foot of net rentable area. To accurately adjust prices to satisfy the requirements of the sales comparison approach, numerous calculations and highly subjective judgments would be required including consideration of numerous income and expense details for which information may be unreliable or unknown. The sales price per unit and square foot are considered relevant to the investment decision, but primarily as a parameter against which value estimates derived through the income approach can be judged and compared. In examining the comparable sales, we have applied a subjective adjustment analysis, which includes specific adjustments derived from our experience and consulting with the market participants. SALES COMPARISON ANALYSIS Detailed on the following pages are sales transactions involving properties located in the subject's competitive investment market. Photographs of the sale transactions are located in the Addenda. Following the summary of sales is an adjustment grid that is used to arrive at a value. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 21 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE SUMMARY OF COMPARABLE SALES -IMPROVED
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 ----------------------------------------------------------------------------------------------------------------------- Property Name Arbours of Hermitage Alta Lake Colonnade LOCATION: Address 6001 Old Hickory Road 3960 Bell Road 4100 Central Pike City, State Hermitage, Tennessee Hermitage, TN Nashville, TN County Davidson Davidson Davidson PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 386,100 360,144 259,776 Year Built 1972 2001 1985 Number of Units 350 366 352 Unit Mix: Type Total Type Total Type Total 1Br/1Ba -1A10 72 1Br/1Ba 189 1Br/1Ba 108 1Br/1.5Ba -1B15 38 2Br/2Ba 129 2Br/2Ba 156 2Br/1.5Ba - 2A15 80 3Br/2Ba 48 3Br/2Ba 24 2Br/2Ba - 2A20 48 2Br/2Ba -2B20 64 3Br/2Ba - 3A20 16 3Br/2.5Ba -3A25 32 Average Unit Size (SF) 1,103 984 738 Land Area (Acre) 28.0100 31.1500 13.4800 Density (Units/Acre) 12.5 11.7 26.1 Parking Ratio (Spaces/Unit) 2.20 2.50 2.20 Parking Type (Gr., Cov., etc.) Open Open, Caroport/Garage Open, Carport/Garage CONDITION: Good Good Good APPEAL: Average Good Good AMENITIES: Pool/Spa Yes/No Yes/No Yes/No Gym Room Yes Yes Yes Laundry Room Yes Yes No Secured Parking No Yes Yes Sport Courts Yes No No Washer/Dryer Connection Yes Yes Yes Storage (Boat) Yes Yes Yes OCCUPANCY: 96% 94% 95% TRANSACTION DATA: Sale Date April, 2002 January, 1999 Sale Price ($) $28,700,000 $17,420,000 Grantor Wood Partners Nashville 2 Central Pike Apts LP Grantee USB Realty Investors United Dominion Realty Trust Sale Documentation Deed -20020611-00771164 Deed-00011288-0000152 Verification Bair Carroll Brian Houchin Telephone Number 615,874,2400 615,391,2232 ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $5,214,312 $14,247 $14.48 $2,753,760 $7,823 $10.60 Vacancy/Credit Loss $ 365,002 $ 997 $ 1.01 $ 137,688 $ 391 $ 0.53 Effective Gross Income $4,849,310 $13,249 $13.46 $2,616,072 $7,432 $10.07 Operating Expenses $2,128,210 $ 5,815 $ 5.91 $1,067,200 $3,032 $ 4.11 Net Operating Income $2,721,100 $ 7,435 $ 7.56 $1,548,872 $4,400 $ 5.96 NOTES: Overall Superior Overall Superior PRICE PER UNIT $ 78,415 $49,489 PRICE PER SQUARE FOOT $ 79.69 $ 67.06 EXPENSE RATIO 43.9% 40.8% EGIM 5.92 6.66 OVERALL CAP RATE 9.48% 8.89% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA COMPARABLE COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 I - 5 ------------------------------------------------------------------------------------------------------------------------------------ Property Name Hermitage Gardens Berkley Ridge (Summittree) Waterford Landing Hermitage LOCATION: Address 4701 Old Hickory Blvd 308 Plus Park Blvd 5901 Old Hickory Blvd City, State Nashville, TN Nashville, TN Hermitae, TN County Davidson Davidson Davidson PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 66,868 227,408 200,008 Year Built 1962 1972 1998 Number of Units 73 244 184 Unit Mix: Type Total Type Total Type Total 1Br/1Ba 25 1Br/1Ba 90 1Br/1Ba 76 2Br/1Ba 48 2Br/2Ba 130 2Br/2Ba 82 3Br/2Ba 24 3Br/2Ba 26 Average Unit Size (SF) 916 932 1,087 Land Area (Acre) 3.0300 18.1100 14.9600 Density (Units/Acre) 24.1 13.5 12.3 Parking Ratio (Spaces/Unit) 2.00 2.80 2.00 Parking Type (Gr., Cov., etc.) Open Open Open CONDITION: Fair Average Average APPEAL: Fair Average Average AMENITIES: Pool/Spa Yes/No Yes/No Yes/No Gym Room No No No Laundry Room Yes Yes Yes Secured Parking No No Yes Sport Courts No No No Washer/Dryer Connection Yes No Yes Storage (Boat) No No Yes OCCUPANCY: 90% 90% 94% TRANSACTION DATA: Sale Date October, 2001 June, 2001 June, 2002 Sale Price ($) $1,300,000 $6,550,000 $10,200,000 Grantor N/A N/A N/A Grantee Hermitage Garden Apartments RCP Summitree LLC Waterford Landing-Hermitage LP LP Sale Documentation Deed-20011029-011773 Deed-20010619-0064950 Deed-20020626-0077077 Verification Bruce Graustein Ellen Parker Tabbetha Moller Telephone Number 615.883.6861 615.360.6004 615.884.9948 ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $ 311,111 $ 4,262 $4.65 $1,384,205 $5,673 $6.09 $1,941,769 $10,553 $9.71 Vacancy/Credit Loss $ 31,111 $ 426 $0.47 $ 138,421 $ 567 $0.61 $ 116,506 $ 633 $0.58 Effective Gross Income $ 280,000 $ 3,836 $4.19 $1,245,784 $5,106 $5.48 $1,825,263 $ 9,920 $9.13 Operating Expenses $ 152,650 $ 2,091 $2.28 $ 671,434 $2,752 $2.95 $ 830,863 $ 4,516 $4.15 Net Operating Income $ 127,350 $ 1,745 $1.90 $ 574,350 $2,354 $2.53 $ 994,400 $ 5,404 $4.97 NOTES: Overall Inferior Overall Slightly Inferior Overall Comparable PRICE PER UNIT $ 17,808 $26,844 $55,435 PRICE PER SQUARE FOOT $ 19.44 $ 28.80 $ 51.00 EXPENSE RATIO 54.5% 53.9% 45.5% EGIM 4.64 5.26 5.59 OVERALL CAP RATE 9.80% 8.77% 9.75% Cap Rate based on Pro Forma or Actual Income? PRO FORMA PRO FORMA PRO FORMA
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE IMPROVED SALES MAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $17,808 to $78,415 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 $36,507 to $47,049 per unit with a mean or average adjusted price of $43,574 per unit. The median adjusted price is $44,348 per unit. Based on the following analysis, we have concluded to a value of $44,000 per unit, which results in an "as is" value of $15,400,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE SALES ADJUSTMENT GRID
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 ----------------------------------------------------------------------------------------------------------------- Property Name Arbours of Hermitage Alta Lake Colonnade Address 6001 Old Hickory Road 3960 Bell Road 4100 Central Pike City Hermitage, Tennessee Hermitage, TN Nashville, TN Sale Date April, 2002 January, 1999 Sale Price ($) $28,700,000 $17,420,000 Net Rentable Area (SF) 386,100 360,144 259,776 Number of Units 350 366 352 Price Per Unit $78,415 $49,489 Year Built 1972 2001 1985 Land Area (Acre) 28.0100 31.1500 13.4800 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) 04-2002 0% 01-1999 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $78,415 $49,489 Location Superior -10% Comparable 0% Number of Units 350 366 0% 352 0% Quality / Appeal Good Superior -15% Comparable 0% Age / Condition 1972 2001 / Good -15% 1985 / Good -10% Occupancy at Sale 96% 94% 0% 95% 0% Amenities Good Comparable 0% Comparable 0% Average Unit Size (SF) 1,103 984 0% 738 5% PHYSICAL ADJUSTMENT -40% -5% FINAL ADJUSTED VALUE ($/UNIT) $47,049 $47,014 COMPARABLE COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 I - 5 ------------------------------------------------------------------------------------------------------------------------ Property Name Hermitage Gardens Berkley Ridge (Summittree) Waterford Landing Hermitage Address 4701 Old Hickory Blvd 308 Plus Park Blvd 5901 Old Hickory Blvd City Nashville, TN Nashville, TN Hermitae, TN Sale Date October, 2001 June, 2001 June, 2002 Sale Price ($) $1,300,000 $6,550,000 $10,200,000 Net Rentable Area (SF) 66,868 227,408 200,008 Number of Units 73 244 184 Price Per Unit $17,808 $26,844 $55,435 Year Built 1962 1972 1998 Land Area (Acre) 3.0300 18.1100 14.9600 VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate 0% Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Arm's Length 0% Date of Sale (Time) 10-2001 0% 06-2001 0% 06-2002 0% VALUE AFTER TRANS. ADJUST. ($/UNIT) $17,808 $26,844 $55,435 Location Comparable 0% Inferior 35% Superior -5% Number of Units 73 -5% 244 0% 184 -5% Quality / Appeal Inferior 40% Inferior 25% Comparable 0% Age / Condition 1962 / Fair 30% 1972 / Average 0% 1998 / Average -10% Occupancy at Sale 90% 0% 90% 0% 94% 0% Amenities Inferior 40% Comparable 0% Comparable 0% Average Unit Size (SF) 916 0% 932 0% 1,087 0% PHYSICAL ADJUSTMENT 105% 60% -20% FINAL ADJUSTED VALUE ($/UNIT) $36,507 $42,951 $44,348
SUMMARY VALUE RANGE (PER UNIT) $36,507 TO $47,049 MEAN (PER UNIT) $43,574 MEDIAN (PER UNIT) $44,348 VALUE CONCLUSION (PER UNIT) $44,000
VALUE INDICATED BY SALES COMPARISON APPROACH $15,400,000 ROUNDED $15,400,000
NET OPERATING INCOME (NOI) ANALYSIS We have also conducted a net operating income (NOI) comparison analysis. The NOI effectively takes into account the various physical, location, and operating aspects of the sale. When the subject's NOI is compared to the sale NOI, a percent adjustment can be arrived at. The following table illustrates this analysis. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 24 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE 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-1 366 $28,700,000 9.48% $2,721,100 $1,461,724 0.562 $44,049 $ 78,415 $ 7,435 $ 4,176 I-2 352 $17,420,000 8.89% $1,548,872 $1,461,724 0.949 $46,971 $ 49,489 $ 4,400 $ 4,176 I-3 73 $ 1,300,000 9.80% $ 127,350 $1,461,724 2.394 $42,633 $ 17,808 $ 1,745 $ 4,176 I-4 244 $ 6,550,000 8.77% $ 574,350 $1,461,724 1.774 $47,628 $ 26,844 $ 2,354 $ 4,176 I-5 184 $10,200,000 9.75% $ 994,400 $1,461,724 0.773 $42,839 $ 55,435 $ 5,404 $ 4,176
PRICE/UNIT
Low High Average Median $42,463 $47,628 $44,824 $44,049
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT Estimated Price Per Unit $ 45,000 ----------- Number of Units 350 ----------- Value Based on NOI Analysis $15,750,000 Rounded $15,800,000
The adjusted sales indicate a range of value between $42,633 and $47,628 per unit, with an average of $44,824 per unit. Based on the subject's competitive position within the improved sales, a value of $45,000 per unit is estimated. This indicates an "as is" market value of $15,800,000 (rounded after necessary adjustment, if any) for the NOI Per Unit Analysis. EFFECTIVE GROSS INCOME MULTIPLIER (EGIM) ANALYSIS The effective gross income multiplier (EGIM) is derived by dividing the sales price by the total effective gross income. The following table illustrates the EGIMs for the comparable improved sales. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 25 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE 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-1 366 $28,700,000 $4,849,310 $2,128,210 43.89% 5.92 $ 78,415 I-2 352 $17,420,000 $2,616,072 $1,067,200 40.79% 6.66 $ 49,489 I-3 73 $ 1,300,000 $ 280,000 $ 152,650 54.52% 4.64 44.31% $ 17,808 I-4 244 $ 6,550,000 $1,245,784 $ 671,434 53.90% 5.26 $ 26,844 I-5 184 $10,200,000 $1,825,263 $ 830,863 45.52% 5.59 $ 55,435
EGIM
Low High Average Median 4.64 6.66 5.61 5.59
VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES Estimate EGIM 5.50 ----------- Subject EGI $ 2,782,078 ----------- Value Based on EGIM Analysis $15,301,429 Rounded $15,300,000 Value Per Unit $ 43,714
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 44.31% before reserves. The comparable sales indicate a range of expense ratios from 40.79% to 54.52%, while their EGIMs range from 4.64 to 6.66. Overall, we conclude to an EGIM of 5.50, which results in an "as is" value estimate in the EGIM Analysis of $15,300,000. 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 $15,400,000. Price Per Unit $15,400,000 NOI Per Unit $15,800,000 EGIM Analysis $15,300,000 Sales Comparison Conclusion $15,400,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE INCOME CAPITALIZATION APPROACH The income capitalization approach is based on the premise that value is created by the expectation of future benefits. We estimated the present value of those benefits to derive an indication of the amount that a prudent, informed purchaser-investor would pay for the right to receive them as of the date of value. This approach requires an estimate of the NOI of a property. The estimated NOI is then converted to a value indication by use of either the direct capitalization or the discounted cash flow analysis (yield capitalization). Direct capitalization uses a single year's stabilized NOI as a basis for a value indication by dividing the income by a capitalization rate. The rate chosen accounts for a recapture of the investment by the investor and should reflect all factors that influence the value of the property, such as tenant quality, property condition, neighborhood change, market trends, interest rates, and inflation. The rate may be extracted from local market transactions or, when transaction evidence is lacking, obtained from trade sources. A discounted cash flow analysis focuses on the operating cash flows expected from the property and the proceeds of a hypothetical sale at the end of a holding period (the reversion). The cash flows and reversion are discounted to their present values using a market-derived discount rate and are added together to obtain a value indication. Because benefits to be received in the future are worth less than the same benefits received in the present, this method weights income in the early years more heavily than the income and the sale proceeds to be received later. The strength of the discounted cash flow method is its ability to recognize variations in projected net income, such as those caused by inflation, stepped leases, neighborhood change, or tenant turnover. Its weakness is that it requires many judgments regarding the actions of likely buyers and sellers of the property in the future. In some situations, both methods yield a similar result. The discounted cash flow method is typically more appropriate for the analysis of investment properties with multiple or long-term leases, particularly leases with cancellation clauses or renewal options. It is especially useful for multi-tenant properties in volatile markets. The direct capitalization AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 27 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE method is normally more appropriate for properties with relatively stable operating histories and expectations. A pro forma analysis for the first year of the investment is made to estimate a reasonable potential net operating income for the Subject Property. Such an analysis entails an estimate of the gross income the property should command in the marketplace. From this total gross income must be deducted an allowance for vacancy/collection loss and operating expenses as dictated by general market conditions and the overall character of the subject's tenancy and leased income to arrive at a projected estimate of net operating income. Conversion of the net operating income to an indication of value is accomplished by the process of capitalization, as derived primarily from market data. MARKET RENT ANALYSIS In order to determine a market rental rate for the subject, a survey of competing apartment communities was performed. This survey was displayed previously in the market analysis section of the report. Detailed information pertaining to each of the comparable rental communities, along with photographs, is presented in the Addenda of this report. The following charts display the subject's current asking and actual rent rates as well as a comparison with the previous referenced comparable rental properties. SUMMARY OF ACTUAL AVERAGE RENTS
Average Unit Area ---------------- Unit Type (Sq. Ft.) Per Unit Per SF % Occupied -------------------------------------------------------- 1Br/1Ba -1A10 770 $529 $0.69 97.2% 1Br/1.5Ba -1B15 750 $523 $0.70 94.7% 2Br/1.5Ba - 2A15 1110 $599 $0.54 93.8% 2Br/2Ba - 2A20 1270 $653 $0.51 91.7% 2Br/2Ba -2B20 1325 $682 $0.51 100.0% 3Br/2Ba - 3A20 1325 $719 $0.54 100.0% 3Br/2.5Ba -3A25 1450 $749 $0.52 96.9%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE RENT ANALYSIS
COMPARABLE RENTS ------------------------------------------------------------ R-1 R-2 R-3 R-4 R-5 ------------------------------------------------------------ Spinnaker Burning Lincoya Park at Creekstone Cove Tree Bay Hermitage ------------------------------------------------------------ SUBJECT SUBJECT COMPARISON TO SUBJECT SUBJECT UNIT ACTUAL ASKING ------------------------------------------------------------ DESCRIPTION TYPE RENT RENT Slightly Inferior Similar Inferior Inferior Similar --------------------------------------------------------------------------------------------------------------------------- Monthly Rent 1Br/1Ba -1A10 $ 529 $ 518 Unit Area (SF) 770 770 Monthly Rent Per Sq. Ft. $ 0.69 $ 0.67 Monthly Rent 1Br/1.5Ba -1B15 $ 523 $ 524 $ 767 $ 515 Unit Area (SF) 750 750 832 750 Monthly Rent Per Sq. Ft. $ 0.70 $ 0.70 $ 0.92 $ 0.69 Monthly Rent 2Br/1.5Ba - $ 599 $ 591 $ 600 $ 613 $ 543 $ 619 Unit Area (SF) 2A15 1,110 1,110 600 1,000 775 684 Monthly Rent Per Sq. Ft. $ 0.54 $ 0.53 $1.00 $ 0.61 $ 0.70 $ 0.90 Monthly Rent 2Br/2Ba - 2A20 $ 653 $ 621 $ 626 Unit Area (SF) 1,270 1,270 1,080 Monthly Rent Per Sq. Ft. $ 0.51 $ 0.49 $ 0.58 Monthly Rent 2Br/2Ba -2B20 $ 682 $ 667 $ 789 Unit Area (SF) 1,325 1,325 1,101 Monthly Rent Per Sq. Ft. $ 0.51 $ 0.50 $ 0.72 Monthly Rent 3Br/2Ba - 3A20 $ 719 $ 716 Unit Area (SF) 1,325 1,325 Monthly Rent Per Sq. Ft. $ 0.54 $ 0.54 Monthly Rent 3Br/2.5Ba -3A25 $ 749 $ 743 $ 989 $ 909 $ 739 $ 775 $ 743 Unit Area (SF) 1,450 1,450 989 1,289 1,258 1,421 1,093 Monthly Rent Per Sq. Ft. $ 0.52 $ 0.51 $1.00 $ 0.71 $ 0.59 $ 0.55 $ 0.68 DESCRIPTION MIN MAX MEDIAN AVERAGE ----------------------------------------------------------------------- Monthly Rent Unit Area (SF) Monthly Rent Per Sq. Ft. Monthly Rent $ 515 $ 767 $ 641 $ 641 Unit Area (SF) 750 832 791 791 Monthly Rent Per Sq. Ft. $ 0.69 $ 0.92 $ 0.80 $ 0.80 Monthly Rent $ 543 $ 619 $ 607 $ 594 Unit Area (SF) 600 1,000 730 765 Monthly Rent Per Sq. Ft. $ 0.61 $ 1.00 $ 0.80 $ 0.80 Monthly Rent $ 626 $ 626 $ 626 $ 626 Unit Area (SF) 1,080 1,080 1,080 1,080 Monthly Rent Per Sq. Ft. $ 0.58 $ 0.58 $ 0.58 $ 0.58 Monthly Rent $ 789 $ 789 $ 789 $ 789 Unit Area (SF) 1,101 1,101 1,101 1,101 Monthly Rent Per Sq. Ft. $ 0.72 $ 0.72 $ 0.72 $ 0.72 Monthly Rent Unit Area (SF) Monthly Rent Per Sq. Ft. Monthly Rent $ 739 $ 989 $ 775 $ 831 Unit Area (SF) 989 1,421 1,258 1,210 Monthly Rent Per Sq. Ft. $ 0.55 $ 1.00 $ 0.68 $ 0.70
CONCLUDED MARKET RENTAL RATES AND TERMS Based on this analysis above, the subject's concluded market rental rates and gross rental income is calculated as follows: GROSS RENTAL INCOME PROJECTION
Market Rent Unit Area ---------------- Monthly Annual Unit Type Number of Units (Sq. Ft.) Per Unit Per SF Income Income ------------------------------------------------------------------------------------- 1Br/1Ba -1A10 72 770 $530 $0.69 $ 38,160 $ 457,920 1Br/1.5Ba -1B15 38 750 $530 $0.71 $ 20,140 $ 241,680 2Br/1.5Ba - 2A15 80 1,110 $600 $0.54 $ 48,000 $ 576,000 2Br/2Ba - 2A20 48 1,270 $675 $0.53 $ 32,400 $ 388,800 2Br/2Ba -2B20 64 1,325 $700 $0.53 $ 44,800 $ 537,600 3Br/2Ba - 3A20 16 1,325 $720 $0.54 $ 11,520 $ 138,240 3Br/2.5Ba -3A25 32 1,450 $750 $0.52 $ 24,000 $ 288,000 --------------------------- Total $219,020 $2,628,240 ===========================
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 29 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE 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 30 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE 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 $2,699,302 $ 7,712 $2,781,179 $ 7,946 $2,631,742 $ 7,519 Vacancy $ 161,318 $ 461 $ 227,936 $ 651 $ 166,210 $ 475 Credit Loss/Concessions $ 50,350 $ 144 $ 99,752 $ 285 $ 23,073 $ 66 --------------------------------------------------------------------------- Subtotal $ 211,668 $ 605 $ 327,688 $ 936 $ 189,283 $ 541 Laundry Income $ 3,984 $ 11 $ 13,964 $ 40 $ 9,523 $ 27 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 289,333 $ 827 $ 190,933 $ 546 $ 225,614 $ 645 --------------------------------------------------------------------------- Subtotal Other Income $ 293,317 $ 838 $ 204,897 $ 585 $ 235,137 $ 672 --------------------------------------------------------------------------- Effective Gross Income $2,780,951 $ 7,946 $2,658,388 $ 7,595 $2,677,596 $ 7,650 Operating Expenses Taxes $ 149,160 $ 426 $ 171,432 $ 490 $ 192,266 $ 549 Insurance $ 38,187 $ 109 $ 46,973 $ 134 $ 60,879 $ 174 Utilities $ 265,606 $ 759 $ 211,443 $ 604 $ 202,997 $ 580 Repair & Maintenance $ 146,555 $ 419 $ 135,197 $ 386 $ 111,903 $ 320 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 86,482 $ 247 $ 78,937 $ 226 $ 67,603 $ 193 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 32,718 $ 93 $ 33,275 $ 95 $ 21,577 $ 62 General Administrative $ 282,313 $ 807 $ 345,246 $ 986 $ 304,185 $ 869 Management $ 135,900 $ 388 $ 142,217 $ 406 $ 134,402 $ 384 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 --------------------------------------------------------------------------- Total Operating Expenses $1,136,921 $ 3,248 $1,164,720 $ 3,328 $1,095,812 $ 3,131 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 --------------------------------------------------------------------------- Net Income $1,644,030 $ 4,697 $1,493,668 $ 4,268 $1,581,784 $ 4,519 --------------------------------------------------------------------------- FISCAL YEAR 2003 ANNUALIZED 2003 ------------------------------------------------- MANAGEMENT BUDGET PROJECTION AAA PROJECTION ------------------------------------------------------------------------------------ DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT % ---------------------------------------------------------------------------------------------------------------- Revenues Rental Income $2,553,258 $ 7,295 $2,553,780 $ 7,297 $2,628,240 $ 7,509 100.0% Vacancy $ 116,940 $ 334 $ 153,816 $ 439 $ 105,130 $ 300 4.0% Credit Loss/Concessions $ 7,400 $ 21 $ 92,268 $ 264 $ 26,282 $ 75 1.0% ----------------------------------------------------------------------------------- Subtotal $ 124,340 $ 355 $ 246,084 $ 703 $ 131,412 $ 375 5.0% Laundry Income $ 9,500 $ 27 $ 22,608 $ 65 $ 14,000 $ 40 0.5% Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 243,292 $ 695 $ 268,212 $ 766 $ 271,250 $ 775 10.3% ----------------------------------------------------------------------------------- Subtotal Other Income $ 252,792 $ 722 $ 290,820 $ 831 $ 285,250 $ 815 10.9% ----------------------------------------------------------------------------------- Effective Gross Income $2,681,710 $ 7,662 $2,598,516 $ 7,424 $2,782,078 $ 7,949 100.0% Operating Expenses Taxes $ 198,034 $ 566 $ 198,032 $ 566 $ 210,000 $ 600 7.5% Insurance $ 69,513 $ 199 $ 89,860 $ 257 $ 78,750 $ 225 2.8% Utilities $ 279,255 $ 798 $ 294,636 $ 842 $ 245,000 $ 700 8.8% Repair & Maintenance $ 119,362 $ 341 $ 111,208 $ 318 $ 113,750 $ 325 4.1% Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Landscaping $ 67,442 $ 193 $ 69,184 $ 198 $ 70,000 $ 200 2.5% Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Marketing & Leasing $ 26,204 $ 75 $ 19,924 $ 57 $ 26,250 $ 75 0.9% General Administrative $ 290,832 $ 831 $ 369,136 $ 1,055 $ 350,000 $ 1,000 12.6% Management $ 132,341 $ 378 $ 127,364 $ 364 $ 139,104 $ 397 5.0% Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% ----------------------------------------------------------------------------------- Total Operating Expenses $1,182,983 $ 3,380 $1,279,344 $ 3,655 $1,232,854 $ 3,522 44.3% Reserves $ 0 $ 0 $ 0 $ 0 $ 87,500 $ 250 7.1% ----------------------------------------------------------------------------------- Net Income $1,498,727 $ 4,282 $1,319,172 $ 3,769 $1,461,724 $ 4,176 52.5% -----------------------------------------------------------------------------------
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 5% based on the subject's historical performance, as well as the anticipated future market conditions. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 31 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE 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 $250 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 $250 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 32 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE SUMMARY OF OVERALL CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR ------------------------------------------------------------------------------- I-1 Apr-02 94% $78,415 9.48% I-2 Jan-99 95% $49,489 8.89% I-3 Oct-01 90% $17,808 9.80% I-4 Jun-01 90% $26,844 8.77% I-5 Jun-02 94% $55,435 9.75% High 9.80% Low 8.77% Average 9.34%
Based on this information, we have concluded the subject's overall capitalization rate should be 9.75%. 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 10.75%. Finally, the subject's discount rate or yield rate is estimated based on the previous investor survey and an examination of returns available on alternative investments in the market. Based on this analysis, the subject's discount rate is estimated to be 12.50%. HOLDING PERIOD The survey of investors indicates that most investors are completing either 10-year cash flows or extending the analysis to the end of the lease if it is more than 10-years. A 10-year period has been used in the analysis of the subject with the eleventh year stabilized NOI used to determine the reversion. SELLING COSTS Sales of similar size properties are typically accomplished with the aid of a broker and will also incur legal and other transaction related cost. Based on our survey of brokers and a review of institutional investor projections, an allowance of 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 12.50% indicates a value of $15,100,000. In this instance, the reversion figure contributes AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 33 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE approximately 37% 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 34 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE DISCOUNTED CASH FLOW ANALYSIS ARBOURS OF HERMITAGE
YEAR APR-2004 APR-2005 APR-2006 APR-2007 APR-2008 APR-2009 FISCAL YEAR 1 2 3 4 5 6 ------------------------------------------------------------------------------------------------------------------------- REVENUE Base Rent $2,628,240 $2,707,087 $2,788,300 $2,871,949 $2,958,107 $3,046,850 Vacancy $ 105,130 $ 108,283 $ 111,532 $ 114,878 $ 118,324 $ 121,874 Credit Loss $ 26,282 $ 27,071 $ 27,883 $ 28,719 $ 29,581 $ 30,469 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 -------------------------------------------------------------------------------- Subtotal $ 131,412 $ 135,354 $ 139,415 $ 143,597 $ 147,905 $ 152,343 Laundry Income $ 14,000 $ 14,420 $ 14,853 $ 15,298 $ 15,757 $ 16,230 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 271,250 $ 279,388 $ 287,769 $ 296,402 $ 305,294 $ 314,453 -------------------------------------------------------------------------------- Subtotal Other Income $ 285,250 $ 293,808 $ 302,622 $ 311,700 $ 321,051 $ 330,683 -------------------------------------------------------------------------------- EFFECTIVE GROSS INCOME $2,782,078 $2,865,540 $2,951,507 $3,040,052 $3,131,253 $3,225,191 OPERATING EXPENSES: Taxes $ 210,000 $ 216,300 $ 222,789 $ 229,473 $ 236,357 $ 243,448 Insurance $ 78,750 $ 81,113 $ 83,546 $ 86,052 $ 88,634 $ 91,293 Utilities $ 245,000 $ 252,350 $ 259,921 $ 267,718 $ 275,750 $ 284,022 Repair & Maintenance $ 113,750 $ 117,163 $ 120,677 $ 124,298 $ 128,027 $ 131,867 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 70,000 $ 72,100 $ 74,263 $ 76,491 $ 78,786 $ 81,149 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 26,250 $ 27,038 $ 27,849 $ 28,684 $ 29,545 $ 30,431 General Administrative $ 350,000 $ 360,500 $ 371,315 $ 382,454 $ 393,928 $ 405,746 Management $ 139,104 $ 143,277 $ 147,575 $ 152,003 $ 156,563 $ 161,260 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 -------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES $1,232,854 $1,269,840 $1,307,935 $1,347,173 $1,387,588 $1,429,216 Reserves $ 87,500 $ 90,125 $ 92,829 $ 95,614 $ 98,482 $ 101,436 -------------------------------------------------------------------------------- NET OPERATING INCOME $1,461,724 $1,505,576 $1,550,743 $1,597,265 $1,645,183 $1,694,539 ========================================================================================================================= Operating Expense Ratio (% of EGI) 44.3% 44.3% 44.3% 44.3% 44.3% 44.3% Operating Expense Per Unit $ 3,522 $ 3,628 $ 3,737 $ 3,849 $ 3,965 $ 4,083 YEAR APR-2010 APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 7 8 9 10 11 ----------------------------------------------------------------------------------------------------------- REVENUE Base Rent $3,138,256 $3,232,404 $3,329,376 $3,429,257 $3,532,135 Vacancy $ 125,530 $ 129,296 $ 133,175 $ 137,170 $ 141,285 Credit Loss $ 31,383 $ 32,324 $ 33,294 $ 34,293 $ 35,321 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------ Subtotal $ 156,913 $ 161,620 $ 166,469 $ 171,463 $ 176,607 Laundry Income $ 16,717 $ 17,218 $ 17,735 $ 18,267 $ 18,815 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 323,887 $ 333,603 $ 343,611 $ 353,920 $ 364,537 ------------------------------------------------------------------ Subtotal Other Income $ 340,603 $ 350,822 $ 361,346 $ 372,187 $ 383,352 ------------------------------------------------------------------ EFFECTIVE GROSS INCOME $3,321,947 $3,421,605 $3,524,253 $3,629,981 $3,738,880 OPERATING EXPENSES: Taxes $ 250,751 $ 258,274 $ 266,022 $ 274,002 $ 282,222 Insurance $ 94,032 $ 96,853 $ 99,758 $ 102,751 $ 105,833 Utilities $ 292,543 $ 301,319 $ 310,359 $ 319,669 $ 329,260 Repair & Maintenance $ 135,823 $ 139,898 $ 144,095 $ 148,418 $ 152,870 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 83,584 $ 86,091 $ 88,674 $ 91,334 $ 94,074 Security $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 31,344 $ 32,284 $ 33,253 $ 34,250 $ 35,278 General Administrative $ 417,918 $ 430,456 $ 443,370 $ 456,671 $ 470,371 Management $ 166,097 $ 171,080 $ 176,213 $ 181,499 $ 186,944 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------ TOTAL OPERATING EXPENSES $1,472,092 $1,516,255 $1,561,742 $1,608,595 $1,656,853 Reserves $ 104,480 $ 107,614 $ 110,842 $ 114,168 $ 117,593 ------------------------------------------------------------------ NET OPERATING INCOME $1,745,375 $1,797,736 $1,851,668 $1,907,218 $1,964,435 =========================================================================================================== Operating Expense Ratio (% of EGI) 44.3% 44.3% 44.3% 44.3% 44.3% Operating Expense Per Unit $ 4,206 $ 4,332 $ 4,462 $ 4,596 $ 4,734
Gross Residual Sale Deferred Price $18,273,814 Maintenance $ 0 Estimated Stabilized NOI $1,461,724 Sales Expense Rate 2.00% Less: Sales Expense $ 365,476 Add: Excess Land $ 0 ----------- Months to Stabilized 1 Discount Rate 12.50% Net Residual Sale Price $17,908,337 Other Adjustments $ 0 ----------- Stabilized Occupancy 96.0% Terminal Cap Rate 10.75% PV of Reversion $ 5,514,803 Value Indicated Add: NPV of NOI $ 9,556,503 By "DCF" $15,071,306 ----------- PV Total $15,071,306 Rounded $15,100,000
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE ---------------------------------------------------------------- TOTAL VALUE 12.00% 12.25% 12.50% 12.75% 13.00% ------------------------------------------------------------------------------------------- TERMINAL 10.25% $15,825,653 $15,580,384 $15,340,321 $15,105,335 $14,875,301 CAP RATE 10.50% $15,681,671 $15,439,576 $15,202,611 $14,970,648 $14,743,565 10.75% $15,544,385 $15,305,318 $15,071,306 $14,842,226 $14,617,956 11.00% $15,413,339 $15,177,162 $14,945,970 $14,719,641 $14,498,056 11.25% $15,288,118 $15,054,701 $14,826,204 $14,602,504 $14,383,485
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 35 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE INCOME LOSS DURING LEASE-UP The subject is currently near or at stabilized condition. Therefore, there is no income loss during lease-up at the subject property. 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 9.75% percent is applicable to the subject. The results of our direct capitalization analysis are as follows: AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 36 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE ARBOURS OF HERMITAGE
TOTAL PER Sq. Ft. PER UNIT % OF EGI ----------------------------------------------------------------------------------------------------- REVENUE Base Rent $ 2,628,240 $ 6.81 $ 7,509 Less: Vacancy & Collection Loss 5.00% $ 131,412 $ 0.34 $ 375 Plus: Other Income Laundry Income $ 14,000 $ 0.04 $ 40 0.50% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 271,250 $ 0.70 $ 775 9.75% ------------------------------------------------ Subtotal Other Income $ 285,250 $ 0.74 $ 815 10.25% EFFECTIVE GROSS INCOME $ 2,782,078 $ 7.21 $ 7,949 OPERATING EXPENSES: Taxes $ 210,000 $ 0.54 $ 600 7.55% Insurance $ 78,750 $ 0.20 $ 225 2.83% Utilities $ 245,000 $ 0.63 $ 700 8.81% Repair & Maintenance $ 113,750 $ 0.29 $ 325 4.09% Cleaning $ 0 $ 0.00 $ 0 0.00% Landscaping $ 70,000 $ 0.18 $ 200 2.52% Security $ 0 $ 0.00 $ 0 0.00% Marketing & Leasing $ 26,250 $ 0.07 $ 75 0.94% General Administrative $ 350,000 $ 0.91 $ 1,000 12.58% Management 5.00% $ 139,104 $ 0.36 $ 397 5.00% Miscellaneous $ 0 $ 0.00 $ 0 0.00% TOTAL OPERATING EXPENSES $ 1,232,854 $ 3.19 $ 3,522 44.31% Reserves $ 87,500 $ 0.23 $ 250 3.15% ------------------------------------------------ NET OPERATING INCOME $ 1,461,724 $ 3.79 $ 4,176 52.54% =================================================================================================== "GOING IN" CAPITALIZATION RATE 9.75% VALUE INDICATION $14,992,042 $ 38.83 $ 42,834 "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $14,992,042 ROUNDED $15,000,000 $ 38.85 $ 42,857 ===================================================================================================
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 37 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF ------------------------------------------------------------------------ 9.00% $16,241,379 $16,200,000 $46,286 $41.96 9.25% $15,802,423 $15,800,000 $45,143 $40.92 9.50% $15,386,569 $15,400,000 $44,000 $39.89 9.75% $14,992,042 $15,000,000 $42,857 $38.85 10.00% $14,617,241 $14,600,000 $41,714 $37.81 10.25% $14,260,723 $14,300,000 $40,857 $37.04 10.50% $13,921,182 $13,900,000 $39,714 $36.00
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $15,000,000. 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 $15,100,000 Direct Capitalization Method $15,000,000
Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $15,000,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 38 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE RECONCILIATION AND CONCLUSION This appraisal was made to express an opinion as of the Market Value of the fee simple estate in the property. AS IS MARKET VALUE OF THE FEE SIMPLE ESTATE Cost Approach Not Utilized Sales Comparison Approach $15,400,000 Income Approach $15,000,000 Reconciled Value $15,000,000
The Direct Capitalization Method is considered a reliable indicator of value. Income and expenses were estimated and projected based on historical operating statements and market oriented expenses. This method is primarily used by investors in their underwriting analysis. Furthermore, there was good support for an overall rate in the Direct Capitalization Method. The Sales Comparison Approach to value supported the value conclusion by the Income Approach and was given secondary consideration. Investment-grade, income-producing properties such as the subject are not typically traded based on cost. Therefore, the Cost Approach has not been considered in our valuation. FINAL VALUE - FEE SIMPLE ESTATE Based on the investigation and premise outlined, it is our opinion that as of May 5, 2003 the market value of the fee simple estate in the property is: $15,000,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE SUBJECT PHOTOGRAPHS [UNIT TYPE FACADE PICTURE] [UNIT TYPE PICTURE] [BEDROOM PICTURE] [BEDROOM PICTURE] [LIVING ROOM AREA PICTURE] [LIVING ROOM AREA PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE SUBJECT PHOTOGRAPHS [POOL PICTURE] [LAUNDRY ROOM PICTURE] [SITE IMPROVEMENTS PICTURE] [MAIN ENTRANCE PICTURE] [OLD HICKORY BLVD-SOUTH PICTURE] [OLD HICKORY BLVD-NORTH PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 COMPARABLE I-2 COMPARABLE I-3 ALTA LAKE COLONNADE HERMITAGE GARDENS 3960 Bell Road 4100 Central Pike 4701 Old Hickory Blvd Hermitage, TN Nashville, TN Nashville, TN [PICTURE] [PICTURE] [PICTURE] COMPARABLE I-4 COMPARABLE I-5 BERKLEY RIDGE (SUMMITTREE) WATERFORD LANDING HERMITAGE 308 Plus Park Blvd 5901 Old Hickory Blvd Nashville, TN Hermitae, TN [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE DESCRIPTION SUBJECT R - 1 ---------------------------------------------------------------------------------------------------------------------------------- Property Name Arbours of Hermitage Creekstone Management Company AIMCO Michelson Organization LOCATION: Address 6001 Old Hickory Road 266 Stewarts Ferry Pike City, State Hermitage, Tennessee Nashville, TN County Davidson Davidosn Proximity to Subject Approx. 3.5 miles west of subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 386,100 257,856 Year Built 1972 1986 Effective Age 20 8 Building Structure Type Brick & wood siding walls; asphalt shingle roof Brick & wood siding walls; asphalt shingle roof Parking Type (Gr., Cov., etc.) Open Open, Covered Number of Units 350 316 Unit Mix: Type Unit Qty. Mo. Rent Type Unit Qty. Mo. 1 1Br/1Ba-1A10 770 72 $529 3 1Br/1Ba 600 140 $600 2 1Br/1.5Ba -1B15 750 38 $523 7 2 Br/2Ba 989 176 $989 3 2Br/1.5Ba - 2A15 1,110 80 $599 4 2Br/2Ba - 2A20 1,270 48 $653 5 2Br/2Ba-2B20 1,325 64 $682 6 3Br/2Ba - 3A20 1,325 16 $719 7 3Br/2.5Ba -3A25 1,450 32 $749 Average Unit Size (SF) 1,103 817 Unit Breakdown: Efficiency 0% 2-Bedroom 54% Efficiency 0% 2-Bedroom 56% 1-Bedroom 31% 3-Bedroom 15% 1-Bedroom 44% 3-Bedroom 0% CONDITION: Good Average APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X W/D Connection Balcony X W/D Connection X Fireplace Other X Fireplace Other 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 X Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track X Business Office Jogging Track X Business Office X Gym Room X Boat Storage X Gym Room Boat Storage OCCUPANCY: 96% 93% LEASING DATA: Available Leasing Terms 6 to 12 months 6 to 12 months Concessions 1 to 2 months off on selected units Up to $100 off per month if in by Apr 2003 Pet Deposit $300/$20Mnth $200 Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas X Water Trash X Water Trash Confirmation Ruth Ann Frewin/Property Manager DeDe Stampley/Property Manager Telephone Number 615,889,6001 615,889,6191 NOTES: None COMPARISON TO SUBJECT: Slightly Inferior COMPARABLE COMPARABLE DESCRIPTION R - 2 R - 3 ---------------------------------------------------------------------------------------------------------------------------------- Property Name Spinnaker Cove Burning Tree Management Company Equity Residential Alco LOCATION: Address 100 Arbor Lake Blvd 345 Burning Tree City, State Hermitage, TN Hermitage, TN County Davidson Davidson Proximity to Subject Approx. 0.2 miles northwest of subject Approx. 0.8 miles north of subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 266,889 265,440 Year Built 1986 1978 Effective Age 17 15 Building Structure Type Brick & wood siding walls; asphalt shingle roof Brick & wood siding walls; asphalt shingle roof Parking Type (Gr., Cov., etc.) Open Open Number of Units 278 280 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 2 1Br/1Ba 832 176 $767 2 1Br/1Ba 750 110 $515 5 2Br/2Ba 1,101 58 $789 3 2Br/2Ba 1,000 120 $613 7 3Br/2Ba 1,289 44 $909 7 3Br/2Ba 1,258 50 $739 Average Unit Size (SF) 960 948 Unit Breakdown: Efficiency 0% 2-Bedroom 21% Efficiency 0% 2-Bedroom 42% 1-Bedroom 63% 3-Bedroom 16% 1-Bedroom 39% 3-Bedroom 19% CONDITION: Average Fair APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling Balcony X W/D Connection Balcony X W/D Connection X Fireplace X Other Fireplace X Other X Cable TV Ready Boat Storage X Cable TV Ready Playground Project Amenities X Swimming Pool X Swimming Pool X Spa/Jacuzzi Car Wash Spa/Jacuzzi Car Wash Basketball Court X BBQ Equipment Basketball Court BBQ Equipment Volleyball Court Theater Room Volleyball Court Theater Room Sand Volley Ball X Meeting Hall Sand Volley Ball Meeting Hall X Tennis Court Secured Parking Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track Business Office X Jogging Track X Business Office X Gym Room Boat Storage X Gym Room Boat Storage OCCUPANCY: 94% 95% LEASING DATA: Available Leasing Terms 6 to 12 month 6 to 12 months Concessions Up to $150 off per month on selected units 1 month free on 2Br Pet Deposit $300 $300 Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas X Water Trash X Water Trash Confirmation Elaine Yates/Property Manager Dixie Knight/Property Manager Telephone Number 615,889,7117 615,883,5884 NOTES: None None COMPARISON TO SUBJECT: Similar Inferior COMPARABLE COMPARABLE DESCRIPTION R - 4 R - 5 ----------------------------------------------------------------------------------------------------------------------------------- Property Name Lincoya Bay Park at Hermitage Management Company Tri-City Rentals Mid-America LOCATION: Address 3000 Lincoya Bay Drive 5900 Old Hickory Blvd City, State Nashville, TN Hermitage, TN County Davidson Davidson Proximity to Subject Approx. 2.9 miles southwest of subject Approx. 0.2 miles north of subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 197,820 392,480 Year Built 1974 1986 Effective Age 17 17 Building Structure Type Brick & wood siding walls; asphalt shingle roof Brick & wood siding walls; asphalt shingle roof Parking Type (Gr., Cov., etc.) Open, Carport/Garage Open Number of Units 180 440 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 3 1Br/1Ba 775 38 $543 3 1Br/1Ba 684 216 $619 4 2Br/2Ba 1,080 98 $626 7 2Br/2Ba 1,093 224 $743 7 3Br/2.5Ba 1,421 44 $775 Average Unit Size (SF) 1,099 892 Unit Breakdown: Efficiency 0% 2-Bedroom 54% Efficiency 0% 2-Bedroom 51% 1-Bedroom 21% 3-Bedroom 25% 1-Bedroom 49% 3-Bedroom 0% CONDITION: Average Average APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling Balcony X W/D Connection Balcony X W/D Connection X Fireplace X Other Fireplace X Other X Cable TV Ready Storage X Cable TV Ready Storage & Playground Project Amenities X Swimming Pool X 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 X Meeting Hall Sand Volley Ball X Meeting Hall Tennis Court Secured Parking Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track Business Office Jogging Track Business Office Gym Room Boat Storage X Gym Room Boat Storage OCCUPANCY: 94% 94% LEASING DATA: Available Leasing Terms 6 to 12 month 6 to 12 months Concessions $100 off first month $100 off first month Pet Deposit $250 to $300/$20 mnth $250 to $300/$45 mnth Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas X Water Trash X Water Trash Confirmation Freddie Adams/Property Manager Kim Banks/Property Manager Telephone Number 615,889,7922 615,883,0209 NOTES: None None COMPARISON TO SUBJECT: Inferior Similar
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 COMPARABLE R-3 CREEKSTONE SPINNAKER COVE BURNING TREE 266 Stewarts Ferry Pike 100 Arbor Lake Blvd 345 Burning Tree Nashville, TN Hermitage, TN Hermitage, TN [PICTURE] [PICTURE] [PICTURE] COMPARABLE R-4 COMPARABLE R-5 LINCOYA BAY PARK AT HERMITAGE 3000 Lincoya Bay Drive 5900 Old Hickory Blvd Nashville, TN Hermitage, TN [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE 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 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE 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 ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE such testimony, and then such testimony shall be at American Appraisal Associates, Inc.'s, prevailing per diem for the individuals involved. Possession of this report or any copy thereof does not carry with it the right of publication. No portion of this report (especially any conclusion to use, the identity of the appraiser or the firm with which the appraiser is connected, or any reference to the American Society of Appraisers or the designations awarded by this organization) shall be disseminated to the public through prospectus, advertising, public relations, news, or any other means of communication without the written consent and approval of American Appraisal Associates, Inc. AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT D ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE EXHIBIT D CERTIFICATE OF APPRAISER (1 PAGE) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT D CERTIFICATE OF APPRAISER I certify that, to the best of my knowledge and belief: The statements of fact contained in this report are true and correct. The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions, and represent the unbiased professional analyses, opinions, and conclusions of American Appraisal Associates, Inc. American Appraisal Associates, Inc. and I personally, have no present or prospective interest in the property that is the subject of this report and have no personal interest or bias with respect to the parties involved. Compensation for American Appraisal Associates, Inc. is not contingent on an action or event resulting from the analyses, opinions, or conclusions in, or the use of, this report. The analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the requirements of the Uniform Standards of Professional Appraisal Practice and the Code of Professional Ethics and the Standards of Professional Practice of the Appraisal Institute. The use of this report is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. I personally did not inspect the subject property. Daniel Salcedo 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 Tennessee Temporary Practice Permit #00053573 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE EXHIBIT E QUALIFICATIONS OF APPRAISER (2 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE 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 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE STATE CERTIFICATIONS State of Arizona, 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 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. ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. ARBOURS OF HERMITAGE, HERMITAGE, TENNESSEE 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.