EX-99.(C)(1) 3 d07270a2exv99wxcyx1y.txt APPRAISAL OF COLONY AT KENILWORTH COLONY AT KENILWORTH 1 BONROCK COURT TOWSON, MARYLAND MARKET VALUE - FEE SIMPLE ESTATE AS OF APRIL 24, 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) LETTERHEAD] JUNE 28, 2003 Apartment Investment and Management Company ("AIMCO") c/o Mr. Steven A. Velkei, Esq. Liner Yankelevitz Sunshine & Regenstreif LLP 1100 Glendon Avenue, 14th Floor Los Angeles, California 90024-3503 Nuanes, et al. ("Plaintiffs") c/o Ms. Joy Kruse Lieff Cabraser Heimann & Bernstein Embarcadero Center West 275 Battery Street, 30th Floor San Francisco, California 94111 RE: COLONY AT KENILWORTH 1 BONROCK COURT TOWSON, BALTIMORE COUNTY, MARYLAND 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 383 units with a total of 342,376 square feet of rentable area. The improvements were built in 1967. The improvements are situated on 22.622 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 COLONY AT KENILWORTH, TOWSON, MARYLAND 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 April 24, 2003 is: ($24,400,000) Respectfully submitted, AMERICAN APPRAISAL ASSOCIATES, INC. -s- Brian Johnson June 28, 2003 Brian Johnson, MAI #053272 Managing Principal, Real Estate Group Report By: Jonathan Hackerman AMERICAN APPRAISAL ASSOCIATES, INC. TABLE OF CONTENTS PAGE 3 COLONY AT KENILWORTH, TOWSON, MARYLAND 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 ......................................... 39
ADDENDA Exhibit A - Photographs of Subject Property Exhibit B - Summary of Rent Comparables and Photograph of Comparables Exhibit C - Assumptions and Limiting Conditions Exhibit D - Certificate of Appraiser Exhibit E - Qualifications General Service Conditions AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 4 COLONY AT KENILWORTH, TOWSON, MARYLAND EXECUTIVE SUMMARY PART ONE - PROPERTY DESCRIPTION PROPERTY NAME: Colony at Kenilworth LOCATION: 1 Bonrock Court Towson, Maryland 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: April 24, 2003 DATE OF REPORT: June 28, 2003 PHYSICAL DESCRIPTION - SITE & IMPROVEMENTS: SITE: Size: 22.622 acres, or 985,414 square feet Assessor Parcel No.: 920551881 Floodplain: Community Panel No. 240010--265 B (March 2, 1981) Flood Zone C, an area outside the floodplain. Zoning: DR16 (Density Residential - 16 units per acre) BUILDING: No. of Units: 383 Units Total NRA: 342,376 Square Feet Average Unit Size: 894 Square Feet Apartment Density: 16.9 units per acre Year Built: 1967 UNIT MIX AND MARKET RENT: GROSS RENTAL INCOME PROJECTION
Market Rent Square ----------------- Monthly Annual Unit Type Feet Per Unit Per SF Income Income --------- ------ -------- ------ -------- ---------- 1A10 736 $ 660 $ 0.90 $ 19,140 $ 229,680 1B10 756 $ 655 $ 0.87 $ 3,930 $ 47,160 2A15 880 $ 810 $ 0.92 $168,480 $2,021,760 2A10 910 $ 825 $ 0.91 $ 9,900 $ 118,800 3A15 1,126 $1,125 $ 1.00 $ 18,000 $ 216,000 3A20 1,210 $1,140 $ 0.94 $ 6,840 $ 82,080 2B15 900 $ 825 $ 0.92 $ 82,500 $ 990,000 3A25 1,210 $1,100 $ 0.91 $ 6,600 $ 79,200 -------- ---------- Total $315,390 $3,784,680 ======== ==========
OCCUPANCY: 89% AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 5 COLONY AT KENILWORTH, TOWSON, MARYLAND ECONOMIC LIFE: 45 Years EFFECTIVE AGE: 13 Years REMAINING ECONOMIC LIFE: 32 Years SUBJECT PHOTOGRAPHS AND LOCATION MAP: SUBJECT PHOTOGRAPHS [PICTURE] FRONT OF SUBJECT [PICTURE] EXTERIOR - LANDSCAPE & PARK AREA MAP [MAP] AMERICAN APPRAISAL ASSOCIATES, INC. EXECUTIVE SUMMARY PAGE 6 COLONY AT KENILWORTH, TOWSON, MARYLAND 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 COLONY AT KENILWORTH, TOWSON, MARYLAND PART TWO - ECONOMIC INDICATORS INCOME CAPITALIZATION APPROACH
DIRECT CAPITALIZATION Amount $/Unit --------------------- ------------------ -------------- Potential Rental Income $ 3,784,680 $9,882 Effective Gross Income $ 3,655,581 $9,545 Operating Expenses $ 1,402,463 $3,662 38.4% of EGI Net Operating Income: $ 2,176,518 $5,683 Capitalization Rate 8.50% DIRECT CAPITALIZATION VALUE $24,900,000 * $65,013 / UNIT DISCOUNTED CASH FLOW ANALYSIS: Holding Period 10 years 2002 Economic Vacancy 14% Stabilized Vacancy & Collection Loss: 6.7% Lease-up / Stabilization Period 18 months Terminal Capitalization Rate 9.25% Discount Rate 11.00% Selling Costs 2.00% Growth Rates: Income 3.00% Expenses: 3.00% DISCOUNTED CASH FLOW VALUE $25,500,000 * $66,580 / UNIT RECONCILED INCOME CAPITALIZATION VALUE $25,400,000 $66,319 / UNIT
SALES COMPARISON APPROACH PRICE PER UNIT: Range of Sales $/Unit (Unadjusted) $45,052 to $57,292 Range of Sales $/Unit (Adjusted) $48,607 to $66,172 VALUE INDICATION - PRICE PER UNIT $23,000,000 * $60,052 / UNIT EGIM ANALYSIS Range of EGIMs from Improved Sales 5.76 to 7.87 Selected EGIM for Subject 6.50 Subject's Projected EGI $3,655,581 EGIM ANALYSIS CONCLUSION $23,000,000 * $60,052 / UNIT NOI PER UNIT ANALYSIS CONCLUSION $23,800,000 * $62,141 / UNIT RECONCILED SALES COMPARISON VALUE $23,500,000 $61,358 / 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 COLONY AT KENILWORTH, TOWSON, MARYLAND PART THREE - SUMMARY OF VALUE CONCLUSIONS SALES COMPARISON APPROACH: Price Per Unit $23,000,000 NOI Per Unit $23,800,000 EGIM Multiplier $23,000,000 INDICATED VALUE BY SALES COMPARISON $23,500,000 $61,358 / UNIT INCOME APPROACH: Direct Capitalization Method: $24,900,000 Discounted Cash Flow Method: $25,500,000 INDICATED VALUE BY THE INCOME APPROACH $25,400,000 $66,319 / UNIT RECONCILED OVERALL VALUE CONCLUSION: $24,400,000 $63,708 / UNIT
AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 9 COLONY AT KENILWORTH, TOWSON, MARYLAND INTRODUCTION IDENTIFICATION OF THE SUBJECT The subject property is located at 1 Bonrock Court, Towson, Baltimore County, Maryland. Towson identifies it as 920551881. SCOPE OF THE ASSIGNMENT The property, neighborhood, and comparables were inspected by Jonathan Hackerman on April 24, 2003. Brian Johnson, MAI has not made a personal inspection of the subject property. Jonathan Hackerman performed the research, valuation analysis and wrote the report. Brian Johnson, MAI reviewed the report and concurs with the value. Brian Johnson, MAI and Jonathan Hackerman 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 April 24, 2003. The date of the report is June 28, 2003. PURPOSE AND USE OF APPRAISAL The purpose of the appraisal is to estimate the market value of the fee simple interest in the subject property. It is understood that the appraisal is intended to assist the clients in litigation settlement proceedings. The appraisal was not based on a requested minimum valuation, a specific valuation, or the approval of a loan. PROPERTY RIGHTS APPRAISED We have appraised the Fee Simple Estate in the subject property (as applied in the Sales & Income Approaches), subject to the existing short-term leases. A Fee Simple Estate is AMERICAN APPRAISAL ASSOCIATES, INC. INTRODUCTION PAGE 10 COLONY AT KENILWORTH, TOWSON, MARYLAND 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 National Property Investors. 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 COLONY AT KENILWORTH, TOWSON, MARYLAND 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 Towson, Maryland. 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 - Dulaney Valley Road West - N. Charles Street South - Towson University North - I-695 MAJOR EMPLOYERS Major employers in the subject's area include educational services, finance, insurance and real estate, health services and retail trade. 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 COLONY AT KENILWORTH, TOWSON, MARYLAND NEIGHBORHOOD DEMOGRAPHICS
AREA -------------------------------------------- CATEGORY 1-MI. RADIUS 3-MI. RADIUS 5-MI. RADIUS MSA --------------------------- ------------ ------------ ------------ ---------- POPULATION TRENDS Current Population 13,928 83,717 266,027 2,567,693 5-Year Population 14,358 84,099 265,243 2,640,264 % Change CY-5Y 3.1% 0.5% -0.3% 2.8% Annual Change CY-5Y 0.6% 0.1% -0.1% 0.6% HOUSEHOLDS Current Households 6,223 34,428 111,268 986,581 5-Year Projected Households 6,519 35,056 112,568 1,028,973 % Change CY - 5Y 4.8% 1.8% 1.2% 4.3% Annual Change CY-5Y 1.0% 0.4% 0.2% 0.9% INCOME TRENDS Median Household Income $44,293 $65,151 $ 49,744 $ 56,893 Per Capita Income $29,228 $33,876 $ 29,615 $ 25,151 Average Household Income $65,734 $82,477 $ 71,097 $ 65,432
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 45.87% 30.84% 35.27% 30.53% 5-Year Projected % Renting 46.37% 30.31% 34.91% 29.34% % of Households Owning 46.59% 64.55% 59.56% 63.19% 5-Year Projected % Owning 46.54% 65.24% 60.04% 64.65%
Source: Demographics Now AMERICAN APPRAISAL ASSOCIATES, INC. AREA ANALYSIS PAGE 13 COLONY AT KENILWORTH, TOWSON, MARYLAND SURROUNDING IMPROVEMENTS The following uses surround the subject property: North - Car Dealership/Shopping Mall South - Residential Apartments East - Residential Apartments West - Residential Apartments CONCLUSIONS The subject is well located within the city of Towson. The neighborhood is characterized as being mostly suburban in nature and is currently in the growth stage of development. The economic outlook for the neighborhood is judged to be favorable with a good economic base. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 14 COLONY AT KENILWORTH, TOWSON, MARYLAND MARKET ANALYSIS The subject property is located in the city of Towson in Baltimore County. The overall pace of development in the subject's market is more or less stable. Dulaney Crescent apartment complex was constructed in 2002 and is located about one mile from the subject property. These luxury apartments really do not compare to the subject as they have favorable apartment amenities as well as community amenities. It is also located adjacent to the Towson Town Mall, a regional shopping mall in the area. The following table illustrates historical vacancy rates for the subject's market. HISTORICAL VACANCY RATE
Period Region Submarket ------------ ------ --------- 4Q01 3.0% 2.4% 1Q02 3.2% 2.9% 2Q02 3.5% 3.1% 3Q02 3.7% 3.3% 4Q02 4.1% 3.6% 1Q03 4.9% 4.7%
Source: REIS Occupancy trends in the subject's market are decreasing. Historically speaking, the subject's submarket has outperformed the overall market. Vacancy rates have historically been at a lower rate for the Towson area than the surrounding Baltimore area and beyond. Vacancy rates are projected to decrease slightly in the future. Market rents in the subject's market have been following a stable trend. The following table illustrates historical rental rates for the subject's market. HISTORICAL AVERAGE RENT
Period Region % Change Submarket % Change --------- ------ -------- --------- -------- 4Q01 N/A - $769 - 1Q02 N/A N/A $758 -1.4% 2Q02 N/A N/A $784 3.4% 3Q02 N/A N/A $790 0.8% 4Q02 N/A N/A $794 0.5% 1Q03 N/A N/A $809 1.9%
{Source:} The following table illustrates a summary of the subject's competitive set. AMERICAN APPRAISAL ASSOCIATES, INC. MARKET ANALYSIS PAGE 15 COLONY AT KENILWORTH, TOWSON, MARYLAND COMPETITIVE PROPERTIES
No. Property Name Units Ocpy. Year Built Proximity to subject ------- ------------------------- ----- ----- ---------- ------------------------------- R-1 Cardiff Charles 152 96% 1971 2-mile northwest of the subject R-2 Towson Woods 168 89% 1975 0.2 miles west of subject R-3 Kenilworth @ Charles 302 94% 1962 Within 4-mile radius R-4 Hampton Plaza 202 98% 1972 Within 2-miles R-5 Dulaney Valley Apartments 256 93% 1952 Within a 2-mile radius Subject Colony at Kenilworth 383 89% 1967
Market rent growth is expected to remain steady for the subjects market in the near future. It is expected to be near the 3% range for several years. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 16 COLONY AT KENILWORTH, TOWSON, MARYLAND PROPERTY DESCRIPTION SITE ANALYSIS Site Area 22.622 acres, or 985,414 square feet Shape Generally rectangular Topography Moderate 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 Good Flood Zone: Community Panel 240010--265 B, dated March 2, 1981 Flood Zone Zone C Zoning DR16, 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 ------------- ---------- ----------- ----------- ---------- --------- 920551881 $3,620,700 $17,630,900 $21,251,600 $0.01344 $285,555
IMPROVEMENT ANALYSIS Year Built 1967 Number of Units 383 Net Rentable Area 342,376 Square Feet Construction: Foundation Reinforced concrete slab Frame Composite concrete or brick and steel Exterior Walls Wood or vinyl siding Roof Composition shingle over a wood truss structure Project Amenities Amenities at the subject include a swimming pool, gym room, barbeque equipment, laundry room, business office, and parking area. Unit Amenities Individual unit amenities include a garage, balcony, cable TV connection, and washer dryer connection. Appliances available in each unit include a refrigerator, stove, dishwasher, water heater, garbage disposal, and oven. AMERICAN APPRAISAL ASSOCIATES, INC. PROPERTY DESCRIPTION PAGE 17 COLONY AT KENILWORTH, TOWSON, MARYLAND Unit Mix:
Unit Area Unit Type Number of Units (Sq. Ft.) --------- --------------- --------- 1A10 29 736 1B10 6 756 2A15 208 880 2A10 12 910 3A15 16 1,126 3A20 6 1,210 2B15 100 900 3A25 6 1,210
Overall Condition Average Effective Age 13 years Economic Life 45 years Remaining Economic Life 32 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 1967 and consist of a 383-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 COLONY AT KENILWORTH, TOWSON, MARYLAND 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 COLONY AT KENILWORTH, TOWSON, MARYLAND 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 COLONY AT KENILWORTH, TOWSON, MARYLAND 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 COLONY AT KENILWORTH, TOWSON, MARYLAND SUMMARY OF COMPARABLE SALES -IMPROVED
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 -------------------------------- ------------------------------ --------------------------- ----------------------------- Property Name Colony at Kenilworth Deer Park Apartments Fairway's at Towson LOCATION: Address 1 Bonrock Court 9902 Cervidae Lane 1300 Colbury Road City, State Towson, Maryland Randallstown, MD Baltimore, MD County Baltimore Baltimore Baltimore PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 342,376 220,000 793,607 Year Built 1967 1968 1967 Number of Units 383 168 829 Unit Mix: Type Total Type Total Type Total 1A10 29 1Br/1Ba 48 1Br/1Ba 534 1B10 6 2Br/2Ba 120 2Br/2Ba 204 2A15 208 3Br/2Ba 60 2A10 12 4Br/2Ba 2 3A15 16 Studio 29 3A20 6 2B15 100 3A25 6 Average Unit Size (SF) 894 1,310 957 Land Area (Acre) 22.6220 11.2700 34.8000 Density (Units/Acre) 16.9 14.9 23.8 Parking Ratio (Spaces/Unit) 1.71 2.17 N/A Parking Type (Gr., Cov., etc.) Garage, Open Covered Open Open CONDITION: Good Average Good APPEAL: Good Average Good AMENITIES: Pool/Spa Yes/No Yes/No Yes/Yes Gym Room Yes No Yes Laundry Room Yes No Yes Secured Parking No No No Sport Courts No No Yes Washer/Dryer Connection No Yes No Other Other OCCUPANCY: 89% 90% 96% TRANSACTION DATA: Sale Date March, 2003 August, 2002 Sale Price ($) $9,485,000 $40,800,000 Grantor DP Associates LLC Glenmont Gardens LLC Grantee Apartment Services Fairways at Towson Property Sale Documentation N/A Book 16735 Page 449 Verification Confidential Buyer Telephone Number (301)479-1600 ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF ---------- ------ ----- ---------- ------ ----- Potential Gross Income $1,638,720 $9,754 $7.45 $5,400,000 $6,514 $6.80 Vacancy/Credit Loss $ 98,323 $ 585 $0.45 $ 216,000 $ 261 $0.27 ---------- ------ ----- ---------- ------ ----- Effective Gross Income $1,540,397 $9,169 $7.00 $5,184,000 $6,253 $6.53 Operating Expenses $ 753,811 $4,487 $3.43 $1,814,400 $2,189 $2.29 ---------- ------ ----- ---------- ------ ----- Net Operating Income $ 786,586 $4,682 $3.58 $3,369,600 $4,065 $4.25 ---------- ------ ----- ---------- ------ ----- NOTES: None A few select units do have washer and dryers. PRICE PER UNIT $56,458 $49,216 PRICE PER SQUARE FOOT $ 43.11 $ 51.41 EXPENSE RATIO 48.9% 35.0% EGIM 6.16 7.87 OVERALL CAP RATE 8.29% 8.26% Cap Rate based on Pro Forma or Actual Income? PRO FORMA ACTUAL
COMPARABLE COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 I - 5 -------------------------------- ---------------------------- ----------------------------- ---------------------------- Property Name Mill Towne Village Rolling Park Apartments Owings Chase Apartments LOCATION: Address 21 Garrison View Road 8331 Mindale Circle 4607 Old Court Road City, State Baltimore, MD Baltimore, MD Pikesville, MD County Baltimore Baltimore Baltimore PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 311,819 162,000 282,240 Year Built 1976 1972 1978 Number of Units 384 144 234 Unit Mix: Type Total Type Total Type Total 1Br/1Ba 192 2Br/2Ba 144 1Br/1Ba 89 2Br/1Ba 156 2Br/2Ba 145 3Br/2Ba 36 Average Unit Size (SF) 812 1,125 1,206 Land Area (Acre) 24.7620 9.0250 14.0400 Density (Units/Acre) 15.5 16.0 16.7 Parking Ratio (Spaces/Unit) 1.30 N/A 1.70 Parking Type (Gr., Cov., etc.) Open Open Open CONDITION: Fair Average Good APPEAL: Average Fair Average AMENITIES: Pool/Spa Yes/No Yes/No Yes/No Gym Room No No Yes Laundry Room Yes No No Secured Parking No No No Sport Courts No Yes No Washer/Dryer Connection No Yes Yes Other Playground All units include individual Other washer/dryer units. OCCUPANCY: 100% 100% 96% TRANSACTION DATA: Sale Date May, 2001 June, 2002 September, 2000 Sale Price ($) $17,300,000 $8,250,000 $11,000,000 Grantor Sandalwood Co-op, Inc. Rolling Park Associates Owings Chase LP Grantee Home Properties Sandalwood Multi LLC Owings Chase Associates Sale Documentation Book 15261 Page 630 N/A N/A Verification Representative of Grantor Confidential Buyer Telephone Number (410) 823-9314 (301) 986-9400 ESTIMATED PRO-FORMA: Total $ $/Unit $/SF Total $ $/Unit $/SF Total $ $/Unit $/SF ---------- ------ ----- ---------- ------ ----- ---------- ------ ----- Potential Gross Income $2,966,400 $7,725 $9.51 $1,273,000 $8,840 $7.86 $1,988,400 $8,497 $7.05 Vacancy/Credit Loss $ 177,984 $ 464 $0.57 $ 105,000 $ 729 $0.65 $ 79,536 $ 340 $0.28 ---------- ------ ----- ---------- ------ ----- ---------- ------ ----- Effective Gross Income $2,788,416 $7,262 $8.94 $1,168,000 $8,111 $7.21 $1,908,864 $8,158 $6.76 Operating Expenses $1,364,544 $3,554 $4.38 $ 488,000 $3,389 $3.01 $ 865,800 $3,700 $3.07 ---------- ------ ----- ---------- ------ ----- ---------- ------ ----- Net Operating Income $1,423,872 $3,708 $4.57 $ 680,000 $4,722 $4.20 $1,043,064 $4,458 $3.70 ---------- ------ ----- ---------- ------ ----- ---------- ------ ----- NOTES: Buyer projects 8.2% cap rate None Located close to I-695. and they expect to spend $4.2 million on cap. impvts. PRICE PER UNIT $45,052 $57,292 $47,009 PRICE PER SQUARE FOOT $ 55.48 $ 50.93 $ 38.97 EXPENSE RATIO 48.9% 41.8% 45.4% EGIM 6.20 7.06 5.76 OVERALL CAP RATE 8.23% 8.24% 9.48% Cap Rate based on Pro Forma or Actual Income? PRO FORMA ACTUAL PRO FORMA
AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 22 COLONY AT KENILWORTH, TOWSON, MARYLAND IMPROVED SALES MAP [MAP] IMPROVED SALES ANALYSIS The improved sales indicate a sales price range from $45,052 to $57,292 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 $48,607 to $66,172 per unit with a mean or average adjusted price of $56,726 per unit. The median adjusted price is $56,458 per unit. Based on the following analysis, we have concluded to a value of $62,000 per unit, which results in an "as is" value of $23,000,000 (rounded after necessary adjustment, if any). AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 23 COLONY AT KENILWORTH, TOWSON, MARYLAND SALES ADJUSTMENT GRID
COMPARABLE COMPARABLE DESCRIPTION SUBJECT I - 1 I - 2 ----------------------------------- -------------------- ------------------------------ ------------------------- Property Name Colony at Kenilworth Deer Park Apartments Fairway's at Towson Address 1 Bonrock Court 9902 Cervidae Lane 1300 Colbury Road City Towson, Maryland Randallstown, MD Baltimore, MD Sale Date March, 2003 August, 2002 Sale Price ($) $9,485,000 $40,800,000 Net Rentable Area (SF) 342,376 220,000 793,607 Number of Units 383 168 829 Price Per Unit $56,458 $49,216 Year Built 1967 1968 1967 Land Area (Acre) 22.6220 11.2700 34.8000 VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Date of Sale (Time) March, 2003 0% August, 2002 5% VALUE AFTER TRANS. ADJUST. ($/UNIT) $56,458 $51,677 Location Inferior 10% Comparable 0% Number of Units 383 168 -5% 829 20% Quality / Appeal Good Inferior 5% Comparable 0% Age / Condition 1967 1968 / Average 0% 1967 / Good 0% Occupancy at Sale 89% 90% 0% 96% -3% Amenities Good Comparable 0% Superior -5% Average Unit Size (SF) 894 1,310 -10% 957 0% PHYSICAL ADJUSTMENT 0% 12% FINAL ADJUSTED VALUE ($/UNIT) $56,458 $57,878
COMPARABLE COMPARABLE COMPARABLE DESCRIPTION I - 3 I - 4 I - 5 ----------------------------------- ----------------------------- ---------------------------- ---------------------------- Property Name Mill Towne Village Rolling Park Apartments Owings Chase Apartments Address 21 Garrison View Road 8331 Mindale Circle 4607 Old Court Road City Baltimore, MD Baltimore, MD Pikesville, MD Sale Date May, 2001 June, 2002 September, 2000 Sale Price ($) $17,300,000 $8,250,000 $11,000,000 Net Rentable Area (SF) 311,819 162,000 282,240 Number of Units 384 144 234 Price Per Unit $45,052 $57,292 $47,009 Year Built 1976 1972 1978 Land Area (Acre) 24.7620 9.0250 14.0400 VALUE ADJUSTMENTS DESCRIPTION ADJ. DESCRIPTION ADJ. DESCRIPTION ADJ. Property Rights Conveyed Fee Simple Estate 0% Fee Simple Estate 0% Fee Simple Estate 0% Financing Cash To Seller 0% Cash To Seller 0% Cash To Seller 0% Conditions of Sale Arm's Length 0% Arm's Length 0% Arm's Length 0% Date of Sale (Time) May, 2001 10% June, 2002 5% 09-2000 10% VALUE AFTER TRANS. ADJUST. ($/UNIT) $49,557 $60,156 $51,709 Location Inferior 10% Inferior 15% Superior -5% Number of Units 384 0% 144 -5% 234 -3% Quality / Appeal Comparable 0% Inferior 10% Inferior 10% Age / Condition 1976 / Fair 5% 1972 / Average 0% 1978 / Good 0% Occupancy at Sale 100% -5% 100% -5% 96% -3% Amenities Comparable 0% Comparable 0% Comparable 0% Average Unit Size (SF) 812 0% 1,125 -5% 1,206 -5% PHYSICAL ADJUSTMENT 10% 10% -6% FINAL ADJUSTED VALUE ($/UNIT) $54,513 $66,172 $48,607
SUMMARY VALUE RANGE (PER UNIT) $48,607 TO $66,172 MEAN (PER UNIT) $56,726 MEDIAN (PER UNIT) $56,458 VALUE CONCLUSION (PER UNIT) $62,000
VALUE OF IMPROVEMENT & MAIN SITE $23,746,000 LESS: LEASE-UP COST -$ 168,000 PV OF CONCESSIONS -$ 564,000 VALUE INDICATED BY SALES COMPARISON APPROACH $23,014,000 ROUNDED $23,000,000
NET OPERATING INCOME (NOI) ANALYSIS We have also conducted a net operating income (NOI) comparison analysis. The NOI effectively takes into account the various physical, location, and operating aspects of the sale. When the subject's NOI is compared to the sale NOI, a percent adjustment can be arrived at. The following table illustrates this analysis. AMERICAN APPRAISAL ASSOCIATES, INC. SALES COMPARISON APPROACH PAGE 24 COLONY AT KENILWORTH, TOWSON, MARYLAND 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-1 168 $ 9,485,000 8.29% $ 786,586 $2,176,518 1.214 $68,526 $ 56,458 $ 4,682 $ 5,683 I-2 829 $40,800,000 8.26% $3,369,600 $2,176,518 1.398 $68,809 $ 49,216 $ 4,065 $ 5,683 I-3 384 $17,300,000 8.23% $1,423,872 $2,176,518 1.533 $69,046 $ 45,052 $ 3,708 $ 5,683 I-4 144 $ 8,250,000 8.24% $ 680,000 $2,176,518 1.203 $68,946 $ 57,292 $ 4,722 $ 5,683 I-5 234 $11,000,000 9.48% $1,043,064 $2,176,518 1.275 $59,930 $ 47,009 $ 4,458 $ 5,683
PRICE/UNIT
Low High Average Median $59,930 $69,046 $67,051 $68,809
VALUE ANALYSIS BASED ON COMPARABLES NOI PER UNIT Estimated Price Per Unit $ 64,000 ----------- Number of Units 383 Value $24,512,000 Less: Lease-Up Cost -$ 168,000 PV of Concessions -$ 564,000 ------------ Value Based on NOI Analysis $23,780,000 Rounded $23,800,000
The adjusted sales indicate a range of value between $59,930 and $69,046 per unit, with an average of $67,051 per unit. Based on the subject's competitive position within the improved sales, a value of $64,000 per unit is estimated. This indicates an "as is" market value of $23,800,000 (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 COLONY AT KENILWORTH, TOWSON, MARYLAND 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-1 168 $ 9,485,000 $1,540,397 $ 753,811 48.94% 6.16 $ 56,458 I-2 829 $40,800,000 $5,184,000 $1,814,400 35.00% 7.87 $ 49,216 I-3 384 $17,300,000 $2,788,416 $1,364,544 48.94% 6.20 $ 45,052 38.36% I-4 144 $ 8,250,000 $1,168,000 $ 488,000 41.78% 7.06 $ 57,292 I-5 234 $11,000,000 $1,908,864 $ 865,800 45.36% 5.76 $ 47,009
EGIM
Low High Average Median ---- ---- ------- ------ 5.76 7.87 6.61 6.20
VALUE ANALYSIS BASED ON EGIM'S OF COMPARABLE SALES Estimate EGIM 6.50 ----------- Subject EGI $ 3,655,581 Value $23,761,279 Less: Lease-Up Cost -$ 168,000 PV of Concessions -$ 564,000 ------------ Value Based on EGIM Analysis $23,029,279 Rounded $23,000,000 Value Per Unit $ 60,052
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 38.36% before reserves. The comparable sales indicate a range of expense ratios from 35.00% to 48.94%, while their EGIMs range from 5.76 to 7.87. Overall, we conclude to an EGIM of 6.50, which results in an "as is" value estimate in the EGIM Analysis of $23,000,000. 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 $23,500,000. Price Per Unit $23,000,000 NOI Per Unit $23,800,000 EGIM Analysis $23,000,000 Sales Comparison Conclusion $23,500,000
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 26 COLONY AT KENILWORTH, TOWSON, MARYLAND 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 COLONY AT KENILWORTH, TOWSON, MARYLAND 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 --------- --------- -------- ------ --------- 1A10 736 $ 690 $0.94 96.6% 1B10 756 $ 697 $0.92 100.0% 2A15 880 $ 958 $1.09 88.5% 2A10 910 $1,085 $1.19 91.7% 3A15 1126 $1,355 $1.20 87.5% 3A20 1210 $1,735 $1.43 83.3% 2B15 900 $1,027 $1.14 88.0% 3A25 1210 $1,573 $1.30 66.7%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 28 COLONY AT KENILWORTH, TOWSON, MARYLAND RENT ANALYSIS
COMPARABLE RENTS ------------------------------------------------------------- R-1 R-2 R-3 R-4 R-5 ------------------------------------------------------------- Dulaney Cardiff Towson Kenilworth Hampton Valley Charles Woods @ Charles Plaza Apartments ------------------------------------------------------------- COMPARISON TO SUBJECT ------------------------------------------------------------- SUBJECT SUBJECT SUBJECT UNIT ACTUAL ASKING Slightly Slightly DESCRIPTION TYPE RENT RENT Similar Superior Inferior Superior Inferior ------------------------ ------------ --------- --------- --------- ---------- ---------- ---------- ---------- Monthly Rent 1A10 $ 690 $ 701 $ 675 $ 660 $ 660 $ 780 $ 735 Unit Area (SF) 736 736 1,000 969 727 745 614 Monthly Rent Per Sq. Ft. $ 0.94 $ 0.95 $ 0.68 $ 0.68 $ 0.91 $ 1.05 $ 1.20 Monthly Rent 1B10 $ 697 $ 691 $ 710 Unit Area (SF) 756 756 1,100 Monthly Rent Per Sq. Ft. $ 0.92 $ 0.91 $ 0.65 Monthly Rent 2A15 $ 958 $ 903 $ 780 $ 835 $ 813 $ 909 $ 900 Unit Area (SF) 880 880 1,200 1,049 928 1,046 837 Monthly Rent Per Sq. Ft. $ 1.09 $ 1.03 $ 0.65 $ 0.80 $ 0.88 $ 0.87 $ 1.08 Monthly Rent 2A10 $1,085 $ 933 $ 780 Unit Area (SF) 910 910 1,400 Monthly Rent Per Sq. Ft. $ 1.19 $ 1.02 $ 0.56 Monthly Rent 3A15 $1,355 $1,260 Unit Area (SF) 1,126 1,126 Monthly Rent Per Sq. Ft. $ 1.20 $ 1.12 Monthly Rent 3A20 $1,735 $1,735 $1,130 $1,200 Unit Area (SF) 1,210 1,210 1,298 1,110 Monthly Rent Per Sq. Ft. $ 1.43 $ 1.43 $ 0.87 $ 1.08 Monthly Rent 2B15 $1,027 $1,027 Unit Area (SF) 900 900 Monthly Rent Per Sq. Ft. $ 1.14 $ 1.14 Monthly Rent 3A25 $1,573 $1,573 Unit Area (SF) 1,210 1,210 Monthly Rent Per Sq. Ft. $ 1.30 $ 1.30
DESCRIPTION MIN MAX MEDIAN AVERAGE ------------------------ ------ ------ ------- ------- Monthly Rent $ 660 $ 780 $ 675 $ 702 Unit Area (SF) 614 1,000 745 811 Monthly Rent Per Sq. Ft. $ 0.68 $ 1.20 $ 0.91 $ 0.90 Monthly Rent $ 710 $ 710 $ 710 $ 710 Unit Area (SF) 1,100 1,100 1,100 1,100 Monthly Rent Per Sq. Ft. $ 0.65 $ 0.65 $ 0.65 $ 0.65 Monthly Rent $ 780 $ 909 $ 835 $ 847 Unit Area (SF) 837 1,200 1,046 1,012 Monthly Rent Per Sq. Ft. $ 0.65 $ 1.08 $ 0.87 $ 0.85 Monthly Rent $ 780 $ 780 $ 780 $ 780 Unit Area (SF) 1,400 1,400 1,400 1,400 Monthly Rent Per Sq. Ft. $ 0.56 $ 0.56 $ 0.56 $ 0.56 Monthly Rent Unit Area (SF) Monthly Rent Per Sq. Ft. Monthly Rent $1,130 $1,200 $1,165 $1,165 Unit Area (SF) 1,110 1,298 1,204 1,204 Monthly Rent Per Sq. Ft. $ 0.87 $ 1.08 $ 0.98 $ 0.98 Monthly Rent Unit Area (SF) Monthly Rent Per Sq. Ft. Monthly Rent Unit Area (SF) Monthly Rent Per 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 --------- --------------- --------- -------- ------ -------- ------- 1A10 29 736 $ 660 $ 0.90 $ 19,140 $ 229,680 1B10 6 756 $ 655 $ 0.87 $ 3,930 $ 47,160 2A15 208 880 $ 810 $ 0.92 $168,480 $2,021,760 2A10 12 910 $ 825 $ 0.91 $ 9,900 $ 118,800 3A15 16 1,126 $1,125 $ 1.00 $ 18,000 $ 216,000 3A20 6 1,210 $1,140 $ 0.94 $ 6,840 $ 82,080 2B15 100 900 $ 825 $ 0.92 $ 82,500 $ 990,000 3A25 6 1,210 $1,100 $ 0.91 $ 6,600 $ 79,200 --------------------- Total $315,390 $3,784,680 =====================
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 29 COLONY AT KENILWORTH, TOWSON, MARYLAND 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 COLONY AT KENILWORTH, TOWSON, MARYLAND 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 $3,573,730 $ 9,331 $3,787,243 $9,888 $4,059,101 $10,598 Vacancy $ 137,936 $ 360 $ 322,043 $ 841 $ 454,805 $ 1,187 Credit Loss/Concessions $ 103,465 $ 270 $ 115,418 $ 301 $ 109,035 $ 285 ------------------------------------------------------------------------ Subtotal $ 241,401 $ 630 $ 437,461 $1,142 $ 563,840 $ 1,472 Laundry Income $ 42,192 $ 110 $ 22,081 $ 58 $ 25,487 $ 67 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 203,559 $ 531 $ 141,430 $ 369 $ 113,297 $ 296 ------------------------------------------------------------------------ Subtotal Other Income $ 245,751 $ 642 $ 163,511 $ 427 $ 138,784 $ 362 ------------------------------------------------------------------------ Effective Gross Income $3,578,080 $ 9,342 $3,513,293 $9,173 $3,634,045 $ 9,488 Operating Expenses Taxes $ 248,632 $ 649 $ 257,490 $ 672 $ 276,267 $ 721 Insurance $ 38,296 $ 100 $ 72,701 $ 190 $ 91,777 $ 240 Utilities $ 78,321 $ 204 $ 111,283 $ 291 $ 151,366 $ 395 Repair & Maintenance $ 86,932 $ 227 $ 81,660 $ 213 $ 70,466 $ 184 Cleaning $ 115,534 $ 302 $ 124,282 $ 324 $ 138,916 $ 363 Landscaping $ 122,407 $ 320 $ 108,779 $ 284 $ 121,593 $ 317 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 65,887 $ 172 $ 44,139 $ 115 $ 28,809 $ 75 General Administrative $ 52,670 $ 138 $ 75,943 $ 198 $ 76,606 $ 200 Management $ 181,589 $ 474 $ 177,077 $ 462 $ 190,363 $ 497 Miscellaneous $ 297,214 $ 776 $ 265,962 $ 694 $ 242,675 $ 634 ------------------------------------------------------------------------ Total Operating Expenses $1,287,482 $ 3,362 $1,319,316 $3,445 $1,388,838 $ 3,626 Reserves $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 ------------------------------------------------------------------------ Net Income $2,290,598 $ 5,981 $2,193,977 $5,728 $2,245,207 $ 5,862 ------------------------------------------------------------------------ FISCAL YEAR 2003 ANNUALIZED 2003 ----------------------- ---------------------- MANAGEMENT BUDGET PROJECTION AAA PROJECTION ----------------------- ---------------------- ------------------------------ DESCRIPTION TOTAL PER UNIT TOTAL PER UNIT TOTAL PER UNIT % ---------------------------------------------------- ---------------------- ------------------------------- Revenues Rental Income $4,076,556 $10,644 $4,528,220 $11,823 $3,784,680 $9,882 100.0% Vacancy $ 396,420 $ 1,035 $ 460,040 $ 1,201 $ 177,880 $ 464 4.7% Credit Loss/Concessions $ 67,428 $ 176 $ 188,468 $ 492 $ 75,694 $ 198 2.0% -------------------------------------------------------------------------------- Subtotal $ 463,848 $ 1,211 $ 648,508 $ 1,693 $ 253,574 $ 662 6.7% Laundry Income $ 53,772 $ 140 $ 20,884 $ 55 $ 28,725 $ 75 0.8% Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Other Misc. Revenue $ 56,904 $ 149 ($ 519,792) -$ 1,357 $ 95,750 $ 250 2.5% -------------------------------------------------------------------------------- Subtotal Other Income $ 110,676 $ 289 ($ 498,908) -$ 1,303 $ 124,475 $ 325 3.3% -------------------------------------------------------------------------------- Effective Gross Income $3,723,384 $ 9,722 $3,380,804 $ 8,827 $3,655,581 $9,545 100.0% Operating Expenses Taxes $ 301,988 $ 788 $ 285,788 $ 746 $ 287,250 $ 750 7.9% Insurance $ 102,036 $ 266 $ 99,220 $ 259 $ 107,240 $ 280 2.9% Utilities $ 125,004 $ 326 $ 151,344 $ 395 $ 153,200 $ 400 4.2% Repair & Maintenance $ 65,496 $ 171 $ 334,516 $ 873 $ 76,600 $ 200 2.1% Cleaning $ 133,560 $ 349 $ 163,928 $ 428 $ 137,880 $ 360 3.8% Landscaping $ 108,948 $ 284 $ 319,696 $ 835 $ 114,900 $ 300 3.1% Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0.0% Marketing & Leasing $ 33,060 $ 86 $ 65,720 $ 172 $ 34,470 $ 90 0.9% General Administrative $ 68,700 $ 179 $ 127,200 $ 332 $ 76,600 $ 200 2.1% Management $ 126,842 $ 331 $ 205,256 $ 536 $ 146,223 $ 382 4.0% Miscellaneous $ 196,176 $ 512 $ 259,896 $ 679 $ 268,100 $ 700 7.3% -------------------------------------------------------------------------------- Total Operating Expenses $1,261,810 $ 3,295 $2,012,564 $ 5,255 $1,402,463 $3,662 38.4% Reserves $ 0 $ 0 $ 0 $ 0 $ 76,600 $ 200 5.5% -------------------------------------------------------------------------------- Net Income $2,461,574 $ 6,427 $1,368,240 $ 3,572 $2,176,518 $5,683 59.5% --------------------------------------------------------------------------------
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 6.7% based on the subject's historical performance, as well as the anticipated future market conditions. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 31 COLONY AT KENILWORTH, TOWSON, MARYLAND RESERVES FOR REPLACEMENT "Reserves for replacements" is a contingency account allocated to the expenses of the property to provide for replacement of short-lived items and for unforeseen necessary capital expenditures. We have utilized the Korpacz Real Estate Investor Survey of the national apartment market, which reports a range of replacement reserves between $150 and $400 per unit. For purposes of this analysis, we have included an allowance of $200 per unit for reserves for replacement. CAPITAL EXPENDITURES Capital expenditures represent expenses for immediate repair or replacement of items that have average to long lives. Based on our inspection of the property as well as discussions with property management personnel, there are no major items remaining in need of repair or replacement that would require an expense beyond our reserves for replacement. Therefore an allowance of $200 per unit should be satisfactory in our reserves for replacement to cover future capital expenditures. DISCOUNTED CASH FLOW ANALYSIS As the subject is a multi-tenant income property, the Discounted Cash Flow Method is considered appropriate. This method is especially meaningful in that it isolates the timing of the annual cash flows and discounts them, along with the expected equity reversion, to a present value. The present value of the cash flow is added to the present value of the reversion, resulting in a total property value. INVESTMENT CRITERIA Appropriate investment criteria will be derived for the subject based upon analysis of comparable sales and a survey of real estate investors. The following table summarizes the findings of Korpacz National Investor Survey for the most recent period. KORPACZ NATIONAL INVESTOR SURVEY 1ST QUARTER 2003 NATIONAL APARTMENT MARKET
CAPITALIZATION RATES ---------------------------------- GOING-IN TERMINAL ---------------------------------- LOW HIGH LOW HIGH ----- ------ ----- ------ RANGE 6.00% 10.00% 7.00% 10.00% AVERAGE 8.14% 8.47%
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 32 COLONY AT KENILWORTH, TOWSON, MARYLAND SUMMARY OF OVERALL CAPITALIZATION RATES
COMP. NO. SALE DATE OCCUP. PRICE/UNIT OAR --------- ------------ ------ ---------- ---- I-1 March, 2003 90% $56,458 8.29% I-2 August, 2002 96% $49,216 8.26% I-3 May, 2001 100% $45,052 8.23% I-4 June, 2002 100% $57,292 8.24% I-5 Sep-00 96% $47,009 9.48% High 9.48% Low 8.23% Average 8.50%
Based on this information, we have concluded the subject's overall capitalization rate should be 8.50%. 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 9.25%. 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 11.00%. HOLDING PERIOD The survey of investors indicates that most investors are completing either 10-year cash flows or extending the analysis to the end of the lease if it is more than 10-years. A 10-year period has been used in the analysis of the subject with the eleventh year stabilized NOI used to determine the reversion. SELLING COSTS Sales of similar size properties are typically accomplished with the aid of a broker and will also incur legal and other transaction related cost. Based on our survey of brokers and a review of institutional investor projections, an allowance of 2.00% of the sale amount is applied. DISCOUNTED CASH FLOW CONCLUSION Discounting the annual cash flows and the equity reversion at the selected rate of 11.00% indicates a value of $25,500,000. In this instance, the reversion figure contributes AMERICAN APPRAISAL ASSOCIATES, INC. INCOME CAPITALIZATION APPROACH PAGE 33 COLONY AT KENILWORTH, TOWSON, MARYLAND approximately 43% of the total value. Investors surveyed for this assignment indicated they would prefer to have the cash flow contribute anywhere from 50% to 60%. Overall, the blend seems reasonable. The cash flow and pricing matrix are located on the following pages. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 34 COLONY AT KENILWORTH, TOWSON, MARYLAND DISCOUNTED CASH FLOW ANALYSIS COLONY AT KENILWORTH
YEAR APR-2004 APR-2005 APR-2006 APR-2007 APR-2008 APR-2009 APR-2010 FISCAL YEAR 1 2 3 4 5 6 7 ------------------------------------------------------------------------------------------------------------------------------------ REVENUE Base Rent $3,784,680 $3,898,220 $4,015,167 $4,135,622 $4,259,691 $4,387,481 $4,519,106 Vacancy $ 349,453 $ 207,957 $ 188,713 $ 194,374 $ 200,205 $ 206,212 $ 212,398 Credit Loss $ 75,694 $ 77,964 $ 80,303 $ 82,712 $ 85,194 $ 87,750 $ 90,382 Concessions $ 302,774 $ 233,893 $ 107,071 $ 34,464 $ 0 $ 0 $ 0 ---------------------------------------------------------------------------------------------- Subtotal $ 727,921 $ 519,815 $ 376,087 $ 311,550 $ 285,399 $ 293,961 $ 302,780 Laundry Income $ 28,725 $ 29,587 $ 30,474 $ 31,389 $ 32,330 $ 33,300 $ 34,299 Garage Revenue $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 95,750 $ 98,623 $ 101,581 $ 104,629 $ 107,767 $ 111,000 $ 114,331 ---------------------------------------------------------------------------------------------- Subtotal Other Income $ 124,475 $ 128,209 $ 132,056 $ 136,017 $ 140,098 $ 144,301 $ 148,630 ---------------------------------------------------------------------------------------------- EFFECTIVE GROSS INCOME $3,181,234 $3,506,615 $3,771,135 $3,960,089 $4,114,389 $4,237,821 $4,364,955 OPERATING EXPENSES: Taxes $ 287,250 $ 295,868 $ 304,744 $ 313,886 $ 323,302 $ 333,001 $ 342,992 Insurance $ 107,240 $ 110,457 $ 113,771 $ 117,184 $ 120,700 $ 124,321 $ 128,050 Utilities $ 153,200 $ 157,796 $ 162,530 $ 167,406 $ 172,428 $ 177,601 $ 182,929 Repair & Maintenance $ 76,600 $ 78,898 $ 81,265 $ 83,703 $ 86,214 $ 88,800 $ 91,464 Cleaning $ 137,880 $ 142,016 $ 146,277 $ 150,665 $ 155,185 $ 159,841 $ 164,636 Landscaping $ 114,900 $ 118,347 $ 121,897 $ 125,554 $ 129,321 $ 133,201 $ 137,197 Security $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 34,470 $ 35,504 $ 36,569 $ 37,666 $ 38,796 $ 39,960 $ 41,159 General Administrative $ 76,600 $ 78,898 $ 81,265 $ 83,703 $ 86,214 $ 88,800 $ 91,464 Management $ 127,249 $ 140,265 $ 150,845 $ 158,404 $ 164,576 $ 169,513 $ 174,598 Miscellaneous $ 268,100 $ 276,143 $ 284,427 $ 292,960 $ 301,749 $ 310,801 $ 320,125 ---------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES $1,383,489 $1,434,192 $1,483,590 $1,531,131 $1,578,485 $1,625,839 $1,674,614 Reserves $ 76,600 $ 78,898 $ 81,265 $ 83,703 $ 86,214 $ 88,800 $ 91,464 ---------------------------------------------------------------------------------------------- NET OPERATING INCOME $1,721,145 $1,993,525 $2,206,280 $2,345,255 $2,449,690 $2,523,181 $2,598,877 Operating Expense Ratio (% of EGI) 43.5% 40.9% 39.3% 38.7% 38.4% 38.4% 38.4% Operating Expense Per Unit $ 3,612 $ 3,745 $ 3,874 $ 3,998 $ 4,121 $ 4,245 $ 4,372 YEAR APR-2011 APR-2012 APR-2013 APR-2014 FISCAL YEAR 8 9 10 11 ----------------------------------------------------------------------------------------- REVENUE Base Rent $4,654,679 $4,794,319 $4,938,149 $5,086,293 Vacancy $ 218,770 $ 225,333 $ 232,093 $ 239,056 Credit Loss $ 93,094 $ 95,886 $ 98,763 $ 101,726 Concessions $ 0 $ 0 $ 0 $ 0 ---------------------------------------------------- Subtotal $ 311,863 $ 321,219 $ 330,856 $ 340,782 Laundry Income $ 35,328 $ 36,388 $ 37,480 $ 38,604 Garage Revenue $ 0 $ 0 $ 0 $ 0 Other Misc. Revenue $ 117,760 $ 121,293 $ 124,932 $ 128,680 ---------------------------------------------------- Subtotal Other Income $ 153,089 $ 157,681 $ 162,412 $ 167,284 ---------------------------------------------------- EFFECTIVE GROSS INCOME $4,495,904 $4,630,781 $4,769,705 $4,912,796 OPERATING EXPENSES: Taxes $ 353,281 $ 363,880 $ 374,796 $ 386,040 Insurance $ 131,892 $ 135,848 $ 139,924 $ 144,122 Utilities $ 188,417 $ 194,069 $ 199,891 $ 205,888 Repair & Maintenance $ 94,208 $ 97,035 $ 99,946 $ 102,944 Cleaning $ 169,575 $ 174,662 $ 179,902 $ 185,299 Landscaping $ 141,313 $ 145,552 $ 149,918 $ 154,416 Security $ 0 $ 0 $ 0 $ 0 Marketing & Leasing $ 42,394 $ 43,666 $ 44,976 $ 46,325 General Administrative $ 94,208 $ 97,035 $ 99,946 $ 102,944 Management $ 179,836 $ 185,231 $ 190,788 $ 196,512 Miscellaneous $ 329,729 $ 339,621 $ 349,810 $ 360,304 ---------------------------------------------------- TOTAL OPERATING EXPENSES $1,724,853 $1,776,598 $1,829,896 $1,884,793 Reserves $ 94,208 $ 97,035 $ 99,946 $ 102,944 ---------------------------------------------------- NET OPERATING INCOME $2,676,843 $2,757,148 $2,839,863 $2,925,058 ---------------------------------------------------- Operating Expense Ratio (% of EGI) 38.4% 38.4% 38.4% 38.4% Operating Expense Per Unit $ 4,504 $ 4,639 $ 4,778 $ 4,921
Estimated Stabilized NOI $2,176,518 Sales Expense Rate 2.00% Months to Stabilized 18 Discount Rate 11.00% Stabilized Occupancy 95.3% Terminal Cap Rate 9.25%
Gross Residual Sale Price $31,622,253 Deferred Maintenance $ 0 Less: Sales Expense $ 632,445 Add: Excess Land $ 0 ----------- Other Adjustments $ 0 Net Residual Sale Price $30,989,808 ----------- Value Indicated By "DCF" $25,462,962 PV of Reversion $10,914,129 Rounded $25,500,000 Add: NPV of NOI $14,548,833 ----------- PV Total $25,462,962
"DCF" VALUE SENSITIVITY TABLE
DISCOUNT RATE ------------------------------------------------------------------------------------------------- TOTAL VALUE 10.50% 10.75% 11.00% 11.25% 11.50% ------------------------------------------------------------------------------------------------- 8.75% $26,982,580 $26,529,618 $26,086,627 $25,653,354 $25,229,554 TERMINAL 9.00% $26,647,285 $26,201,815 $25,766,132 $25,339,989 $24,923,145 CAP RATE 9.25% $26,330,114 $25,891,731 $25,462,962 $25,043,563 $24,633,299 9.50% $26,029,636 $25,597,968 $25,175,748 $24,762,739 $24,358,708 9.75% $25,744,567 $25,319,269 $24,903,263 $24,496,315 $24,098,198
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 35 COLONY AT KENILWORTH, TOWSON, MARYLAND INCOME LOSS DURING LEASE-UP The subject is currently 89% occupied, below our stabilized occupancy projection. We have estimated a 18-month lease-up period. An adjustment must be made to bring the subject to a stabilized operating level. To account for this income loss during lease-up, we have compared the current DCF analysis to an "as stabilized" DCF analysis assuming the subject's occupancy were stabilized. The difference in net operating income during the lease-up period is discounted to a present value figure of $168,000 as shown in the following table.
DESCRIPTION YEAR 1 YEAR 2 ----------------------------------------- ----------- ----------- "As Is" Net Operating Income $ 1,721,145 $ 1,993,525 Stabilized Net Operating Income $ 1,885,855 $ 2,017,276 ----------- ----------- Difference $ 164,710 $ 23,751 PV of Income Loss During Lease-Up $ 167,664 Rounded $ 168,000
CONCESSIONS Due to softness in the market, concessions have been utilized at the subject property and within the market. Based on our discussions with the subject's property manager and those at competing properties, these concessions are expected to continue in the near term until the market returns to a stabilized level. Concessions have been included as a line item deduction within the discounted cash flow analysis. The present value of these concessions equates to $564,000 (rounded). This amount has been deducted from the Direct Capitalization analysis, as well as the Sales Comparison Approach value. DIRECT CAPITALIZATION METHOD After having projected the income and expenses for the property, the next step in the valuation process is to capitalize the net income into an estimate of value. The selected overall capitalization rate ("OAR") covers both return on and return of capital. It is the overall rate of return an investor expects. AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 36 COLONY AT KENILWORTH, TOWSON, MARYLAND After considering the market transactions and the investor surveys, we previously conclude that an overall rate of 8.50% percent is applicable to the subject. The results of our direct capitalization analysis are as follows: AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 37 COLONY AT KENILWORTH, TOWSON, MARYLAND COLONY AT KENILWORTH
TOTAL PER SQ. FT. PER UNIT %OF EGI REVENUE Base Rent $ 3,784,680 $ 11.05 $ 9,882 Less: Vacancy & Collection Loss 6.70% $ 253,574 $ 0.74 $ 662 Plus: Other Income Laundry Income $ 28,725 $ 0.08 $ 75 0.79% Garage Revenue $ 0 $ 0.00 $ 0 0.00% Other Misc. Revenue $ 95,750 $ 0.28 $ 250 2.62% Subtotal Other Income $ 124,475 $ 0.36 $ 325 3.41% EFFECTIVE GROSS INCOME $ 3,655,581 $ 10.68 $ 9,545 OPERATING EXPENSES: Taxes $ 287,250 $ 0.84 $ 750 7.86% Insurance $ 107,240 $ 0.31 $ 280 2.93% Utilities $ 153,200 $ 0.45 $ 400 4.19% Repair & Maintenance $ 76,600 $ 0.22 $ 200 2.10% Cleaning $ 137,880 $ 0.40 $ 360 3.77% Landscaping $ 114,900 $ 0.34 $ 300 3.14% Security $ 0 $ 0.00 $ 0 0.00% Marketing & Leasing $ 34,470 $ 0.10 $ 90 0.94% General Administrative $ 76,600 $ 0.22 $ 200 2.10% Management 4.00% $ 146,223 $ 0.43 $ 382 4.00% Miscellaneous $ 268,100 $ 0.78 $ 700 7.33% TOTAL OPERATING EXPENSES $ 1,402,463 $ 4.10 $ 3,662 38.36% Reserves $ 76,600 $ 0.22 $ 200 2.10% NET OPERATING INCOME $ 2,176,518 $ 6.36 $ 5,683 59.54% "GOING IN" CAPITALIZATION RATE 8.50% VALUE INDICATION $ 25,606,096 $ 74.79 $ 66,857 LESS: LEASE-UP COST ($ 168,000) PV OF CONCESSIONS ($ 564,000) "AS IS" VALUE INDICATION (DIRECT CAPITALIZATION APPROACH) $ 24,874,096 ROUNDED $ 24,900,000 $ 72.73 $ 65,013
AMERICAN APPRAISAL ASSOCIATES, INC. INCOME APPROACH PAGE 38 COLONY AT KENILWORTH, TOWSON, MARYLAND DIRECT CAPITALIZATION VALUE SENSITIVITY TABLE
CAP RATE VALUE ROUNDED $/UNIT $/SF -------- ----------- ----------- ------- ------ 7.75% $27,352,106 $27,400,000 $71,540 $80.03 8.00% $26,474,477 $26,500,000 $69,191 $77.40 8.25% $25,650,039 $25,700,000 $67,102 $75.06 8.50% $24,874,096 $24,900,000 $65,013 $72.73 8.75% $24,142,494 $24,100,000 $62,924 $70.39 9.00% $23,451,535 $23,500,000 $61,358 $68.64 9.25% $22,797,926 $22,800,000 $59,530 $66.59
CONCLUSION BY THE DIRECT CAPITALIZATION METHOD Applying the capitalization rate to our estimated NOI results in an estimated value of $24,900,000. CORRELATION AND CONCLUSION BY THE INCOME APPROACH The two methods used to estimate the market value of the subject property by the income approach resulted in the following indications of value: Discounted Cash Flow Analysis $25,500,000 Direct Capitalization Method $24,900,000 Giving consideration to the indicated values provided by both techniques, we have concluded the estimated value by the income capitalization approach to be $25,400,000. AMERICAN APPRAISAL ASSOCIATES, INC. RECONCILIATION AND CONCLUSION PAGE 39 COLONY AT KENILWORTH, TOWSON, MARYLAND 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 $23,500,000 Income Approach $25,400,000 Reconciled Value $24,400,000
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 April 24, 2003 the market value of the fee simple estate in the property is: $24,400,000 AMERICAN APPRAISAL ASSOCIATES, INC. ADDENDA COLONY AT KENILWORTH, TOWSON, MARYLAND ADDENDA AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A COLONY AT KENILWORTH, TOWSON, MARYLAND EXHIBIT A SUBJECT PHOTOGRAPHS AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A COLONY AT KENILWORTH, TOWSON, MARYLAND SUBJECT PHOTOGRAPHS [PICTURE] [PICTURE] FRONT OF SUBJECT EXTERIOR - LANDSCAPE & PARK [PICTURE] [PICTURE] EXTERIOR - APARTMENT BUILDING INTERIOR - APARTMENT UNIT [PICTURE] [PICTURE] EXTERIOR - POOL EXTERIOR - ROOF AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT A COLONY AT KENILWORTH, TOWSON, MARYLAND SUBJECT PHOTOGRAPHS [PICTURE] INTERIOR - KITCHEN [PICTURE] INTERIOR - BALCONY [PICTURE] INTERIOR - BATHROOM [PICTURE] INTERIOR - BEDROOM [PICTURE] EXTERIOR - INTERIOR ROADWAY [PICTURE] INTERIOR - STAIRCASE AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B COLONY AT KENILWORTH, TOWSON, MARYLAND EXHIBIT B SUMMARY OF RENT COMPARABLES AND PHOTOGRAPH OF COMPARABLES AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B COLONY AT KENILWORTH, TOWSON, MARYLAND PHOTOGRAPHS OF COMPARABLE SALE PROPERTIES COMPARABLE I-1 DEER PARK APARTMENTS 9902 Cervidae Lane Randallstown, MD [PICTURE] COMPARABLE I-2 FAIRWAY'S AT TOWSON 1300 Colbury Road Baltimore, MD [PICTURE] COMPARABLE I-3 MILL TOWNE VILLAGE 21 Garrison View Road Baltimore, MD [PICTURE] COMPARABLE I-4 ROLLING PARK APARTMENTS 8331 Mindale Circle Baltimore, MD [PICTURE] COMPARABLE I-5 OWINGS CHASE APARTMENTS 4607 Old Court Road Pikesville, MD [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B COLONY AT KENILWORTH, TOWSON, MARYLAND SUMMARY OF COMPARABLE RENTAL PROPERTIES
COMPARABLE DESCRIPTION SUBJECT R - 1 ---------------------------------------------------------------------------------------------------------------------------------- Property Name Colony at Kenilworth Cardiff Charles Management Company AIMCO Kenilworth Equities LOCATION: Address 1 Bonrock Court 4 Nightingale Way City, State Towson, Maryland Timonium, MD County Baltimore Baltimore Proximity to Subject 2-mile northwest of the subject PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 342,376 178,600 Year Built 1967 1971 Effective Age 13 20 Building Structure Type Brick & wood siding walls; asphalt shingle roof Brick walls; asphalt shingle roof Parking Type (Gr., Cov., etc.) Garage, Open Covered Open Number of Units 383 152 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1A10 736 29 $ 690 1 1Bd/1Ba 1,000 36 $675 2 1B10 756 6 $ 697 2 1Bd/1Ba/den 1,100 38 $710 3 2A15 880 208 $ 958 3 2Bd/1Ba 1,200 42 $780 4 2A10 910 12 ###### 4 2Bd/2Ba 1,400 36 $780 5 3A15 1,126 16 ###### 6 3A20 1,210 6 ###### 7 2B15 900 100 ###### 8 3A25 1,210 6 ###### Average Unit Size (SF) 894 1,175 Unit Breakdown: Efficiency 0% 2-Bedroom 39% Efficiency 0% 2-Bedroom 51% 1-Bedroom 61% 3-Bedroom 0% 1-Bedroom 49% 3-Bedroom 0% CONDITION: Good Good APPEAL: Good Good AMENITIES: Unit Amenities X Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony Balcony Fireplace 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 X BBQ Equipment X 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 Tennis Court 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 Gym Room OCCUPANCY: 89% 96% LEASING DATA: Available Leasing Terms 6 to 15 Months 6 to 15 Months Concessions 1 - 1 1/2 Months Free 1/2 month free for long sitting apts. Pet Deposit $300 - $500 None Utilities Paid by Tenant: X Electric X Natural Gas X Electric Natural Gas X Water Trash Water Trash Confirmation May 1, 2003; Joseph Beard(Property Manager) May 15, 2003; Property Contact Lynn Telephone Number (972)234-1231 (410) 821-7787 NOTES: None COMPARISON TO SUBJECT: Similar COMPARABLE COMPARABLE DESCRIPTION R - 2 R - 3 ------------------------------------------------------------------------------------------------------------------------------------ Property Name Towson Woods Kenilworth @ Charles Management Company Kenilworth Equities CRC Realty LOCATION: Address 24 Witherwood Court 1149 Donnington Circle City, State Towson, MD Towson, MD County Baltimore Baltimore Proximity to Subject 0.2 miles west of subject Within 4-mile radius PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 172,952 357,168 Year Built 1975 1962 Effective Age 15 20 Building Structure Type Brick and T1-11 siding walls; asphalt shingle roof Brick walls; asphalt shingle roof Parking Type (Gr., Cov., etc.) Open Open Number of Units 168 302 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1Bd/1Ba 969 41 $660 1 1Bd/1Ba 727 50 $ 660 3 2Bd/1Ba 1,049 60 $835 3 2Ba/1Ba 905 51 $ 765 3 2Bd/2Ba 1,049 67 $835 3 2Bd/1.5Ba 950 51 $ 860 6 3Bd/2Ba 1,298 50 $1,130 Average Unit Size (SF) 1,029 970 Unit Breakdown: Efficiency 0% 2-Bedroom 76% Efficiency 0% 2-Bedroom 50% 1-Bedroom 24% 3-Bedroom 0% 1-Bedroom 25% 3-Bedroom 25% CONDITION: Good Average APPEAL: Good Average AMENITIES: Unit Amenities Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony X Balcony X Fireplace 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 X Meeting Hall Tennis Court Secured Parking Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track X Business Office Jogging Track X Business Office Gym Room Gym Room OCCUPANCY: 89% 94% LEASING DATA: Available Leasing Terms 12 Months 12 Months Concessions None None Pet Deposit No pets $250 Utilities Paid by Tenant: X Electric X Natural Gas X Electric X Natural Gas Water Trash X Water Trash Confirmation May 15, 2003; Robyn (Property Manager) May 15, 2003;Property Contact Telephone Number 1-866-429-7780 (972)234-1231 NOTES: None Cats only COMPARISON TO SUBJECT: Slightly Superior Slightly Inferior COMPARABLE COMPARABLE DESCRIPTION R - 4 R - 5 --------------------------------------------------------------------------------------------------------------------------------- Property Name Hampton Plaza Dulaney Valley Apartments Management Company Wallace Campbell & Co. Philadelphia Mgmt. LOCATION: Address 302 E. Joppa Road 944 Dunlaney Valley Road City, State Towson, Md Towson, Md County Baltimore Baltimore Proximity to Subject Within 2-miles Within a 2-mile radius PHYSICAL CHARACTERISTICS: Net Rentable Area (SF) 180,540 197,835 Year Built 1972 1952 Effective Age 10 25 Building Structure Type Stone veneer; flat roof Stone walls; asphalt shingle roof Parking Type (Gr., Cov., etc.) Garage, Covered Open Number of Units 202 256 Unit Mix: Type Unit Qty. Mo. Type Unit Qty. Mo. 1 1Bd/1Ba 745 102 $ 780 1 1Bd/1Ba 645 87 $ 750 3 2Bd/1Ba 915 70 $ 855 3 2Bd/2Ba 837 140 $ 900 3 2Bd/2Ba 1,350 30 $1,035 6 3Bd/2Ba 1,110 19 $1,200 1 Efficiency 345 10 $ 600 Average Unit Size (SF) 894 773 Unit Breakdown: Efficiency 0% 2-Bedroom 50% Efficiency 0% 2-Bedroom 41% 1-Bedroom 50% 3-Bedroom 0% 1-Bedroom 50% 3-Bedroom 8% CONDITION: Average Average APPEAL: Average Average AMENITIES: Unit Amenities X Attach. Garage Vaulted Ceiling Attach. Garage Vaulted Ceiling X Balcony Balcony Fireplace 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 Tennis Court Secured Parking Racquet Ball X Laundry Room Racquet Ball X Laundry Room Jogging Track Business Office Jogging Track Business Office Gym Room Gym Room OCCUPANCY: 98% 93% LEASING DATA: Available Leasing Terms 12 Months 9 to 12 months Concessions None None Pet Deposit $100 X Utilities Paid by Tenant: Electric Natural Gas X Electric Natural Gas Water Trash Water Trash Confirmation May 15, 2003; Debra - Property contact May 15, 2003; Debra (Property Manager) Telephone Number 1-866-253-6114 (410) 823- 7255 NOTES: Cats only None COMPARISON TO SUBJECT: Superior Inferior
AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT B COLONY AT KENILWORTH, TOWSON, MARYLAND PHOTOGRAPHS OF COMPARABLE RENT PROPERTIES COMPARABLE R-1 CARDIFF CHARLES 4 Nightingale Way Timonium, MD [PICTURE] COMPARABLE R-2 TOWSON WOODS 24 Witherwood Court Towson, MD [PICTURE] COMPARABLE R-3 KENILWORTH @ CHARLES 1149 Donnington Circle Towson, MD [PICTURE] COMPARABLE R-4 HAMPTON PLAZA 302 E. Joppa Road Towson, Md [PICTURE] COMPARABLE R-5 DULANEY VALLEY APARTMENTS 944 Dunlaney Valley Road Towson, Md [PICTURE] AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C COLONY AT KENILWORTH, TOWSON, MARYLAND EXHIBIT C ASSUMPTIONS AND LIMITING CONDITIONS (3 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT C COLONY AT KENILWORTH, TOWSON, MARYLAND 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 COLONY AT KENILWORTH, TOWSON, MARYLAND 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 COLONY AT KENILWORTH, TOWSON, MARYLAND 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 COLONY AT KENILWORTH, TOWSON, MARYLAND 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. Jonathan Hackerman provided significant real property appraisal assistance in the preparation of this report. I am currently in compliance with the Appraisal Institutes continuing education requirements. -s- Brian Johnson --------------------------------- Brian Johnson, MAI Managing Principal, Real Estate Group AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E COLONY AT KENILWORTH, TOWSON, MARYLAND EXHIBIT E QUALIFICATIONS OF APPRAISER (2 PAGES) AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E COLONY AT KENILWORTH, TOWSON, MARYLAND F. BRIAN JOHNSON, MAI MANAGING PRINCIPAL, REAL ESTATE ADVISORY GROUP POSITION F. Brian Johnson is the Managing Principal of the New York Real Estate Advisory Group of American Appraisal Associates, Inc. ("AAA"). EXPERIENCE Valuation Mr. Johnson has completed appraisals for securitization and pension funds/insurance industries. Analyses he has performed involve various types of investment-grade real estate throughout the continental United States including apartments, cooperatives, hotels, industrial and research and development parks, office buildings, regional shopping centers, and undeveloped acreage. Additional experience includes the valuation of existing and proposed investment-grade real estate, market and feasibility studies and offering memorandums for debt placement, equity investments and acquisitions, and disposition analysis. Court Mr. Johnson is qualified as an expert witness for the New Jersey Supreme Court. Business Mr. Johnson joined AAA in 1998 and was promoted to his current position in 1999. Prior to joining AAA, Mr. Johnson was a Senior Vice President at Koeppel Tener Real Estate Services and a Vice President at L. W. Ellwood & Co. EDUCATION Fairleigh Dickinson Bachelor of Science - Finance STATE CERTIFICATIONS State of New Jersey, General Appraiser, #42RG00158300 AMERICAN APPRAISAL ASSOCIATES, INC. EXHIBIT E COLONY OF SPRINGDALE, SPRINGDALE, OHIO PROFESSIONAL Appraisal Institute, MAI Designated Member AFFILIATIONS VALUATION AND Several courses are completed on an annual basis as part of SPECIAL COURSES the continuing education requirements of the Appraisal Institute. In addition, Mr. Johnson attends real estate and financial industry-related conferences and seminars. PUBLICATIONS "Operational Items to Consider When Appraising a Regional Mall," Appraisal Journal, 1991 AMERICAN APPRAISAL ASSOCIATES, INC. COLONY AT KENILWORTH, TOWSON, MARYLAND GENERAL SERVICE CONDITIONS AMERICAN APPRAISAL ASSOCIATES, INC. COLONY AT KENILWORTH, TOWSON, MARYLAND 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.