EX-99.(C)(2) 4 d07248a2exv99wxcyx2y.txt APPRAISAL OF MISTY WOODS MISTY WOODS APARTMENTS 4630 CENTRAL AVENUE CHARLOTTE, NORTH CAROLINA 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 3, 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: MISTY WOODS APARTMENTS 4630 CENTRAL AVENUE CHARLOTTE, MECKLENBURG COUNTY, NORTH CAROLINA 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 228 units with a total of 162,623 square feet of rentable area. The improvements were built in 1985. The improvements are situated on 10.68 acres. Overall, the improvements are in average condition. As of the date of this appraisal, the subject property is 89% 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 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA 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: ($8,200,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. -s- Frank Fehribach July 3, 2003 Frank Fehribach, MAI #053272 Managing Principal, Real Estate Group North Carolina Temporary Practice Permit #2578 Report By: John Hayden North Carolina Temporary Practice Permit Pending AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA 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........................................... 37
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 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Misty Woods Apartments LOCATION: 4630 Central Avenue Charlotte, North Carolina 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 3, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 10.68 acres, or 465,221 square feet Assessor Parcel No.: 13103301 Floodplain: Community Panel No. 370159 0014 B (February 26, 1982) Flood Zone C, an area outside the floodplain. Zoning: R-22 MF (Multifamily Zoning) BUILDING: No. of Units: 228 Units Total NRA: 162,623 Square Feet Average Unit Size: 713 Square Feet Apartment Density: 21.3 units per acre Year Built: 1985 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 530 $479 $0.90 $ 27,782 $ 333,384 1Br/1Ba 652 $599 $0.92 $ 49,717 $ 596,604 1Br/1Ba 745 $649 $0.87 $ 7,139 $ 85,668 1Br/1Ba 748 $649 $0.87 $ 15,576 $ 186,912 2Br/2Ba 892 $754 $0.85 $ 18,096 $ 217,152 2Br/2Ba 1,079 $789 $0.73 $ 22,092 $ 265,104 -------- ---------- Total $140,402 $1,684,824 ======== ==========
OCCUPANCY: 89% ECONOMIC LIFE: 45 Years AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA EFFECTIVE AGE: 18 Years REMAINING ECONOMIC LIFE: 27 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - MAIN ENTRANCE EXTERIOR - TYPICAL BUILDING ELEVATION AREA MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA NEIGHBORHOOD MAP [MAP] HIGHEST AND BEST USE: As Vacant: Hold for future multi-family development As Improved: Continuation as its current use METHOD OF VALUATION: In this instance, the Sales Comparison and Income Approaches to value were utilized. AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 7 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
DIRECT CAPITALIZATION Amount $/Unit --------------------- ------ ------ Potential Rental Income $ 1,684,824 $7,390 Effective Gross Income $ 1,596,142 $7,001 Operating Expenses $ 746,707 $3,275 46.8% of EGI Net Operating Income: $ 792,435 $3,476 Capitalization Rate 9.50% DIRECT CAPITALIZATION VALUE $ 8,100,000 * $35,526 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 17% Stabilized Vacancy & Collection Loss: 10% Lease-up / Stabilization Period N/A Terminal Capitalization Rate 10.25% Discount Rate 11.25% Selling Costs 3.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $ 8,500,000 * $37,281 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $ 8,300,000 $36,404 / UNIT
SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $40,139 to $48,020 Range of Sales $/Unit (Adjusted) $32,889 to $41,233 VALUE INDICATION - PRICE PER UNIT $ 8,300,000 * $36,404 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 5.09 to 6.48 Selected EGIM for Subject 5.25 Subject's Projected EGI $ 1,596,142 EGIM ANALYSIS CONCLUSION $ 8,100,000 * $35,526 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $ 7,700,000 * $33,772 / UNIT RECONCILED SALES COMPARISON VALUE $ 8,100,000 $35,526 / 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 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $ 8,300,000 NOI Per Unit $ 7,700,000 EGIM Multiplier $ 8,100,000 INDICATED VALUE BY SALES COMPARISON $ 8,100,000 $35,526 / UNIT INCOME APPROACH: Direct Capitalization Method: $ 8,100,000 Discounted Cash Flow Method: $ 8,500,000 INDICATED VALUE BY THE INCOME APPROACH $ 8,300,000 $36,404 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $ 8,200,000 $35,965 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 4630 Central Avenue, Charlotte, Mecklenburg County, North Carolina. Charlotte identifies it as 13103301. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by John Hayden on May 13, 2003. Frank Fehribach, MAI has not made a personal inspection of the subject property. John Hayden performed the research, valuation analysis and wrote the report. Frank Fehribach, MAI reviewed the report and concurs with the value. Frank Fehribach, MAI and John Hayden 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 3, 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 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA defined in The Dictionary of Real Estate Appraisal, 3rd ed. (Chicago: Appraisal Institute, 1993), as: "Absolute ownership unencumbered by any other interest or estate, subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power, and escheat." MARKETING/EXPOSURE PERIOD MARKETING PERIOD: 6 to 12 months EXPOSURE PERIOD: 6 to 12 months HISTORY OF THE PROPERTY Ownership in the subject property is currently vested in CPF XIX. 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 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 Charlotte, North Carolina. Overall, the neighborhood is characterized as a suburban setting with the predominant land use being residential. The subject's neighborhood is generally defined by the following boundaries. NEIGHBORHOOD BOUNDARIES East - North Sharon Amity Road West - Norland Road South - Highway 74 North - Shamrock Drive MAJOR EMPLOYERS Major employers in the subject's area include Wachovia Corporation, Charlotte-Mecklenburg Schools, Bank of America, Carolinas Health Care System, Duke Energy Corporation, US Airways, State of North Carolina, City of Charlotte, US Government, and Mecklenburg County, Presbyterian Healthcare, Ruddick/Harris Teeter, and Winn Dixie. 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 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA NEIGHBORHOOD DEMOGRAPHICS
AREA --------------------------------------------- CATEGORY 1-Mi. RADIUS 3-Mi. RADIUS 5-Mi. RADIUS MSA ---------------------------------------------------------------------------------------------- POPULATION TRENDS Current Population 14,389 112,315 225,601 1,561,413 5-Year Population 15,393 117,296 236,347 1,721,386 % Change CY-5Y 7.0% 4.4% 4.8% 10.2% Annual Change CY-5Y 1.4% 0.9% 1.0% 2.0% HOUSEHOLDS Current Households 5,767 46,021 91,715 601,124 5-Year Projected Households 6,052 47,700 96,098 667,464 % Change CY - 5Y 4.9% 3.6% 4.8% 11.0% Annual Change CY-5Y 1.0% 0.7% 1.0% 2.2% INCOME TRENDS Median Household Income $ 33,039 $ 35,131 $ 38,782 $ 48,633 Per Capita Income $ 16,343 $ 18,908 $ 24,544 $ 24,575 Average Household Income $ 41,681 $ 46,493 $ 60,102 $ 63,841
Source: Demographics Now The subject neighborhood's population is expected to show increases below 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 58.15% 50.62% 44.69% 29.67% 5-Year Projected % Renting 59.47% 50.71% 44.75% 29.33% % of Households Owning 32.67% 42.29% 48.09% 64.90% 5-Year Projected % Owning 31.70% 42.35% 48.27% 65.65%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Various retail uses across Central South - Elementary School East - Commercial and residential development West - Apartments (Lansdale Crossing) CONCLUSIONS The subject is well located within the city of Charlotte. The neighborhood is characterized as being mostly suburban in nature and is currently in the stable stage of development. The economic outlook for the neighborhood is judged to be favorable with a good economic base. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 14 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA MARKET ANALYSIS The subject property is located in the city of Charlotte in Mecklenburg County. The overall pace of development in the subject's market is more or less decreasing. Currently, there are 92 apartment units under construction within this submarket. These are comprised of 72 units in the second phase of Crown Ridge on Regal Estates Lane and the final 20 units at Thorngrove on Amity Springs Drive. In the past six months, there were 124 units completed at Thorngrove. Otherwise, there has been no other recent new apartment development within this submarket. The following table illustrates historical vacancy rates for the subject's market. HISTORICAL VACANCY RATE
Period Region Submarket -------------------------------------------- Feb-01 8.8% 7.0% Aug-01 9.8% 8.5% Feb-02 12.9% 10.5% Aug-02 11.2% 11.3% Feb-03 12.7% 14.6%
Source: Charlotte Apartment Index March '03 Occupancy trends in the subject's market are decreasing. Historically speaking, the subject's submarket has equated the overall market. Occupancies have been declining for both the Charlotte area as a whole and within the subject's East-2 submarket. In addition, rents have generally exhibited a declining trend as well in both the overall market and the subject's submarket. Occupancies are expected to stay in the 88%-90% area for at least the next year, as the recently developed new units are absorbed. Market rents in the subject's market have been following a decreasing trend. The following table illustrates historical rental rates for the subject's market. HISTORICAL AVERAGE RENT
Period Region % Change Submarket % Change -------------------------------------------------------------------------- Feb-01 $700 - $650 - Aug-01 $713 1.9% $655 0.8% Feb-02 $712 -0.1% $649 -0.9% Aug-02 $708 -0.6% $635 -2.2% Feb-03 $710 0.3% $631 -0.6%
Source: Charlotte Apartment Index March '03 The following table illustrates a summary of the subject's competitive set. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 15 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA COMPETITIVE PROPERTIES
No. Property Name Units Ocpy. Year Built Proximity to subject ----------------------------------------------------------------------------------------------------------- R-1 Dominion @ Peppertree 292 92% 1985 1/2 mile west of the subject R-2 Pace's Glen 172 91% 1986 1 mile east/southeast of the subject R-3 Steeplechase 246 88% 1986 1.5 miles southeast of the subject R-4 Timbers 341 74% 1988 1.5 miles northwest of the subject R-5 Wellington Farms 254 97% 1988 1 mile northeast of the subject Subject Misty Woods Apartments 228 89% 1985
As previously discussed, rental rates have exhibited a declining trend for both the overall Charlotte market and the subject's East-2 submarket. Rents, as well as occupancies, are not expected to rise noticeably over the next year as the recently constructed new product is absorbed. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA PROPERTY DESCRIPTION SITE ANALYSIS Site Area 10.68 acres, or 465,221 square feet Shape Irregular Topography Level Utilities All necessary utilities are available to the site. Soil Conditions Stable Easements Affecting Site None other than typical utility easements Overall Site Appeal Good Flood Zone: Community Panel 3701590014 B, dated February 26, 1982 Flood Zone Zone C Zoning R-22 MF, the subject improvements represent a illegal conforming use of the site. REAL ESTATE TAXES
ASSESSED VALUE - 2003 ----------------------------------------- TAX RATE / PROPERTY PARCEL NUMBER LAND BUILDING TOTAL MILL RATE TAXES ------------- ---- -------- ----- ---------- -------- 13103301 $1,163,100 $7,005,200 $8,168,300 0.01307 $106,735
IMPROVEMENT ANALYSIS Year Built 1985 Number of Units 228 Net Rentable Area 162,623 Square Feet Construction: Foundation Reinforced concrete slab Frame Heavy or light wood Exterior Walls Brick or masonry Roof Composition shingle over a wood truss structure Project Amenities Amenities at the subject include a swimming pool, gym room, laundry room, and secured parking. Unit Amenities Individual unit amenities include a balcony, fireplace, cable TV connection, and washer dryer connection. Appliances available in each unit include a refrigerator, stove, dishwasher, water heater, garbage disposal, and oven. Unit Mix: AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 17 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA
Unit Area Unit Type Number of Units (Sq. Ft.) ---------------------------------------------- 1Br/1Ba 58 530 1Br/1Ba 83 652 1Br/1Ba 11 745 1Br/1Ba 24 748 2Br/2Ba 24 892 2Br/2Ba 28 1,079
Overall Condition Average Effective Age 18 years Economic Life 45 years Remaining Economic Life 27 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 1985 and consist of a 228-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 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA SUMMARY OF COMPARABLE SALES -IMPROVED
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 --------------------------------------------------------------------------------------------------------------- Property Name Misty Woods Apartments Cedars I Timbers LOCATION: Address 4630 Central Avenue 7139 Winding Cedar Trail 3317 Magnolia Hills Dr City, State Charlotte, North Carolina Charlotte, NC Charlotte, NC County Mecklenburg Mecklenburg Mecklenburg PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 162,623 340,000 256,100 Year Built 1985 1983 1988 Number of Units 228 360 341 Unit Mix: Type Total Type Total Type Total 1Br/1Ba 58 1Br/1Ba 152 1Br/1Ba 247 1Br/1Ba 83 2Br/2Ba 152 2Br/2Ba 94 1Br/1Ba 11 3Br/2Ba 56 1Br/1Ba 24 2Br/2Ba 24 2Br/2Ba 28 Average Unit Size (SF) 713 944 751 Land Area (Acre) 10,6800 31,3500 22,7570 Density (Units/Acre) 21,3 11,5 15,0 Parking Ratio (Spaces/Unit) 1,46 N/A N/A Parking Type (Gr., Cov., etc.) Open Open Open CONDITION: Average Average Average APPEAL: Average Average Average AMENITIES: Pool/Spa Yes/No Yes/No Yes/No Gym Room Yes Yes Yes Laundry Room Yes Yes Yes Secured Parking Yes Yes Yes Sport Courts No No No Washer/Dryer Connection Yes Yes Yes OCCUPANCY: 89% 93% 97% TRANSACTION DATA: Sale Date August, 2002 September, 2001 Sale Price ($) $14,800,000 $16,060,000 Grantor CAPREIT Cedars LP BRI Timbers Inc Grantee Cedars Apt Assoc LLC Dermot Patrician LLC Sale Documentation Book 13946 Page 148 Book 12639, Page 864 Verification Confidential Confidential Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $2,964,816 $8,236 $8.72 $2,753,614 $8,075 $10.75 Vacancy/Credit Loss $ 296,482 $ 824 $0.87 $ 275,361 $ 808 $ 1.08 Effective Gross Income $2,668,334 $7,412 $7.85 $2,478,253 $7,268 $ 9.68 Operating Expenses $1,164,600 $3,235 $3.43 $1,103,135 $3,235 $ 4.31 Net Operating Income $1,503,734 $4,177 $4.42 $1,375,118 $4,033 $ 5.37 NOTES: None None PRICE PER UNIT $41,111 $47,097 PRICE PER SQUARE FOOT $ 43.53 $ 62.71 EXPENSE RATIO 43.6% 44.5% EGIM 5.55 6.48 OVERALL CAP RATE 10.16% 8.56% Cap Rate based on Pro Forma or Actual Income? ACTUAL PRO FORMA COMPARABLE COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 I - 5 -------------------------------------------------------------------------------------------------------------- Property Name Drake Willow Ridge Cameron @ Hickory Grove LOCATION: Address 1701 Gander Cover Ln 9200 Willow Ridge 5625 Keyway Blvd City, State Charlotte, NC Charlotte, NC Charlotte, NC County Mecklenburg Mecklenburg Mecklenburg PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 223,200 370,728 165,842 Year Built 1988 1986 1987 Number of Units 288 456 202 Unit Mix: Type Total Type Total Type Total 1Br/1Ba 144 1Br/1Ba 190 1Br/1Ba 82 2Br/2Ba 144 2Br/2Ba 266 2Br/2Ba 120 Average Unit Size (SF) 775 813 821 Land Area (Acre) N/A 11.9780 11.3570 Density (Units/Acre) 38.1 17.8 Parking Ratio (Spaces/Unit) N/A N/A N/A Parking Type (Gr., Cov., etc.) Open Open Open CONDITION: Average Average Average APPEAL: Average Average Average 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 No No No Washer/Dryer Connection Yes Yes Yes OCCUPANCY: 89% 93% 91% TRANSACTION DATA: Sale Date August, 2001 December, 2002 November, 2000 Sale Price ($) $11,560,000 $20,300,000 $9,700,000 Grantor WTC No One Hundred Willow Ridge Apts LLC SCA North Carolina Grantee Group One Investments New Willow Ridge Assoc. Owings Chase LP Sale Documentation Book 12518, Page 898 Book 14555, Page 549 Book 11714, Page 833 Verification Confidential Confidential Confidential Telephone Number ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Total $ $/Unit $/SF Potential Gross Income $2,521,728 $8,756 $11.30 $4,058,846 $8,901 $10.95 $1,734,332 $8,586 $10.46 Vacancy/Credit Loss $ 252,173 $ 876 $ 1.13 $ 405,885 $ 890 $ 1.09 $ 173,433 $ 859 $ 1.05 Effective Gross Income $2,269,555 $7,880 $10.17 $3,652,961 $8,011 $ 9.85 $1,560,899 $7,727 $ 9.41 Operating Expenses $ 931,680 $3,235 $ 4.17 $1,475,160 $3,235 $ 3.98 $ 653,470 $3,235 $ 3.94 Net Operating Income $1,337,875 $4,645 $ 5.99 $2,177,801 $4,776 $ 5.87 $ 907,429 $4,492 $ 5.47 NOTES: None None None PRICE PER UNIT $40,139 $44,518 $48,020 PRICE PER SQUARE FOOT $ 51,79 $ 54,76 $ 58,49 EXPENSE RATIO 41.1% 40.4% 41.9% EGIM 5.09 5.56 6.21 OVERALL CAP RATE 11.57% 10.73% 9.35% Cap Rate based on Pro Forma or PRO FORMA PRO FORMA PRO FORMA Actual Income?
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA IMPROVED SALESMAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $40,139 to $48,020 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 $32,889 to $41,233 per unit with a mean or average adjusted price of $37,397 per unit. The median adjusted price is $37,816 per unit. Based on the following analysis, we have concluded to a value of $37,500 per unit, which results in an "as is" value of $8,300,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA SALES ADJUSTMENT GRID
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 -------------------------------------------------------------------------------------- Property Name Misty Woods Cedars I Timbers Apartments Address 4630 Central 7139 Winding 3317 Magnolia Avenue Cedar Trail Hills Dr City Charlotte, Charlotte, NC Charlotte, NC North Carolina Sale Date August, 2002 September, 2001 Sale Price ($) $14,800,000 $16,060,000 Net Rentable Area (SF) 162,623 340,000 256,100 Number of Units 228 360 341 Price Per Unit $ 41,111 $ 47,097 Year Built 1985 1983 1988 Land Area (Acre) 10.6800 31.3500 22.7570 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Fee Simple Fee Simple 0% Fee Simple 0% Conveyed Estate Estate Estate Financing Cash To 0% Cash To 0% Seller Seller Conditions of Sale Arm's Length 0% Arm's 0% Length Date of Sale (Time) 08-2002 0% 09-2001 3% VALUE AFTER TRANS. $41,111 $48,510 ADJUST. ($/UNIT) Location Superior -10% Superior -10% Number of Units 228 360 5% 341 5% Quality / Appeal Average Comparable 0% Comparable 0% Age / Condition 1985 1983 / 0% 1988 / 0% Average Average Occupancy at Sale 89% 93% -5% 97% -10% Amenities Average Comparable 0% Comparable 0% Average Unit Size (SF )713 944 -10% 751 0% PHYSICAL ADJUSTMENT -20% -15% FINAL ADJUSTED VALUE $32,889 $41,233 ($/UNIT) DESCRIPTION COMPARABLE COMPARABLE COMPARABLE I - 3 I - 4 I - 5 ------------------------------------------------------------------------------------------ Property Name Drake Willow Cameron @ Hickory Ridge Grove Address 1701 Gander 9200 Willow 5625 Keyway Blvd Cover Ln Ridge City Charlotte, NC Charlotte, NC Charlotte, NC Sale Date August, 2001 December, 2002 November, 2000 Sale Price ($) $11,560,000 $20,300,000 $ 9,700,000 Net Rentable Area (SF) 223,200 370,728 165,842 Number of Units 288 456 202 Price Per Unit $ 40,139 $ 44,518 $ 48,020 Year Built 1988 1986 1987 Land Area (Acre) N/A 11.9780 11.3570 VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Fee Simple 0% Fee Simple 0% Fee Simple 0% Conveyed Estate Estate Estate Financing Cash To 0% Cash To 0% Cash To 0% Seller Seller Seller Conditions of Sale Arm's 0% Arm's 0% Arm's 0% Length Length Length Date of Sale (Time) 08-2001 3% 12-2002 0% 11-2000 5% VALUE AFTER TRANS. $41,343 $44,518 $50,421 ADJUST. ($/UNIT) Location Superior -10 Superior -10% Superior -20% Number of Units 288 0% 456 5% 202 0% Quality / Appeal Comparable 0% Comparable 0% Comparable 0% Age / Condition 1988 / 0% 1986 / 0% 1987 / 0% Average Average Average Occupancy at Sale 89% 0% 93% -5% 91% 0% Amenities Comparable 0% Comparable 0% Comparable 0% Average Unit Size (SF) 775 0% 813 -5% 821 -5% PHYSICAL ADJUSTMENT -10 % -15% -25% FINAL ADJUSTED VALUE $37,209 $37,840 $37,816 ($/UNIT)
SUMMARY VALUE RANGE (PER UNIT ) $32,889 TO $41,233 MEAN (PER UNIT) $37,397 MEDIAN (PER UNIT) $37,816 VALUE CONCLUSION (PER $37,500 UNIT)
VALUE OF IMPROVEMENT & $8,550,000 MAIN SITE PV OF CONCESSIONS -$ 247,000 VALUE INDICATED BY SALES $8,303,000 COMPARISON APPROACH ROUNDED $8,300,000
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 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA 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-1 360 $14,800,000 10.16% $1,503,734 $ 792,435 0.832 $ 34,207 $ 41,111 $ 4,177 $ 3,476 I-2 341 $16,060,000 8.56% $1,375,118 $ 792,435 0.862 $ 40,591 $ 47,097 $ 4,033 $ 3,476 I-3 288 $11,560,000 11.57% $1,337,875 $ 792,435 0.748 $ 30,031 $ 40,139 $ 4,645 $ 3,476 I-4 456 $20,300,000 10.73% $2,177,801 $ 792,435 0.728 $ 32,397 $ 44,518 $ 4,776 $ 3,476 I-5 202 $ 9,700,000 9.35% $ 907,429 $ 792,435 0.774 $ 37,152 $ 48,020 $ 4,492 $ 3,476
PRICE/UNIT
Low High Average Median $30,031 $40,591 $34,876 $34,207
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT Estimated Price Per Unit $ 35,000 ---------- Number of Units 228 Value $7,980,000 PV of Concessions -$ 247,000 ---------- Value Based on NOI Analysis $7,733,000 Rounded $7,700,000
The adjusted sales indicate a range of value between $30,031 and $40,591 per unit, with an average of $34,876 per unit. Based on the subject's competitive position within the improved sales, a value of $35,000 per unit is estimated. This indicates an "as is" market value of $7,700,000 (rounded after necessary adjustment, if any) for the NOI Per Unit Analysis. EFFECTIVE GROSS INCOME MULTIPLIER (EGIM) ANALYSIS The effective gross income multiplier (EGIM) is derived by dividing the sales price by the total effective gross income. The following table illustrates the EGIMs for the comparable improved sales. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 25 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA 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-1 360 $14,800,000 $2,668,334 $1,164,600 43.65% 5.55 $ 41,111 I-2 341 $16,060,000 $2,478,253 $1,103,135 44.51% 6.48 $ 47,097 I-3 288 $11,560,000 $2,269,555 $ 931,680 41.05% 5.09 46.78% $ 40,139 I-4 456 $20,300,000 $3,652,961 $1,475,160 40.38% 5.56 $ 44,518 I-5 202 $ 9,700,000 $1,560,899 $ 653,470 41.86% 6.21 $ 48,020
EGIM
Low High Average Median 5.09 6.48 5.78 5.56
VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES Estimate EGIM 5.25 ---------- Subject EGI $1,596,142 Value $8,379,743 PV of Concessions -$ 247,000 ---------- Value Based on EGIM Analysis $8,132,743 Rounded $8,100,000 Value Per Unit $ 35,526
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 46.78% before reserves. The comparable sales indicate a range of expense ratios from 40.38% to 44.51%, while their EGIMs range from 5.09 to 6.48. Overall, we conclude to an EGIM of 5.25, which results in an "as is" value estimate in the EGIM Analysis of $8,100,000. SALES COMPARISON CONCLUSION The three valuation methods in the Sales Comparison Approach are shown below. The overall value via the Sales Comparison Approach is estimated at $8,100,000. Price Per Unit $8,300,000 NOI Per Unit $7,700,000 EGIM Analysis $8,100,000 Sales Comparison Conclusion $8,100,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 530 $463 $0.87 93.1% 1Br/1Ba 652 $546 $0.84 83.1% 1Br/1Ba 745 $578 $0.78 72.7% 1Br/1Ba 748 $613 $0.82 83.3% 2Br/2Ba 892 $706 $0.79 95.8% 2Br/2Ba 1079 $723 $0.67 100.0%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA RENT ANALYSIS
COMPARABLE RENTS ------------------------------------------------------ R-1 R-2 R-3 R-4 R-5 ------------------------------------------------------ Dominion @ Pace's Wellington Peppertree Glen Steeplechase Timbers Farms ------------------------------------------------------ SUBJECT SUBJECT COMPARISON TO SUBJECT SUBJECT ACTUAL ASKING ------------------------------------------------------ DESCRIPTION UNIT TYPE RENT RENT Similar Similar Similar Similar Similar ------------------------------------------------------------------------------------------------------ Monthly Rent 1Br/1Ba $ 463 $ 479 $ 571 $ 549 $ 545 Unit Area (SF) 530 530 571 523 532 Monthly Rent Per $0.87 $0.90 $1.00 $1.05 $1.02 Sq. Ft. Monthly Rent 1Br/1Ba $ 546 $ 599 $ 589 $ 452 $ 575 $ 620 Unit Area (SF) 652 652 632 652 664 678 Monthly Rent Per $0.84 $0.92 $0.93 $0.69 $0.87 $0.91 Sq. Ft. Monthly Rent 1Br/1Ba $ 578 $ 649 $ 622 $ 573 $ 647 $615 $ 645 Unit Area (SF) 745 745 725 625 745 748 706 Monthly Rent Per $0.78 $0.87 $0.86 $0.92 $0.87 $0.82 $0.91 Sq. Ft. Monthly Rent 1Br/1Ba $ 613 $ 649 $ 630 $ 650 $ 503 $ 625 Unit Area (SF) 748 748 742 788 748 757 Monthly Rent Per $0.82 $0.87 $0.85 $0.82 $0.67 $0.83 Sq. Ft. Monthly Rent 2Br/2Ba $ 706 $ 754 $ 761 $ 609 $ 715 $ 675 Unit Area (SF) 892 892 838 892 888 882 Monthly Rent Per $0.79 $0.85 $0.91 $0.68 $0.81 $0.77 Sq. Ft. Monthly Rent 2Br/2Ba $ 723 $ 789 $ 798 $ 888 $ 799 $ 805 $ 805 Unit Area (SF) 1,079 1,079 1,067 1,260 1,079 1,081 978 Monthly Rent Per $0.67 $0.73 $0.75 $0.70 $0.74 $0.74 $0.82 Sq. Ft. DESCRIPTION MIN MAX MEDIAN AVERAGE ----------------------------------------------------- Monthly Rent $ 545 $ 571 $ 549 $ 555 Unit Area (SF) 523 571 532 542 Monthly Rent Per $1.00 $1.05 $1.02 $1.02 Sq. Ft. Monthly Rent $ 452 $ 620 $ 582 $ 559 Unit Area (SF) 632 678 658 657 Monthly Rent Per $0.69 $0.93 $0.89 $0.85 Sq. Ft. Monthly Rent $ 573 $ 647 $ 622 $ 620 Unit Area (SF) 625 748 725 710 Monthly Rent Per $0.82 $0.92 $0.87 $0.88 Sq. Ft. Monthly Rent $ 503 $ 650 $ 628 $ 602 Unit Area (SF) 742 788 753 759 Monthly Rent Per $0.67 $0.85 $0.83 $0.79 Sq. Ft. Monthly Rent $ 609 $ 761 $ 695 $690 Unit Area (SF) 838 892 885 875 Monthly Rent Per $0.68 $0.91 $0.79 $0.79 Sq. Ft. Monthly Rent $ 798 $ 888 $ 805 $819 Unit Area (SF) 978 1,260 1,079 1,093 Monthly Rent Per $0.70 $0.82 $0.74 $0.75 Sq. Ft.
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 58 530 $479 $0.90 $ 27,782 $ 333,384 1Br/1Ba 83 652 $599 $0.92 $ 49,717 $ 596,604 1Br/1Ba 11 745 $649 $0.87 $ 7,139 $ 85,668 1Br/1Ba 24 748 $649 $0.87 $ 15,576 $ 186,912 2Br/2Ba 24 892 $754 $0.85 $ 18,096 $ 217,152 2Br/2Ba 28 1,079 $789 $0.73 $ 22,092 $ 265,104 Total $140,402 $1,684,824
PRO FORMA ANALYSIS For purposes of this appraisal, we were provided with income and expense data for the subject property. A summary of this data is presented on the following page. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 29 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA SUMMARY OF HISTORICAL INCOME & EXPENSES
FISCAL YEAR 2000 FISCAL YEAR 2001 FISCAL YEAR 2002 FISCAL YEAR 2003 ----------------------- ----------------------- ----------------------- ----------------------- ACTUAL ACTUAL ACTUAL MANAGEMENT BUDGET ----------------------- ----------------------- ----------------------- ----------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT ---------------------------------------------------------------------------------------------------------------------------------- Revenues Rental Income $1,627,719 $ 7,139 $1,678,252 $ 7,361 $1,586,825 $ 6,960 $1,574,496 $ 6,906 Vacancy $ 138,775 $ 609 $ 153,578 $ 674 $ 209,779 $ 920 $ 121,829 $ 534 Credit Loss/Concessions $ 44,963 $ 197 $ 53,207 $ 233 $ 64,472 $ 283 $ 42,000 $ 184 Subtotal $ 183,738 $ 806 $ 206,785 $ 907 $ 274,251 $ 1,203 $ 163,829 $ 719 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 62,695 $ 275 $ 75,289 $ 330 $ 81,562 $ 358 $ 43,296 $ 190 Subtotal Other Income $ 62,695 $ 275 $ 75,289 $ 330 $ 81,562 $ 358 $ 43,296 $ 190 Effective Gross Income $1,506,676 $ 6,608 $1,546,756 $ 6,784 $1,394,136 $ 6,115 $1,453,963 $ 6,377 Operating Expenses Taxes $ 91,465 $ 401 $ 94,067 $ 413 $ 100,537 $ 441 $ 94,518 $ 415 Insurance $ 14,655 $ 64 $ 41,836 $ 183 $ 33,218 $ 146 $ 34,137 $ 150 Utilities $ 106,485 $ 467 $ 125,328 $ 550 $ 112,934 $ 495 $ 126,072 $ 553 Repair & Maintenance $ 109,960 $ 482 $ 152,162 $ 667 $ 161,331 $ 708 $ 156,252 $ 685 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 25,820 $ 113 $ 30,286 $ 133 $ 25,036 $ 110 $ 30,900 $ 136 General Administrative $ 219,577 $ 963 $ 224,356 $ 984 $ 183,460 $ 805 $ 160,473 $ 704 Management $ 78,092 $ 343 $ 84,801 $ 372 $ 72,477 $ 318 $ 74,382 $ 326 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Total Operating Expenses $ 646,054 $ 2,834 $ 752,836 $ 3,302 $ 688,993 $ 3,022 $ 676,734 $ 2,968 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Net Income $ 860,622 $ 3,775 $ 793,920 $ 3,482 $ 705,143 $ 3,093 $ 777,229 $ 3,409 ANNUALIZED 2003 ----------------------- PROJECTION AAA PROJECTION ----------------------- -------------------------------- DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT % --------------------------------------------------------------------------------------- Revenues Rental Income $1,360,564 $ 5,967 $1,684,824 $ 7,390 100.0% Vacancy $ 209,372 $ 918 $ 134,786 $ 591 8.0% Credit Loss/Concessions $ 262,016 $ 1,149 $ 33,696 $ 148 2.0% Subtotal $ 471,388 $ 2,067 $ 168,482 $ 739 10.0% Laundry Income $ 0 $ 0 $ 0 $ 0 0.0% Garage Revenue $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 71,448 $ 313 $ 79,800 $ 350 4.7% Subtotal Other Income $ 71,448 $ 313 $ 79,800 $ 350 4.7% Effective Gross Income $ 960,624 $ 4,213 $1,596,142 $ 7,001 100.0% Operating Expenses Taxes $ 94,820 $ 416 $ 94,620 $ 415 5.9% Insurance $ 100,528 $ 441 $ 39,900 $ 175 2.5% Utilities $ 132,336 $ 580 $ 125,400 $ 550 7.9% Repair & Maintenance $ 141,848 $ 622 $ 159,600 $ 700 10.0% Cleaning $ 0 $ 0 $ 0 $ 0 0.0% Landscaping $ 0 $ 0 $ 0 $ 0 0.0% Security $ 0 $ 0 $ 0 $ 0 0.0% Marketing & Leasing $ 38,428 $ 169 $ 30,780 $ 135 1.9% General Administrative $ 199,724 $ 876 $ 216,600 $ 950 13.6% Management $ 80,768 $ 354 $ 79,807 $ 350 5.0% Miscellaneous $ 0 $ 0 $ 0 $ 0 0.0% Total Operating Expenses $ 788,452 $ 3,458 $ 746,707 $ 3,275 46.8% Reserves $ 0 $ 0 $ 57,000 $ 250 7.6% Net Income $ 172,172 $ 755 $ 792,435 $ 3,476 49.6%
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 10% based on the subject's historical performance, as well as the anticipated future market conditions. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 30 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 31 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA SUMMARY OF OVERALL CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR --------------------------------------------------------------- I-1 Aug-02 93% $41,111 10.16% I-2 Sep-01 97% $47,097 8.56% I-3 Aug-01 89% $40,139 11.57% I-4 Dec-02 93% $44,518 10.73% I-5 Nov-00 91% $48,020 9.35% High 11.57% Low 8.56% Average 10.08%
Based on this information, we have concluded the subject's overall capitalization rate should be 9.50%. 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 10.25%. Finally, the subject's discount rate or yield rate is estimated based on the previous investor survey and an examination of returns available on alternative investments in the market. Based on this analysis, the subject's discount rate is estimated to be 11.25%. HOLDING PERIOD The survey of investors indicates that most investors are completing either 10-year cash flows or extending the analysis to the end of the lease if it is more than 10-years. A 10-year period has been used in the analysis of the subject with the eleventh year stabilized NOI used to determine the reversion. SELLING COSTS Sales of similar size properties are typically accomplished with the aid of a broker and will also incur legal and other transaction related cost. Based on our survey of brokers and a review of institutional investor projections, an allowance of 3.00% of the sale amount is applied. DISCOUNTED CASH FLOW CONCLUSION Discounting the annual cash flows and the equity reversion at the selected rate of 11.25% indicates a value of $8,500,000. In this instance, the reversion figure contributes AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 32 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA approximately 40% 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 33 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA DISCOUNTED CASH FLOW ANALYSIS MISTY WOODS APARTMENTS
YEAR APR-2004 APR-2005 APR-2006 APR-2007 APR-2008 APR-2009 FISCAL YEAR 1 2 3 4 5 6 ------------------------------------------------------------------------------------------------------------------------ REVENUE Base Rent $1,684,824 $1,710,096 $1,761,399 $1,814,241 $1,868,668 $1,924,729 Vacancy $ 134,786 $ 136,808 $ 140,912 $ 145,139 $ 149,493 $ 153,978 Credit Loss $ 33,696 $ 34,202 $ 35,228 $ 36,285 $ 37,373 $ 38,495 Concessions $ 155,846 $ 85,505 $ 35,228 $ 18,142 $ 0 $ 0 ---------- ---------- ---------- ---------- ---------- ---------- Subtotal $ 324,329 $ 256,514 $ 211,368 $ 199,567 $ 186,867 $ 192,473 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 79,800 $ 80,997 $ 83,427 $ 85,930 $ 88,508 $ 91,163 ---------- ---------- ---------- ---------- ---------- ---------- Subtotal Other Income $ 79,800 $ 80,997 $ 83,427 $ 85,930 $ 88,508 $ 91,163 ---------- ---------- ---------- ---------- ---------- ---------- EFFECTIVE GROSS INCOME $1,440,295 $1,534,579 $1,633,458 $1,700,604 $1,770,309 $1,823,419 OPERATING EXPENSES: Taxes $ 94,620 $ 97,459 $ 100,382 $ 103,394 $ 106,496 $ 109,691 Insurance $ 39,900 $ 41,097 $ 42,330 $ 43,600 $ 44,908 $ 46,255 Utilities $ 125,400 $ 129,162 $ 133,037 $ 137,028 $ 141,139 $ 145,373 Repair & Maintenance $ 159,600 $ 164,388 $ 169,320 $ 174,399 $ 179,631 $ 185,020 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 30,780 $ 31,703 $ 32,655 $ 33,634 $ 34,643 $ 35,682 General Administrative $ 216,600 $ 223,098 $ 229,791 $ 236,685 $ 243,785 $ 251,099 Management $ 72,015 $ 76,729 $ 81,673 $ 85,030 $ 88,515 $ 91,171 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ---------- ---------- ---------- ---------- ---------- ---------- TOTAL OPERATING EXPENSES $ 738,915 $ 763,636 $ 789,187 $ 813,770 $ 839,117 $ 864,291 Reserves $ 57,000 $ 58,710 $ 60,471 $ 62,285 $ 64,154 $ 66,079 ---------- ---------- ---------- ---------- ---------- ---------- NET OPERATING INCOME $ 644,381 $ 712,233 $ 783,800 $ 824,549 $ 867,038 $ 893,049 Operating Expense Ratio (% of EGI) 51.3% 49.8% 48.3% 47.9% 47.4% 47.4% Operating Expense Per Unit $ 3,241 $ 3,349 $ 3,461 $ 3,569 $ 3,680 $ 3,791 YEAR APR-2010 APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 7 8 9 10 11 --------------------------------------------------------------------------------------------------------- REVENUE Base Rent $1,982,470 $2,041,944 $2,103,203 $2,166,299 $2,231,288 Vacancy $ 158,598 $ 163,356 $ 168,256 $ 173,304 $ 178,503 Credit Loss $ 39,649 $ 40,839 $ 42,064 $ 43,326 $ 44,626 Concessions $ 0 $ 0 $ 0 $ 0 $ 0 ---------- ---------- ---------- ---------- ---------- Subtotal $ 198,247 $ 204,194 $ 210,320 $ 216,630 $ 223,129 Laundry Income $ 0 $ 0 $ 0 $ 0 $ 0 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 93,898 $ 96,715 $ 99,616 $ 102,605 $ 105,683 ---------- ---------- ---------- ---------- ---------- Subtotal Other Income $ 93,898 $ 96,715 $ 99,616 $ 102,605 $ 105,683 ---------- ---------- ---------- ---------- ---------- EFFECTIVE GROSS INCOME $1,878,121 $1,934,465 $1,992,499 $2,052,274 $2,113,842 OPERATING EXPENSES: Taxes $ 112,981 $ 116,371 $ 119,862 $ 123,458 $ 127,161 Insurance $ 47,643 $ 49,072 $ 50,544 $ 52,060 $ 53,622 Utilities $ 149,734 $ 154,226 $ 158,853 $ 163,619 $ 168,527 Repair & Maintenance $ 190,571 $ 196,288 $ 202,177 $ 208,242 $ 214,489 Cleaning $ 0 $ 0 $ 0 $ 0 $ 0 Landscaping $ 0 $ 0 $ 0 $ 0 $ 0 Security $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 36,753 $ 37,856 $ 38,991 $ 40,161 $ 41,366 General Administrative $ 258,632 $ 266,391 $ 274,382 $ 282,614 $ 291,092 Management $ 93,906 $ 96,723 $ 99,625 $ 102,614 $ 105,692 Miscellaneous $ 0 $ 0 $ 0 $ 0 $ 0 ---------- ---------- ---------- ---------- ---------- TOTAL OPERATING EXPENSES $ 890,220 $ 916,926 $ 944,434 $ 972,767 $1,001,950 Reserves $ 68,061 $ 70,103 $ 72,206 $ 74,372 $ 76,603 ---------- ---------- ---------- ---------- ---------- NET OPERATING INCOME $ 919,841 $ 947,436 $ 975,859 $1,005,135 $1,035,289 Operating Expense Ratio (% of EGI) 47.4% 47.4% 47.4% 47.4% 47.4% Operating Expense Per Unit $ 3,904 $ 4,022 $ 4,142 $ 4,267 $ 4,395
Estimated Stabilized NOI $792,435 Sales Expense Rate 3.00% Months to Stabilized 1 Discount Rate 11.25% Stabilized Occupancy 92.0% Terminal Cap Rate 10.25%
Gross Residual Sale Price $10,100,377 Deferred Maintenance $ 0 Less: Sales Expense $ 303,011 Add: Excess Land $ 0 ----------- Net Residual Sale Price $ 9,797,366 Other Adjustments $ 0 ---------- PV of Reversion $ 3,373,721 Value Indicated By "DCF" $8,496,120 Add: NPV of NOI $ 5,122,399 Rounded $8,500,000 ----------- PV Total $ 8,496,120
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE --------------------------------------------------------------------------- TOTAL VALUE 10.75% 11.00% 11.25% 11.50% 11.75% -------------------------------------------------------------------------------------------------------------- TERMINAL CAP RATE 9.75% $8,958,875 $8,812,411 $8,669,131 $8,528,957 $8,391,811 10.00% $8,866,122 $8,721,725 $8,580,463 $8,442,257 $8,307,031 10.25% $8,777,893 $8,635,463 $8,496,120 $8,359,786 $8,226,386 10.50% $8,693,865 $8,553,309 $8,415,793 $8,281,242 $8,149,582 10.75% $8,613,745 $8,474,975 $8,339,203 $8,206,352 $8,076,350
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 34 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA INCOME LOSS DURING LEASE-UP The subject is currently near or at a stabilized condition. Therefore, there is no income loss during lease-up at the subject property. CONCESSIONS Due to softness in the market, concessions have been utilized at the subject property and within the market. Based on our discussions with the subject's property manager and those at competing properties, these concessions are expected to continue in the near term until the market returns to a stabilized level. Concessions have been included as a line item deduction within the discounted cash flow analysis. The present value of these concessions equates to $247,000 (rounded). This amount has been deducted from the Direct Capitalization analysis, as well as the Sales Comparison Approach value. DIRECT CAPITALIZATION METHOD After having projected the income and expenses for the property, the next step in the valuation process is to capitalize the net income into an estimate of value. The selected overall capitalization rate ("OAR") covers both return on and return of capital. It is the overall rate of return an investor expects. After considering the market transactions and the investor surveys, we previously conclude that an overall rate of 9.50% percent is applicable to the subject. The results of our direct capitalization analysis are as follows: AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 35 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA MISTY WOODS APARTMENTS
TOTAL PER SQ. FT. PER UNIT %OF EGI ----------------------------------------------------------------------------------------------------- REVENUE Base Rent $1,684,824 $10.36 $ 7,390 Less: Vacancy & Collection Loss 10.00% $ 168,482 $ 1.04 $ 739 Plus: Other Income Laundry Income $ 0 $ 0.00 $ 0 0.00% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 79,800 $ 0.49 $ 350 5.00% Subtotal Other Income $ 79,800 $ 0.49 $ 350 5.00% -------------------------------------------- EFFECTIVE GROSS INCOME $1,596,142 $ 9.81 $ 7,001 OPERATING EXPENSES: Taxes $ 94,620 $ 0.58 $ 415 5.93% Insurance $ 39,900 $ 0.25 $ 175 2.50% Utilities $ 125,400 $ 0.77 $ 550 7.86% Repair & Maintenance $ 159,600 $ 0.98 $ 700 10.00% Cleaning $ 0 $ 0.00 $ 0 0.00% Landscaping $ 0 $ 0.00 $ 0 0.00% Security $ 0 $ 0.00 $ 0 0.00% Marketing & Leasing $ 30,780 $ 0.19 $ 135 1.93% General Administrative $ 216,600 $ 1.33 $ 950 13.57% Management 5.00% $ 79,807 $ 0.49 $ 350 5.00% Miscellaneous $ 0 $ 0.00 $ 0 0.00% TOTAL OPERATING EXPENSES $ 746,707 $ 4.59 $ 3,275 46.78% Reserves $ 57,000 $ 0.35 $ 250 3.57% -------------------------------------------- NET OPERATING INCOME $ 792,435 $ 4.87 $ 3,476 49.65% "GOING IN" CAPITALIZATION RATE 9.50% VALUE INDICATION $8,341,416 $51.29 $36,585 PV OF CONCESSIONS ($ 247,000) "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $8,094,416 ROUNDED $8,100,000 $49.81 $35,526
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 36 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF -------------------------------------------------------------------------- 8.75% $8,809,395 $8,800,000 $38,596 $54.11 9.00% $8,557,828 $8,600,000 $37,719 $52.88 9.25% $8,319,860 $8,300,000 $36,404 $51.04 9.50% $8,094,416 $8,100,000 $35,526 $49.81 9.75% $7,880,534 $7,900,000 $34,649 $48.58 10.00% $7,677,345 $7,700,000 $33,772 $47.35 10.25% $7,484,068 $7,500,000 $32,895 $46.12
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $8,100,000. 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 $8,500,000 Direct Capitalization Method $8,100,000
Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $8,300,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 37 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 $8,100,000 Income Approach $8,300,000 Reconciled Value $8,200,000
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: $8,200,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - MAIN ENTRANCE EXTERIOR - TYPICAL BUILDING ELEVATION [PICTURE] [PICTURE] EXTERIOR - TYPICAL BUILDING ELEVATION INTERIOR - APARTMENT UNIT [PICTURE] [PICTURE] INTERIOR - APARTMENT UNIT EXTERIOR - OFFICE/CLUBHOUSE AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] EXTERIOR - SWIMMING POOL INTERIOR - OFFICE/CLUBHOUSE AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 COMPARABLE I-2 COMPARABLE I-3 CEDARS I TIMBERS DRAKE 7139 Winding Cedar Trail 3317 Magnolia Hills Dr 1701 Gander Cover Ln Charlotte, NC Charlotte, NC Charlotte, NC [PICTURE] [PICTURE] [PICTURE] COMPARABLE I-4 COMPARABLE I-5 WILLOW RIDGE CAMERON @ HICKORY GROVE 9200 Willow Ridge 5625 Keyway Blvd Charlotte, NC Charlotte, NC [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE DESCRIPTION SUBJECT R - 1 ---------------------------------------------------------------------------------------------------------------------------------- Property Name Misty Woods Apartments Dominion @ Peppertree Management Company AIMCO United Dominion Realty LOCATION: Address 4630 Central Avenue 4311 Central Avenue City, State Charlotte, North Carolina Charlotte, North Carolina County Mecklenburg Mecklenburg Proximity to Subject 1/2 mile west of the subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 162,623 235,060 Year Built 1985 1985 Effective Age 18 18 Building Structure Type Brick & wood siding walls; asphalt Brick & wood siding walls; asphalt shingle roof shingle roof Parking Type (Gr., Cov., etc.) Open Open Number of Units 228 292 Unit Mix: Type Unit Qty. Mo. Rent Type Unit Qty. Mo. 1 1Br/1Ba 530 58 $463 1 1BD/1BH 571 16 $571 2 1Br/1Ba 652 83 $546 2 1BD/1BH 632 16 $589 3 1Br/1Ba 745 11 $578 1BD/1BH TNHS 716 88 $600 4 1Br/1Ba 748 24 $613 3 1BD/1.5BH TNHS 725 36 $622 5 2Br/2Ba 892 24 $706 4 1BD/1.5BH TNHS 742 48 $630 6 2Br/2Ba 1,079 28 $723 2BD/1BH 786 8 $731 5 2BD/1BH 838 8 $761 6 2BD/2BH 1,067 48 $798 2BD/2BH TNHS 1,117 24 $840 Average Unit Size (SF) 713 805 Unit Breakdown: Efficiency 0% 2-Bedroom 23% Efficiency 0% 2-Bedroom 30% 1-Bedroom 77% 3-Bedroom 0% 1-Bedroom 70% 3-Bedroom 0% CONDITION: Average Average APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X W/D Connect. X Balcony X W/D Connect. X Fireplace X Fireplace X X Cable TV Ready X Cable TV Ready Burglar Alarms 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 Meeting Hall Sand Volley Ball Meeting Hall Tennis Court X Secured Parking X Tennis Court X Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track Business Office Jogging Track Business Office X Gym Room X Gym Room OCCUPANCY: 89% 92% LEASING DATA: Available Leasing Terms 6 to 12 Months 6 to 12 Months Concessions $99 Security Deposit; 1 month prorated 3 months free Pet Deposit $150-$200 $200 Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas Water Trash Water Trash Confirmation Telephone Number NOTES: COMPARISON TO SUBJECT: Similar COMPARABLE COMPARABLE DESCRIPTION R - 2 R - 3 ---------------------------------------------------------------------------------------------------------------------------------- Property Name Pace's Glen Steeplechase Management Company Conerstone Realty Equity Residential LOCATION: Address 5600 Paces Glen Avenue 7200 Wallace Road City, State Charlotte, North Carolina Charlotte, North Carolina County Mecklenburg Mecklenburg Proximity to Subject 1 mile east/southeast of the subject 1.5 miles southeast of the subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 155,660 178,828 Year Built 1986 1986 Effective Age 17 17 Building Structure Type Brick & wood siding walls; asphalt Brick & wood siding walls; asphalt shingle roof shingle roof Parking Type (Gr., Cov., etc.) Open/Carports Open Number of Units 172 246 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 3 1BD/1BH 625 40 $573 1 1BD/1BH 523 53 $549 4 1BD/1BH 788 52 $650 2 1BD/1BH 652 86 $452 1BD/1BH 938 16 $740 3 1BD/1BH 745 24 $647 2BD/1BH 1,136 48 $778 4 1BD/1BH 748 27 $503 6 2BD/2BH 1,260 16 $888 5 2BD/2BH 892 18 $609 2BD/2BH 958 6 $744 6 2BD/2BH 1,079 32 $799 Average Unit Size (SF) 905 724 Unit Breakdown: Efficiency 0% 2-Bedroom 37% Efficiency 0% 2-Bedroom 23% 1-Bedroom 63% 3-Bedroom 0% 1-Bedroom 77% 3-Bedroom 0% CONDITION: Average Average APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage X Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X W/D Connect. X Balcony X W/D Connect. X Fireplace X X Fireplace X X Cable TV Ready Carports X Cable TV Ready Washer/Dryers in Apts 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 Meeting Hall Sand Volley Ball Meeting Hall X Tennis Court Secured Parking Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track Business Office Jogging Track Business Office X Gym Room X Gym Room OCCUPANCY: 91% 88% LEASING DATA: Available Leasing Terms 6 to 12 Months 6 to 12 Months Concessions 1 Bedroom $499/2 Bedroom $659 $100 off market rent Pet Deposit $300 $250 Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas Water Trash Water Trash Confirmation Telephone Number NOTES: COMPARISON TO SUBJECT: Similar Similar COMPARABLE COMPARABLE DESCRIPTION R - 4 R - 5 ---------------------------------------------------------------------------------------------------------------------------------- Property Name Timbers Wellington Farms Management Company Durmont Realty Management Claremont Management LOCATION: Address 3317 Magnolia Hill Drive 4700 Twisted Oaks Road City, State Charlotte, North Carolina Charlotte, North Carolina County Mecklenburg Mecklenburg Proximity to Subject 1.5 miles northwest of the subject 1 mile northeast of the subject PHYSICAL CHARATERISTICS: Net Rentable Area (SF) 256,091 197,612 Year Built 1988 1988 Effective Age 15 15 Building Structure Type Brick & wood siding walls; asphalt Brick & wood siding walls; asphalt shingle roof shingle roof Parking Type (Gr., Cov., etc.) Open Open Number of Units 341 254 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1BD/1BH 532 52 $545 2 1BD/1BH 678 100 $620 2 1BD/1BH 664 121 $575 3 1BD/1BH 706 32 $645 3 1BD/1BH 748 39 $615 0 1BD/1BH 822 32 $675 4 1BD/1BH 757 35 $625 5 2BD/2BH 882 74 $675 5 2BD/2BH 888 48 $715 6 2BD/2BH 978 16 $805 6 2BD/2BH 1,081 46 $805 Average Unit Size (SF) 751 778 Unit Breakdown: Efficiency 0% 2-Bedroom 28% Efficiency 0% 2-Bedroom 35% 1-Bedroom 72% 3-Bedroom 0% 1-Bedroom 65% 3-Bedroom 0% CONDITION: Average Average APPEAL: Average Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage X Vaulted Ceiling X Balcony X W/D Connect. X Balcony X W/D Connect. X Fireplace X Fireplace X Cable TV Ready X Cable TV Ready Project Amenities X Swimming Pool X Swimming Pool Spa/Jacuzzi Car Wash 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 Meeting Hall Tennis Court Secured Parking X Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track Business Office Jogging Track Business Office X Gym Room X Gym Room OCCUPANCY: 74% 97% LEASING DATA: Available Leasing Terms 6 to 12 Months 6 to 12 Months Concessions 2 months free on an 11 month lease Up to $150 off quoted rent Pet Deposit $300 $300 Utilities Paid by Tenant: X Electric Natural Gas X Electric Natural Gas Water Trash Water Trash Confirmation Telephone Number NOTES: COMPARISON TO SUBJECT: Similar Similar
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 COMPARABLE R-2 COMPARABLE R-3 DOMINION @ PEPPERTREE PACE'S GLEN STEEPLECHASE 4311 Central Avenue 5600 Paces Glen Avenue 7200 Wallace Road Charlotte, North Carolina Charlotte, North Carolina Charlotte, North Carolina [PICTURE] [PICTURE] [PICTURE] COMPARABLE R-4 COMPARABLE R-5 TIMBERS WELLINGTON FARMS 3317 Magnolia Hill Drive 4700 Twisted Oaks Road Charlotte, North Carolina Charlotte, North Carolina [PICTURE] [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA 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. John Hayden 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 North Carolina Temporary Practice Permit #2578 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA EXHIBIT E QUALIFICATIONS OF APPRAISER (2 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA 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 MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA 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. MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. MISTY WOODS APARTMENTS, CHARLOTTE, NORTH CAROLINA 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.